Projection of retirement adequacy with withdrawals and investment elements using simulation approach

Abstract

The issue of whether Malaysians are adequately prepared for costs of their future retirements has been the subject of significant debate and research over the last few years, especially for those who contributing under defined contribution (DC) plan, since the contributors under this plan are allowed in managing some portion of their savings. The contributors are allowed to withdraw or invest during contribution (working) period, according to rules and regulations. Therefore, the objective of this study is to estimate the retirement wealth adequacy of future retirees under the DC plan in Malaysia using wealth-need ratio model and simulation approach. There are four simulated wealth-need ratio models projecting with several feasible scenarios, including an optimistic scenario involving more investment activities (more-investments) and a pessimistic scenario including no or less investment activities (more-savings), based on several related assumptions. The results show that 43% of households are projected to have adequate retirement benefits under the pessimistic scenario, while 94% of households are projected to have adequate retirement benefits under the optimistic scenario. In addition, three hybrid models are constructed to provide more realistic scenarios of Malaysian population, by developing three samples with different proportions of households with more-investments, and households with more-savings. The results show that 80% of households with higher proportion of more-investments households have adequate retirement benefits, while only 65% of households with higher proportion of more-savings households have adequate retirement benefits.The issue of whether Malaysians are adequately prepared for costs of their future retirements has been the subject of significant debate and research over the last few years, especially for those who contributing under defined contribution (DC) plan, since the contributors under this plan are allowed in managing some portion of their savings. The contributors are allowed to withdraw or invest during contribution (working) period, according to rules and regulations. Therefore, the objective of this study is to estimate the retirement wealth adequacy of future retirees under the DC plan in Malaysia using wealth-need ratio model and simulation approach. There are four simulated wealth-need ratio models projecting with several feasible scenarios, including an optimistic scenario involving more investment activities (more-investments) and a pessimistic scenario including no or less investment activities (more-savings), based on several related assumptions. The results show that 43% of households are projected ...