Saturday December 4, 2010
By LEONG HUNG YEE How to secure high enough returns in a low interest rate regime
HAVE you started to think about your retirement? Do you have a solid financial retirement plan? Do you know how much you need? Perhaps, you may think that you are too young to retire but any financial planner will tell you it is never too early to think about retirement planning.
According to AXA Retirement Scope 2010, Malaysians have become more concerned about their ability to finance a comfortable retirement experience. Only 37% consider their future income to be sufficient compared with 62% in 2007.
We all know how important planning for retirement is, but how do we plan for it in a low interest rate regime like in our current times.The low interest rate has taken its toll on savings sitting in fixed deposits. These factors negatively impact the retirement planning process, especially if you want to retire and live well.
The alternative way is to invest into unit trusts, bonds, equities or pay for insurance premiums. Financial planners say it is important to make the money work for you and make it work hard as a way to beat inflation in a diversified range of instruments and markets. It may not be sufficient to just save money in a savings or fixed deposit account, especially in this low interest rate environment, as money saved may not grow at the rate necessary to meet one's target, says Jeremy Wong, a financial planner with a local insurance agency.
Wong adds that the interest rate offered by banks' fixed deposits are relatively low. He says, for example, if you deposit RM10,000 for a 12-month fixed deposit, then the return on an annual basis that you are looking at is probably around RM350, which means less than RM30 return per month. RM30 a month is not even enough for your petrol for a week! he exclaims.
For those who save occasionally or regularly but not necessarily for retirement may fail also if they do not take into consideration the inflation and rising medical costs, Wong says, adding that the rate of return from the Employee Provident Fund of 5% to 6% may not be sufficient to offset inflation in the future.
Last year, the pension fund declared a dividend of 5.65%. The country's headline inflation rate increased to 1.9% on an annual basis on higher consumer prices. Another financial planner with a foreign bank, Sophie Lee, says fresh graduates who just joined the workforce are in a very good position to start investing. At their age, they have very few commitments and could afford to invest a good ratio of their earnings. And of course they must pick the good yielding investments, Lee says. She adds that those who have just started working will have a longer investing period and could afford to invest in slightly riskier assets such as equities.
She cautions that one should check that one's investments are growing at the rate that one intends, but not panic if there are short-term fluctuations, as this is part and parcel of investing.
Wong concurs with Lee. However, he says they should have some investments in bonds or unit trust in their portfolio in order to be diversified because the equity markets could go up as well as the tendency for the bond market to fall and vice versa. It will help to buffer or stabilise investments even when particular segments of the market are experiencing drastic movements up or down, he says. Both Lee and Wong remind us that while deploying the retirement benefits, one should not only worry about the interest rates but also ensure safety of the investments.