- Should I be conservative?
- What do I do with the EPF funds?
- Where to invest my retirement money?
- Should I sell my properties and put it all in FD?
- Should I still hold on to my stocks portfolio?
These are the common questions retirees ask in Malaysia.
I wish to give you some clarity on how to manage your retirement nest eggs.
A disclaimer here: I am 44 years old this year. I still couldn’t believe that I am approaching the official retirement age of 55 in Malaysia so soon. Anyway, please don’t take my words as professional advice. Whatever you do with your money, you are accountable for it.
Here are some crucial points that will give you a better idea of managing your retirement fund.
You want to preserve your capital. But don’t be too conservative.
Let’s say you have RM1 million of retirement funds stashed in several places, e.g. unit trust funds, stocks, properties, etc. Do you think it is necessary to liquidate everything and just put it in fixed deposits? Then you live on the guaranteed interest income, happily ever after.
If you think this is ridiculous, it is ironic that we hear this kind of advice very frequently.
For example, a licensed financial planner did your risk profile and found that a retiree usually has a low-risk appetite. Then they will advise you to allocate up to 80%-90% of your investment funds in fixed-income assets.
In my opinion, it sounds like at the moment you retire, you should sell most of your equity holdings and put it in low-risk investments like bonds and even fixed deposits.
Here is a metaphor – How do you keep fit? You exercise every day, and work on most parts of the body. So when you retire, you are still fit due to all the regular workouts you did. Then when you hit retirement age, the fitness coach tells you that you should stop exercising now. You don’t want to get hurt. Of course, nothing could be further from the truth. To stay fit, you will still remain in the exercise routine, maybe just less intense. Isn’t it?
Back to the topic about accumulating your retirement fund. If you have gotten good returns from the stock market over decades of accumulation, holding good company shares that have been your golden goose all these times, why would you sell it away? Why couldn’t you keep doing that to fuel your retirement lifestyle?
So I don’t think that liquidating everything and hoarding a big pile of cash is a wise thing to do. Having a low-risk profile limits your equity investment to only 10%-20% of your portfolio is just overkill.
I understand that a retiree might no longer have an active regular income, so you want to preserve your capital. But don’t be too conservative.
Anyway, your fitness coach is right to ask you not to stress yourself. You are no longer in the competitive circuit, so don’t work yourself up like you were in the 20s.
So similarly, without an active regular income, you need to have enough liquidity during retirement.
Have 2-3 years expense set aside in short-term and low-fluctuation assets
These will be handy for an emergency or economic downturn. You have to set aside the money you absolutely need to survive in the next 2-3 years. If you need to spend RM80k a year, set aside RM160k or more in low-risk and low-fluctuation investments. I call this the Defence Fund.
It can be:
- Fixed Deposit
- Flexi-loan linked current account that you can withdraw anytime.
- Money market funds, bond funds, fixed-income funds.
- Versa: the digital cash management platform that earns you interest that is on par with FD and gives you the power to withdraw your funds anytime you wish, without penalty
- Short-term P2P financing notes, usually the bullet payments type where you can get back your money in 30-60 days. You can find these products on licensed P2P financing platforms like Funding Societies, MoneySave, CapBay, etc.
- EPF, where you can have a dividend rate that beats FD
By the way, don’t forget to replenish your Defense Fund from time to time.
One more suggestion here – keep your credit cards. Your unused card limit serves as an emergency credit. Credit cards give you 30-50 days to gather your funds. Essentially, it buys more time for you.
Now you have taken care of the money you absolutely need for the next 2-3 years, how about the rest of the fund? The amount could be 90% or more of your net worth. I call this the Offence Fund. Here is a mistake that you would want to avoid.
Avoid investing in areas you don’t understand
Don’t invest in anything that you don’t understand or have no knowledge and skills. For retirees without investing knowledge, this could be a very common mistake. And when you lose your capital in money games, scams or highly leveraged instruments, it is very tough for you to recoup.
70 retirees in Texas lost all their retirement funds investing through a financial advisory firm that sold them a fund that invests in private companies.
In Singapore, a retired electrician lost $90,000 to a Ponzi scheme.
The less savvies are more likely to be the next victims.
There are a lot of scammers out there right now preying on you. They especially like to target the naive old retirees who have stashes of cash.
So please …please… please be careful.
Don’t chase after the next hot trend, business ventures, easy money, and end up in money games and scams.
If you don’t have investment skills, probably you were too busy during your working years. Now you are retired and have more spare time, why not pick up the skills. Learn how to differentiate between speculating versus investing. Do more readings and attend courses. What I recommend is value investing and long-term investing. I don’t trade the market actively like some active traders. And I don’t think you should trade the market actively either. Instead, learn how to identify good businesses, become their shareholders and tag along with the business growth.
