How much MORE I need to save for retirement?

How do you fund your retirement? Common ways:-

1. EPF
2. Share Investment
3. Mutual Fund
4. Life policy
5. Property (rental income or sell the property)
6. Allowance from children
   

Use this simple calculator to estimate the shortfall (gap to reach your goal) for your ideal retirement. Just 1-2-3 steps. Save MORE for a better retirement.

Remember, when you are retired, the two most important thing are

1. Safety of principal
2. Cash flow
   

Comments on the "asset" to fund retirement:-

1. EPF - Common to all it is NOT enough. Return is average due to huge fund size. Related to many government-linked company like Sime Darby which incurred heavy loss in 2010.
2. Share investment - High return, high risk. High liquidity. Should have more high dividend stock during post-retirement for stream of cash flow.
3. Mutual fund - mostly linked to share investment or bond. High return, high risk+high expenses. To switch to low risk profile during post-retirement.
4. Life policy - Cash value in life insurance policy. Life fund managed by life insurance company according to Insurance Act 1996, therefore the allocation of fund is restricted. Pros - safe and steady return. Cons - Can not give high return. Highly suitable for retirement planning as the outcome as highly certain.
5. Property - Low liquidity. Need tenant management if aim for rental income to support retirement.
6. Allowance from children. - This is special. Take how much you give your parent now and divide by 2 or 3.... probably that is how much you can expect. So, better don't expect any.
   

Ideal mixture of asset for retirement

1. EPF 20%~35%
2. Share Investment 10%-30%
3. Mutual Fund 10%-20%
4. Life policy 20%~30%
5. Property 5% ~20%
6. Allowance from children - don't expect any. If you have, take it as bonus.
   

You will never know which "asset" will depreciate in value (esp. Share and Mutual Fund) in 10 to 30 years later when you need to cash it.

• If EPF, Share Investment and Mutual Fund give you good return, life policy is a bonus.
• If Share investment and mutual fund doesn't perform well, life policy helps to minimize the impact.
  

Property - An Asset or Expense?

In accounting/bookkeeping language, both Asset and Expense are Debit Balance item.

If you owned a property worth RM500,000 - do you really own an asset or an expense?

Actually, both are right since both are Debit Balance. Sound confusing....

Suppose, the ideal ROI for you is 5% (using EPF last 10 years as benchmark), the cost of using the property (as if you are renting it) is RM500,000 x 5% = RM25,000 per year or RM2,083 per month. On top of that, you still need to pay insurance, quit rent and assessment as well as the maintenance.

Can we expect another round of big appreciation like what happened is the past 10-20 years in next 10 to 20 years? Hard to predict.

Malaysia is well known of having slowing population growth especially amongst the Chinese. Can you predict the future supply and demand?

More residential properties will be purchased for investment purposes rather than primary place of shelter. Look at China, supply in certain cities is more than demand for next decade or more.

So, it is not surprising that many old folks with empty nest (no more children staying together with them) will opt to sell the big house and move to lower cost of living places or smaller house. Keep the money for retirement as the "cost of owning an expensive house" is high as per above illustration.

Lastly, property is still an ideal investment but not the perfect and sure-make-money investment. I will still buy another but with careful planning to avoid property-rich-cash-poor trap.

Buy Term Life, Invest The Difference

Many research indicates to “Buy term and invest the difference” which is what I plan on doing. But I’m still curious, if the wiser choice is to buy term, then:

Who actually buys whole life? Why?


Reply from someone, very interesting.

A rule of thumb:

When you select TERM insurance, you are RENTING the coverage.

When select a whole life policy, your are BUYING the coverage.

You have to decide what type of coverage is right for you.

Keep in mind that TERM rates increase annually or in increments (5 year, 10 year, 20 year, 30 year) and at some point, the rates will be higher than you will want to pay…so, you go without it.

