5 Years to Retirement: Important To-Dos in the Redzone

Why the Last 5 Years Before Retirement are Critical for Your Future

Retirement is one of the most significant milestones in life, marking the end of a career and the beginning of a new chapter filled with freedom, relaxation, and the opportunity to pursue passions and hobbies. However, the five-year countdown to retirement, often called the "red zone," is a critical period that requires careful planning and preparation to ensure a smooth transition and financial stability.

As you approach this red zone, there are several essential tasks and considerations that can significantly impact your retirement experience. Let's explore the key to-dos to focus on in the five years leading up to retirement.

1. Assess Your Retirement Readiness

The first and foremost step when you are five years away from retirement is to assess your overall readiness. Start by asking yourself the following questions:

• Do you have a clear understanding of your desired lifestyle in retirement?

• Have you estimated your retirement expenses, including living costs, healthcare, travel, and other personal goals?

• Are your current savings and investments on track to meet your retirement goals?

Creating a detailed retirement plan or revisiting your existing plan is crucial at this stage. A comprehensive retirement plan includes an estimation of your monthly expenses, a calculation of your projected income from various sources (such as pension, savings, and investments), and an assessment of your net worth. This plan will serve as a roadmap to ensure you stay on track during the final years before retirement.

 2. Review and Adjust Your Financial Portfolio

As you enter the retirement red zone, it's time to closely examine your financial portfolio and make any necessary adjustments to align with your retirement goals. Here are some steps to consider:

• Evaluate Asset Allocation: The asset allocation of your investment portfolio should reflect your risk tolerance and time horizon. As retirement approaches, many financial advisors recommend shifting towards a more conservative allocation, reducing exposure to high-risk assets such as stocks and increasing allocation to safer investments like bonds or dividend-paying stocks. However, it’s essential to strike a balance between safety and growth to ensure your portfolio continues to generate returns that keep pace with inflation.

• Diversify Your Investments: Diversification helps reduce risk by spreading your investments across different asset classes and sectors. Consider including a mix of stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other alternative investments to prolong your wealth in retirement.

• Rebalance Your Portfolio Regularly: As markets fluctuate, the allocation of your portfolio may drift from your target mix. Regularly rebalancing your portfolio ensures it remains aligned with your retirement goals.

• Review Investment Fees: High fees can eat into your returns over time. Review the fees associated with your investments and consider switching to lower-cost options if appropriate.

3. Maximize Retirement Savings Contributions

The five years before retirement are a crucial period to boost your savings. Take advantage of any opportunities to maximize your contributions to retirement accounts such as the Employees Provident Fund (EPF), private retirement schemes (PRS), and other investment accounts.

• Contribute to Your EPF: For Malaysians, the EPF is a significant source of retirement income. Consider making additional voluntary contributions to your EPF account to enhance your retirement savings. The EPF allows voluntary contributions of up to RM100,000 per year, which can help increase your retirement nest egg.

• Consider a Private Retirement Scheme (PRS): If you are already contributing to a PRS, consider increasing your contributions. PRS is a voluntary long-term savings and investment scheme designed to help individuals accumulate savings for retirement. Contributions to PRS are eligible for tax relief of up to RM3,000 per year, providing an additional incentive to save more.

• Leverage Catch-Up Contributions: In many countries, individuals over a certain age are allowed to make additional "catch-up" contributions to their retirement accounts. In Malaysia, there are no specific catch-up contributions for EPF or PRS, but you can maximize your contributions up to the allowed limit.

• Active Income: Rental from properties, provided loan is fully paid

 4. Evaluate Your Income Sources

Understanding your income sources in retirement is essential to ensure a comfortable lifestyle. The three primary sources of retirement income are:

• Pensions and Government Benefits : If you are eligible for a pension from your employer or the government, review the terms and conditions to understand how much you will receive and when.

• EPF Savings and Investments: Determine how much you can withdraw from your EPF and other investments to supplement your retirement income. Consider whether to withdraw a lump sum, take periodic withdrawals, or a combination of both.

• Part-Time Active Income:For example, retirees can leverage their years of experience and expertise to offer consulting services, providing valuable insights to businesses or individuals. As a trainer, they can conduct workshops, mentoring sessions, or educational programs, sharing knowledge in their field.

It is crucial to have a clear understanding of how these income sources will work together to provide for your retirement needs. Consider consulting a financial planner to help you assess your income sources and create a sustainable withdrawal strategy.

