This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 12 - 18, 2016.
Retirement planning to get tougher
BlackRock Inc’s global chief investment strategist Richard Turnill
said in a Bloomberg report in late July that it is going to be really
hard for any asset class to give investors returns of more than 6% in
the coming years.
“Most won’t even scrape 5%. Our five-year return assumptions have
steadily moved lower since the financial crisis, amid weak global growth
prospects, easy monetary policy and rising valuations. We have lowered
our assumed returns for most fixed-income assets, following a drop in
yields (and rise in valuations) in the second quarter,” he added.
According to Schroders’ Seven-Year Asset Class Forecast Returns: 2016
Update, Asia-Pacific ex-Japan equities will generally be the best
performer in the 2016 to 2023 period, with real returns forecast at
8.5%. This is followed closely by Japanese equities, with real returns
of 7.9%. UK equities will be the worst performer, delivering real
returns of -2.1%. Private equities will do well and is predicted to
generate a 7.5% real return (see table).
The low-growth, low-return environment will make it much tougher for
those heading for retirement. In McKinsey Global Institute’s Diminishing
Returns: Why Investors May Need to Lower Their Expectations, released
in May, it was found that lower rates of return could have a profound
effect on both individual and institutional investors, and by extension,
on governments as well. For example, a 2% difference in average annual
returns over an extended period means that a 30-year-old today would
have to work seven years longer or almost double her savings to live as
well in retirement.
“As a result, pension funds could face a funding gap that is even
larger than the one they are struggling with today. Among others likely
to be affected are asset managers, whose fees will come under pressure
in a lengthy period of lower returns, and insurers that rely on
investment income for earnings … policymakers may need to prepare for a
later generation of retirees with less income,” says the report.
As it is, one’s retirement savings are usually not enough. In May,
EPF’s head of strategy management Balqais Yusoff pointed out more than
two-thirds of its contributors (78%) did not have at least RM196,800 to
sustain them in their retirement years.
As pensions are going to be affected, those who are preparing for
retirement today have to make serious adjustments to their lifestyle or
savings, says Wan Kamaruzaman. “We are trying to educate civil servants
on the importance of financial planning when they enter the labour
market. Financial planning starts the moment you start working.
“Previously, we focused more on people nearer the retirement age. But
now, it is the other way around. We are trying to inculcate a saving
culture to remind us that we need to save more to retire.”
He acknowledges that it is not going to be easy. “It is a Catch 22
situation — you tell people they have to save more, but the cost of
living and discretionary spending mean they do not have enough to save.
Companies are not performing that well, so obviously, the bonuses will
not be as great. It is a vicious cycle.”
Datuk Javern Lim, group managing director of VKA Wealth Planners Sdn
Bhd, advises people to focus on increasing their monthly income so as to
be able to save more. “Focus on increasing your monthly income stream,
which can lead you to save a bigger 10% portion for investment too.
Consider some structured investment products that may require a longer
lock-in period but are able to offer a higher return on investment.”
In an investing climate like this, investors may be tempted to invest
in higher risk assets to compensate for the lower returns from other
assets. But Yong Chu Eu, licensed financial adviser at Fin Freedom Sdn
Bhd, advises against it. He does not recommend taking higher risks in
today’s climate as investors risk losing all of their money.
“High living costs are pushing more people to more complex,
short-term, high-return investment schemes so that they can have their
retirement on track or financial freedom soon, which I don’t think is
appropriate. Because of this, many people end up losing money after
falling into investment traps or scams, or taking on too high a risk,”
he says.
Lim advises investors to stay away from investments that could see
them lose all of their money. “When we invest in unit trusts, we invest
in businesses. When we invest in properties, in the worst-case scenario,
the properties are still there. The same goes for gold; the gold bars
are still there. We are talking about accumulating a retirement fund for
our old age. Our retirement fund is serious money. We cannot afford to
lose it,” he says.
Picking an investment that offers tax benefits is all the more
important in this climate. Lim says investors should consider
instruments that could offer moderate returns and yet free you from tax
implications. PRS is a case in point.
“[If you are in a high tax bracket,] you have already saved 25% in
tax on that RM3,000 invested, that is, assuming the RM3,000 did not give
you any returns. Moreover, the PRS funds are managed by the fund
managers who also manage the existing funds [into which many of the PRS
funds feed].
“Under the regulations, they can only charge up to 3%, so there is an immediate saving of 2%. Some even charge a 0% fee.”
De Alwis advises investors to reexamine their portfolio. “If
everybody is chasing returns, now is the time to look again at your
portfolio to ensure that you really have diversification across the
different investment classes. Bear in mind, I don’t mean asset classes,
but investment classes,” he says.
