Saving

Should I consider buying an annuity insurance for my retirement?

Annuity is an insurance product that insures your income for life or a certain period of time. Annuity insurance used to be quite popular in the past used for retirement planning. Life insurance companies will collect lump sum or a series of installments from the insured and help them to invest. In return, the life insurance companies guarantee the fixed regular income for a period of time to the insured. In this article, we will discuss the pros and cons of an annuity insurance.

Pros:

Annuity insurance is good because the income is guaranteed for a period of time during retirement. Some annuity products will provide life time guaranteed income. Hence, it provides certainty of income during retirement life. The income is kicked start after certain years upon purchasing the insurance policy.

Comparing annuity insurance with normal investment, the return of annuity insurance is certain. There is no need to worry about market volatility and hence the retiree has the peace of mind on the market movement.

Cons:

Annuity insurance is a type of insurance and hence there are various costs involved, i.e. insurance agent commission, administration charges, insurance cost, fund management cost, etc. The return will not be high compared to pure investment scheme.

Annuity is suitable for people that cannot save regularly, no idea on how to invest or very afraid on market volatility. It provides a good solution to help people to save and withdraw retirement income systematically. The regular draw down feature of the annuity will prevent people withdraw excessively and finish off their retirement fund just few years after retirement.

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How to calculate your retirement fund by “multiply-by-25 rule”?

As per the Ringgitplus Malaysia survey on Malaysian financial literacy, 21% of Malaysians didn’t save money at all. This is one of the biggest reason why most Malaysians cannot afford to retire.

There are many ways to calculate the retirement fund required. The one requires the financial calculator will be the most accurate one. However, is there anyway you can calculate your retirement fund based on some simple rule of thumb? Yes, you can calculate using “multiply-by-25 rule”.

Based on this rule, the formula is: –

Retirement fund required = 25 x annual income required during retirement

For example, if Ali needs RM 50,000 annual income to survive, the retirement fund required is RM 1,250,000 (RM 50,000 x 25).

This is assuming for 30 years’ retirement with 4% yearly withdrawal. How does the formula works? Basically, you are saving 25 years’ of annual income to fund 30 years retirement. It is based on the assumption that the lump sum is investing at a reasonable return slightly higher than inflation. Also, it is assumed that the yearly withdrawal is only 4% of the lump sum. For example, for the first year of Ali’s retirement, he will withdraw 4% of RM 1,250,000 = RM 50,000.

If one requires to retire early and have more than 30 years’ retirement, the fund needs to be bigger. Also, as mentioned above, the retirement fund requires to be saving or investing in vehicles which generate reasonable return slightly higher than the inflation. If the retirement fund is saved in normal bank account with no interest or low interest, higher retirement fund will be required too.

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The formula of wealth

I recently learnt about a formula of wealth via a book authored by Rob Moore. So, I’m sharing some insights I got from the formula he shared in the book:-

Wealth = (Value + Fair Exchange) x Leverage

It is interesting to note that leverage is part of the formula. I realized that the inflation is rising too fast in the modern world currently, hence we require at least a bit of leverage to speed up the wealth creation process. If there is no leverage, perhaps there is no wealth at all. As long as the wealth is created slower pace than the inflation, our wealth is in fact decreasing. Leverage can come in the form of leverage on other people’s money, skills and time.

Value is the value of service we provide to others. Wealth cannot be built without active income. We need to trade our time / service to get some forms of active income initially before we can leverage on other to help our money works faster. Once we have some savings from our active effort, we can then channel our money on investment (leverage on other successful businesses). Read here for an article on this topic.

Fair exchange in the book refers to give and receive fairly. Products / services that we offer shall be in fair price. Also, we must also learn to receive the fair compensation. If we purely know how to give but unable to receive, we will be poor. If we only know how to take from others without serving, the money transfer will soon end as no one will be willing to give continuously without receiving.

In conclusion, money moves from those who value it least to those who value it most. Start to create more value and the equivalent amount of money shall flow back to you.

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Withdrawing your EPF savings via I-sinar?

Last month, the EPF authority has removed all conditions to withdraw EPF monies in Account 1. For those with balance more than RM 100,000 in their EPF account 1, they are allowed to withdraw up to 10% of their account 1 balance. For those with balance less than RM 100,000 in their EPF account 1, they are allowed to withdraw max RM 10,000. These withdrawals will be disbursed in stages over 6 months.

However, the question is whether you should withdraw the EPF retirement money?

According to EPF data, 65% of contributors below 55 years old had less than RM50,000 in savings. Around 60% of retirees used up all their savings within three years of retiring. Many published articles have shown that most Malaysians cannot afford to retire.

The reason why the government limit the withdrawal of the monies within the EPF account all this while is to ensure Malaysians have more locked savings for their retirement stage. Now, due to pandemic, it seems to be good to allow Malaysians to withdraw their retirement saving before age 55, however, the drawbacks could be severe if the withdrawal if not handled correctly.

