Retirement Planning
Contents
1. An Overview of the Retirement Issues
2. The Retirement Planning Process
3. Approaches for Determining the Required Retirement Capital
4. Risk and “Risk Profiling” in Retirement Planning
5. Analyzing Investment Risk and Its Application
6. Investment basics and Strategies in Retirement Planning
7. Construction and Management of Retirement Portfolio
8. Strategy to Meet Shortfalls in Retirement Capital
9. Retirement Schemes for Individuals
10.Private Retirement Scheme
11.Retirement Planning Issues in Entrepreneurs and Small Businesses
12.Managing Consumption Credits in Retirement Planning
13.Debt Management in Retirement Planning

An Overview of Retirement Issues
Chapter Outline:
1.1 Introduction
1.2 Definition of Retirement Planning
1.3 The Purpose of Retirement Planning
1.4 Retirement Planning Issues
1.5 Phases in Retirement Planning
1.6 Accumulation Phase
1.7 Retirement Phase
(a) Barricades to Retirement Planning
1.8 Impact on Retirement due to Aging Population
1.9 Changing Cultural Trends and Impacts on Retirement
1.10 The Present Picture of Resources for Retirement
1.11 Future Picture on Resources for Retirement at Retirement Age
1.11.1Retirement Income Systems
1.11.2Non- Financial Aspects of Retirement Planning
1.12 Conclusion

1.1 Introduction
Retirement planning is a very delicate process as no one really knows with full certainty the exact amount that will be required for retirement. One of the simplest reasons for this is that no one knows how long it will live in this world. There are some individuals who need no retirement fund because they die too young and leave this world before retirement. On the other hand, there are some people who live well beyond the average life expectancy. Another reason is attributed to the scarce resources available for spending and the need for the resources to be spread out into two main phases of individual life, one before retirement and the other during retirement. Thirdly, some of the future expenses are predictably unpredictable.

1.2 Definition of Retirement Planning

Before we move on, let us first of all provide a definition on retirement planning. There can be many ways of defining retirement planning; one of which is presented as follows:

“A process of managing an individual’s financial resources, expenses and liabilities, both present and future, with the purpose of providing sufficient future periodic passive income that starts at a predetermined retirement date, for the individual and its dependents.”

By examining the definition, one will note that it involves management of the present and future financial resources. It also includes the proper control and management of all future expenses and liabilities. In addition, one should take note of the importance of passive income that suggests that a retiree should no longer be engaged in the generation of active income upon retirement. Another element to be noted in the definition is that retirement planning is not confined to providing retirement funds to the retiree, but is also about providing income for retiree’s dependents such as spouse, children and parents.

When a person is employed, he is said to be engaged in the generation of active income. It is to be noted that generation of active income requires the active involvement of an individual. When a person stops working for whatever reason, this source of active income stops. Self-employed individuals are also involved in generation of active income. This is because the nature of job requires his active participation. Passive income in the context of the definition refers to those incomes that are generated without any active involvement of an individual. Examples of passive income are interest income, rental income, dividend income, royalty, franchise fees and pension.

From the financial risk perspective, we either die too young or live too long. In both cases, a burden is laid upon the individual because of responsibilities to loved ones, business associates or to oneself. Hence, the financial issues concerning an individual involve the impact of death as well as the impact of withdrawal from work where he has to consider his lifestyle after his income producing years are over.

Economic death is often the term used to describe the characteristic of retirement. It denotes retirement is the period where work-generated income ceases. The retirement risk exists because no one knows when he will die. Anyone who has outlived his working years will necessitate a replacement income to maintain his chosen lifestyle – if he still lives. Only when this is considered that planning on his other issues, e.g. estate and education planning, becomes meaningful. A person should plan to live well later in life, just as he should plan for loved ones to live favourably after his death. Financial planning will not be complete if there are no considerations given to retirement income objectives and how assets are accumulated to meet them. As life expectancy improves, even insurance companies are seen shifting from an emphasis on “death” benefits to the major focuses of these living benefits.

