RETIREMENT

PLANNING
DPD30073 ISLAMIC FINANCIAL PLANNING
COURSE LEARNING OUTCOMES
Here‘s what you‘ll be able to, upon completing this course:

1. Analyze the systematic process of developing a financial plan

towards achieving financial objectives (C4, PLO2)
2. Construct Islamic financial planning according to the financial
planning code of conduct (P3, PLO3)
3. Presents the implementation process for the financial
planning by adopting professional responsibilities and ethical
conducts of Islamic financial planner (A2, PLO8)
TABLE OF CONTENTS

DETERMINE
01 RETIREMENT PLANNING
• Define the meaning of retirement
Describe retirement planning
process

CONSTRUCT
02 RETIREMENT PLANNING
• Describe the importance of
retirement planning
Demonstrate retirement
planning analysis
–Yusuf 12:47-48
DETERMINE
RETIREMENT PLANNING
What is retirement?
What are steps in retirement planning process?
What is Retirement?
What is retirement?

Retirement refers to the time of life when one chooses

to permanently leave the workforce behind.

● You choose your retirement age to leaves the

workforce for good
● Minimum retirement age is 60 – Minimum
Retirement Age Act 2012 (Amendment 2016)
● Compulsory retirement for government servant age
are 55/56/58 or 60, subject to the option selected
RETIREMENT PLANNING
Why we do retirement planning?

Retirement planning comes into the picture in wealth

management because of the assumption that a person
may live well after his contractual retirement age.

● Retirement age : 56 – 60 years old

● Average age of Malaysian : 75 years
● Retirement life : 15 – 19 years

If you retired at 60, there is an extension of 15 years Sources : Department of Statistics Malaysia
where there will be no active income generation!
Malaysian towards ageing population

Sources: DOSM
RETIREMENT PLANNING
Why we do retirement planning?

● Retirement planning is an arrangement to provide people with an income during retirement, that is, when
they are no longer earning a steady income from employment

● Retirement plans may be set up by employers, insurance/takaful companies, the government or

institutions such as employer associations or trade unions

● The major issue : how to prepare for and live in retirement?

RETIREMENT FROM ISLAMIC PERSPECTIVES
1. In Islam, yes, it is the responsibility of the children to look after their parents
2. It is an act of disloyalty towards Allah if one neglects one’s responsibility of
taking care of one’s parents (an-Nisaa’: 36)
3. Even though it is a religious responsibility of the children, it is very much
encouraged that parents voluntarily release their children from such burden
4. Because the children have their own families to take care, parents may opt to But, my children can

good retirement planning tools and processes as preparation for financially

take care of me
when I grow old!
independent
5. The needs for retirement plan becomes more obvious as year pass
6. There is no injunction which precludes one from planning for one’s benefit in
retirement
7. Retirement planning becomes significant as the financial impact and demands
of modern society take their toll on the grown children’s lives
8. 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
Retirement planning is a tricky
process, and one that requires
careful planning and patience –
Robert Valentine

Even if one has a retirement plan

and a clear set of financial and
lifestyle visions and goals, it is
important that one should be
aware of several common
missteps that many fall victims
to, even those with a plan.
RETIREMENT HAZARDS
 Underestimating the costs of healthcare
 Misjudging how long one or one‘s spouse will
live
 Presuming a longer working life
 Demographic change and consequences to
retirement
RETIREMENT PLANNING PROCESS

Gathering Analysing Determining Designing and Implementing Monitoring

data & setting data to and filling the recommending the Islamic performance
retirement determine client’s a retirement retirement and reviewing
goals and client’s retirement plan plan the
objectives situation and needs retirement
his retirement plan
needs
01 Gathering data &
retirement objectives

 The information obtained from client provides the basis of

analysis to understand the client‘s situation
 IFP must have clear understanding of client‘s financial well-
being, and his future needs, aspirations, goals and
objectives at retirement
 This is important to find out what the client‘s current
financial health is and the availanle financial resources that
can be used to support his retirement plan
02 Analyzing data & identify
retirement needs