5. Create a Retirement Budget

A retirement budget is essential to ensure you do not outlive your savings. Begin by estimating your monthly expenses in retirement. These expenses may include:

• Housing (mortgage, rent, utilities, maintenance)

• Healthcare (insurance premiums, out-of-pocket costs, medications)

• Transportation (car payments, fuel, insurance, maintenance)

• Groceries and dining

• Travel and leisure

• Taxes

• Miscellaneous expenses (gifts, charitable donations, etc.)

Once you have a clear picture of your expenses, compare them to your projected income to determine if there is a gap. If there is, consider ways to reduce your expenses or increase your income to close the gap.

 

6. Plan for Healthcare Costs

Healthcare is often one of the most significant expenses in retirement. As you approach retirement, it is essential to plan for potential healthcare costs, including insurance premiums, out-of-pocket expenses, and long-term care.

• Review Your Health Insurance: Evaluate your current health insurance coverage and determine if you need to make any changes as you transition to retirement. If you plan to retire before the age of 65, you may need to purchase a private health insurance plan

• Consider Long-Term Care Insurance: Long-term care insurance can help cover the costs of extended care, such as in-home care, assisted living, or nursing home care. Evaluate whether purchasing a long-term care policy is appropriate for your situation.

• Build a Health Savings Fund: Start setting aside funds specifically for healthcare expenses in retirement. This can be in the form of a health savings account (HSA) or a dedicated savings account earmarked for medical expenses.

7. Pay Down Debt

Entering retirement with significant debt can be a burden that limits your financial freedom. The five years leading up to retirement are an ideal time to focus on paying down high-interest debt, such as credit card balances and personal loans. Consider the following steps:

• Prioritize High-Interest Debt: Focus on paying off high-interest debt first, such as credit cards or personal loans. Reducing high-interest debt can free up more of your retirement income for other expenses.

• Pay Off Your Mortgage: If possible, aim to pay off your mortgage before retirement. This can significantly reduce your monthly expenses and provide peace of mind.

• Avoid New Debt: Be cautious about taking on new debt as you approach retirement. Focus on living within your means and saving for your future.

8. Plan for Lifestyle Changes

Retirement often brings significant lifestyle changes, such as downsizing your home, relocating to a different area, or pursuing new hobbies and interests. Take the time to plan for these changes:

• Consider Downsizing: If your current home is larger than you need or costly to maintain, consider downsizing to a smaller, more affordable property. This can help reduce your living expenses and free up equity for other retirement goals.

• Explore Relocation Options: If you are considering relocating, research potential destinations that offer a lower cost of living, access to healthcare, and recreational opportunities.

• Pursue Your Passions: Retirement is the perfect time to pursue hobbies, travel, and other interests. Make a list of activities you want to explore and consider how they fit into your retirement budget.

9.  Update Your Estate Plan

An often-overlooked aspect of retirement planning is ensuring that your estate plan is up to date. This includes:

• Reviewing Your Will: Ensure that your will reflects your current wishes and is legally valid. If you don’t have a will, consider creating one as soon as possible.

• Establishing a Trust: If you have significant assets or specific wishes for how your estate should be managed, consider establishing a trust.

• Designating Beneficiaries: Review the beneficiaries on your retirement accounts, life insurance policies, and other financial accounts. Ensure they align with your current wishes.

• Creating a Power of Attorney and Healthcare Directive: Designate someone you trust to make financial and healthcare decisions on your behalf if you become incapacitated.

10.   Seek Professional Advice

Retirement planning can be complex, and the final years leading up to retirement are critical for making the right decisions. Consider consulting a licensed financial planner who can help you:

• Evaluate your retirement readiness

• Develop a comprehensive retirement plan

• Optimize your investment strategy

• Create a sustainable withdrawal strategy

• Plan for healthcare costs and long-term care

• Update your estate plan

A financial planner can provide personalized guidance based on your unique circumstances, helping you navigate the complexities of retirement planning and achieve your goals.

Conclusion

The five years before retirement are a critical period for planning and preparation. By taking these essential steps, you can enter retirement with confidence, knowing that you have taken the necessary actions to secure your financial future. Remember, retirement is not just about leaving work; it’s about beginning a new chapter of life with peace of mind and the freedom to enjoy the things you love. Start planning today to make the most of your retirement years.

About The Author

Hairil Jaslan Jaafar is a Certified Financial Planner (CFP) and Islamic Financial Planner with the Financial Planning Association of Malaysia (FPAM). He holds a Capital Market Services Representative License (CMSRL) and Financial Advisor Representative License (FAR) from the Securities Commission Malaysia (SC) and Bank Negara Malaysia (BNM). Hairil recently joined the financial services industry, after being in the corporate world for about 25 years. He is now with Wealth Vantage Advisory Sdn Bhd.

