How often do you think about your retirement? Most of us do but we don’t do much to prepare ourselves for it. Most of us are surviving day to day in a You-Only-Live-Once (YOLO) world especially during the pandemic. So how should you plan for retirement if you’re not financially savvy and how do you plan to achieve the amount you need for your FI/RE (financial independence/ Retire Early)?
Let us address the most common retirement investment denominator in Malaysia, Employees Provident Fund (EPF) i.e. defined-benefit which ~40% of Malaysians are members of.
As obligated by law, every employee and their employer makes monthly contributions to the EPF at the rate of:
- 24% (11% by employees and 13% by employers) for employees who earn <RM5k per month
- 23% (11% by employees, 12% by employers) for employees earning >RM5k per month
- For employees aged above 60, the contribution is set at half the regular rate
EPF was set up in 1949, making it mandatory for Malaysian citizens employed in the private sector, and voluntary for non-Malaysian citizens to become a member. Now with a monthly inflow of ~RM5b, it is ranked within the top 15 biggest pension funds in the world and top 5 biggest in Asia. Total investment assets as of 2020 was RM998bil and it would hit a value of over RM1 trillion at the end of 2021, subject to the total Covid related withdrawals of i-Lestari, i-Citra and i-Sinar.
The average 5-year dividend is 5.88% is higher than the stipulated EPF Act which guarantees a nominal dividend of 2.5% and of course, the current pathetic Ringgit Fixed Deposit(FD) rates. If you’re looking to grow your retirement or FI/RE fund, I would suggest you increase your EPF contribution to the maximum. Employing the rule of 72, your savings in EPF will double every 12 years.
So how was this improved performance created?
The key goes back to the Strategic Asset Allocation (SSA) strategy, where the EPF diversifies its investments in three different ways: by asset classes, by geographical location, and by taking active risk through the appointed external fund managers.
In 2020, the breakdown of asset class:
Fixed Income instruments made up 49% (government & corporate bonds) of investments while Equities (listed & non-listed) comprised 39%.
Money Market instruments and Real Estate and Infrastructure made up 7% and 5% respectively of investments. The portfolio reflects the EPF’s strategy to optimise returns within tolerable risk limits as guided by the SAA which is reviewed every 3 years.
Why did the EPF decide to invest in overseas markets?
In 2020, the foreign investment threshold is 33%. There are two key reasons:
- EPF assets have been growing at 10-11% annually which is much faster than the growth of the domestic market, currently at 4-5%. The Malaysian market is simply too small; in fact, the size of the fund is about 60% of Malaysia’s GDP.
- The overseas market i.e developed countries, provides greater opportunities to invest in high quality matured investments that also give greater liquidity for the EPF to effectively execute its investment strategies.
How is my EPF account separated?
Your savings will be split into two accounts: 70% of the monthly contribution goes to Account 1, and 30% goes to Account 2.
When can I withdraw from EPF apart from i-Lestari, i-Citra & i-Sinar?
Members are allowed to withdraw fully from Account 2 upon reaching Age 50.
Pre-retirement withdrawals from Account 2 can also be made for the purpose of pre- retirement such as: for housing, i.e. to purchase a house, to reduce or redeem a house loan, to build a house; for education, i.e. to finance their or their children’s education; and for health, i.e. to pay for a specific health-related matters. Account 2 can also be utilised by eligible members to perform the Hajj (pilgrimage). Or you can withdraw fully from Accounts 1 & 2 when you are leaving the country for good, incapacitation and optional retirement,
Can I increase my EPF contribution?
Yes, discuss with your employer on what is the maximum amount you’re eligible to contribute which ranges from 9-12% and for the employer, the maximum they can contribute is 19%!. Alternatively, you may transfer an additional RM5k per month via online banking into your EPF account. Do have your EPF membership number handy as it is required for the transaction.
Retirement challenges in Malaysia
- Aging population: Despite the high rate of monthly contribution (~24%), most members’ retirement funds are not enough as Malaysia will become an aging population by 2035 i.e. the population over 65 years old will account for 15% of the country. As healthcare facilities improve, our average lifespans have also increased to 72.6 and 77.6 years old for men and women respectively.
- Low wages & low retirement age: EPF estimates the minimum retirement savings needed per member after retirement of 55 years old is RM240k, based on a monthly expense of RM1k for 20 years.
Data as of 2020 shows that half of the contributors aged 54 years old have <RM50k set aside for retirement and the bottom 20% members have <RM7k in savings. With such low wages in Malaysia, we ought to be working well into our 60s or 70s in order to have a chance of a comfortable retirement. The retirement age in Singapore and Philippines is at 62 and 65 officially. The Malaysian government should raise the official retirement age in Malaysia to at least 65 years old.
- Low EPF coverage for self-employed/gig economy: As of end-2017, only a little more than half of workers in the labour force are contributing EPF members, which means that the other half have no old-age pension coverage at all. The employed labour force without an active EPF account increased from 54% to 55% during the same period and will keep rising. The government has initiated the 1Malaysia Retirement Savings Scheme (SP1M) to ensure that those who are self- employed and do not earn a regular income achieve a certain level of savings upon reaching the retirement age.
Members who save under the scheme shall receive Government contribution of 15% on the amount contributed, subject to a maximum of RM250 a year for a period of five years from 2018 to 2022. That low amount makes it unattractive for any informal/ gig worker to participate and hence, the take-up rate remains very low at <5%.
- Leakages: when a member withdraws at any point before their retirement, this is known as leakages as there will be less savings left to grow for their retirement. Withdrawal criterias should be reviewed every few years to ensure leakages can be prevented for non-emergency/non-appreciating assets.
- Poor money management/ financial awareness: Data from the EPF shows that ~71% of EPF members aged 55–60 years opt for lump-sum withdrawals of their pension savings upon retirement; and half of members exhaust their savings within five years. Money management education should start in school and as for lump sum EPF withdrawal requirement, members should go through a course in retirement management and financial scam detection.
Malaysia’s EPF has proven how a disciplined process to create and execute a long-run investment strategy driven in the best interest of its members’ retirement can achieve strong results. I hope this blog post will give you more confidence to save for your retirement continually at EPF and to achieve your aim of FI/RE so you can really relax once you hit your 60s!