 Once gathering data is completed, it is time to analyze the

data to help determine the client‘s current financial situation,
his retirement needs and resources adequacy in meeting
those needs
 IFP should take holistic approach when analysing the client‘s
retirement situation
 Effective retirement funding plan with strategies that
optimize the client‘s needs and wishes on his retirement will
result from the design stage
03 Determine retirement needs
 The retirement gap is deficiency amount that has to be determined and
filled in order for the client to have adequate funds to meet his retirement
needs
 Steps to determine the funds required to cover deficiency of client at
retirement are:
i. Determining the 1st year income needed at retirement
ii. Determining the lump-sum required at retirement to fund income need during
the retirement period
iii. Determining the current and future resources destined for retirement purpose
iv. Converting the value of the current resources to their value at retirement
v. Finding the lump-sum retirement gap or the deficit/surplus amount
vi. Determining the funding needs during the pre-retirement period to meet the
lump sum needs
04 Design & recommend
retirement plan
 5 questions to answer when building a retirement plan:
i. What does the client want at retirement?
ii. What are the client‘s financial retirement resources?
iii. What is the income needed to sufficiently fund the lifestyle?
iv. What is the additional lump sum amount needed (fund deficiency) to fill the
client‘s retirement needs?
v. What must the client do from now on in order to meet his retirement
funding shortfall?
 IFP should be reminded that the laws and regulations, plan qualification,
as well as the principles of Shariah compliance can help determine the
design of the retirement plan
 Example of important determinants are tax laws and the payment of
zakat
05 Implement Islamic
retirement plan
 The implementation of the plan starts once the consent
from the client is obtained
 It constituting a contract, like an agreement, that there
must be mutual consent between the contracting parties
 The key element that IFP must follow is to ensure he
selects the appropriate products and services that are in
line with client’s goals, needs and priorities without
contradict the principles of Shariah
 The implementation responsibilities must be clearly defined
and they should be consistent with the scope of
engagement agreed on earlier
06 Monitor & review
retirement plan

 The IFP may have to monitor changes in the environment,

the laws and regulations, or other factors that may impact
the performance of the client‘s investments
 The monitoring function may involve rebalancing the
assets in the portfolio
 Reviewing the investment Shariah status, returns and risk
should be done by IFP and scheduling the review sessions
can be done initially, yearly or impromptu
CONSTRUCT
RETIREMENT PLANNING
Is retirement planning important?
How to retirement planning analysis?
 IS RETIREMENT PLANNING IMPORTANT?
• An individual who retires today can
expect to live anther 15 – 20 years
• With increased awareness of health
concept and improvement to the health
care system, people are generally living
longer than those of the past generations
• The live expentancy of Malaysian male is
70 years old while women is slightly
longer
• The increased longevity arises the
problem of retirement income
• For income to produce, it is either the When a retired person really retires, he is the necessities that
everyone else needs. So, the question arises as to where he is
man works or the money works
going to get the income to sustain the balance of his living years?
 WHY ISLAMIC RETIREMENT PLANNING?
• The issue of payment of zakat is significant
when one talks about retirement planning
• EPF money, the gratuity and any type of
financial benefits that would received by a
person when retires are subject to zakat
• Muslim who are not performed pilgrimage
are also advised to prepare for it as this is a
religious obligation
• Islam encourages Muslims to spend their
wealth in the way of Allah, such as
sustaining their families and their
dependants, give donations, waqf, etc. as
“And those who spend their money wastefully are the brothers of evils”
their preparation for life after death [Al-Isra‘:26]
OBSTACLES TO RETIREMENT SAVINGS

Tendency to
Divorce
Can you help

Overspent
me to explain all
these
obstacles?

Unexpected
Expenses & Other Competing
Reduction in Long-term Financial
Income Objectives
RETIREMENT PLANNING
ANALYSIS
Determining Financial Objectives
Determining financial objectives during retirement includes questions like:
• What is the retirement income that meets your financial objectives?
• What is the right retirement age?
• How long will I live during retirement?
• What are my assumptions during retirement?
• What are the inflation rates?
• What are the rates of returns?
• What are my economic securities?
• What are the medical expenses measured against my current health conditions?
• What are my special health needs?
• How do I distribute my wealth?
• What annual retirement income meets my objectives?