Even after retirement, your investment horizon is still very long term. You will still be investing 20-40 years down the road. From age 55, you might live a healthy lifestyle, up to 100 years old or longer. To have your money last as long as possible, you will have to invest to beat inflation at the bare minimum.
If I were to retire today, here is how I would invest my Offense part of my retirement funds, mainly in equities and properties.
This is a short guide:
How to beat inflation in the long-term by investing in the equity market?
There are three ways to tackle this depending on your level of involvement:
- Full Involvement: Provided that you have the skills and knowledge to pick good stocks. You should be able to identify good businesses, buy the shares at a reasonable price, and hold on to them to ride on their growth and increasing incomes into the future. In other words, you do your stock picking.
- Minimum involvement: If you have no interest in screening stocks, reading or analysing financial reports, the alternative is to invest in the broad market. You can do it passively through ETF and unit trust funds. Construct your portfolio and do rebalancing periodically.
- Hands-off: It means you hire other people to do it for you. You can engage licensed financial planners and investment advisors who usually charge based on AUM (total asset under management). You will pay asset management fees. Another alternative is to engage professional fund managers to invest for you. If you have half a million ringgit to start, you can consider many fund managers, local and even overseas. Interview them and find out if any of them charge performance fees rather than management fees. In my opinion, the performance fees method is more aligned with investors’ interests. For example, I know a fund manager who only charges his client after the hurdle rate of 6%. If you don’t make more than 6% a year, the fund manager will not get paid. Unlike the industry-standard management fees where fund managers get paid regardless of fund performance. It means you bear all the risk, and they get paid no matter what.
We have briefly covered investing in the equity market. Let’s move on to properties and mortgages.
A very common question by retirees:
Should you pay off mortgages?
I understand that most retirees would like to be debt-free. The burden of paying housing loans might not give you peace of mind. Nevertheless, here are some facts that non-property investors seldom realise:
- Property investment is profitable due to the leverage of a housing loan. The return rate you get drops when you use smaller loans.
- Interest expense is an expenditure that you can deduct from your rental income. When there is no mortgage, it means your net rental income will be higher, resulting in higher income tax.
- The housing loan interest rate is low. Historically, it has been lower than the EPF dividend rate for the past 20 years.
So another common question:
Should you use your EPF money to pay off a housing loan?
I made a video about this, and you can check it out.
I don’t think it is wise to pay off housing loans with EPF. While reducing your return, you also turn liquid funds into home equity which is much harder to extract. You will have to refinance or sell the property to get back the money.
I wrote more about this in my book Money Smart, Chapter 75, Page 287.
Understanding all these, I would prefer to just pay the minimum required for my housing loans. To be safe, you should have a liquid fund to pay the mortgage for the next 2-3. Count that in your Defense Fund. That’s already good enough. Therefore, I don’t see any urgency to pay it off completely, even for the property that I will be staying in.
If you have bought several properties and keep them until retirement, you might be thinking about the next question here:
Should you sell your properties?
You can generally derive two types of return from an investment property: capital gain and rental yield.
I will look at the rental yield. For a too low yield, like 1-2% based on the property’s market value, I will sell and shift the capital to other assets.
And for retirees, you will have to consider whether you want to be actively managing your properties. Some people love to do that because you get to meet people and close deals. But if you are thinking of travelling the world or don’t enjoy the hassle of property management, you can hire property managers or just sell off your property portfolio.
For me, I will sell the properties if:
- It has a low rental yield
- It is too old and needs a lot of maintenance and repair
- Leasehold property with expiring lease less than 30 years
On the other hand, I would love to keep commercial properties:
- Stable tenants who stay for many years
- No need for any upkeep
Thanks for watching until this point. Let’s conclude the main takeaways in this video:
- While preserving your capital, don’t be too conservative and let inflation erode your buying power.
- Have a Defense Fund that covers at least two years of expenses set aside in short-term, low-risk and liquid assets, so you will not worry about the money you absolutely need for the next two years.
- Avoid investing in areas you don’t understand. It is always the best idea to be financially literate so you can spot real opportunities instead of being hunted by scammers.
- For the rest of your retirement funds: the Offence Fund — Keep investing to beat inflation in the long-term through the proven equity markets and property markets.
- There is no hurry to pay off your mortgage because you will just turn your liquid cash into illiquid home equity.
- Consider selling your older properties that require more repairs, or leasehold properties with short tenure remaining, and those with very low rental yield based on the current market price.
I am glad to have your attention until this point. You can take part in the Money Smart book contest. Here is how you can participate by posting in the comment section. Please tell me your retirement age, or the age you plan to retire.
I will pick a lucky winner to receive my book Money Smart. If you want a higher chance of winning, please tell us the new idea you learnt here.
Be smarter with money.