1.3 The Purpose of Retirement Planning

For the young, retirement is a distant need. So unless the purpose is strong, there will be no motivation for them to plan. Why would they want to plan for their retirement? It is because of two main factors – the longer compounding period of the funds and that retirement is an inevitable phenomenon – unless we die prematurely. To look at the benefit of savings early, let us assume there are two individuals: Alex (aged 24) and Peter (aged 44). We shall assume that Alex has agreed to invest RM2,400 annually until retirement at age 55, while Peter will invest RM12,000 annually until retirement at age 55. If the rate of return is at 7% per annum, the amount of money available for retirement shall be RM262,124 and RM202,661 for Alex and Peter respectively. Alex managed to accumulate more money for retirement when compared with Peter although Alex set aside only one-fifth of the amount set aside by Peter. This is because of the compounding effect of interest rate over a longer period of time.

Likewise, the older individual needs to find a compelling purpose too. For those nearing retirement, it is to determine where they stand and what need to be done when they finally retire. When it is closer to retirement age, it is getting easier to estimate the amount of resources needed for retirement. The issue will include how long the retirement resources will last and whether the funds are adequate to meet the retirement needs. It may also give rise to suggestion on whether the retirement should be deferred.

But whether young or old, the basic purpose of planning is so that one can live his retirement years as worry-free as possible. The main concern in retirement planning would be the financial aspects of the client’s retirement concerns. Although there are other non-financial concerns, they are generally not within the financial planner function to get deeply involved in – unless they are relevant to the planning of the client’s needs and the planner is competent to link them to the other retirement concerns of a financial nature. An example would be the choice of retirement home, whether it is better to have a single-storey or double-storey house and the location suitability.

In other words, the retirement purpose in our context is to mainly ensure that when an individual retires, he is able to live in a desired lifestyle without or with minimal outside financial help. A question relating to this statement is whether an individual should be made to sacrifice or suffer during accumulation phase so that he can have a future comfortable life style. The availability of sufficient financial resources will of course be able to resolve the competing needs before and after retirement. Efficient management of assets and liabilities during accumulation phase plays a very large role in this aspect. However, when resources are obviously insufficient, it will be up to each and every individual to decide on the priority. The individual must plan what he wants and how that can be achieved.

Retirement may be an event of the future, but it is a definite event for most people. We can only plan for the future today – before the future becomes a present event! Planning in advance provides a framework for success and helps us gain a measure of control over the destiny of our retirement.

In retirement planning, one of the steps a planner should do is to gather financial data of its client. The existing financial position of the client should be determined and presented in a balance sheet. A sample is as follows:

1.4 Retirement Planning Issues

While people may want to save for their retirement, most would also want to leave something behind for loved ones. Because resources are often limited, the central goal of retirement is somewhat conflicting with the goal of estate planning. Retirement planning revolves around striving for the maintenance or upgrade of pre-retirement standards of living during the retirement years. It focuses on how to accumulate assets for future spending.

On the other hand, estate planning focuses primarily on accumulating assets and preserving these accumulations for the purpose of distributing them to selected heirs. Since people are usually concerned for themselves and their loved ones as they age, the balancing of asset allocation to serve both purposes is a major component of retirement planning.

As people are expected to live for quite sometime after they retire, retirement planning is a form of long-term planning. The aim is to ensure that through the planning, the person can fulfill his financial needs during retirement by providing maximum benefits from his available resources. A good plan entails ensuring that a desired lifestyle is possible at retirement supported by sufficient income generated by accumulated assets that are created through savings and investments prior to retirement.

1.5 Phases in Retirement Planning

There are essentially two phases in retirement planning. The phase before retirement is simply known as accumulation phase. Another phase is the retirement phase itself. While some writers may prefer to split the accumulation phase into sub-phases for analysis, this text will simply classify the phase as accumulation phase. The main reason for adopting this approach is that there can be numerous opinions on how the accumulation phase should be subdivided. While employment for the less fortunate may start at teen age, the more fortunate one may start their career after graduation with a doctorate degree. Further more, if sub-classification is made on accumulation phase, similar sub-classifications should also be made on the retirement phase as there are also sufficient reasons for doing so. For example, a retiree who is aged 51 will definitely have characteristics that differ from a retiree who is aged 90! What should be emphasized here is that, retirement planning, being part of financial planning should be tailor made to cater for the specific needs based on the circumstances of each and every individual.

