and the possible avenues to prevent the deterioration of the retirement income
Rhesa Yogaswara
rhesayogaswara@yahoo.com
July
2009
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The implication of world financial crisis on the retirement plans of the individuals
and the possible avenues to prevent the deterioration of the retirement income
Rhesa Yogaswara
Abstract
World financial crisis that happened many times, have been affected to the world.
The recession was happening in many countries. The impact was not only to the country
level, but also indidual level.
One of the good impacts is the changes of purchasing power, which will be
decreased. It means that the individual’s lifestyle is almost unchanged. For example
eating frequently and nutrient-rich foods can be fulfilled.
At the end, the economic condition globally can avoid the recession. It is because
of the stability in the macro and micro economic aspects.
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The implication of world financial crisis on the retirement plans of the individuals
and the possible avenues to prevent the deterioration of the retirement income
1.0 Introduction
World financial crisis were associated with banking panics or recession that
happened in many countries in the 19th and early 20th centuries.1 Other situations in more
specific conditions of financial crisis are stock market crashes, the bursting of financial
Banking panic is called systemic banking crisis. That situation was happened
while bank were reluctant to lend because they worry that they have insufficient funds
The bursting of financial bubbles is a crisis that happened while financial asset’s
price exceeds the present value of future income. If there is a bubble, there is also a risk
of a crash in asset prices. It happened while the market participants will go on buying
only as long as they expect others to buy, and when many decide to sell the price will fall.
speculative attack that forced the country to maintain a fixed exchange rate by
The last is recession, it is a negative GDP growth in the last two or more quarters.
Many recessions have been caused by financial crisis. For example is the Great
Depression, which was preceded in many countries by bank runs and stock market
crashes. The sub prime mortgage crisis and the bursting of other real estate bubbles
1
http://en.wikipedia.org/wiki/Financial_crisis (accessed 3 June 2009)
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around the world were widely expected to lead to recession in the U.S. and a number of
to the financial crisis. In many cases, investors have incentives to coordinate their
choices. For example, someone who thinks other investors want to buy many Japanese
yen may expect the yen to rise in value, and therefore has an incentive to buy yen too.
If the investors who think like that much bigger, then there are less yen that had
been bought, until there is no value for yen. Therefore, financial crises are sometimes
viewed as a vicious circle in which investors avoid some institution or asset because they
investments. It borrows in order to invest more, it can potentially earn more from its
investment, but it can also lose more than all it has. Therefore, leverage magnifies the
potential returns from investment, but also creates a risk of bankruptcy. Bankruptcy
means that a firm fails to honor all its promised payments to other firms.
mismatch. That condition is a situation in which the risks associated with an institution's
The mismatch between the banks' short-term liabilities (its deposits) and its long-
term assets (its loans) is seen as one of the reasons bank runs occur (when depositors
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panic and decide to withdraw their funds quickly than the bank can get back the proceeds
of its loans. The sample case is financing long-term investments in mortgage securities.
caused by lack of knowledge or the imperfections of human reasoning. It has ever been
financial situations publicly known, and to make sure that institutions have sufficient
requirements, and other limits on leverage. Some financial crises have been blamed on
insufficient regulation, and have led to changes in regulation in order to avoid a repeat.
Fraud has played a role in the collapse of some financial institutions, when
companies have attracted depositors with misleading claims about their investment
Many rogue traders that have caused large losses at financial institutions have
been accused of acting fraudulently in order to hide their trades. Fraud in mortgage
financing has also been cited as one possible cause of the 2008 sub prime mortgage crisis.
Contagion refers to the idea that financial crises may spread from one institution
to another, as when a bank run spreads from a few banks to many others, or from one
country to another, as when currency crises, sovereign defaults, or stock market crashes
spread across countries. When the failure of one particular financial institution threatens
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Economists often debate whether observing crises in many countries around the
same time is truly caused by contagion from one market to another, or whether it is
instead caused by similar underlying problems that would have affected each country
Some financial crises are believed to have played a role in decreasing growth that
could have a recessionary effect on the rest of the economy. Those crises could be caused
by currency crises and banking crises together, which can cause recessions.
transaction. There are four factors that made transaction prohibited. The first is a
prohibition in the substance (zat), such as khamr, alcohol, pork, carcass, and blood.
