Guest article by Lieu Ching Foo
Everyone would agree that we need to ensure sufficient financial resources regardless of where we want to retire.
It could be in a lump sum or any form of periodical cash flow, but the important thing is that it must be able to sustain a comfortable retirement lifestyle.
After all, one of the reasons of retiring to a foreign country like Malaysia is to stretch your money further than if you were to retire in your home country.
This article outlines the financial benefits of retiring in Malaysia for non-Malaysians. Knowing this will boost your odds of outliving your retirement nest egg.
Annual inflation rate in Malaysia averages between 2 to 3 percent, measured by the CPI (Consumer Price Index) indicator from Department of Statistics of Malaysia.
However, bear in mind this could be higher due to your unique circumstances or lifestyle.
Coincidentally, Malaysia risk free rate of return stands at circa 3 percent at time of this writing (2016).
That means, if you put your money in any Malaysian bank cash deposit (or more famously known as fixed deposit among locals), you earn 3 percent per annum return on your money. You could get higher rates if you ‘lock in’ for a longer period, per the table above.
To put that into perspective, that’s RM 3,000 for a RM 100,000 deposit, or RM 30,000 for a RM 1 million deposit.
Not too shabby compared to near zero cash deposit rates in the US or even neighboring country, Singapore.
There has not been drastic change in the risk free return rate for the past 8 years since the 2008 global economic crisis.
On top of that, at the time of this writing (2016), Malaysian Ringgit is now at an ALL TIME LOW since 50 years ago.
If you are an American planning to retire to Malaysia, this is one of the best times to maximize the value of your retirement nest egg at 1 Dollar = 4+ Ringgit. More mileage for your money for your retirement in Malaysia!
Here’s the kicker: For just $ 250,000, you are literally a Ringgit millionaire!
If you hail from countries like the US where interest rate is near zero percent, a 3 percent guaranteed return annually in Malaysian fixed deposit does appear like an offer you can’t refuse.
The image above gives you a guesstimate of the monthly cost of living in Malaysia. Discretionary living costs such as eating out, travel and entertainment, may vary depending on your retirement activities.
However, it is a no brainer that you don’t spend as much if you live at the island state of Penang, instead of staying in the metropolitan city of Kuala Lumpur.
Now, you, a Ringgit millionaire overnight, may feel that 2 to 3 percent reduction of purchasing power in Malaysia isn’t alarming at all.
But just how far can you go with having one million Ringgit for your retirement in Malaysia?
A word of caution: Don’t ever underestimate the power of compounding.
In fact, a one million Malaysian Ringgit retirement nest egg will only last you just short of 14 years if you spend RM 5,000 per month, adjusted for a 3 percent annual inflation, without reinvesting the balance.
The generally weaker Ringgit versus the US Dollar also means that imported goods are more expensive. This is especially true when you are used to certain brands of household items back in your home country, and are reluctant to buy local brands.
In a nutshell, do not overspend and keep a close watch on your savings versus your expenses during your retirement in Malaysia.
Medical costs are almost always:
For minor medical conditions like cataract or appendicitis, the cost of such treatments may hardly dent your retirement savings.
However, major medical condition will cost a lot more as the table below demonstrates.
Medical costs have escalated around the world and this is no different in Malaysia. Medical inflation averages about 10% each year and is projected to rise due to advancement in medical technology.
However, cost of treatment is still relatively cheap in Malaysia.
To give you an idea of the comparative cost of just one procedure, a full-face lift in the U.S., including a chin lift (sometimes done separately or not at all), can be as much as $35,000. In Malaysia it’s half the price. When you think of that, it’s no wonder that Malaysia’s medical tourism industry is on the rise.
On top of that, hospitals in Penang and Kuala Lumpur were among Southeast Asia’s first recipients of the United States’ prestigious Joint Commission International (JCI) certification, which is seen as the gold standard for health care service providers around the world. Now, Malaysia has 10 JCI-accredited hospitals (2016).
(Source: International Living – Why Medical Tourism in Malaysia is booming)
You can further stretch the sustainability of your retirement nest egg by purchasing a health insurance policy in Malaysia. It is formally known as hospitalization and surgical insurance or casually known as medical card.