1.6 Accumulation Phase

Accumulation phase for an individual starts when his resources for retirement are first created. In reality, the commencement of accumulation of retirement resources can be an issue for deliberation. For instance, when a single premium investment-linked whole life policy is purchased for a new born child, one can argue that accumulation has started, with or without the awareness of the parent taking up the plan. As the child is growing, he collects gifts in cash during special occasions. When the cash are banked into savings account, the assets of the child increase. With interest accumulation and further deposits, the wealth of the child will increase accordingly. Unless the parents utilized the money that belongs to the child, the child will have money, the uses of which may include retirement that is to be decided by the child when he grows up.

Notwithstanding the aforesaid, in a normal sense, most planners will want to talk about retirement if a person is already under employment. In this regard, most people will agree that accumulation phase starts with employment. Employment starts when a person takes up job that pay him income. It can be a part time, full time or temporary job. In Malaysia, it is particularly true that accumulation of retirement resources starts with employment because employees and employers are required to make mandatory contribution to EPF, the primary form of retirement resources. For the employees who just joined the employment market, they will not have much resource to be set aside for retirement. Their priorities in life are more on building their career or businesses. Very rarely, we can find young employees that express concern for retirement when they have just started employment.

1.7 Retirement Phase

The retirement phase is the period where the individual has ceased his active working life. Whatever financial resources accumulated during accumulation phase are being utilized at this phase. In Malaysia, the normal retirement age is 55 (for government servant, it is age 56), while in Singapore it is 62, and these may be taken as the period that falls after the respective country’s official retirement age. At this age, the main focus would be to conserve assets and maintain a sufficient income flow to sustain the retiree’s standard of living until he dies.

While the length of the accumulation phase is easier to determine and variable by choice of individuals, the time duration of retirement phase is projected based on life expectancy. Longer life expectancy increases the retirement phase.

Although this is a phase where derivation of active income has stopped, it does not mean the retiree is not able to derive any active income. For those retirees who are healthy and self[1]employed, stoppage to generate active income is just a matter of choice. Undoubtedly, the nature of job also determines whether an elderly person can still perform a job effectively.

(a) Barricades to Retirement Planning

Retirement is bad news for most people. Studies have shown that only a very small portion of retirees can survive independently of outside support. The barriers to retirement must be fully understood as the planner charts and attempts to help the client achieve the quality of his retirement based on his expressed desires. A clear comprehension of the client’s situation will ensure that the plan has taken into consideration the realities of life that can stand in the way of realizing the goals and objectives of a retirement plan. Here are some of the concerns that should be taken into consideration:

(i) Penchant for High Living

It is difficult to change a lifestyle, especially one that is presently providing a person with plenty of gratification and pleasure. If the client is currently enjoying a high living lifestyle that is not sustainable during his retirement years, he should be alerted to the fact. The plan should include progressive adjustments needed to place him nearer to the desired living habits that are more in sync with his resources available at retirement.

(ii) Heavy Fixed Commitments

Having heavy fixed commitments at retirement is an unwelcome burden at best. At worst, it can tear down the retirement plan. Examples of fixed commitments are as follows:

a. Car installments.

One will need to think critically whether car installment will still be payable during retirement. If a car cannot last for 20 years, it would seem that its replacement will be inevitable during retirement phase. In addition, if retiree wants to maintain their pre-retirement lifestyle, they may also have to replace their motor vehicles periodically during retirement.

b. Housing loan installment.

Although the ideal situation is to have fully settled housing loan outstanding when a person retires, there are many commercial banks that offered loan tenure to last till a borrower is aged 70. The unusually long loan tenure is usually granted to individuals who run their own business and where retirement can stretch beyond 60 years old.

c. Monthly subscription for club membership.

A retiree may still maintain his membership in golf clubs and other social clubs upon retirement.

d. Regular donations to churches and charitable organization.

e. Regular payment of education fees for retirees who have children still studying.

f. Insurance premium on whole life policies and medical policies.

A good estimation of the type, duration and quantum of fixed commitments at retirement is an important activity that must be carried out at the planning stage. The retirement plan should include strategies that help reduce or if possible eliminate such commitments.

3. Spending Future Dollars

In today’s world, you can spend future earnings with ease. Credit programmes and credit cards are probably some of the most sinful doorways to spending future dollars that can hurt a person’s retirement. The spending under these credit programmes usually involves rather high interest charges that further reduces resources for retirement. This is one of the areas of concern that a good retirement programme must attack first.