Especially for the respective countries who are experiencing the recession.
economic condition, which impacted not only to the poor countries, but also to
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Example case of global crisis in the last 2008, could impacted more
• People are adapting livelihoods in order to cope but often into illegal or
dangerous activities.
• People are eating less frequently, less diverse and less nutrient-rich foods.
• Different countries are putting the blame for the crisis in very different
places.
also lowering the price of oil, reducing the severity of the impact on oil
importing nations.
• Access to trade credit is not a major problem for established garment and
• Major global buyers are forcing developing country suppliers to absorb the
3
http://www.research4development.info/news.asp?ArticleID=50393 (accessed 3 June 2009)
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After ripple effects of a sub prime mortgage lending crisis in the U.S.
began to be felt across the globe, housing values deflated, banks failed, credit
froze, and layoffs spurred unemployment levels not seen in decades. While all
of the accumulated evidence points to a deep global recession now, the recent
50+.4
is specific on the country level. We can consider that individual level is the
last level who feels the financial crises effect. However, individual has the
For the individual, the main problem is the changes of the purchasing
power, which reflect to the changes of the lifestyle. In some countries, some
people are eating less frequently, less diverse and less nutrient-rich foods.
Purchasing power could be caused not only by the rise of the daily
need’s price, but also the decrement of the individual source of funds. Both
trillion in value. Between the 2nd quarters of 2007 and 2008, private pension
fund assets declined by over half a billion dollars while state and local pension
4
http://www.aarpinternational.org/resourcelibrary/resourcelibrary_show.htm?doc_id=860569 (accessed 3
June 2009)
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funds declined at rate of nearly $350 billion. In the current labor market, those
aged 55 and over are losing their jobs at a higher rate than the young are.
reinvesting in the market and our own futures, and how to encourage older
unemployment.
individual, need to protect our income in order to stabilize our financial condition.
Especially how to protect our income for retirement plan in global crises, is another thing
There are many approach methods in investment plan as a solution to protect our
income. Which investment is one of the solutions that would be highlighted in this
discussion? There are three types of period terms in investment plan. There are short
high yield rate of return, and gain access to the return sooner rather than later.
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You might need short-term investments if you have a pressing need
coming up in the near future. For example, if you might need a down payment
for a house or car in a year or two, you could use short-term investment
options. The period is usually between one up to ten years. This is most likely
Most people are comfortable with investing around ten percent of their
total income. Then, choose the investment to use. It is best to take the amount
and invest it into one particular investment. There are several short-term
investment options out there, and the key to making money successfully is
savings, deposits, and bonds. All of them have same characteristics. There are
investors can buy and sell stock of any company. The characteristics are
liquid, high risk, but it is high return. However, the investor must have
knowledge of the market trends, company portfolio, and needs a lot of time to
monitor any information that could be the key driver of the stock price’s
movement.
Securities are similar with stock investment. The differences are in the
process and the institution involved which affected to the investor. Securities
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investors are simple investment, low risk, does not need to have a complex
In addition, the other samples are savings, deposits, and bonds. Where
all of them are more liquid than the first two samples. These investments are
the least risk and the least return. These are simple investments for anyone,
sold, whereas the long-term investments may never be sold, which long-term
estate, and equity. Insurance simply means joint guarantee. It is not a contract
but an agreement for mutual help among the group, and can be visualized as a
pact among clients who agree to jointly guarantee among themselves against
loss or damage that may befall any of them. The basic objective is to pay for
The objective of the insurance is to protect the loss. In addition, for the
modern insurance nowadays, the objective of the insurance is not only for
5
Rosly, Saiful Azhar. 2005. Critical Issues on Islamic Banking and Financial Market. Dinamas. Kuala
Lumpur.