Most folks get the idea of “I’ll buy term and invest the difference” yet they fail to “invest the difference” and as they get older, with the increase in the term insurance, they have LESS to invest.

With whole life insurance, the payments will stay the same for the entire period. Not a bad deal for youth as it keeps the cost of life insurance low, and protects their “insurability” in the future.

Good luck and I hope this helps.

Click here for a case study using my own age and expectation, comparing Term and Investment-Link Product.

There is no one fixed rule for everyone, else all financial advisors and consultant will be redundant.

Retirement killers

So, you have prepared for it since age 25.

Beware of the retirement killers, even if you are well prepared, if you have not prepare for it, do it now.

Killer # 1 - Cracking your nest egg before retirement.
Killer # 2 - Spending your retirement money way too early.
Killer # 3 - Having no clue about how much to save.
Killer # 4 - Spending your retirement savings too fast.
Killer # 5 - Wrong asset allocation.
Killer # 6 - Health problem / medical cost
..... and the list goes on....

Should I save for retirement?

Do you really need five reasons to save for retirement? Probably not, but in case you did here are five very good reasons why you should start saving, even if it’s not for retirement, right this second.

1. Time Is Your Friend
Time will smooth out the ups and downs of the stock market and it will, when combined with the power of compounding, means greater and greater returns down the road. At 10% a year, $100 today will become $110 next year, $121 the year after, and $672 in 20 years. The longer you have, the more it will grow.

2. Old Habits Die Hard, So Start An Old Habit Today
Still bite your nails huh? Yeah, me too, that’s why they say old habits die hard so why not start an old habit today by saving for your retirement? In five years it’ll be old hat and in ten you won’t know what to do if you didn’t save a percentage of your pay into a retirement account.

3. Save Now Or You Might Not Be Able To Later
Habit...
Build a habit of saving or build a habit of spending...
If you don't save now, what are the chances you will be saving later???

4. Don’t Put Off Until Tomorrow What You Can Do Today
Just a call, many financial advisor will be ready to serve you, either fee-based or product-based.

5. You Will Regret It If You Don’t
Let guilt be your guide in this one… you know you should be saving, it’s just a matter of overcoming those obstacles you’ve put ahead of yourself. Let guilt be the bulldozer that knocks them all down because it’s very powerful and it only speaks the truth. You don’t want to be 30 and wondering why you didn’t save the last five years, or 40 and wondering why you didn’t save the last fifteen years, and you surely don’t want to be 60 with little in retirement savings wondering when you can actually call it quits. It’s never too early, it’s never too late, because you’ll only get older and you want to retire someday right?

Importance of Health Care Insurance.... a cost of a cup of coffee a day

Read this

Advantages of Whole Life Insurance

Read this for better understanding of the role of Whole Life Insurance in your financial planning.

Forget about rate of return if you don't even have a fund.

Forget about rate of return when your property is vacant.

Pros and Cons of Unit Trust Investment

Advantages of Unit Trust Funds:

Affordability
This is an obvious advantage - it does not cost much to invest in a unit trust fund. For an initial investment as low as RM1,000, and you can buy into a fund and get started. Some unit trust funds allow you to add monthly basis as low as RM 100 after the initial investment.

Diversification
As an investor in a unit trust fund you can access a wider range of securities than you could by investing on your own. With the amount of money you invested you can only purchase limited shares of a very few companies; but when pooled in a unit trust you achieved an immediate diversification - your money is pooled with other investors a like and get spread out over many companies: this provides you with greater purchasing power.

More important diversification reduces risk. Loses in some (invested) companies can be offset by gains made in other companies. You can further reduce your risk by investing in several trust funds across different sectors.

Liquidity
It is easier to buy and sell your units compared to investing directly in company stocks where price and opportunities depended on actual demand and supply of your share at any given time. With unit trust fund you can buy and sell at the published price of the fund.