4. Unforeseen Expenses

One can never predict the future with complete certainty. Even for a well-laid plan, a sudden emergence of a heavy unexpected bill can put the retirement plan in disarray. An example of a dire surprise would be a sudden illness that needs expensive medical treatment. If the illness is chronic and requires long-term medical care, the situation is worse. A good retirement plan must have some contingency plan built into it for such surprises. In order to tackle the medical expenses during retirement, a person should have a medical insurance that starts before retirement. More importantly, client should be advised that the medical insurance must be taken up while a person is healthy and insurable. In order to avoid using retirement fund to pay for premium on medical insurance, a medical plan with cash value may be necessary so that insurance charges can be paid based on the accumulated cash value.

5. Divorce Maintenance

For those men who are divorced, an added burden that may be mandated by law would be the maintenance allowance that they have to pay to their wives to maintain their lifestyles and those of the children. Depending on each individual situation, the cost of alimony could range in quantum, and this could be an added burden that may deplete asset-building capability and jeopardize the retirement plan.

6. Self-Employed

If the client is self-employed but has not been contributing to any form of social security like EPF (and lacking in personal savings), the situation could be dire when he retires. In fact, it is quite common to find business owners (particularly in Malaysia) without any form of retirement programme.

7. Competing Needs and Temptations

Another common hindrance to retirement is the inclination for the client to divert funds meant for retirement to a current need that has arisen. For instance, new investment or business opportunities could tempt the client to divert such funds, and if the ventures turned sour, the retirement plan would be disrupted. To ensure that the client’s retirement plan is geared for success, the planner will have to constantly educate and remind the client of the importance of keeping on track of the plan and not getting swayed into some ventures that could hinder the success. There must be adequate contingency plans for those impediments that cannot be prevented and have a chance of occurring.

8. Taxation
Tax reduces the surplus income that may be used for the client’s retirement. To minimize the tax impact to release surplus money, tax planning is required. The savings from tax can increase the yield of returns from investment or contributions to a retirement fund or increase the disposable income that can be channeled to a retirement kitty. Deferral and splitting of income may be used as techniques to achieve such an end.

1.8 Impact on Retirement due to Aging Population

The stark realities of an aging population will sink in, when we look at the statistics reported in the World Bank Development Report on population and labour force. The report illustrates that a sizeable proportion of the world’s population is with a higher number of individuals falling within the “aged” faction – those who are 65 years and above. The longer a person lives, the higher shall be the fund required for retirement. How exactly is the population ageing in Malaysia? Let us take a look at the finding provided by the World Bank:

By examining the life expectancy from 1980 to 2008, one will be able to observe that the life span of a female adult increased from 69 in 1980 to 72 in 1990; it was further increase to 75 by 2000. It was increasing by about 3 years every 10 years. The trend is still improving as 2004 saw the figure rising to 76. Additional statistics extracted from the Department of Statistics (Malaysian Government) continue to indicate higher life expectancy as follows:

The multiple “contributors” to this aging population phenomenon ironically include such desirable developments as improved health care systems, improvements in biotechnology research (that has rapidly enabled powerful disease-fighting drugs to be developed), and the elimination of poverty, which has facilitated people to live healthier and hence longer lives. As the world population continues to grow, mortality rates and the percentage of the population entering the workforce are declining.

To illustrate the effect of longer life expectancy, let us look into the following example. Let us assume that Mr. A currently has RM1 million which is placed in a retirement account with a return of 5% p.a. We shall also assume that the number of years in retirement phase is 20 years. Based on these assumptions, the amount of annual retirement fund, ignoring inflation, shall be RM76,422. However, if the retirement phase is increased from 20 years to 25 years with other variables unchanged, the amount of annual retirement fund shall be RM67,573 only. The formula
used to compute the fixed amount that can be withdrawn annually as in the case here is:

Apart from the formula, financial calculator may also be used to compute the fixed annual amount as retirement income. If retirement income is to last for 20 years, the inputs shall be:

Tabular presentations of the two scenarios are as follows:
Table Showing Income Need of 20 years

Notes:
a. Opening balance – withdrawal + return = ending balance
b. Return = (beginning balance – withdrawal ) x rate of return
c. Column three that shows annual withdrawal of RM76,422 indicates zero inflation

Table Showing Income Need of 25 years

The two tables above show that the amount of annual income has to be adjusted downward from RM76,422 to RM67,574 in order for the retirement resources to last longer. The amount of annual income in the two tables are fixed and therefore do not cater for inflation. By building in inflation factor, the impact will even be greater. In later chapters, the techniques for computations by building in the inflation factor shall be taught.