From Confusion to Clarity: Richard's Path to Financial Security

Read about one of Carol's client's experiences with financial planning and how he went from confusion to financial security.

#1. Client Introduction

Richard is a 43-year-old senior manager in the medical instruments manufacturing industry, earning an annual income of approximately RM230,000. He is single and often too busy with work to pursue a relationship. With both of his parents having passed away, Richard has two younger sisters who are married and financially independent. His demanding job has left little room for a personal life, and he is beginning to think about his future beyond his career.

#2. Client’s Problem Before Meeting and How He Met Me

Richard had been investing with his cousin, a Unit Trust Agent, in PRS, EPF, and Cash Trusts. However, he grew concerned after seeing an Investor Alert from the Securities Commission regarding a Cash Trust product his cousin had recommended, in which he had invested RM220,000. Not wanting to strain their relationship, Richard quietly searched for a professional financial planner and found Wealth Vantage Advisory online.

When we first met, Richard shared his frustration with the investment and his broader concerns. As a single man with no immediate family, Richard had already dealt with the complexities of being the executor for his parents' estates. He wanted to ensure his assets were well-organized to avoid causing similar challenges for his sisters in the future. Although he was knowledgeable about various investments such as property, gold, unit trusts, shares, and options, his busy schedule made it difficult to manage everything effectively.

With his employer planning to relocate the business to Thailand, resulting in his layoff by early 2025, Richard was also worried about his financial future. He wanted to know whether he could retire at 45 or if he should seek a less stressful, lower-paying job to finally have time to meet his "Miss Right."

#3. Advice and Implementation

I began by helping Richard gain a clear understanding of his cash flow, assets, liabilities, and life goals. Although he was a diligent saver, his approach of accumulating funds and then seeking high-return investments left him vulnerable to scams and inefficient asset allocation. We focused on increasing his savings ratio in the first year of our engagement, ensuring his funds were better allocated and less susceptible to risky investments.

Next, I assisted him in mapping out his life goals and aligning them with his resources, income, and bonuses. We created a financial plan to assess the feasibility of retiring at 45. Through our analysis, Richard realized that early retirement was within reach, giving him newfound confidence in his financial future.

Beyond retirement planning, we also addressed his wealth transfer needs, including setting up a will and ensuring he would be taken care of in the event of a critical illness or comatose, not just after his passing. Additionally, I actively managed his investments, reallocating them to better suit his risk appetite and financial goals.

By illustrating the weighted average return of each investment, Richard understood how this reallocation made his money work harder for him. We also secured sufficient wealth protection to cover debt cancellation or provide for him in case of critical illness or total permanent disability.

#4. Changes in Client Experience

After one year of working together, Richard now has a clear understanding of where his hard-earned money is and how it is working for him. He has peace of mind knowing that if anything happens, he is financially secure.

#5. Client and Advisor Hopes for the Financial Future

In the second year of our engagement, Richard has become much clearer about his goals. Unlike in the first year, he now confidently articulates his desires, such as retiring at 45 with a monthly income of RM12,000. This kind of clarity and certainty is deeply satisfying for me as his financial planner. It reassures me that the work we have done together has helped turn his dreams into tangible goals, and with our continued partnership, I am confident he will achieve them.

#6. A Personal Note

I am truly honoured that as our one-year engagement approached its end, Richard was the one to suggest a meeting to discuss our second-year engagement and his financial plan. His willingness to share his positive experience with his sisters, relatives, friends, and colleagues, and his enthusiastic recommendation of my services, is immensely gratifying. Richard’s testimony about the value of the advisory fee and how my guidance has helped him identify and address financial blind spots underscores the worth of our work together. It is incredibly rewarding to see how the proactive management of his investments has made a significant difference in his financial journey.

What do you think about Richard's story? Share with us in the comment section. 

About The Author

Carol is a Registered Financial Planner (RFP) under the Malaysian Financial Planning Council (MFPC). She also holds a Capital Market Services Representative License (CMSRL) and Financial Advisor Representative License (FAR) from Securities of Commission (SC) & Bank Negara Malaysia (BNM). Carol joined the financial industry back in 1998, starting with providing singular solutions in life insurance products. Since Carol resolutely decided in taking a holistic, personalized approach to bring all the pieces of her clients’ financial life together, she is now a licensed Financial Planner with Wealth Vantage Advisory (WVA).