Professional Management
Unit trusts are managed by a team of experienced professionals who manage the fund in an informed and organised manner as opposed to the individual investor who may invest in a random fashion. Investment decisions made by fund managers are based on extensive research and their own investment skills, and they continuously monitor the portfolio based on researched information.

Reduced Stress
The investor does not have to worry about personally monitoring his various investments - keeping an eye on their performance and deciding when to buy or sell. Instead he has the superior investment skill of professionals to do it for him. Unit holders receive interim reports every six months on the progress of their funds, the investment changes made and dividends paid, as well as the fund manager's opinion on the investment market and economy.

Access to broader array of financial assets
Unit trust fund managers can trade in investment products that are normally inaccessible to the individual investor, such as government and corporate bonds, which may be restricted to institutional investors. Some of these products are traded in large amounts, which limits the individual investor even when he has the opportunity.

Disadvantages of Unit Trust Funds:

Subject to market risks
Since unit trusts invest in marketable securities, they are of course, exposed to market movements. Diversification will help reduce the risk but it will not eliminate risk entirely. The prices of units go up and down, dividends may or may not be paid, and you may realise a gain or loss when you sell your units.

Not suitable for short-term investment
Unit trusts are an investment vehicle suited for the medium to long term. This is because the gains from the investment in unit trusts are not realised immediately. At best one could sell the units held once its price appreciates. However, the upward movement in price, being dependent on the movement of the market, is usually much slower than the market's movement.

The moderating effect of diversification also works both ways i.e. to spread the risks in the case of a market downturn as well as the rewards in the case of an upswing in the market. Dividends for unit trusts are declared on a periodic basis and the compounding effects would only be realised over time in a favourable market environment.

No custom-made service
Unit trust funds are not custom made for you specifically; however there are various funds available in the market for you portion your investments and savings to come as close as possible to match your financial plan.

For more info on types of unit trust fund please read Types of Unit Trsut Fund

And to understand better the type of investor you are please read What type of investor are you?

A Word about Costs Associated with Unit Trusts:
There are some costs to the investor of unit trusts. It is important that you understand the various fees that will be charged to you by the fund as they will affect your total returns.

The unit trust companies are allowed to charge three types of fees:

1. Initial service charge - this is usually built into the fund's unit selling price also known as front-end load;
2. Repurchase fee - this may be included in the fund's unit buying price; and
3. Management fee - this represents the company's fee for administering the fund and is directly charged to the fund.
In addition, there are also other expenses such as the trustee fee and brokerage expenses borne by the fund.

You as an investor should examine the fees structure of the various funds you are considering. Ultimately what is most important is the fund manager's competence. It is pointless to choose a cheap fund if it is managed by a mediocre fund manager, but a great fund manager may warrant higher fees.

The biggest gift a dad could give – a child’s financial security - StarProperty.my

The biggest gift a dad could give – a child’s financial security - StarProperty.my

Retirement for Sandwich Generation

Are you a member of Sandwich Generation?

Wikipedia:
Sandwich Generation = A generation of people who care for their aging parents while supporting their own children.

If you are, don't worry, you are not alone as there are millions upon millions of us caught in the middle.

Solutions:
1. Teaching your children money skills
2. Teaching your children how to budget and how to save and live within means
3. Medical plan for your parents
4. Keep yourself financially savvy and healthy so your children won't be in the Sandwich Generation again.

Post Retirement - Maintain or Downgrade Lifestyle?

Let's assume 80/20 Rule.

80% of the working adult will have insufficient retirement fund.
20% of them, will have sufficient retirement fund.

Click here for the report on the chances that you will run short of money in retirement.

What does it mean insufficient retirement fund?
- High chances you'll exhaust your retirement funds within 10 or 20 years.
- You live longer than you have expected.
- You have to lower down your cost of living/living standard.
- You have to work longer (i.e. continue to work after 65)
- You should have save more when you are young.

Downgrading living standard / lifestyle isn't easy, it can be painful. Try it now if you don't believe.