1.9 Changing Cultural Trends and Its Impact on Retirement
Culture also has an impact on retirement. One of the important cultures for Asians is the culture of filial piety – of grown children taking care of their aged parents. It is not uncommon to find parents slogging their whole life and pawning their life savings just to give their children a chance of a better tomorrow. In return, they expect their grown-up children to take care of them when they grow old. For these folks, their children are the funding source of their retirement plan!
This practice is increasingly under threat of annihilation as the financial impact and demands of modern society take their tolls on people’s lives. When the cost of living goes up, the ability of the working population to care for those other than their immediate families will become increasingly difficult. Like the West, many of those who do not plan their retirement are going to find themselves in a lurch when the time arrives for them to take a long rest from work life. Realizing the changing trend, financial planners should advise their clients to be independent from their children as far as retirement funds are concerned. Some clients may even have to reduce on cost of education so that more funds can be allotted for retirement.
1.10 The Present Picture of Resources for Retirement
The amount of resources already available for retirement can be seen and presented in a personal financial statement or a statement of net worth which you learn in Module 1. A sample of statement of net worth with greater details is presented as follows:

From the statement of net worth, a planner should be able to identify the resources already available for retirement. In this statement, we have assumed that resources for retirement are unit trust, EPF and stocks and shares. In more complicated cases, sources of retirement fund could come from business investments which can be a sole –proprietorship, partnership or unquoted shares.
For individuals with royalty income or franchise fees, the balance sheet may not reflect their availability and valuations. Likewise, there are also many retired government servants with pension fund on a regular basis from the government. The issue is how should this source of regular income be accounted for? The answer will be provided in later chapter.
Also not available in the balance sheet of an individual is a form of liability known as contingent liability. An example of contingent liability is the guarantee signed by an individual in favour of financial institutions to facilitate the usage of credit facilities by third party. Planners must identify and help clients to eliminate contingent liabilities as well.
Based on the fact that important items affecting the financial well being of their clients are not sufficiently reflected in the personal financial statements, it is therefore recommended notes to the balance sheet be drawn up to avoid omissions.
1.11 Future Picture on Resources for Retirement at Retirement Age
From the present resources available for retirement, planners will be able to project the resources available and the liabilities at a future date. A planner should then be able to present them in a pro forma balance sheet for his client. By then, the resources available for retirement should have increased at assumed rates in fact finding sheet. Preferably and ideally for most people, all liabilities including contingent liabilities should have been fully settled by retirement age. Since most if not all individuals would prefer a retirement life without any debts, a chapter is presented on managing personal debts. An example of pro-forma balance sheet that reflects zero liabilities is as Table 1.2 follows:

Table 1.2: Pro-Forma Statement as at Retirement Age

In this statement of net worth, a person has retired without any liabilities and the resources for retirement have been ascertained. What else need to be done? You will notice that retirement resources comprise investment assets that could be income generating. If the passive income
alone is sufficient to meet annul retirement expenses, the client is capable of conserving his assets. A capital conservation approach on retirement can be put in place. On the other hand, if assets need to be liquidated to provide the annual retirement income for 20 to 30 years, planner may have to examine which resources should be utilized first. It remains a tricky matter as several questions still need to be tackled. The questions include when will be the time to convert unit trust and shares to cash or cash equivalent. Another related question is whether EPF should
be withdrawn in one lump sum. This shall be part of investment planning. A schedule of utilization of resources may be necessary to assist the client.
1.11.1 Retirement Income Systems
Retirement schemes are mechanisms designed to replace earned income either totally or partially at the end of working life. These schemes are useful because people’s earned income usually stops or is reduced considerably at retirement. The only way to upkeep a desired lifestyle after that point is to rely on investment assets as you have seen in the pro-forma statement in the previous section. If yearly income from invested assets is sufficient to pay for annual retirement income need, the client is well on a comfortable of retirement. Little adjustment may be necessary unless there are major financial crises. On the other hand, if yearly passive income from these assets is insufficient to meet yearly retirement needs, there will be a need to top it up through liquidation of the investment assets on appropriate time and schedule. Availability of retirement schemes is designed to provide the mechanism to solve the problem.
In most developed western countries, the government provides some form of minimum old age social welfare schemes. The U.S. retirement income system, for instance, is often described as being like a three-legged stool. The first leg is the US Social Security System. The second is the employer-sponsored retirement plans. The third is the private savings by individuals, in the form of personal savings or post-retirement employment.
The comparable social security schemes in Malaysia are the government pension schemes for civil servants and EPF but they are not as comprehensive as those found in, for instance, the US. The situation is expected to improve as there are some serious proposals made to the
government to introduce tax-approved private pension schemes. But as of now, the existing schemes are largely inadequate. The US model is very similar to the World Bank Model developed in 1990, known as the Three Pillars Model.
 The first pillar consists of the social security schemes, which are mandatory schemes that are publicly managed and tax financed. Under this pillar, the government takes responsibility to finance, insure and manage a fund to provide defined benefit income to its citizens. The government finances these programmes through a scheme commonly called Pay-as-You-Go (PAYG) method.
 The second pillar consists of mandatory schemes that are privately managed and funded by the employers, employees or both. These programmes can be defined contribution or defined benefit plan, and benefit payments are from the contributions and accumulations to the funds.
 The third pillar consists of the self-funded defined contribution plans, where individuals save for their own retirement. These programmes can be voluntary or mandatory, and are often supported and encouraged by tax incentives.
Increasingly, the movement is towards the adoption of a multi-legged approach as the solution to the old age issue. Financing under the PAYG method, for instance will only work if the number of economically actively persons who are paying tax is large enough to support the funding of the
aged and retired. In a scenario where the country is having an aging population, and the ratio of retirees to the employed is increasingly higher, the strain on the active workers to support the structure in the future can be unbearable.
1.11.2 Non-Financial Aspects of Retirement Planning
Retirement planning involves more than just the financial issues concerning the client. Some of the other issues dip into the client’s belief system, values, attitude and perception. An effective planner must consider all these when he plans for the client. Here are some of the factors to take into consideration:
(i) Loss of Identity and Feeling of Loneliness
Studies have shown that retirees have high suicide tendency the first few years of their retirement. This is especially true of those individuals with a high profile or those who are very attached to their work. One reason is because of the sudden loss of identity and a feeling of loss of control over the new environment. A CEO today becomes a “nobody” tomorrow. Some feel useless without work and others feel lonely without the usual colleagues around them. The planner should discuss the potential social implications and impact with the client so that he can better prepare mentally and socially to reduce the impact when he retires. Where appropriate, this could be highlighted in the plan.
(ii) Health Considerations
The issue of health is not just about finances but also about pain, inconvenience and suffering to the retiree and those around him. The planner can make the client aware of these issues and encourage him (where appropriate) to live a healthy lifestyle (or kick unhealthy ones as early as possible). Health insurance is an important consideration. All these financial and non-financial health-related issues are equally important and should be considered in the retirement plan.
(iii) Marital Stability
For those whose marriage is on the rocks, the planner should consider planning for each spouse separately. The divorce rate in Malaysia is on the rise and issues concerning divorce that may impact either’s retirement, such as alimony and settlement, should be noted in the retirement plan.
(iv) Notion on Life Expectancy
The perception of the client regarding how long he may live may or may not tally with the reality.
This sometimes causes problems for the planner. If for instance, the client expects to live till age 60, where in fact he may live to age 80, the projection of the retirement needs will not be accurate.
(v) Pre-and Post-Retirement Interests
For the person without any hobby and interest other than work, retirement from work will take away a meaningful part of his life. For such individuals, the planner must make them aware of the situation and suggest ways where they can occupy their time meaningfully. This may even involve going back to active work.
(vi) Religious / Spiritual Aspects
With a retirement plan in place, the retiree can concentrate more on activities for the hereafter.
The fact that if his/her financial problems/issues are addressed accordingly through a well planned accumulation phase, then during the retirement phase the retiree can have a relatively peace of mind.
Private Retirement Scheme (PRS)
In the 2014 Budget tabled on 25 October 2013, the Prime Minister had announced an incentive of RM500 to contributors who participate in the PRS scheme to inculcate the importance of saving from an early age to ensure sufficient savings after retirement. The RM500 is a one-off contribution by the Government to young PRS members to encourage youth to undertake longterm savings for retirement through the PRS.
The Government will contribute RM500 per qualified person to be used to purchase units of PRS funds in the PRS account of youths, whom have accumulated a minimum gross contribution amount of RM1,000 within a year. This incentive will be made available for a period of 5 years from 2014 to 2018.
PRS is a voluntary long-term investment scheme designed to help individuals accumulate savings for retirement. PRS seek to enhance choices available for all Malaysians, whether employed or self-employed, to voluntarily supplement their retirement savings under a well structured and regulated environment.
Each PRS offers a choice of retirement funds from which individuals may choose to invest in based on their own retirement needs, goals and risk appetite. The fund options under a PRS are intended to enhance long-term returns for members within a regulated framework. Assets of each PRS are segregated from the PRS Provider and held by independent Scheme Trustee
under a trust. Further details will be provided on this scheme
1.11 Conclusion
Population ageing is a world’s phenomena and we need to know how to plan and design schemes to address the old age issues. Through Retirement Planning which involves the management of the present and future financial resources, prospective retirees will encounter both the accumulation and retirement phase.
However, due to various issues such as penchant for high living, heavy fixed commitment, unforeseen expense or even divorce maintenance, studies have shown that only a very small portion of retirees can survive independently of outside support. Therefore, a retirement schemes need to be designed to replace earned income either totally or partially at the end of their working life. Finally, non-financial aspects of retirement planning such as issues like the loss of identity and feeling of loneliness, health considerations, and marital stability need also be highlighted.

