“I’ve often been asked,

“What do you old folks do now that you’re retired?”

Well, I am fortunate to have a chemical engineering background and one of the things I enjoy most is converting beer, wine and vodka into urine. I do it every day and I really enjoy it.”

Harold Schlumberg

I have written an article on “Advice for 25 years old” regarding the need to save and invest to utilize time arbitrage to build long-term wealth in the link below,

https://klse.i3investor.com/blogs/kcchongnz/160185.jsp

What about retirees, or those close to retirement?

Most retirees worked hard to put food on the table, buying a house, to bring up children and support their education up to tertiary level, many even send their children for the costly overseas education, and even help them out when they first starting work like first payment for their house and car. That is our Asian culture. These retirees have done a great job. Kudos to them.

However, one has to retire one day when he gets old; either it is because of statutory requirement, or that he just can’t carry on working any more due to his old age. And when he retires, does he have enough money to survive and live a comfortable life before he expires?

If you are retiring soon, aren’t you concern about whether you and your wife have enough money to last you for another 20-30 years? Or are you concern if you have anything productive to do after retirement?

Let us discuss about the financial aspect of retirement here.

Retirement Cash Flows

Assuming one retires at the age of 60, with everything paid up and without any other commitment such as children’s education, mortgage payment, car hire purchase, personal loans etc., how much money does he needs? How much he can spend?

This depends on several factors, among them are,

1. How much wealth has he accumulated?
2. What is his life style?
3. How long is he expected to live?
4. What kind of medical care he is expecting?
5. What car is he going to drive?
6. Is he going to travel often, local or overseas? Where overseas?
7. How is his money kept or invested?
8. ETC.

Table 1 in the Appendix shows how much one can withdraw, in today’s Ringgit (Adjusted for inflation) at the beginning of each year with one million Ringgit now for different rate of return and number of years of withdrawal in retirement, assuming he leaves nothing behind after expiry.

If one retires at the age of 60 and has a retirement sum of RM1 million put as fixed deposit in the bank earning an interest of 4% and plans to live another 20 years to the age of 80 years old, he would be able to withdraw RM50000 every year until he dies, in today’s Ringgit, adjusted for inflation.

RM50,000 withdrawal in today’s ringgit may be enough, or even abundant for some people leading a simple lifestyle, who are completely debt free and with no other heavy obligations. For others who would prefer to enjoy a more luxurious life, such as having a bigger house, a better car, or to travel to Europe, US, South American etc. for annual holidays, RM50,000 a year is definitely not enough.

What the retiree can do is to invest in the equity market, earning say 8% return a year. With this, he would be able to have an expected amount RM70000 a year, or RM20000 more to spend in a year as shown in the TAble, which he can use to do travelling, even to overseas destinations.

How can the retiree achieve his goal of a higher return, more importantly, safely and with little risk?

Investing in unit trust agents and fund managers

Unit trust is a good form of investing for long-term, especially for those who has no time, or little investing knowledge. However, with the upfront fee of say 5%, annual management expense of 2%-3%, the asset under management fee and wrapped fee by financial adviser, and many other fees, it is highly unlikely one can get a real return of 8% a year over a long period of time investing in unit trust, unless one can spot a good fund manager. You can forget about the 18.6% as advertised above.

My own experience in unit trust investing shows the huge underperformance against the broad index, mainly due to the various costs. Some investors may have different experience, but my hunch is, most investors don’t even know how to calculate and compare with the broad market the right way.

Invest with a qualified, independent, licensed financial advisor

I worked as one before in a firm with the largest number of qualified, independent and licensed advisors, with the aim of providing holistic approach to personal financial planning. However, it was difficult to cari makan (survive) trying to do that as nobody was willing to pay for a comprehensive personal financial planning advice. The firm I worked with was not interested to support its advisors doing this. it is quite sad to reveal that the industry focuses too much on pushing financial products rather than giving independent advice. Sorry to say that my own experience didn’t end well. Almost all investments, supposedly suitable for high net worth investors for overseas investments; Dominion Funds, Walton, Man fund, funds of funds etc., scores of them; few have positive results, and many investments tanked, and investors lost, or almost lost everything. None could keep up with the performance of the broad market. The only consolation for me was I never sold any of those stuff as I myself didn't believe in them.

The next time any of them ask you to buy their products, first ask what they get out of it. That is very important as you will be able to make a better judgment whether to invest or not. There is huge conflict of interest in this industry.

Invest in exchanged traded funds

Exchange traded funds or ETFs are attractive because they allow investors to be invested in a fund with much lower costs of entry and exit compared to almost any other type of fund. Entering into or exiting from a fund is as simple as selling or buying a share but brings benefits such as cheaper cost, greater diversification, lower risk and convenience.

Since these investments are passive, ETFs often charge management fees that are less than half that of unit trusts for equities – typically around 0.5% compared to 1-1.5% for unit trusts. For bonds, management fees for ETFs can drop to as low as 0.1%. There are no exit/entry costs, which can save an investor as much as 6% compared to unit trusts. Overall cost savings can be as high as 7%.

There are currently eight ETFs listed in Malaysia which includes a bond fund. Four out of the seven equity funds are regional funds, covering Asean and China.

However, unlike the ETF in the more matured market such as that of US, the liquidity and diversity of these funds are still much to be desired.

Invest in the stock market on your own

If the experience investing above is so bad, why don’t invest on your own?

“It’s not supposed to be easy,” Berkshire Hathaway’s Charlie Munger says about investing. “Anyone who finds it easy is stupid.”

JP Morgan published the 1Q 2014 Guide to the markets. Based on their analysis, the average investor had a 2.3% annualized return over the 20 years from 1993 to 2012, way underperformed the broad market return of 8.4% during the same period. This return is not even enough to beat the rate of inflation during the same period, resulting in negative real return.

Hence to be able to have higher probability of success investing on your own, one really has to have something extra, some sound knowledge in investing ad good and proven strategies of investing.

Following stock tips

I have a friend from New Zealand who used to tell me this.

He and his friends previously working in Singapore had been using this strategy”, i.e. following stock tips from friends and reading from newspapers and magazines. All his friends, including himself, lost huge amount of money doing that. Their CPF money had diminished in value by half or even two thirds following rumours and tips.

Well, that was his and his friends experience. Each and every one may have different experience. My own experience wasn’t good too. That is why I have written this article recently, “Never buy any stock touted by anybody in the link below,

https://klse.i3investor.com/blogs/kcchongnz/157367.jsp

So, what are you going to do if you wish to have a more comfortable retirement life in a safe and predictable manner, beating the gremlin of inflation and mitigating the risk of longevity and also uncertainties such as currency depreciation risks etc.?

We will discuss this in the next topic.

You are welcome to contact me and discuss about it at

ckc14invest@gmail.com

KC Chong

Appendix

Table 1: Annual withdrawal for 1 million Ringgit principal for various years of retirement and return

Note: All in today’s Ringgit