11
investment, which managed by fund manager. So insurance is categorized as
low risk with low return investment. However, the return could be received in
a long time. The benefits are less effort to have knowledge and savings time
for monitoring.
in direct investment in real business. Investors, who have money, give the
money to the party who will run the business. Investment in equity is
categorized as high risk and high return. Investor must have much knowledge
since in the early, management must build and setting the business up. This
process needs much effort from investor to have a good analysis and invest
more time.
The last is the investment in real estate. Real estate consists of three
property. In the individual level, investment in real estate will make income
for investors who have the property from the rental fee.
which potentially high return and potentially high risk if it were wrong
managed. The operational cost in real estate is relatively higher than another
traditional real estate, investor must have much money in the early to buy the
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Same with several stocks that combined in securities, real estate also
investment is simpler than traditional real estate. Investor does not need to
invest time to maintain the property, and it is relatively liquid. The benefit for
investor is less money to invest in the early, less of operational cost, and
savings time.
The choice of investment has been determined in the above sections, both for
short-term and long-term period. Moreover, how do we combine those investments as the
optimum income, both for short term and long term as our retirement plan?
There are some combinations which could be combined depends on the investor’s
the tax-effective strategies, which are available to assist you in achieving your goals for
retirement; which the process includes a comprehensive review and analysis of your
assets, liabilities, saving patterns and investment strategy in the context of your timing of
your retirement, retirement income and your tolerance for investment risk.6
It means that retirement planning is a plan to ensure that we have enough money
to spend when we will retire. It includes the amount to save and to invest in the
diversified portfolio. It should also consider the future inflation rate, the life style
expected etc. Retirement planning is one of the financial planning which focusing on
wealth protection.
Retirement Plan Goals. The Second is analyzing information and calculating savings
6
Alhabshi, Syed Othman. 2009. Retirement Planning. Presentation Slide. INCEIF. Kuala Lumpur
13
needed to meet the Objectives. Next is planning the distribution, ascertaining the best
method to distribute that is best. Then, it is implementing the plan. The last is review the
plan.7
However, the investment structure for the retirement plan must be considered for
investor. In Islamic perspective, all each transaction must bee free from riba. Risk in
retirement plan must be managed properly as mentioned in Surah Yusuf (12:67) and
Surah Yusuf (12:47); (7 yrs good harvest,7 yrs for bad harvest).
Those risk factors that must be managed consist of four types. There are personal
risks, property risks, liability risks, and investment risks. In order to keep economic
stability in retirement, we could apply the portfolio theory. Diversification and tax
management are the main point in managing portfolio investment, which mentioned in
(capital appreciation/long term/rental income), level of returns, and leveraging tool for
using borrowed funds. However, there are several portfolio investments that must be
managed properly, such as market risk (macro economic issues), specific risk (related
with industry), and financing risk (cash flow). All of the retirement plan methods can
5.0 Conclusion
planning, as part of wealth planning management is one of the best methods that
7
Razak, Shaikh Hamzah Abdul. 2009. Wealth Planning and Management. INCEIF. pg 270
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individual can do to minimize risk from financial crises impact. Therefore, risk in
One of the good impacts is the changes of purchasing power, which will be
decreased. It means that the individual’s lifestyle is almost unchanged. For example
At the end, the economic condition globally can avoid the recession. It is because
6.0 Reference
Alhabshi, Syed Othman. 2009. Retirement Planning. Presentation Slide. INCEIF. Kuala
Lumpur
http://www.aarpinternational.org/resourcelibrary/resourcelibrary_show.htm?doc_id=8605
2009)
Karim, Adiwarman. 2004. Bank Islam Analisis dan Keuangan, RajaGrafindo Persada,
Jakarta.
Razak, Shaikh Hamzah Abdul. 2009. Wealth Planning and Management. INCEIF. Kuala
Lumpur.
Rosly, Saiful Azhar. 2005. Critical Issues on Islamic Banking and Financial Market.
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