Solution?
Earn more, save even more, keep living standard low NOW so you don't have to Downgrade it later.

Retirement Risk

Some says Risk is Opportunity, true only if one knows what the risks are and how they might be managed.

What are the TWO (2) biggest "Retirement Risk"?

1. Inflation

No doubt. Inflation is a big risk for would-be retiree and current retirees.
Official inflation rate might be 2%~3% but the actual inflation rate can goes up to double digit as health care expenses in going up up up while one's health status might going down down down.

How to manage?
- To ensure rate of return is good and most important, don't lose money in investment and get-rich-quick-scam.
- Earn as much as possible, save as much as possible, investment return as good as possible.
- Pool of risk (medical insurance)
- Eating right, exercising on a regular basis and using preventive care.


2. Outliving one's assets

How come longevity is a risk?
Most people (don't have enough saving) will run out of money first, before they run out of life.
No money (or with too little saving), how to survive with comfortable lifestyle? How to survive with dignity?

How to manage?
- To ensure rate of return is good and most important, don't lose money in investment and get-rich-quick-scam.
- Earn as much as possible, save as much as possible, investment return as good as possible.
- Create passive income
- Doing something you enjoy to keep mentally active and earning income to supplement your retirement fund.
- Keep hobby a low cost hobby.

The Power of Compounding

Hypothetically,

Mr. Young, age 18, start invest RM2,000 per year over a period of 8 years, then stops.

Ms. Late, age 26, start invest RM2,000 per year over the next forty years.

Even Ms. Late contributes RM64,000 more than Mr. Young [(40 years - 8 years) * RM2,000 per year], she can never catch up ; at age 65, Mr. Young 's fund will be worth RM1,035,160 while Ms. Late's will be only RM885,185.

* Assumption: 10% annual return for both, no transaction costs or taxes.

TIME, is one of the most important advantages for retirement planning. Procrastinating can be very costly. As the saying goes, time is money!!

Click here for the table of illustration.

Malaysia Mortality Rate

Source: http://www.indexmundi.com/malaysia/death_rate.html

Death rate: 5.02 deaths/1,000 population (July 2009 est.)

Year	Death rate	Rank	Percent Change	Date of Information
2003	5.12	193		2003 est.
2004	5.06	192	-1.17 %	2004 est.
2005	5.06	192	0.00 %	2005 est.
2006	5.05	192	-0.20 %	2006 est.
2007	5.05	189	0.00 %	2007 est.
2008	5.02	188	-0.59 %	2008 est.
2009	5.02	188	0.00 %	July 2009 est.
2010	5.02	185	0.00 %	July 2009 est.

Definition: This entry gives the average annual number of deaths during a year per 1,000 population at midyear; also known as crude death rate. The death rate, while only a rough indicator of the mortality situation in a country, accurately indicates the current mortality impact on population growth. This indicator is significantly affected by age distribution, and most countries will eventually show a rise in the overall death rate, in spite of continued decline in mortality at all ages, as declining fertility results in an aging population.

Source: CIA World Factbook - Unless otherwise noted, information in this page is accurate as of February 19, 2010

Well, 5.02/1,000 is less than 0.5%. However, 0.5% includes those die of old age. I can't find data on Mortality Rate for people die during their working life..... we can safely assume it is less than 0.5%, right?

So, the problem of "die too young" (probably define as pre-mature death during working life) is safely said to be less than 1% and the problem of "lack of money for retirement" should be a problem of 99% of us.

99 vs 1

A working person faces the following risks:

a) premature death

b) serious illness and disability

c) unemployment

d) insufficient income during retirement

The chance of (a) and (b) occurring during the working life is quite low, perhaps less than 1%.
By getting bad advice from insurance agents, they spend too much of their savings to insure against these risk.

Most people (i.e. 99%) are likely to face the risk of (c) and (d). This risk can be best managed through personal savings.

