1. INTRODUCTION By Associate Professor Dr. GholamReza Zandi zandi@segi.edu.my

2. Introduction Retirement planning is a long term process Part of retirement planning is determining how much a person needs to accumulate in order to fund their desired lifestyle in retirement Having accumulated sufficient funds for retirement, decisions need to be made about how these funds are used – Should the individual take a lump sum or an income stream? – If the individual takes an income stream then what type of income stream should they take?

3. What Is Retirement Planning? Planning involves making choices. Retirement planning requires an individual to make many choices, including: – How much current consumption am I prepared to forgo in order to fund future consumption? – How aggressive should my investment strategy be? – How much do I need to accumulate in order to fund my desired lifestyle in retirement?

4. 4 Pitfalls In Retirement Planning Starting too late. Putting away too little. Investing too conservatively (especially when you are younger).

5. 5 Initials of Retirement Planning Set Your Goals At what age do you want to retire? Start early in your career devoting money toward your retirement goals.

6. 6 Initials of Retirement Planning Estimate Your Needs Determine household expenditures. Estimate income. Consider the effects of inflation. Decide how you will provide for the difference between income and needs.

7. 7 Initials of Retirement Planning Establish Investment Program Create systematic savings plan. Identify appropriate investment vehicles. Consider tax implications. Develop investment plan.

8. 8 Review of Financial Planning Process Remember that your life changes; therefore, revise the plans that you make to keep them relevant and current. There are six steps Financial Planning process

9. 9 1. Define financial goals 2. Develop plans The Six Step Financial Planning Process

10. 10 3. Implement plans 4. Develop budgets 1. Define financial goals 2. Develop plans FINANCIAL ACTIONS Basic asset decisions Credit decisions Insurance decisions Investment decisions Retirement and estate decisions The Six Step Financial Planning Process

11. 11 3 Implement plans 4 Develop budgets 1 Define financial goals 2 Develop plans 5 Evaluate results 6 Revise plans FINANCIAL ACTIONS Basic asset decisions Credit decisions Insurance decisions Investment decisions Retirement and estate decisions Prepare Financial Statements The Six Step Financial Planning Process

12. 12 Age Income 10 20 30 40 50 60 70 80 Income Stream Retirement/ Estate Tax Savings/ Investment Asset Acquisition Liability/Insurance Benefits Remember The Lifecycle & Revise How It Reflects Your Circumstances

13. 13 * Evaluate and plan major outlays * Reduce taxes * Establish savings and investment programs and manage employee benefits * Manage credit * Secure adequate insurance * Implement retirement program * Minimise estate taxes FINANCIAL PLANS The Importance Of Financial Statements Upon Plans

14. 14 * Evaluate and plan major outlays * Reduce taxes * Establish savings and investment programs and manage employee benefits * Manage credit * Secure adequate insurance * Implement retirement program * Minimize estate taxes FINANCIAL PLANS * Monitor and control income, living expenses, purchases, and savings on a monthly basis. BUDGETS Feedback

15. 15 * Evaluate and plan major outlays * Reduce taxes * Establish savings and investment programs and manage employee benefits * Manage credit * Secure adequate insurance * Implement retirement program * Minimise estate taxes FINANCIAL PLANS * Monitor and control income, living expenses, purchases, and savings on a monthly basis. BUDGETS Feedback Actual financial results * Balance sheet * Income & expenditures statement FINANCIAL STATEMENTS Feedback

16. Retirement Planning Process Similar to the steps taken in financial planning, There are six steps in formulating retirement needs of your client as follows: Set Retirement Plan Goals. As with a personal financial plan, the retirement plan of the client must have a solid foundation. The client's goals must be specific, realistic, and in measurable terms, for example, dollar requirements and time parameters. Obtain Information. All pertinent financial information regarding the client must be obtained, including a financial statement, budget, net worth, needed retirement income, and resources that will be available to be utilized at retirement. You must also determine what interest rate and inflation assumptions to use in calculations of client's needs. Analyze the information and calculate the savings needed by your client at retirement. Determine the alternative recommendations that can be utilized to meet retirement goals of the client and develop a savings program for him. Review all possible investment alternatives and those alternatives that best meet his needs. Implement the plan. If required, assist the client in implementing the alternatives. Review the plan. Each plan should be reviewed at least annually to be sure that goals of the client are being met and to make any necessary changes.

