The world of work is changing. The COVID-19 crisis has accelerated existing structural trends and caused organizations to rethink many aspects of employment. How work gets done, where and by whom is becoming more varied and fluid. As the nature of work and how we make money continues to change, this will inadvertently impact other aspects of personal finances as well.
If you’re a young Malaysian saving for retirement, your future might be less secure than you think. Even though the next decade will see one of the greatest transfers of intergenerational wealth to millennials and Gen Z, the current financial habits and behaviours of these young generations, as well as the changing nature of work, are poised to put their future savings in jeopardy.
The Existing Pension System Won’t Be Enough
ICMR’s nationwide study of millennials and Gen Z in Malaysia found that 70% of respondents anticipate changes to their work life over the next 12 months. Of this, 61% see themselves changing job modalities, be it taking up additional side hustles or part-time work, or working as a freelancer or business owner.
As the number of people moving away from the traditional notion of a single full-time job increases, issues of coverage and adequacy within the existing pension system will become more serious. The old retirement wisdom of relying on traditional retirement plans might have worked for their parents and grandparents, but these won’t be enough to get millennials and Gen Z through their golden years.
The existing pension system in Malaysia is largely employer-based, with a portion of salary automatically deducted from payroll and put towards retirement savings. But as we highlighted in our previous report, gig workers, freelancers, and small business owners are not covered by the existing system, and neither does it accurately capture extra income from side hustles or other job modalities.
“I’m comfortable with freelance working arrangements, and I don’t think I’ll go back to full-time work in the future. But I’ve been looking to buy a house recently and it’s been hard to get a loan because banks don’t recognize freelance work, even though I’m getting paid consistently every month for it.”– Hussein, 30, freelance consultant
Overcoming Present Bias For A Better Retirement
Without access to employer-based pension plans, young Malaysians will be left to take on the responsibility of planning for their own retirement. However, ICMR’s survey found that a worrying number of millennials and Gen Z do not consider retirement savings as a top priority. Instead, they are prioritising to buy a house, high-priced items, and making profits from higher investment returns.
This is in line with insights from our qualitative interviews, where only one respondent had a specific retirement financial goal in mind. For all other respondents, retirement was a vague and distant notion, or there was a belief that “things would fall into place” for retirement purposes. Many also felt they had too many present commitments and expenses to think about retirement.
These examples indicate a present bias when thinking about retirement, or the tendency to settle for a smaller present reward than to wait for a larger future reward. In fact, past research has shown that Malaysians only start planning for retirement after the age of 40, hence missing out on the critical long-term accumulation stage that could make a significant difference in their retirement savings.
“I lost my job in March 2020. Now I’m a Lalamove driver, and I help out at a friend’s workshop for extra income. It’s hard to think of financial goals or make any long-term plans when I’m just focused on trying to get by day-to-day. I don’t have the time or the energy to research these things, and I don’t have the funds for it.”– Zaim, 34, Lalamove driver
Starting Early To Benefit From Lifecycle Planning
The lack of retirement adequacy among young Malaysians is concerning both on an individual level, as well as on a national policy level. The combined effects of population ageing and lack of retirement savings is multifaceted and complex, with policy implications for the labour market, productivity, as well as social and family institutions.
Fortunately, millennials and Gen Zs who have a longer time horizon can benefit from better lifecycle planning based on their own risk appetites. It is therefore crucial that individuals take the first step as early as possible in assessing their overall financial situation, and making a long-term financial and investment plan that fits their own needs and lifestyle.
What can help is to think of retirement savings as wealth accumulation instead. Building a sizable nest egg becomes more difficult later in life as one acquires more and more expenses, such as a mortgage and a family. But by starting early, saving for retirement can be a much more pleasant – and exciting – prospect. Even a small amount saved for retirement now can make a huge difference in the future.
With time on their side, millennials and Gen Z can take advantage of the power of compound interest and minimize the impact of market fluctuations on their investments. They can also make informed decisions about their career choices, education, and lifestyle, all of which can have a significant impact on their financial futures.
Redesigning Retirement For The Future
As the nature of work continues to evolve in Malaysia and across the globe, it’s important for individuals to recognize the impact this can have on their personal finances, particularly in relation to retirement planning. Meanwhile, policymakers must also play their part in ensuring that the current pension system is adequate and inclusive for all Malaysians.
Ultimately, building a sustainable and secure financial future for all Malaysians requires a combination of individual action and systemic reform. By prioritizing early and comprehensive planning, as well as addressing policy gaps, we can ensure that all Malaysians have the opportunity for a comfortable and dignified retirement.
This article is part of a content series by the Institute for Capital Market Research (ICMR). Follow ICMR’s Facebook page to stay updated on behavioral tips and insights for better investing habits. To learn more about ICMR’s research on millennials and Gen Z, visit www.icmr.my or download the full report.
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