The savings should be invested to earn a good rate of return and can be withdrawn without penalty, e.g. through a low cost investment fund. The personal savings can be used to cover cash flow needs during a temporary period of unemployment, without the need to depend on borrowings which incur a high interest burden. If the savings are invested prudently, they will provide an adequate amount for retirement.

As an alternative, they can also buy a personal accident insurance for $100,000 at a premium of about $175 a year. Most of the risk of premature death is caused by accident, right?

Summary:
The key priority is to have adequate savings (say 15% to 20% of your earnings, in addition to EPF) and keep it for an adequate rate of return (low risk fund). Spend not more than 5% of your savings on term or personal accident insurance.

KWSP Dividend

Interesting.... You may get more information from KWSP's official website.

Example of some FAQs related to Dividends:

1. How did the EPF manage to offer a dividend of 8% in the 80s?

In the 80s, EPF’s investments were concentrated on interest-based investments, such as Malaysian Government Securities (MGS). It should be noted that the interest rate regime during those years were high, with the average base lending rates (BLR) hitting a peak of 12.25 per cent in 1984, compared to the significantly lower current BLR. For instance, Maybank’s 12-month fixed deposit rate as of March 2009 is only 2.50 per cent.

Consequently, investments in MGS during that era were able to produce very high returns for the EPF, making it possible for the Fund to declare its highest dividend rates. However, the high interest rate regime also meant that cost of housing loans and hire purchase were considerably higher at that time than they are now.

2.	Why are other savings funds in Malaysia able to offer better dividends than the EPF?

The simplest explanation is that other funds have different investments objectives. The EPF maintains an asset allocation structure that does not expose our investments to high risk in line with our role as a retirement fund.

Other funds are also much smaller in size compared to the EPF which stands at RM340 billion today. Smaller funds are easier to manage and more maneuverable in terms of reshuffling asset allocation and selling off shares.

Therefore, it is consistent with the "Interest And You" posted earlier this month.

If you hope the EPF dividend will be higher... then you are also expecting to pay MORE interest for house loan, car loan or business loan.

KWSP Nomination

There are two things can not be WILL away
1. KWSP Nomination
2. Insurance Policy (with Cash Value)

Have you received an email from friend on EPF Rules as follows?
-------------------------------------------------------------------------------------------
Subject: EPF Rules- A MUST READ
If ONE (1) of your Nominees in the EPF Nominees list dies, automatically the whole arrangement (EPF Nominees list) is VOID .. Meaning if, you only put in One (1) name & unfortunately he/she dies before you - automatically EPF will channel your EPF money to trustee of AMANAH RAYA upon your death.
Even though if you have few names in the EPF Nominees list, - the whole arrangement is VOID & none of the individual names left in the EPF Nominees list will get their portion & automatically EPF will channel your EPF money to trustee of AMANAH RAYA upon your death.
Piece of advice - if any of the your Nominees in the EPF Nominees list dies, please do immediately approach the nearest EPF counter & present the Death Certificate of the individual & register your NEW / LATEST Nominee in the EPF Nominees list + NEW / LATEST percentage .
If, you & the other party (maybe spouse) involved in the same misfortune (accident / illness) that caused death to both yourself / spouse please, please, please alert your siblings / relatives / parents to immediately approach the nearest EPF counter & share the information within 3 days to AVOID all EPF money to be surrendered to trustee of AMANAH RAYA .
Upon surrender to trustee of AMANAH RAYA, your children will have to battle the money thru 3 channels;
Majlis Agama
Pejabat Tanah
Mahkamah
The normal period via above 3 channels usually takes 2-3 years (except if you have inside/tip top connection) at Amanah Raya.

------------------------------------------------------------------------------------

Ok, now, let see what i got...

1. You don't have to present the Death Certificate to update Nomination. Just submit a new form, the old one will be void automatically.

2. If a member has more than one nominee and one of the nominees dies during the member’s lifetime, only the portion that was bequeathed to the deceased nominee will be invalid. So, not the whole nomination will be void.