17. Individual’s Needs In Retirement Retirement brings with it a change in lifestyle to satisfy the same needs Maslow’s hierarchy of individual needs: – needs at higher levels cannot be satisfied unless lower level needs in the hierarchy are satisfied The hierarchy starts with base level needs such as water, food, shelter and moves up to safety, love and friendship needs, self-esteem and self satisfaction needs Funding available in retirement determines which one of the needs can be satisfied in retirement

18. The Three Phases of Retirement The average Malaysian retiring today might reasonably expect a retirement period of 20 to 30 years — over that period, the individual might go through a number of phases: – The active phase of retirement — some may continue to work part time — more time for hobbies, sport and travel – The passive phase of retirement — individual less active but continues to care for themselves – The support phase of retirement — individual moves to an aged care facility

19. Issues in Retirement Planning To most people, retirement planning is a complex subject and this is where you can play an important role. However, it is imperative that when advising on retirement planning, you should take note of the following risks your clients are exposed to: Insufficient funds to support the desired lifestyle post-retirement; Exhaustion of funds prior to death; Over-exposure to 'high risk' investment assets on which he will depend; Failure to provide money for emergency expenses in an easily accessible account or investment; Poor use of benefits-in-kind or employer ex-gratia payments, thereby paying more than necessary tax; and Inadequate medical insurance, as the need for medical insurance is generally greater.

20. Important Factors in Planning For Retirement 1.Inflation 2.Outliving one's assets. 3.Loss of a spouse 4.Long-term care 5.Healthcare and medical expenses

21. Risks of Retirement 1.Market Risk 2. Household Shock Risk 3. Spending Risk 4. Health Risks 5.Retirement Income Risk 6. Legislation Risk 7. Socio-psychological Risks

22. Funding Retirement The level of funds available to fund retirement will be a function of: – the lump sum amassed – investment selection (risk / return trade off) — the investment strategy should be less aggressive in pension mode – the level of inflation – life expectancy / longevity risk.

23. The Amount Required By A Client of For Comfortable Retirement Determine the pre-retirement income of the client; Calculate his desired retirement income; Establish his lump-sum capital needed; Assess his current retirement savings; Match his retirement savings against his lump- sum needed; Eliminate his retirement shortfall

24. Example Your client is now 30 years old and plans to retire at the age of 55. His current annual income is RM 100,000 and he expects his salary to increase annually on an average rate of 3%. What is your Client’s Pre-retirement Income?

25. Solution The Pre-retirement income of your client is therefore RM209,377.79 The above figure is derived as follow: RM 100,000 (1.03) 25 = RM209,377.79

26. Example After a long deliberation, your client has agreed to your proposal to establish his desired retirement income at a target percentage of 70%. Your client is now 30 years old and plans to retire at the age of 55. His current annual income is RM 100,000 and he expects his salary to increase annually on an average rate of 3%. what is his desired retirement income? How much should be his Saving at the age of 55 for the target income of 70%? Discount rate 5%. How much your client should save for the target income at 55 from now at 30 years old? Interest rate 8%.

27. Solution If your client’s the Pre-retirement income is RM209,377.79, A target income replacement ratio of 70%, the desired retirement income of your client is RM146,564.46 (RM209,377.79 x 70%). (209377*70% ) / 5% = 2,931,289 2,931,289= A * CVIFa8%,25= 2,931,289 / 73 = 40,154

28. Funding Retirement Male and female life expectancies

29. Life Expectancy in Malaysia Years Life Expectancy Current Age Men Women 50 27.83 32.65 55 23.61 28.04 60 -· 19.66 23.74 65 15.95 19.70 70 12.62 15.88

30. Ordinary Money Vs. Superannuation Money If money is accumulated outside of a superannuation environment it is known as ordinary money – after-tax money — includes cash, shares and property If money is accumulated inside a superannuation environment, it is known as superannuation money – money held inside the tax-concessional superannuation environment (Malaysian Employee Provident Fund) and must be preserved until a condition of release is satisfied

31. Superannuation Components Superannuation money can be held in one of three forms: – Taxed superannuation money — money held inside a superannuation environment which has been subject to the more contributions and earnings tax – Untaxed superannuation money — money held inside a superannuation environment which has not been subject to the more contributions and earnings tax – Non-concessional superannuation money — a contribution to superannuation for which a tax deduction has not been claimed

32. Withdrawing A Lump Sum In Order To Fund Retirement It is important to separate taxable superannuation money from tax free superannuation money – Non-concessional superannuation money is after tax- money that has been contributed to superannuation and forms part of the tax free component All superannuation money which is not tax free is taxable

33. Superannuation Death Benefits Payable As A Lump Sum The tax consequences of leaving a superannuation lump sum to a beneficiary depends on whether the beneficiary is a dependant or non dependant — a dependant is a person who is: – the spouse of the deceased – a child of the deceased under the age of 18 – a person who was financially dependent on the deceased – a person who had an interdependency relationship with the deceased.

