The Risk of Not Having Passive Income in Old Age
Introduction
As we age, the reality of our financial situation becomes more evident. While our younger years are often spent working actively to earn an income, the time will come when we may no longer be able to contribute as much time and energy to active employment. This natural progression is when many hope to rely on passive income—income that continues to come in without the need for daily work, such as investment returns, rental income, or business profits. Unfortunately, without proper planning, the absence of passive income can result in older individuals having to compromise their lifestyle, or worse, rely solely on their savings until they are depleted.
More than 90% of the young graduates I interviewed expressed awareness of the future risk of not having passive income to sustain the lifestyle they envision. However, many older individuals today are still facing this harsh reality, despite having had decades to address it. The risk of not having passive income has not been adequately de-risked, and the consequences are severe.
The Importance of Passive Income
Passive income plays a critical role in ensuring financial stability during retirement. When we are no longer able to earn an active income, such as a salary or wages from employment, passive income streams provide financial security. Without it, retirees may have to:
- Rely solely on savings, which could run out faster than expected, especially if faced with unexpected expenses like medical bills.
- Reduce their standard of living, cutting back on lifestyle expenses such as travel, leisure, or even basic comforts.
- Delay retirement, continuing to work into old age even if health or desire no longer permits it.
The Risk of Zeroing Out Savings
The greatest risk in not having passive income is the potential of outliving one’s savings. People are living longer than ever, and many do not factor in the rising cost of living and inflation over several decades of retirement. If retirement spans 20, 30, or even 40 years, savings that seemed sufficient at the time of retirement could be drained long before one’s life expectancy is met.
According to statistics from the Employees Provident Fund (EPF) in Malaysia, this risk is becoming a reality for many. The EPF suggests that the majority of Malaysians have inadequate savings for retirement. As of 2023, 52% of EPF members aged 54 have savings of less than RM50,000, a sum far from sufficient to support the average Malaysian’s retirement, considering the increasing costs of healthcare, housing, and living expenses. The EPF also estimates that a minimum of RM240,000 is needed upon retirement to live comfortably for 20 years, which highlights a significant shortfall.
This is a clear indication of a gap between retirement expectations and financial reality, emphasizing the need for individuals to establish passive income streams early in life to reduce the risk of running out of money in their later years.
Why Young Graduates Understand the Risk
It’s encouraging to see that more than 90% of the young graduates interviewed understand the importance of passive income and the risk of not having it. These graduates are well aware of the changing economic landscape, where jobs may no longer offer lifetime security, pensions are becoming rarer, and the burden of retirement planning falls largely on the individual. This generation is more aware of the need to diversify income streams through investments, side businesses, and other forms of passive income.
However, the gap between understanding and action remains. Many young people recognize the risk but delay taking action due to perceived obstacles such as lack of financial literacy, limited capital, or competing financial goals, such as buying a home or paying off student debt.
The Reality for Older Generations
Despite decades of time to prepare, many older individuals today find themselves financially unprepared for retirement. This may stem from a variety of factors:
- Lack of financial planning: In earlier years, there was less emphasis on long-term financial education, leaving many older adults today without the knowledge or tools to adequately prepare for retirement.
- Underestimation of life expectancy and inflation: Many may have underestimated how long they would live or how much the cost of living would increase over time, resulting in insufficient savings.
- Reliance on active income: Some may have assumed they could continue working or rely on children for financial support, only to find that health issues or other factors made this impractical.
The Malaysian EPF: A Case Study in Risk
The Malaysian EPF provides a useful case study on the risks of not having passive income. While the EPF is designed to provide a safety net for Malaysians in their retirement, the adequacy of EPF savings has been a growing concern. According to EPF data:
- Only 18% of active EPF members aged 54 have at least RM240,000 in savings, the amount considered sufficient for a modest retirement.
- The median savings of Malaysians at retirement age are far below the recommended amount, indicating that many retirees may struggle to maintain their standard of living.
These statistics reveal a stark reality: without alternative sources of income, such as passive income from investments, property, or businesses, many Malaysians are at risk of running out of funds during their retirement.
Steps to Build Passive Income and Avoid Financial Risk
To avoid the financial risk of zeroing out savings in old age, individuals should take steps to build passive income early in their lives. Some of these steps include:
- Investing in assets that generate passive income, such as rental properties, dividend-paying stocks, or bonds. These assets can provide steady income during retirement without requiring active work.
- Starting a side business or income stream that can continue generating revenue even after retirement.
- Focusing on financial education, learning about investment opportunities and risk management to make informed decisions.
- Contributing regularly to retirement accounts, such as the EPF, and considering additional retirement savings plans to ensure that savings are sufficient to support future needs.
Conclusion: De-risking the Future
The risk of not having passive income in old age is one that should not be ignored. While many young people today understand the risk, taking early action is critical to ensuring financial stability and avoiding the need to compromise on lifestyle in later years. For older generations, it’s never too late to start building passive income streams, but the sooner these efforts begin, the more secure their financial future will be.
Planning for the future means acknowledging the risks and acting to de-risk them. Establishing passive income is a key component of this strategy, and by doing so, individuals can move closer to achieving their dream lifestyle in retirement, without the fear of outliving their savings.