We need to figure out how much would client spend per month if he retired today? Multiply that figure by 12 to get reasonable estimate of annual
retirement expenses. Calculating retirement income can use 2 strategies – Target Replacement Ration method or Expense method.
Determining Financial Objectives

Example

Haris is 35 years of age, he plans to

retire at 55.
1. Current annual salary is RM80,000 TRR METHOD TRR METHOD
groeing at 8% per annum Using financial calculator: Using financial calculator:
2. Life expectation assumed is 75 Present value = RM80,000 Present value = RM64,000
years
Interest = 8% Interest = 6%
N = 20 years N = 20 years
3. Calculate his retirement income Solve FV Solve FV
per annum using:
TRR = FV x 70% Total = RM205,257 per annum
Total = RM372,877 x 70%
• Target Replacement income (he needs = RM261,014 per annum
70% of his last drawn salary at age 55)
• Expense method (his annual expenses are
RM64,000 at 6% inflation rate)
Identifying Sources of Retirement Income
Where is client’s retirement income coming from?
Identifying Sources of Retirement Income

• The EPF invests in a diverse portfolio to ensure that members receive dividends
yearly

• The EPF guarantees a minimum 2.5% dividend through approved investments

to ensure your savings are secured (Conventional Account)

• An Annual Dividend pay-out is credited based on your savings as at 1 January

yearly, dividends are calculated based on your daily aggregate balance

• Partial withdrawal – age 50, buy/build home, education, reduce/redeem housing

loan, housing loan monthly instalment, flexible housing, PR1MA housing, Hajj,
Health, more than RM1m savings

• Full withdrawal – age 55/60, pensionable employees & optional retirement,

leaving the country, incapacitation, death

• Refer EPF Act 1991

Identifying Sources of Retirement Income

• EPF) announces that the quantum for the Basic Savings will be revised from
the current RM228,000 to RM240,000 effective 1 January 2019
• The amount will be set as the minimum target EPF basic savings members
should have upon reaching Age 55
• Basic Savings refers to the amount that is considered sufficient to support
members’ basic needs for 20 years upon retirement, from Age 55 to 75
aligned with the Malaysian life expectancy
• With the new Basic Savings in place, members will now accordingly be
required to have higher savings in their EPF account in order to be eligible to
participate in the EPF Members Investment Scheme
• The scheme provides members with an option to have a portion of their EPF
savings in Account 1 invested in unit trust funds or via private mandates
managed by the appointed Fund Managers Institutions (FMI)
Cukup ke..?
Retire at… Retirment saving Expected to live…
55 RM240,000 75 240,000 / 20 RM1,000/month
(average age of Malaysian)
years / 12 month
• EPF, in its latest findings, reported that a majority of its members in
the low- and middle-income groups are likely to live in poverty in old
age due to post-Covid situation
• The data showed a 60% decline in median savings among the 5.05
million EPF members in the low-income group (B40) from RM2,434 to
RM1,005 post-pandemic
• A 17% drop in median savings from RM30,113 to RM24,995 was
reported for the 5.05 million members in the M40 category
• Median savings among the T20 group (2.53 million members), who are
the least affected by the pandemic, saw an 8% increase from
RM140,440 to RM152,043
• The total withdrawals of about RM99.5 billion by its members
exceeded the total contributions of RM53.9 billion up to Aug 31 (i-
Lestari, i-Sinar, i-Citra)
• Almost half of EPF members have less than RM10,000
• If we were to base on the minimum target of RM240,000 savings that
EPF members should have upon reaching the age of 55,
only 3% of us can afford retirement
Identifying Sources of Retirement Income

• Private Retirement Schemes (PRS) is a voluntary long-term savings and

investment scheme designed to help you save more for your retirement.

• PRS seek to enhance choices available for all Malaysians whether employed or
self-employed to 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 PRS are intended to enhance long-term returns for
members within a regulated framework.
Identifying Sources of Retirement Income

• PRS providers are approved by the Securities

Commission Malaysia:
Do I need PRS?