Note: The fact is, non-Malaysians are discouraged from seeking medical treatments in public hospitals. That is why one of the requirements of the MM2H (Malaysia My Second Home) program is to buy a health insurance policy in Malaysia.
Malaysian REITs (Real Estate Investment Trusts) are Securities-Commission-regulated investment trusts which invest in Malaysian commercial properties. They are traded on stock exchanges and the dividends are tax free in the hands of investors.
The price of REIT counters don’t fluctuate much, hence making it low management. The only cost involved is brokerage fees, which comes about as low as 0.1% of the transacted amount.
Here are 4 reasons why you should consider investing in MREITs:
With MREITs, you are buying into the top shopping malls in Malaysia. Malls such as Pavilion (Pavilion REIT), MidValley Megamall (IGB REIT), Sunway Pyramid (Sunway REIT) are all available on the Kuala Lumpur Stock Exchange as REIT counters.
In other words, the underlying assets are correlated with some of the premium commercial properties in major cities. Income generating properties like shopping malls are pretty resilient in their ability to generate income even in anaemic economic times. Hence, this fulfils the low risk investment criteria.
And I am obliged to tell you that in this part of the world, real estate property rentals almost always go up. It is not a matter of ‘what if’, but it is a matter of ‘when’.
This is perhaps the most important because we must prioritize cash flow over capital gain for your retirement in Malaysia.
Like property rentals, MREITs also generate income in the form of dividends to investors like clockwork. Since MREITs are usually diversified, vacancy rates are generally low so they are a more stable form of income as compared to physical properties which could have vacancy periods.
The frequency of dividends payout for MREITs is quarterly or bi-annually, making them an ideal investment for retirement income. To make it even more attractive, the dividend payout for MREITs tend to be pretty high as they need to pay out at least 90% of their net income so that the MREIT will be tax exempt.
As MREITs are exchange traded, buying and disposing your holdings is generally easier compared to physical properties. MREITs are bought and sold like normal stocks. Therefore, the prices are transparent and the transactions take place instantly.
One of the key advantages of MREITs is that there is minimal effort required to maintain these investments. MREITs hire professional management teams to manage the tenants and upkeep of the properties, leaving you to enjoy the fruits of your investment. Anyone familiar with property investments will know that there is in fact a lot of work involved in managing your own properties.
At current market condition, net dividend yields of most MREITs are pretty attractive compared to other investments, ranging from 5% to 7%.
This is good news even if you are a non-resident individual in Malaysia (stay in Malaysia for less than 182 days in the first year, and stay less than 90 days in subsequent years even though you stay more than 182 days in the preceding year).
Say, you have RM 2.5 million in liquid cash. After you decide to retire in Malaysia, you transfer it over into a fixed deposit account in any Malaysian bank. At 3 percent per annum return, you are getting RM 75,000 per year, or RM 6,250 per month.
RM 6,250 per month – this is the amount of tax free income that can yield you a pretty comfortable lifestyle if you are not a big spender.
So by now you can conclude Malaysia has a very welcoming tax regime for foreigners, making retirement in Malaysia your perfect choice. There is however, Goods & Services Tax at 6 percent, implemented since April 2015.
When it comes to financial advisers, we are referring to independent financial advisers (IFAs) with Certified Financial Planner (CFP) designation. IFAs are like Registered Investment Advisers (RIAs) in the US, rather than the tied financial agent type.
Just like RIAs, IFAs in Malaysia tend to think they are on the side of the angels as they can more easily avoid conflicts of interest.
Because an IFA charges a flat or hourly fee for advisory work rendered to clients, instead of commissioned product sales.
In fact, IFAs operate under stricter rules on dealing with clients by not being tied to any financial products provider. This means they don’t have any sales quota to meet every quarter. More often than not, IFA acts as a ‘filter’ between you and the various financial products you might not be familiar with in a foreign country.
You could be paying $ 3,000 to $ 5,000 in the US for a fee-based adviser; in Malaysia, you could be paying the same rate, but in Ringgit.
Plus, a talented adviser can find you local investment opportunities that safely help you preserve and allocate your assets while also giving you a reasonable return – sometimes even a significant return if you find the right environment.