This article first appeared in Forum, The Edge Malaysia Weekly on February 24, 2025 - March 2, 2025

The lack of retirement savings in Malaysia is a growing concern. A recent survey revealed that 70% of Malaysians saved less than RM500 per month in 2023 or did not save at all. Additionally, only 36% of active formal Employees Provident Fund (EPF) members meet the existing basic savings level according to age, anchored at RM240,000 by age 55. The basic savings level of RM240,000 — which is considered the minimum amount needed for a “dignified” retirement — will now be gradually transitioned to a new level of RM390,000 based on the newly launched Retirement Income Adequacy (RIA) framework by the EPF in December 2024. With the upward revision of the basic savings level, fewer EPF members will have sufficient savings for retirement. Alarmingly, over 25% of EPF members under the age of 55 have savings of less than RM1,000 in their accounts, according to the Khazanah Research Institute report, Households and the Pandemic 2019-2022: The State of Households 2024. This situation is exacerbated by low wages, high inflation and increased post-pandemic spending.

As Malaysia transitions to an aged nation by 2044, with life expectancy expected to rise to 80 by 2040, the need for adequate retirement savings becomes even more critical. Bank Negara Malaysia, via its Economic, Monetary and Financial Developments report in 2023, warned that an average Malaysian would be at risk of having depleted his or her retirement savings 19 years before death. This sizeable retirement savings gap signals an urgent need for a parametric and structural reform of the retirement ecosystem in Malaysia.

While the focus on solving the accumulation issues and rebuilding savings buffers has been intense, equal importance must be placed on optimising the decumulation phase, where retirees must be shrewder in developing a long-term plan to gradually spend down their accumulated assets throughout their retirement years.

The importance of decumulation strategies in retirement has gained traction in recent years as more government pension reforms are driving a move away from defined benefit (DB) schemes (which promise an income for life) in favour of defined contribution (DC) plans (which offer no such guarantee). In Malaysia, DC plans already account for around 85% of retirement assets (RM1,136 billion as at December 2023) and are projected to rise significantly in the next few years, especially with the recent indication of civil service pension reform.

To ensure sustainability and adequacy, decumulation strategies must be meticulously designed and curated, which will involve a high degree of complexity. For example, popular retirement goals include a desire to: (i) receive a steady income; (ii) spend as much as possible during retirement (maximise withdrawals); and (iii) be protected against the risk of outliving retirement savings. Yet, these cannot be pursued simultaneously, as they may conflict with each other. Decumulation strategies also need to take into account individual preferences for consumption rates, bequests (that is, inheritance received by heirs or heiresses) and risk tolerance levels. Balancing all these elements is key to designing a robust decumulation strategy.

Countries like Australia, Canada, Ireland and Singapore, considered to have among the top-rated pension systems in the world, each offer unique decumulation strategies for DC schemes, reflecting their distinct socio-economic contexts.

In Australia, the superannuation guarantee ensures a steady accumulation of retirement savings. During the decumulation phase, retirees can choose between account-based pensions, which provide flexible income streams, and annuities, which offer more predictable payments. However, challenges such as longevity risk and market volatility persist. To address these challenges, Australia has introduced products like deferred annuities and lifetime income streams, aimed at providing more stable and long-term income for retirees.

Canada’s approach to decumulation includes options like registered retirement income funds (RRIFs) and life annuities. RRIFs allow retirees to withdraw funds as needed, offering flexibility, but they also expose retirees to the risk of outliving their savings. Life annuities, on the other hand, provide guaranteed income for life but the downside is they lack flexibility. The main challenge in Canada is balancing these options to ensure retirees do not exhaust their savings prematurely. To mitigate this, Canada has implemented measures such as mandatory minimum withdrawals for RRIFs and promoting financial literacy to help retirees make informed decisions.

In Ireland, the primary decumulation strategy involves the use of approved retirement funds (ARFs), which allow retirees to keep their pension savings invested and withdraw funds as needed. However, this approach faces several challenges, particularly the complexity of managing investment in the decumulation phase. To address these issues, solutions such as dynamic asset allocation strategies, like the Success Rate Optimiser, have been explored to adjust the asset mix based on market conditions. Additionally, annuity products are offered to provide guaranteed income for life, though they may offer lower returns compared to ARFs.