“When I say asset classes, many get confused because they begin
thinking how much they should put into equity, fixed income and balanced
funds. When I say investment classes, it is a good time for you to look
again at things on a holistic level — how much exposure you have in
unit trusts, the stock market, properties, bonds and so on.”
Today, it is even more important for investors to set a “true blue
minimum target”, he says. “When I ask investors, they tend to say 8% or
10%. But your true blue minimum target should be your real inflation
rate, which should be averaged at 3% to 4%.
“You can be more ambitious and give yourself 5%. But first things
first. You have to build a portfolio to make sure you can achieve that
minimum 5%. From there, you need to remember that you have certain
things that give you higher returns over a certain period.
“You have to look at the annual returns of your portfolio. Start
looking at those that give you higher returns over a rolling period
[when returns and markets] are higher, and those during years that are
lower.”
Investors must revisit their retirement portfolio and set realistic
targets. De Alwis says with a floor target, their mindsets change and
they find that they do not need to take on much risk to achieve their
targets.
“If I were your financial adviser, I cannot build your portfolio
around 8% [which is your ideal target]. I need to set a minimum floor of
5%. After that, we ask how do you achieve more than 5%?
“Let’s say you want 8%. If you use the rule of 72, you will need nine
years [to double your initial investment]. But if you take 72 and
divide by 5%, it will take about 12 years. Is that acceptable or do you
need to put more money in? Do you need to save more? Then the reality
sets in.
“So, I always ask people to take a few steps back. I am not saying
you should put everything into less risky assets. But once you take a
few steps back, you would have better peace of mind. I have already
conservatively decided that I need 5% and I have 12 years to [double my
investments], so that means I will be fine.
“It is a fact that the low-yield environment is here to stay. So,
manage your expectations and revisit your portfolio; whatever extra is a
bonus. Be more pragmatic about your financial planning — diversify
properly across all investment classes.”
Investors must always have cash ready to deploy to take advantage of
future opportunities and to average down. “These two strategies are
different because averaging down means doing it when the market is down.
You do not want to be forced to realise your loss. Opportunity means
when you see a potentially good investment coming and you don’t want to
sell down [your other investments], you have the cash. Now is a good
time to revisit your portfolio because there are always opportunities
when the market is down.
De Alwis elaborates further on portfolio allocation. “In your
portfolio, 20% should be as liquid as possible because the first rule of
thumb of liquidity when you invest is you need to know how much your
reserve can last you.
“Before you invest in anything, make sure you have a cash reserve of
three to six months. That is the basic principle. Once you have the
reserve, you can invest the additional portion. Of that portion, I
recommend putting 20% in liquid assets.
“You never know when an investment opportunity is coming and you want
to catch the trend without have to sell any of your current holdings as
it is just a short opportunity that you can liquiditate later. Do not
have an investment portfolio that gives you no choice but to realise
your losses unnecessarily.”
Options for EPF contributors
Contributors to the Employees Provident Fund (EPF) have a few options if
the dividend is low. Yong Chu Eu, a licensed financial adviser at Fin
Freedom Sdn Bhd, says they can use their EPF savings to pare down debts
such as their mortgages or withdraw more to put into unit trusts.
“They can use their EPF savings to offset debts, especially housing
loans. If interest rates fall to a similar rate as the housing loan, the
free cash can be used to invest.
“Let’s say your current effective interest rate for the housing loan
is about 4.5%. If EPF dividends fall below 5%, then it is wise to
withdraw your EPF money to pay monthly loan instalments for a year,
which will give you free cash to invest. This way, you are managing your
‘good debt’ to grow your wealth.
“They can also withdraw some of the EPF money [quarterly] to invest
in approved unit trusts to get more returns. The EPF investment strategy
is very conservative. If you look at its previous annual reports, most
of its money are invested in bonds and the guaranteed annual return is
2.5% (the average return over the past 64 years has been about 5.9%).
“That might not match the risk appetite of someone who is hungry for
higher returns or looking for more risk (more equity/foreign exposure)
... If we refer to Fundsupermart’s fund ranking (last updated Aug 20),
Kenanga Growth Fund is the top performer with an average 17.2% return
yearly for the past 10 years (about around 17% annualised return for the
past 15 years). This fund’s returns are far more superior than those of
EPF and unit trusts.”
Those who have cash to spare can place their savings in private
mandates under the EPF-approved investment scheme. A quick check found
that PhillipCapital is a provider of the private mandate option.
“Investors can withdraw their money from Account 1 and pass it to the
EPF-approved fund managers who will select stocks for them. The minimum
investment is RM30,000, so this option is only for investors who are
willing to take higher risks in exchange for possibly higher returns,”
says Datuk Javern Lim, group managing director of VKA Wealth Planners
Sdn Bhd.