Rules of thumb:-

If you do not need this money to survive, do not withdraw the money so that you can have more savings for your retirement.
Do not withdraw the money for purchase of non-essential products especially those products which cannot generate income for you now and in the future.
Never withdraw money to pay off loans that have interest lesser than 5%. EPF generally distributes dividends of 4-5%. If the loan interest is below 5%, i.e. PTPTN loans, housing loans, it is not recommended to withdraw.
Never withdraw money and keep the money in the saving account. Some may have the idea to have more monies sitting in their saving account so that they feel more comfortable. Saving accounts generally have very less interest and it is not productive to keep the long-term retirement money in the saving accounts.
If you are withdrawing the money to invest in the stock market, you need to ensure you have the appropriate skills and knowledge to invest and trade. Do not simply listen to rumors and bet on certain stocks.

Hope the above will give a rough idea for you to decide whether you should or should not withdraw your EPF saving.

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The Source of Wealth Building

Learning from the richest from world, the wealth can mainly be built from 2 sources. One is building a successful business with high valuation and second one is building profitable investment portfolio by leveraging on other successful businesses.

If one desires to be very rich, one cannot simply rely on working to get higher salary and save more. Even becoming a self employed does not necessarily mean an effective way in building wealth. One needs to build the business to be automated and having high valuation to be able to increase his / her wealth. In fact, the wealth built through business can only be confirmed when the business is sold or listed. Else, the wealth is not retriable when it seems to be only on paper that cannot be realized.

The world wealth is being built at a pace that is so fast compared to last century. If we notice, the inflation rate is getting higher and higher. It is a sad fact to know that the salary increment mostly cannot catch up with the inflation rate. This is why we feel that the things are getting more and more expensive, and it is harder to afford a house compared to a decade ago.

Because of the high speed of inflation and wealth growing, one needs to be aware of what needs to be done on building his / her own wealth at least at the same pace. If others are growing their wealth at a faster pace, staying on the same pace will mean he / she is poorer. Things will be getting more expensive.

Hence, it is important to stop and think about the source of wealth. One shall not only put the focus on the salary increment or expenses reduction. The focus shall now be more on channeling the extra saving to build wealth. The effective ways, from what is happening now, are building a listed company or invest in such companies on the secondary market. If we cannot build a listed company, at least we shall find a way to leverage on such companies through investment.

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Should you spend or save?

Financial literacy of Malaysians is low. Research shows that most Malaysians do not have enough for retirement and many millennials have high credit card debts. What is the root cause? The saving rate of Malaysian is too low. Malaysians are spending more than what it should be. Malaysians are also very optimistic about their future as they just believe that they will have enough in the future.

In order to decide whether you should spend or save, there should be a financial plan in place. Understanding your future earning capability is hence very important. Say for example, if one can only work until age 40 and will spend another 30 years not working, one needs to save more compared to the one who is working till age 60 and spend 10 years on retirement life.

Many Malaysians ignore the importance of financial planning until they are too old to work or stuck with heavy debts. At that time, it is too difficult to resolve the financial issue. When one is too old to work, can he still reverse the time to earn more or save more? When debts are piling, where can he gets money to pay off the debt?

While having financial plan in place will ensure one has the clarity how much he / she needs to save per month to have comfortable retirement life. He / she will then able to judge what item he / she can spend on. For example, if one realized that he needs to have RM 1 million to retire and he has 20 years’ time before he retires, he needs to save RM 4,167 per month or invest RM 1,700 per month at 8% annual return. If he cannot save and invest RM 1,700, he needs to find ways to increase his income or reduce his expenses. He then knows what he can spend per month. If one has no clarity of what amount he needs to save monthly, he is likely to spend more. It is not when the earning capacity is increased only one needs to do financial planning.

It is also not when there is saving only one needs to start planning. We don’t wait for problem to arrive only we are thinking about the solution, it is often too late and the problem might be too difficult to solve. We need to start planning to avoid the problem!

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What is the relationship among bond yield, inflation rate and bond price?

In layman term, bond yield is the “interest rate” which the bondholder will receive by investing in the bond. If the bond yield is 3%, it means the bondholder will be getting 3% return from the bond.

Bond yield and bond price has inverse relationship. When the bond price drops, the bond yield increases. Bond is issued at a fixed par value initially. Before the maturity date of the bond, the bond price is fluctuating according to the supply and demand of the market. If the demand is strong, the bond price will increase, i.e. can be higher than the initial issued par value, hence the “bond interest rate” (bond yield) will drop. Vice versa, if the demand of the bond is low, the bond price will drop to attract demand and hence the bond yield will increase.