I already
contribute to
EPF. Do I still
need PRS?
Managing Retirement Income
Equities

• Stock selection must go through a stringent process

• It is important to set up a blue print on how to manage the retirement • Conservative nature is preferred for retirees
• Choose a low risk profile
income effectively
Property
• The retirement fund would be the principle fund and only the • Gains from rental income
return/income would be spent • Invest for capital appreciation

• By adopting this approach, the person would be able to amonitor the Unit Trust

progress of his/her retirement income • Increasingly popular as retirement investment assets

• Indirect exposure to equities and bonds
• Diversification in investment
• Managed by a professional fund manager

Cash & Fixed Deposit

• In Malaysia, it guaranteed by the Government

• Relatively low return
• Popular for retirement. Safe, recurring income from profit and highly liquid

Takaful/Insurance Product

• Endowment ending at 55, 60 or 65

• Investment linked plan
• Family takaful has similar features to the investment linked products

Others

• Fixed income securities from the government bonds

Managing Retirement Income
TIME HORIZON CHART
Assumption Return of Investment is 9% per annum
Invest (RM) Time Horizon Nest Egg at 65 (RM)
What happen if the retirement plan goes wary?
1 300 40 years 1,400,000
2 300 30 years 550,000
3 300 20 years 201,000

Strategy:

1. Start saving early

2. Regular saving
3. Save in a halal and good rate of return
Short, Medium & Long Term Planning
• In creating income for retirement years, a person should consider a short, medium and long-term planning to achieve his goals

Description Period Approach

Short Term 1 – 12 months Aggressive

Medium Term 12 – 36 months Balanced

Long Term 36 months above Low risk

• Depending on a person’s risk appetite and risk exposure, short term investment is usually applied when a person decides to make a personal investment in
the stock market (the approach is to enter the market and exit the market in the shortest time the moment the profit/target is achieved)

• Medium term investment is applied when a person decides to invest in unit trust products where return would be visible in the period of 36 months

• Long-term investment is applied when a person decides to invest in landed properties where the price would increase proportionately within the period of 5
years or more

• The most important is the person is able to handle and manage the risk intelligently because missing the steps would not only wipe out any forms of returns
but also the capital
Business During Retirement

• Another option can be considered as retirees is to set up business during retirement

• Business is all about managing risks, and a person should understand the whole works of the
business before committing any funds into the business

• Many retirees have lost the retirement fund and some even become bankrupt due to lack of
diligence before committing funds to a business enterprise

• There have also been cases where retirees are being cheated of their retirement funds in
legitimate business where they are outsmarted and manoeuvred out

• However, there are still retirees who become successful entrepreneurs after retirement. This is
due to the fact that they are passionate about the business and preserve against all odds to
become successful in what they do
Monitor the Retirement Plans Effectively

• Once the retirement plans is in place, it is important to monitor the retirement plan periodically

• The reason is that important changes may happen from time to time and would require
appropriate corrective measures

• Furthermore, a person will also need to know when to re-strategize or exit from a retirement plan

• It is evident that a proper retirement plan would require input from financial planners, lawyers
and accountants to ensure the retirement plan would be viable
 The question isn‘t at what age I
want to retire, its at what income.
ANOTHER FACTORS TO CONSIDER

LOAN NEED TO BE RETIREMENT PLANNING LIFESTYLE APPROACH

ADDRESSED ASSUMPTIONS DURING RETIREMENT
It is important that all the loans are The assumptions are important What would be a strong indication
settle during the retirement planning because it will determine the direction would be a person‘s saving or spending
period or upon reaching retirement and outcome after the retirement plan. ratio.

Housing loan The income is consistent Simple lifestyle

Car loan There is no sudden illness Medium lifestyle
Credit card The mortality rate High flyers
ANOTHER FACTORS TO CONSIDER

BIOLOGICAL EVENTS INFLATION DIVERSIFYING RETIREMENT

DURING RETIREMENT RATE PORTFOLIOS
There are certain events that may take Inflation rate would erode purchasing It would be resourceful to diversify
place which is unexpected, such as power, over a period of time we can buy retirement portfolios into certain
marriage or practice polygamy. less items with same amount of money. classes of assets.
Based on the dream of Prophet Yusuf, the strategy is
to save and be prudent for seven years and to go
through seven years of drought. This strategy is
called riding the economic cycle.
–Yusuf 12 : 46 – 49
THANKS!
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