Let’s say, you are in your late 50s, 60s, or 70s today.
You could be at the tail end of your career, contemplating retirement. Or, you’re a retiree, setting your own pace of life presently. In this write-up, I would like to make a general assumption, where as a retiree, you most likely would possess a list of financial assets:
1. Real estate: residence or investment properties.
2. EPF
3. Insurance policies
4. Bank accounts: savings, fixed deposit, and credit cards
5. Stocks and unit trust funds
From them, I’ll answer 4 main questions that retirees or elderlies frequently ask when it comes to their finances. They are as follows:
Question 1: Should I Withdraw from My EPF to Settle My Mortgage in Full?
Supposedly, you have a mortgage balance of RM 100,000. Its interest is close to 4% per year. Thus, is it savvy to retrieve RM 100,000 from your EPF account and use it to pay off your outstanding mortgage?
There are two aspects to this question. The first is on mathematics. Meanwhile, the second is on emotions. So, if it is based on maths, the EPF had paid out 6+% in annual dividends (except 2019-2020) for the last 10 years. The lowest payout was 5.2% in 2020, which is higher than the mortgage interest of 4% a year. So in this viewpoint, withdrawing EPF to settle mortgages isn’t financially prudent for it involves sacrificing ‘6% dividends’ to save ‘4% interest costs’ per annum.
Hence, you would be on ‘negative 2% per annum’ if you choose to do so.
But, if the decision is based on emotions, where you feel liberated after you are officially ‘debt-free’, then possibly, it could be worthwhile for you. The impact in this case is not measured in ‘Ringgit Value’ but in ‘Psychological Value’. Perhaps, you feel a sense of peace, relief, calmness … etc and all of these could translate to better mental and physical health to you.
If so, is ‘negative 2% per annum’ a cost that is worth it for you?
As such, the answer falls back to you. Do you choose to be ‘mathematical’ or be ‘emotional’ in making the above decision?
Question 2: Should I Cancel My Credit Cards?
Some retirees wish to dine, travel and be entertained. For them, it is practical in their cases, for most parts, not to cancel off their credit cards. In fact, cancelling credit cards is an idea that never really crosses their minds. However, as I write, there are retirees who are less-travelled and enjoy the simplicities of life. These retirees may also love to hang around at home and thus, spend less.
So, is it practical to cancel off their credit cards as they are not spending much?
Well, the question is: ‘What is the financial impact, if a retiree chooses to retain or to cancel their credit cards?’. If the impact is minimal, why cancel it? Retirees could retain the cards for emergency purposes. Also, it is key to note this – Once a card is cancelled, it is harder for some retirees to apply for new credit cards as they are not earning an income or earning as much as they did before retiring.
But yet again, there is always an emotional aspect to this. Thus, if a retiree feels that it is ‘troublesome’ for him to maintain many cards, he can choose to cancel one or two of his many cards that he rarely uses to keep his ‘peace of mind’.
Question 3: Should I Cancel My Life Insurance Policies?
There are some people who bought life insurance policies as they intend to give financial support to their family members (especially their young children). But, as these policyowners age and contemplate retirement, they believe that these policies would no longer serve their initial purposes as their children had grown up and have the capabilities of earning income.
So, should they cancel their policies?
Well, it depends. Supposedly, a retiree has a couple of life insurance policies. All in all, their combined sum assured is RM 500,000 and they were bought around 20-30 years ago when he was fit and healthy. Hence, the thing is – If he chooses to cancel all of his policies, he would receive some cash value but he shall forgo the sum assured of RM 500,000, which could be handy in a life circumstance be it death, disability, or a major disease.
Once he cancels his policies, it would be a lot harder and expensive to purchase a brand new life insurance policy that covers RM 500,000, because his insurer is to underwrite this policy based on his current age and health condition which is different from when he was 20-30 years younger. As such, for most cases, it will be better to keep his insurance policies.
In addition, it is important for retirees to do proper estate planning. Basically, in most cases, such a plan would include:
1. EPF nomination to beneficiaries.
2. Life insurance nomination to beneficiaries.
3. Writing a will.
4. Setting up a trust, be it a testamentary trust or a living trust.
The situation for each retiree is different and hence, it is best to engage a highly qualified estate planner to get yours done professionally.
Question 4: Should I Invest in Stocks?
Well, it depends.
I believe if you are in your 50s, 60s, or 70s, you would have formed a viewpoint, an opinion, or possibly a conclusion, as to what stock investing is. The views can be formed based on your experiences and insights, after having ridden through a few cycles of booms and busts in the 1980s, 90s, 00s, 10s, and 20s today.
So, if you are one who have built and managed yourself a 6, 7, or, 8-figure stock portfolio filled with fundamentally sound stocks and you are highly experienced and emotionally mature in handling portfolios during market crises, I believe, in your case, you would be more inclined to continue on investing.
However, if you are a total newbie with little practical experiences in investing, I believe it is best for you to decide if you want to learn how to invest. If let’s say, you wish not to learn about investing, it is best for you to not invest in stocks as you are likely not a good investor. The same applies in unit trusts, real estate, or any other kinds of investments. If you are not a good investor, don’t invest. As a matter of fact, you may opt to preserve your funds in various vehicles such as:
1. Fixed deposit
2. Fixed-income funds (ASB)
3. Digital cash management platforms (Versa, KDI Save, Stashaway Simple)
4. EPF
Conclusion:
In short, the above are questions that skim the surface when it comes to having a comprehensive financial plan for retirees. With financial planning, it would be possible for retirees to strike a balance in areas such as cash flow needs, capital growth and preservation needs, insurance, estate, and legacy planning needs. If you happen to have your financial plans done professionally, you can consider a consultation session with Stephen Yong, director of Wealth Vantage Advisory Sdn Bhd (WVA).
Link: Stephen Yong – WVA