Financial Freedom: A Personal Journey, or a Universal Destination?

Financial freedom can be varied depending on each individual. Discover your concepts of financial freedom

Financial freedom is a term that has gained immense popularity in recent years. It conjures images of an ideal life, free from the worries of money, where one can pursue their passions, live comfortably, and have ample time to enjoy life. However, the concept of financial freedom is not as universal as it is often portrayed. It is a highly subjective impression that varies from person to person, shaped by individual circumstances, cultural beliefs, personal values, and life goals. What financial freedom means to one person might be entirely different for another, making it a multifaceted and deeply personal journey.

The Prejudice of Financial Freedom

Financial freedom is often defined as having enough income, savings, or investments to live the life one desires without being held-back by a traditional 9-to-5 job. Yet, this definition fails to capture the nuance that financial freedom means different things to different people. For some, financial freedom might mean retiring early and traveling the world. For others, it could mean having enough savings to cover unexpected emergencies without going into debt. For many, especially in less affluent communities, financial freedom may simply mean having enough to provide for basic needs like housing, food, and healthcare.

The variation in the definition of financial freedom is largely due to differences in personal circumstances. For example, a single individual living in a city might prioritize having enough money to enjoy dining out and entertainment, while a family with children might focus on securing funds for their children's education and future. Moreover, someone in a high-income country might consider financial freedom as having a large investment portfolio, whereas someone in a developing country might view financial freedom as the ability to escape the cycle of poverty.

This subjectivity is further influenced by cultural and societal norms. In some cultures, financial freedom is closely tied to the ability to support extended family members, while in others, it is more about personal independence. For Muslims, financial freedom is not only about securing one's material life but also ensuring that wealth is managed in a way that aligns with Islamic principles, such as the avoidance of interest (riba) and the importance of charitable giving (zakat). The end goal for a Muslim is not just worldly success but achieving Al-Falah, or success in both this life and the hereafter.

The Hype and Peer Pressure Surrounding Financial Freedom

In recent years, the concept of financial freedom has been heavily promoted in books, seminars, and on social media platforms. Phrases like "FIRE" (Financial Independence, Retire Early) and "passive income" have become buzzwords, creating a sense of urgency and even fear of missing out (FOMO) among individuals. The narrative often suggests that anyone not actively pursuing financial freedom is somehow failing at life, which can lead to unnecessary stress and anxiety.

This hype around financial freedom can create unrealistic expectations. Social media influencers often showcase luxurious lifestyles funded by passive income streams, which can make financial freedom seem like an unattainable goal for the average person. The constant exposure to these idealized images can create a yardstick by which people measure their own financial success, leading to feelings of inadequacy if they fall short. Additionally, there is a growing trend of individuals using financial freedom as a status symbol, a right to brag about their savvy investments, early retirement, or ability to live without a traditional job. This can perpetuate the idea that financial freedom is only for the wealthy or those with significant resources, further alienating those who may not have the same opportunities.

However, it is crucial to recognize that financial freedom is not about conforming to a specific lifestyle or achieving a certain level of wealth. It is about understanding one's own financial needs and goals and finding a balance that allows for both security and fulfilment. Financial freedom should not be a source of pressure but a personal journey that reflects individual priorities and values.

Financial Abundance but Prisoner to Wealth

The ultimate level of financial freedom which is out of reach to many is coined as Financial Abundance. This is the level of wealth which will last generations. Examples are Conglomerates in the US, Chaebols in Korea, Keiretsu in Japan and Grupos Económicos in Latin America. 

However, even with significant financial resources, many find themselves prisoners to money—trapped by the pursuit of more wealth, driven by fear of losing what they've gained, or overwhelmed by the complexities of managing their assets. This paradox highlights that true financial freedom isn't just about accumulating money but also about achieving a balanced mindset where money serves as a tool for a fulfilling life, rather than a source of anxiety or control. Without this balance, wealth can become a gilded cage, limiting personal freedom and perpetuating the very stress it was meant to alleviate. 

Financial Freedom for All: Is it a Myth?

One of the most damaging myths about financial freedom is that it is only achievable by those who are already well-off. This perception is rooted in the idea that financial freedom requires a large income, substantial savings, and the ability to make significant investments. However, financial freedom is not solely about the amount of money one has but how that money is managed.

For instance, someone with a modest income can achieve financial freedom by living within their means, avoiding unnecessary debt, and saving consistently over time. The key is not how much one earns but how well they manage their resources. Simple practices like budgeting, reducing expenses, and prioritizing savings can go a long way in achieving financial security. Moreover, financial freedom can also be about mindset—being content with what one has and not constantly striving for more. This approach to financial freedom emphasizes contentment and financial responsibility over wealth accumulation.

