Don’t Make These Mistakes In Retirement Planning

Plan Ahead For Your Retirement With Principal

Arriving at retirement with enough savings does not happen by chance. For most of us, it takes decades of saving, budgeting, and hard work to increase our income so we can put money aside for retirement.

However, the recent news of the government allowing Malaysians to withdraw RM10,000 from their EPF 1 account shows that not only are people struggling financially at the moment and needing to use their pension funds, but they can’t. -be not enough for their retirement. Even if you’ve been saving for many years, you may still struggle to reach your retirement savings goals.

So if you want peace of mind when you retire, you might want to start thinking about your future now and avoid some of the common mistakes people make when planning for retirement.

Error 1: Not enough savings / I started saving late

Malaysians’ savings rate now stands at 26.3%, having fallen by more than 10% from 2006, when it was 38.8%. This means that fewer people are saving today compared to almost twenty years ago.

Not saving enough, or saving late, is one of the mistakes you can make because you miss the cumulative effect that time can have on the money saved.

With a compound effect, every ringgit you save today will continue to grow. The longer you accumulate your savings, the more your retirement funds will grow with it.

For example, if you save RM15,000 in your bank which offers an interest or profit rate of 2% per annum, that’s an additional RM300 you can get at the end of the year. Now, if you had saved RM500 per month in that same account for a period of 10 years, you would end up with over RM85,000 in savings, with over RM10,000 of that coming from compounding alone.

However, if you started saving the same amount later and saved RM500 per month for 5 years, you will only have just over RM48,000 and just over RM3,000 in compound interest or interest. So the key point here is to start early.

Tips: start saving early using the 50/30/20 rule

You should start saving as soon as you start earning a stable income or having a stable job. Of course, the amount you should save may depend on your income flexibility.

A good rule to follow is the 60/20/20 method of budgeting, where you allocate 60% of your income to what you need (like bills, rent, groceries, food, etc.), 20% to emergency funds (car breakdown, home repairs, etc.), and 20% to your savings.

Mistake 2: Spending all your bonus and going into more debt

When bonus time comes, you might think you deserve to treat yourself to something nice. You should be able to afford a treat, but if you spend your bonus on things you have to go into more debt for, you’ll end up using more of your own money to pay them back instead of contributing to your retirement savings.

It might not sound “exciting”, but instead of using that extra income/bonus on, say, a shiny new phone or gadget, why not consider using it to wipe out all the debt you’ve accumulated (credit card, student loans, etc.) and give you more room for your savings/investment pool.

Tips: Set a savings goal and avoid incurring unexpected debt

The best way to use your bonus or extra income is to first make sure all your bills, payments, emergency funds and everything else is taken care of. After that, whatever you have left, instead of just spending it, set yourself “fun” savings goals.

If you want to go on a trip, set up a “travel savings”. Or if you want to buy a new phone, set up a separate savings account for “new phone savings”. Allocate your extra income to what you want to enjoy after taking care of your savings through investments.

Mistake 3: Disregarding unexpected life changes

“You can plan a nice picnic, but you can’t predict the weather.”

Life, like the weather, can be unpredictable. You may have planned your whole life, but chances are you will find yourself facing unexpected situations that will change your goals. It could be something routine, like dipping into your savings to pay for major home repairs, or something unexpected like losing your job or a medical emergency.

This is especially true when it comes to healthcare costs, as our current medical inflation rate is 12%, six times the general annual inflation rate, and you can expect Medical costs skyrocket by the time you reach retirement age.

If you don’t plan ahead, you could end up using your retirement funds to pay for unexpected living costs.

Tips: Regularly review your retirement and medical plans

Whenever an unexpected change occurs in your life, it’s best to review your current retirement plans and assess whether you are saving enough and have sufficient funds set aside.

Plan ahead and budget for life milestones like getting married, starting a family, buying a home, and ensuring you have enough funds to extend your medical coverage into your retirement years.

Mistake 4: Having only one form of savings

The main key to a successful retirement is diversification. Yet, this is the biggest mistake people often make, as they tend to rely solely on their EPF savings when they retire.

In 2021, more than half of EPF members were unable to save enough to meet the recommended minimum savings amount of RM240,000 for retirement.

And while the EPF is considered a stable retirement fund with its current rate of 6.10% per annum, it shouldn’t be your only source.

Tips: Diversify your savings by investing

Your approach to saving and investing shouldn’t stay the same as you move from your 20s to your 40s, as your risk tolerance and financial commitments change over time.

Even if you contribute to a mandatory retirement fund like EPF, consider allocating your retirement savings to other investments that generate long-term, consistent, and competitive returns with minimal risk.

Plan your retirement goals with Principal

Having the right mix of assets and investments across the board can ensure better long-term returns. Principal can help you achieve this with its goal-oriented investment solutions.

Whether through PRS, EPF i-Invest, mutual funds or even Shariah-compliant investments, Principal can help ensure you have the funds you need in retirement .

Plan your retirement the right way with Director.

Investing involves risks and costs. You should understand the risks involved, compare and consider the fees, charges and costs involved, make your own risk assessment and seek professional advice, if necessary. The Securities Commission Malaysia does not review advertisements produced by the Principal. For a full disclaimer, please visit here.

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