34. Superannuation Death Benefits Payable As A Lump Sum Continued If the beneficiary is a dependant, any lump sum will be tax free If the beneficiary is a non-dependant, any lump sum will be divided into a tax free and a taxable component If the taxable component contains taxed superannuation money, this will be taxed If the taxable component contains untaxed superannuation money, this will be taxed

35. Rolling Over A Superannuation Lump Sum Rolling over superannuation does not constitute a lump sum withdrawal Rollovers are normally immediate however if an amount is withdrawn and not rolled over within 30 days it might be deemed a withdrawal and lump sum withdrawal taxes might apply

36. Re-contribution of a Lump-sum Withdrawal A strategy developed by financial planners to increase the amount of the tax free component of superannuation is called re- contribution Re-contribution involves taking out a lump sum from superannuation and paying a small amount of tax or no tax and then re- contributing it as a non-concessional contribution

37. Example How should be withdrawal of your client?

38. Solution

39. Sources Of Income Streams In Retirement Most Malaysian often seek to create an income stream in retirement Sources of income: – part-time work – the age pension – from owning a business – the use of capital. Income which is essentially a consumption of capital is not taxed

40. Sources of Income Streams in Retirement Capital can be used in a number of ways: Draw down of capital – A gradual use of the capital which earns no interest Investment earnings only – The use of interest earned only indefinitely Combination of capital draw down and investment earnings

41. Life Expectancy Life expectancy tables are published periodically by the Malaysian Government Actuary Life expectancy at all age levels has increased over the last 100 years The tables show evidence of survivor bias Retirement income stream modelling has to allow for the survival bias Life expectancies are averages so an individual may live longer or shorter than the average

42. Assessable Income Various components of income from capital: Deductible Amount : Amount of an income stream which represents a return of capital Assessable Income: Income which is assessable or recognised and measured under taxation law Life Expectancy Income Stream: A fixed-term income stream where the term is determined by the Government Actuary’s life expectancy tables Lifetime Income Stream: An income stream that will last as long as a person lives

43. Account Based Vs. Non-account Based Income Streams Account-based income stream — where an individual owns and maintains an individual account from which an income stream is drawn Non-account based income streams — where an individual gives their retirement savings to an income-stream provider who pools those assets and promises an income stream in return

44. Account-based Income Streams Payment made at least annually Cannot make contributions to the fund in pension mode Payments based on a minimum percentage according to age (pro-rata if commenced during a year) — the minimum increases with age No maximum payment Commutation allowable Capital value cannot be used as security for a loan Balance available for estate

45. Non-account Based Income Streams A payment is made at least annually Income stream payable for life of member or reversionary beneficiary or for fixed term Payments must meet minimum standards — the purchase price is wholly converted to annuity payments No residual value available to estate No commutation allowed Capital value not able to be used as security

46. Taxation of Retirement Income Streams If the individual uses taxed superannuation money or ordinary money to fund their retirement income stream and they are over 60 years of age, the taxation consequences are very simple: no tax is payable For some income streams, the amount of tax otherwise payable will be reduced by a rebate which is applied to assessable income

47. Taxation of Retirement Income Streams on Death A retirement income stream can revert only to a dependant The amount of tax payable on the taxable component depends on: – whether the money used taxed or untaxed – age of the deceased (over or under 60) – age of the beneficiary (over or under 60).

48. Choosing Between An Account-based And Non- account Based Income Stream

49. The Use Of Annuities To Provide Retirement Income Superannuation money can be used to purchase an annuity from a life office which includes an insurance component Features include: – can be as short term as 1 year or as long as lifetime – fixed or indexed income paid for agreed term or life – return of partial or full amount of capital at expiration. Insures the individual against market movements

50. Reverse Mortgages Older people with a large amount of equity in their family home can turn that equity into cash A reverse mortgage allows the home owner to borrow a sum of money secured against the family home Complex terms and conditions apply

51. The End