Ok, don't just trust everything from email from unknown source.

Source: unknown.... ha ha (Please visit www.kwsp.gov.my)


Some of the FAQs from www.kwsp.gov.my (Genuine and realiable source) -

1. I have made a nomination and at the same time I have also made a will. What is the status of the nomination and will?

• The status of nomination supersedes the will. Payment will be made to the nominee/nominees that you have elected.

2. I did not nominate the beneficiary of my savings, but I have a will on my savings. What is the status of this will?

• The will cannot be used to determine the beneficiary of your savings. Your next-of-kin needs to produce the Letter of Administration/Grant of Probate/Distribution Order to claim your EPF savings.

3. If a member did not nominate an heir or next of kin, but nominate other people, can the heir or next of kin make a claim on the savings?

• If the nominee is not an heir, the heir or next of kin are not eligible to make any claims on the savings unless the nominee dies before the member whereby the nomination will be revoked and payments can be made to the heir or next of kin.

Source: http://www.kwsp.gov.my/index.php?ch=p2faqmembers&pg=en_p2faqmembers_nominate

KWSP 2009 Statistic & Annual Report

The EPF's Annual Report 2009 was tabled in Parliament on 13.7.2010 and it is good to know that the information is available for public to access.

• The statistic 2009 (12 pages) is available here.
• The full financial statement (72 pages) is available here.
• The Nanyang newspaper cutting is available here.

I did some analysis myself, interesting facts:

1. Only 1% (of total member of 5.7 million) has saving above RM400,000
2. Of this 1% (56,085 members) , 77.7% was Male.
3. 88.3% (5,111,772) members have RM100,000 and lesser in their saving.
4. Withdrawal application increased by 237% since year 2005. A lots more people drawing money. (1.95 million in Year 2009 vs. 0.58 million in Year 2005)
5. Withdrawal for housing related increased by 1,576% since Year 2005. Wow!!! Mainly from the Housing Loan Monthly Installment Scheme.

Why?? The following may be part of the answer, if not all:

1. Saving (or rather earnings) is not enough, if salary only RM2,000 per month, one needs almost 15 years plus to achieve RM100,000 saving, assuming he/she didn't apply for any withdrawal - That is why we need to aim for high income nation with high standard of living.

2. Too many withdrawal schemes. Over 1.9 million applications received for various withdrawal scheme during year 2009, 73.1% is housing related and 16.8% is age-related.

3. People don't trust EPF investment and its return, so they are not willing to keep their saving with the EPF for golden year, and try to withdraw any much as possible for whatsoever reason and manage by themselves.

It may not really that people don't know how to manage finance and thus having low deposit with EPF, right? Anyhow, I tend to believe most people have not save enough for their golden years (at least the those born in the '70 and '80).

If YOU can and able to save more for golden years, why not doing it now, why wait?

Women And Retirement

Extract from the website, The Women Summit 2009, some salient points:-

• In 2006, Malaysian women accounted for 49.1% (13.08 million) of the total population, of this
• 63.3% (8.28 million) were between 15 to 64 year age group .Female labour force makes up 45.8% with 3.8 million in the labour market, which is 36% of the total labour force.
• A recent survey (not sure how recent lah...) by the EPF revealed that 72% of EPF Contributors spend their entire EPF saving within THREE (3) years of retirement.
• The year 2007 data from EPF on the saving capacity of women age 54 (just before retirement, leaving the workforce at age 55) showed there were 15,944 women registered with the EPF with a total saving of RM1,354,532,480. That is.... an average of RM84,955.62 per person. Enough for retirement? (Average also implies that most of the 15,944 women have much less than RM84,955)

Some inportant steps for women to take control of their finances:

• Take stock of your financial health today. Review your financial strengths and weaknesses. Understand your challenges and obstacles - is it last minute shopping or lack of discipline in sticking to your savings plan?
• Set clear goals. Think how you can make your money work for you. Make 2008 the year when you will succeed in achieving your financial goals!
• Prepare for emergencies. Build a large enough nest egg to deal with emergencies. No matter how much you earn, you must put some aside for savings.
• Develop a budget and stick to it. Identify how you spend your cash. This is the best way to minimise expenditure on items you don’t need. Use any extra funds to pay off debts or save it.
• Try to improve your Fin-Q. Equip yourself with the necessary information - read books, attend investment seminars, visit websites etc. Be proactive, take control and learn more about options to improve your financial health. By doing so, you will be in a better position to choose the right plan for yourself. Armed with information and confidence, you will have a better understanding of the equity markets, investments, property investments and other avenues.
• Understand the fundamentals of developing a proper investment portfolio. Do not be afraid of technical information and jargon. When in doubt, engage a professional financial advisor to provide advice and assistance.
• Start your retirement planning today. Younger women should start by learning as much as they can to ensure they have enough savings to sustain themselves during retirement.

It is never too late to start!

Seeing a financial advisor is also critical. Starting early, developing effective habits, then taking ongoing steps for retirement is the best way to have a smooth transition from working life to retirement and ensuring you can maintain your current lifestyle.

Source: www.thewomenssummit.org

Financial Products And You

We work hard to generate income.

We keep as much income as possible to become our asset.

We grow our asset to become our wealth.

We preserve our wealth for a comfortable post-retirement life.

There are many vehicles out there, to help us along the way to meet needs at different stage of life.

Click here for some products offer by HLA, feel free to add comments for sharing.

Key reasons for using financial product

1. To protect what we already have.
2. To protect what we going to have.
3. To preserve what we have.
4. To accumulate our income.
5. To grow our wealth.

Many people try to grow the wealth the "fast way" by investing somewhere.... the golden rule is

Rule No 1: Don't ever make losses, If you have, Cut losses.

Rule No 2: Don't forget Rule No 1.

Remember the old adage,

No one fail to plan, they just plan to fail.

"Secure Your Future" by proper planning.

Interest Rate And You

Found this website, interesting to know major central banks' next meeting and their interest rate ..... http://www.fxstreet.com/fundamental/interest-rates-table/

Today's paper (7th July 2010), finance specialists predict BNM will up OPR to another 0.25% by tomorrow's meeting and will keep it for the rest of the year due to uncertainty of the economy.

If it happened, OPR will be 2.75% by 8th July 2010, 3rd increase during last 4 months. What will happen thereafter?

1. BLR will up by same quantum of 0.25% to 6.30%
- most Malaysian whom has a house loan will be paying more interest than principal (assuming bank keep the installment amount)

2. Fixed deposit rate will be up but likely to be less than 0.25%, say 0.15% to 3.00%.
- small percentage of Malaysian population will be very happy as they depends on fixed income like FD to sustain their life-style (especially retiree)

So what? How to link "interest rate" to you?

Are you a lender or a borrower?

Lets learn a bit about interest rate from economic point of view.

• Interest rates control the flow of money in the economy.
• High interest rates curb inflation, but also slow down the economy.
• Low interest rates encourage spending and make it easier for business to borrow to invest.
• Interest rates also affect the value of Ringgit versus that of other country.
• All other things held constant, when real interest rate (inflation-adjusted) are higher (e.g. Malaysia's interest rate is higher than Singapore, Thailand, Taiwan, Japan, Hong Kong, USA, UK, Canada, European), then foreigners want to invest their fund here in Malaysia in order to earn a higher return. Therefore, demand for Ringgit will push up the value of the Ringgit.
• When Ringgit become more expensive, good for imported good (cheaper now) but bad for exporting business because our goods are more expensive. (Malaysia's economy is heavy on export).
• So, when interest rates are too high, Malaysia economy will slow down from two sides, internally domestic spending and external demand for our goods.
• So, as a conclusion, Malaysia's OPR or FD Rate are highly likely capped for the time being until..... who knows, can be a decade or more.