Self Assessment
Choice Select the correct answer from choices provided in each question.
1. The definition on retirement planning in the text includes all but one of the following:
A. Management of existing and future financial resources
B. Management of expenses
C. Aim to provides future income for the retiree and its dependents
D. Immediate settlement of all liabilities
2. A retiree with retirement resources of RM1 million wishes to have constant annual retirement income for 30 years that will start immediately. If the rate of return is 5% per annum, how much should be the constant amount of annual retirement income?
A. RM61,954 B. RM65,051 C. RM67,678 D. RM69,331
3. There are efforts to improve on retirement planning schemes in Malaysia. Which of the following statement is not correct?
A. The Three Pillars Model used in the USA is a multi-legged approach to provide multiple solutions to the old age issue. B. There are proposals to introduce tax-approved private pension in Malaysia.
C. In Malaysia, the government pension scheme and the EPF are of the social security schemes in the country.
D. All of the above statements are not correct.
4. Which of the following assets is generally considered as least ideal for accumulation of wealth for retirement purpose if the emphasis is on the rate of return?
A. Real estate
B. Traditional whole life insurance plan
C. Unit trust
D. Quoted shares
5. A good retirement plan has many ingredients. Which is not correct?
A. Ensures that a desired lifestyle is made possible.
B. Ensures that sufficient income is generated by accumulated assets
C. Accumulated assets are created through savings and investments retirement
D. Retirement planning is a form of long-term planning.
6. Which of the following transactions will not increase the net worth of an individual?
A. Payment of housing loan instalment
B. Payment of alimony
C. Payment of whole life insurance premium D. Payment of loan instalment in acquisition of club membership
7. If the rate of return is fixed at 7% per annum, which of the following investment alternatives will produce the most retirement resources?
A. investing RM1,000 per year for 5 years
B. investing RM475 per year for 10 years
C. investing RM230 per year for 20 years
D. investing RM100 per year for 40 years
8. Which of the following can be barricades for retirement planning?
I. Spending future earnings with ease
II. Contingent liabilities
III. Alimony
A. I, II, III B. I & II only C. II & III only D. I & III only
9. Retirement Planning can be affected by non-financial items as well. Which of the following is not a non-financial item?
A. Loss of identity B. Marital stability C. Competing needs D. Life expectancy
10. Tax planning is imperative for retirement planning. Which statement is not correct?
A. Net of tax savings always increase yield of returns.
B. Disposable income can be channelled to a retirement kitty.
C. Deferral of income is a useful technique in tax planning.
D. Splitting of income can increase family income.
Answers: 1-d, 2-a, 3-d, 4-b, 5-c, 6-b, 7-d, 8-a,9-c,10-a