An example of this can be seen in individuals who, despite not having high incomes, manage to live debt-free, save for emergencies, and even invest for the future. These individuals may not be wealthy, but they have achieved a level of financial freedom that allows them to live without the stress of financial insecurity. This approach to financial freedom is often overlooked in the broader discourse, which tends to focus on wealth accumulation rather than financial stability and peace of mind.

Money, Greed, and Fear: The Emotional Aspects of Financial Freedom

The pursuit of financial freedom is often driven by a mix of emotions, including fear, greed, and the desire for security. For some, the desire to achieve financial freedom is rooted in a fear of poverty or financial insecurity. This fear can be a powerful motivator, pushing individuals to save, invest, and work towards financial independence. However, it can also lead to anxiety and stress, particularly if financial goals are not met as quickly as expected.

On the other hand, greed can also play a role in the pursuit of financial freedom. The desire for more wealth, luxury, and status can drive individuals to take risks, sometimes beyond their comfort zone, in the hope of achieving financial independence. While ambition can be positive, it can also lead to unhealthy behaviours, such as overworking, neglecting personal relationships, or engaging in unethical activities.

The role of risk tolerance is also crucial in the pursuit of financial freedom. Some individuals are naturally more comfortable taking risks, such as investing in stocks or starting a business, while others prefer the security of a stable job and guaranteed income. Understanding one's risk tolerance is essential in creating a financial plan that aligns with personal comfort levels and long-term goals. It is important to recognize that financial freedom does not require taking excessive risks; rather, it involves making informed decisions that balance potential return with the associated risks.

For Muslims, the pursuit of financial freedom is also guided by religious principles. In Islam, wealth is considered a trust from God, and individuals are encouraged to manage it responsibly. This includes not only saving and spending wisely but also giving back to the community through charitable donations (zakat). The ultimate goal for a Muslim is to achieve Al-Falah, which means success in this life and the hereafter. Financial freedom, therefore, is not just about accumulating wealth but ensuring that wealth is used in a way that pleases God and benefits society.

The Pillars of Financial Freedom: Save, Spend, and Donate

In my humble opinion, the way forward in achieving financial freedom requires a balanced approach to managing money. This can be broken down into three key pillars: saving, spending, and donating.

• Saving: Building a financial cushion is one of the first steps toward financial freedom. This includes creating an emergency fund, saving for future goals, and investing for long-term growth. Consistent saving, even in small amounts, can help individuals build wealth over time and provide a sense of security.

• Spending: Wise spending is just as important as saving. This involves creating a budget, living within one's means, and avoiding unnecessary debt. Financial freedom is not about depriving oneself but about making conscious spending decisions that align with one's values and goals.

• Donating: For many, especially in the Muslim community, charitable giving is a vital part of financial management. Donating a portion of one's income not only helps those in need but also brings a sense of fulfilment and purpose. In Islam, giving zakat is a religious obligation, and it is considered a means of purifying one's wealth.

  
  

These pillars are interconnected and together form the foundation of financial freedom. By saving, spending wisely, and giving back, individuals can create a financial plan that not only secures their future but also contributes to the well-being of others.

Conclusion

Financial freedom is not a one-size-fits-all concept. It is a personal journey that is shaped by individual circumstances, values, and goals. While the hype around financial freedom can create pressure and unrealistic expectations, it is important to remember that financial freedom is not about conforming to a specific lifestyle or achieving a certain level of wealth. It is about finding a balance that allows for both security and fulfilment.

Whether it is living debt-free on a modest income, achieving early retirement, or managing wealth in a way that aligns with religious principles, financial freedom is within reach for anyone who is willing to take control of their finances and make informed, intentional decisions. Ultimately, financial freedom is not just about money—it is about living a life that is meaningful, secure, and aligned with one's values.

What is your concept of financial freedom? Share with us in the comment section! 

About The Author

Amelia Mei Leng is a Licensed Financial Planner at Wealth Vantage Advisory. Her journey in the financial industry began in internal audit and financial reporting within the hospitality and property management sectors. She later oversaw an investment portfolio at one of Malaysia's largest investment houses from 2008 to 2010. After a decade-long break to raise her children and manage her family, Amelia returned to her passion for finance. She was drawn to Wealth Vantage Advisory for its dedication to making financial planning the core of its business and its strong focus on Shariah-compliant advisory.