For example, during the initial bond issue, Bond A was sold at USD100 at 5% coupon rate annually (USD 5 per year is given as “interest” to bondholders for every USD 100 bond). After a year of issuance, many bondholders of Bond A wanted to sell the bond and there were not many buyers around. Hence, the bond price of Bond A dropped to attract buyers. New bond buyers could buy the same bond at, say USD 90, lower than the initial price of USD 100. Considering the “interest” (coupon) is USD 5 per bond, the yield is no longer 5% but 5.55% (USD 5 / USD 90), an increase in the bond yield when the bond price dropped.

Bond yield is also greatly affected by the monetary policy – interest rate. The government normally increases the interest rate to slow down inflation. When the government announces higher interest rate, it means there will be higher saving rate and high borrowing rate. Corporates then tend to borrow less because the borrowing cost is higher. Savers will save more because the saving rate is higher. This will in turn curb spending and slow down the inflation.

When the interest rate is high, the bond yield will be high too. This is why, when the bond yield is climbing high recently, there is a fear that it was driven by high inflation rate. High inflation rate will lead to government increasing interest rate which will cause corporate borrowing cost to be higher and hence slow down the growth of the companies. It might in turn hurt the equity market. Read more about bond here and here.

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Your kids have received some Ang Pao monies! So what’s next?

Every year, your kids will surely receive some monies. The monies received can be as high as 4 figures every year! What to do with them? You shall put these monies to work in long term. See the table below:-

If your kid is receiving RM1,200 Ang Pao every year, after 15 years, your kid will get RM 18,000 in the saving account at almost 0% interest. Meanwhile, if you choose to help your kid to invest and put into an investment account which grows at 8% annually, the money would have almost double to RM 32,000+. If the rate of return is 12%, the RM 1,200 yearly Ang Pao would turn to RM 44,000+ in 15 years. That is the power of compounding interest and the habit of regular saving.

If the money is untouched for long time, choose a saving place that can help you kids to grow their Ang Pao monies. It can be part of their education fund in the future too! These are some of my kids’ investment accounts and I started with only RM 5,000 each and slowly, it turned out to slowly grow into 5 figures account.

Where you choose to save your money is crucial. Every little effort counts! Let’s help your kids to grow their monies too! Contact me if you wish to help your kids to set up this little investment account!

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MCO and can’t visit relatives and friends? This is how you can send Ang Pao!

This year is a special year which we are not allowed to travel and visit relatives and friends. No worry, we have Zoom meeting which allows us to meet our friends, family members, relatives electronically! How about angpao? With the advanced technology, these are the few ways you can send your Ang Pao too!

Wechat: Wechat allows you to send money via Wechat Pay and include the special Chinese New Year message!

Send monies via Wechat with special message

E-wallets like “Touch and Go”, “Boost” and “Grabpay”: many are giving promotions like cash backs and lucky draws

Various banks – Maybank2u, Ambank, CIMB clicks, Hong Leong bank, HSBC banks, etc.: many are having promotions for sending e-angpao and you can win prizes too while sending angpao like usual!

Check out the promotions on the banks or e-wallet websites! Don’t miss out the lucky draw while sending Ang Pao to your loved one! Personally, I prefer Ambank, CIMB and Public Bank. There are better promotions from these 3 banks. You can have lucky draw entry via min transaction of RM 10 for CIMB and Public Bank and RM5 for Ambank. Huat ar!

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How to maximize your money to achieve your goal?

Money and time are valuable resources. So, it is important to understand how you can maximize the use of money so that you can achieve your goals.

In order to maximize the usage of money, you can split the usage into 3 categories: –

Necessities (using “optimization” technique) – these are the things you must spend money on, for example, insurance, food, rental, kid education and transport. So, you need to “optimize” the usage of it, i.e. spend less but getting the same results. This can be done by doing cost comparison or spending on shops which offer long term discount. If you are driving to work alone in a car, consider whether it is possible to car pool to save on transport cost? If you are eating out, check is there any restaurant which can offer better discount?

“Want” item (use “fix the budget” technique) – these are things which are good to have but not necessarily give you great benefits considering the cost. Examples of this category of items are luxurious handbag, watches, big cars, etc. A more expensive handbag would have the same function as a cheaper bag. So, spending on it might only give you higher status, perhaps? In this case, I suggest you to fix a budget on these items, say 2-5% of your salary every month. You shall not spend more than the set budget. Eventually, you will see you are able to save more as you have set the boundary of your expenses on the “want” item. At the same time, you still enjoy the great feeling of having what you want (may not be instantly, but you will eventually get it). It will also give you motivation to earn more money so that the money allocated to these items will be higher.

“Goal” item (use “investment” technique) – Goal items need more effort to get them. Hence, investment shall be used to get better return. Saving money slowly is no longer working to obtain a goal. Commit to put a little bit more time and money to invest, grow your remaining saving better. If you save RM 500 a month, you will have RM 60,000 after 10 years. However, if you save and invest RM 500 a month to an investment which gives 10% a year, you will have RM 463,500 after 10 years. nearly 700% different! Invest to reach your goals.

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