Closer to home, Singapore’s Central Provident Fund (CPF) integrates both accumulation and decumulation phases. The auto conversion of a Singapore retiree’s savings to CPF LIFE (Singapore’s national life annuity scheme), upon retirement, offers a compelling income-in-retirement solution, effectively addressing longevity risk. Additionally, the noteworthy feature of CPF’s HDB Lease Buyback Scheme, which allows retired homeowners to monetise home equity into a lifelong retirement income stream, also provides an effective retirement decumulation. Despite the high cost of living, Singapore has increased CPF contribution rates and introduced additional monetary support for lower-income groups to ensure retirees maintain their standard of living. The success of these government-backed retirement initiatives, however, is deeply rooted in a subsidised model that invariably helps to lower the cost and offer some degree of attractiveness.

Each country’s strategy highlights the importance of flexibility, risk management and financial education in effectively navigating the decumulation phase.

Improving retirement security and optimising the decumulation phase in Malaysia requires a multifaceted approach involving public policy, private sector offerings and individual responsibilities. Individual responsibility and private sector offerings often take centre stage in retirement planning, but policymakers also have an important role to play. Policymakers need to demonstrate leadership on this front to continuously improve retirement security.

Recent reforms by the EPF, including account restructuring and the Belanjawanku initiatives, evidence the leadership of the policymakers in this space. The restructuring exercise appears to take a middle approach in striking a balance between meeting the contributors’ short-term needs and long-term financial security. The 5% increase in the Akaun Persaraan contribution to 75% underscores EPF’s commitment to prioritising adequate retirement income. The Belanjawanku initiative, on the other hand, introduced a comprehensive three-tier savings framework, shifting away from the current single-tier, to provide members with greater financial independence and sustainable retirement income over 20 years post-retirement.

While these improvements are commendable and mark a step towards a broader reform of the retirement ecosystem, further transformation is possible. It is perhaps timely to review the need to develop a regulatory framework to encourage the development of diverse decumulation products; for example, mandatory programmed withdrawal, annuity and pooled longevity fund. Other potential initiatives could also include implementing a national social pension model (known as a Tier 1 pension system) for larger lifetime benefits. It is essential to emphasise that Malaysia’s multi-tiered retirement ecosystem has yet to fully achieve its intended outcome with the non-existence of the Tier 1 pension system. Hence, continuous assessment and evaluation of implementing the social pension system must be undertaken by the policymakers.

Additionally, efforts like incentivising the reinvestment of retirement savings, implementing tax-efficient withdrawal strategies, and educating individuals and employers on new reforms must continuously be pursued.

Regulators and policymakers have made significant strides in encouraging innovation in the decumulation phase. However, to truly drive this shift, the private sector’s offerings and solutions will play a crucial role. Financial institutions can develop and offer innovative products tailored to the needs of retirees, such as dynamic asset allocation for decumulation investment funds and longevity insurance or annuities. Certain insurance products can help individuals achieve an invaluable goal — which is to delay the withdrawal of retirement savings to secure a larger monthly benefit for life. By relying on insurance products for several years, individuals can use annuities as a “bridge” to later withdraw retirement benefits from their retirement accounts. This strategy holds significant potential to enhance retirement security in later years.

Beyond retirement accounts, home equity can also serve as an important decumulation asset for some older homeowners in their retirement planning. However, many older Malaysians are reluctant to move, and instead seek to generate income from their homes through strategies such as tapping into a home equity line of credit or taking out a reverse mortgage. Financial institutions like Cagamas Bhd, which has been instrumental in developing the reverse mortgage space, can do more to strengthen and innovate programmes that support and advise consumers on these products and widen the reach of such programmes. Additionally, they should consider whether changes are needed to enhance consumer protection and improve the functionality and cost-effectiveness of these products.

On an individual level, early and consistent savings are crucial for building a substantial nest egg for retirement. Staying informed about financial products and strategies can empower individuals to make better decisions regarding their retirement savings. Periodically reviewing and adjusting retirement plans to reflect changes in personal circumstances and market conditions can help ensure financial stability in retirement.

With Malaysians living longer than ever and the average retirement age largely unchanged, many households struggle to make their assets last through retirement. Financial advice often focuses on boosting personal savings rates and maximising return on investment during savers’ working lives; that is, the accumulation phase of retirement planning. Equally important, however, is the decumulation phase. To address this, savers and retirees must treat retirement as a phase of life rather than a destination and develop a retirement income toolkit made up of multiple potential income sources and strategies that will help diversify and increase retirement income. Ensuring this toolkit remains robust throughout the entire decumulation process requires active planning during the accumulation phase and a strong retirement ecosystem. The synergies between public, private and individual efforts are essential to support the development of creative solutions to modern problems associated with the retirement landscape.

Wan Najwa Wan Sulaiman is a strategist with a government-linked investment company

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