Glossary:
BNM = Bank Negara Malaysia
OPR = Overnight Policy Rate
BLR = Based Lending Rate
FD = Fixed Deposit

Lower return from EPF for 2010??

News on 21 June 2010:
EPF Posts RM5.55 Billion Investment Income In Q1 2010
More than 70% Increase Compared to Same Quarter Last Year

As at 31 March 2010, the EPF’s total accumulated fund stood at RM402.22 billion.

Simple math:
RM5.55 b x 4 quarters = RM22.2b / year

RM22.2b / year divided by fund size RM402.22 b = 5.5% p.a only (don't forget that the main contributor to 2010Q1 RM5.55 b income is from equity market (RM2.79b out of RM5.55b) where Q1 is a bull market).

So, do we expect a lower return from EPF for year 2010?

Read more here from KWSP official website.

EPF and My Retirement Planning

In March 2010, EPF declares 5.65% dividend for year 2009. Is it good enough? Is it too low? It depends on your perception and ..... many many factors.

Many Malaysian depends "solely" on EPF for retirement. It is one of the best "pension" scheme ever created. However things have change over the decades and the change is getting faster than ordinary Malaysian can comprehend.

From year 1983 to year 1994 - the golden years for EPF Contributors. Average return above 8.0%
From 1995 to 2000 - not so bad, still have on average above 6.5%
From 2000 to 2009 - Alert!! Alert!! We have only on average 5.06%

What has happened?

According to many articles and publications,
1. EPF size is too "huge" now compared to years ago. So, it is not easy to get high return for all member
2. Losing some money to rescue somebody. [beyond the topic]

By May 2010, EPF has a total fund size of RM370b... some estimate it will grow to RM500b by 2013. How "huge" is RM370b?

RM1 b = RM1,000,000 x 1,000

RM370b = RM1,000,000 x 370,000

The Dilemma of EPF now is how to get better return for its members yet not risking the principal. Lets look at the portfolio of EPF fund's allocation.

The following extracted from http://tonypua.blogspot.com/

As it is EPF equities investments has increased from RM46.9 billion in 2005 to RM93.9 billion in 2009. This represents a significant increase in allocation to equity from 18.0% to 26.5%. At the same time, EPF's fund allocation to the safest of instruments, the Malaysian Government Securities (MGS) has declined significantly from 39.2% to 27.5% over the same period.

What is also notable, is the fact that EPF's “loans” portfolio has increased significantly over this period as well, increasing from RM94.36 billion (36.3%) in 2005 to RM145.75 billion (41.2%) in 2009. In part, this is related to a series of loans mandated by the Government such as a RM5 billion loan by EPF to ValueCap to invest in the stock market, as well as up to RM10 billion to Khazanah Nasional for the 2009 economic stimulus plan.

Above "facts" tell us that more money has been injected into our BURSA. Anyone who does active investment knows that EPF can't easily get out from Bursa without inserting a selling pressure. In years to come, our retirement fund (EPF) will become too "market related" and unnecessary exposure to risk, 1.2 million members' retirement money.

Retire Rich, Retire Poor

Rich Dad, Poor Dad.

Retire Rich, Retire Poor.

How one can retire rich? How most retire poor?

Try this link to a Retirement Calculator by Bloomber.com, not 100% for Malaysian but quite close.

http://www.bloomberg.com/invest/calculators/retire.html

Try to do some WHAT IF for yourself. One start young will definitely "Retire Rich" while those started late may end up "Retire Poor" with very high probability.

Factors determine the retirement fund size

My retirement fund size = my earning power * my saving discipline * how long I save

and .... of course, it also includes

RATE of RETURN (something very unpredictable)

A joke to crack ...

if your retirement fund is highly "market" related (e.g. Unit trust in Equity or a portfolio of equity).... think again!!