If you’re like me and many other young working adults in Malaysia, you probably haven’t given much thought to your retirement. Especially if you’re just starting out in your career and still in your tender 20s. Why would you?
There’s so much time (or so we think) ahead and you’re probably trying to figure out the best career path that will lead you to your millions and achieve that goal of ‘early retirement’. Maybe you’re an investment banker, or you’re a teacher, maybe even an entrepreneur and boldly going where so many choose not to go. Whatever your occupation, profession, or passion; I’ll take the bet that we’re all living in the now, the present, and we aren’t even thinking about growing our wealth or securing our financial future for retirement. It might be at the back of our minds, but let’s deal with it as we cross the 40-year mark. Right?
Worse still, how many of us contribute a portion of our monthly income to EPF and not even know what it is, how it works, and why the 11% or 8% option should even matter? *hands up*
I’m not here to preach or give you a listicle of the top 10 reasons you need to contribute to your retirement. I am here in hopes that I can make a difference amongst my fellow peers across Malaysia, because just like you, I didn’t give an (insert profanity word of choice) about retirement, until very recently.
What changed?
I witnessed family members of my own struggle with their insufficient retirement funds, and that is as close to home as it gets.
There will come a time in our lives when our parents, our friends’ parents, and our aunties and uncles retire. The luxury and comfort of life that some of us might have enjoyed by living off “mama papa’s” hard earned income will soon fade. We will begin to see the struggle first-hand and watch as our family or friends, struggle to survive on their insufficient retirement funds. Many have no choice but to live a more frugal life, and if they’re lucky, their friends or children will help ease some of the financial burdens.
At this point, it clicked – we work so hard for the most part of our lives, and for what exactly? To live on the bare minimum and not even enjoy the fruits of our labour? There needs to be a better way to prepare for the day we are no longer employable.
Shocking truth – Malaysians Have ZERO Savings!
The majority of us will retire poor. That’s the hard truth. We are NOT prepared for retirement and that’s a hard pill to swallow.
BNM assistant governor Jessica Chew Cheng Lian said 33% were ‘very worried’ about their financial health when they got old, while the remaining 59% were ‘a bit worried’.
EPF recently reported that only 22% of those aged 54 have enough savings to last only 5 years upon retirement. That means they are out of retirement funds before they even turn 60, but still, have at least another 15 years of retired life ahead of them.
Also shocking: 68% of EPF members aged 54 have savings of less than RM50,000.
Let that sink in for a little while.
RM50,000 might seem like enough, because it buys you a Myvi car, so surely it will be enough to last many years after retirement? Think again. The cost of living is higher and our life expectancy is longer too, this means we live longer in a more expensive environment (taking into account inflation).
Assuming a monthly expense of a household is around RM1,000, that will only last you 4 years (RM48,000). This takes into account that all you spend on is bare necessities because we all know RM1,000 is barely enough to survive in urban KL.
I tried to calculate my own expenses to see if I could survive on RM1,000 per month.
Based on the above, I’ve busted my retirement budget for the month by RM380 and I have nothing left for insurance, or even for a little bit of entertainment. What about households that support their spouses too, RM1,000 is kacang (peanuts) and isn’t even worth much these days! It just isn’t possible.
Even with RM100,000 in retirement savings, that will only last you 8 years after retirement, and surely we all hope to live beyond 63 years, considering that the life expectancy of Malaysians is now between 72 to 77 years. And if in some magical world, we are able to survive on RM1,000 a month from the age of 55 to 75 (20 years), we would need at least RM240,000 in our retirement accounts!
The fact is, retiring at age 55 is a lavish dream that many of us cannot afford. We end up working far beyond our retired years to make ends meet. EPF too has acknowledged the rising costs of living and the increased life expectancy of Malaysians that they have increased the basic minimum savings amount.
EPF Basic Savings for retirement has increased from RM196,800 to RM228,000
“The EPF Basic Savings quantum is revised periodically according to the minimum pension for public sector employees, or every three years, whichever is earlier, with the last revision having taken effect in 2014. In view of the escalating cost of living and longer life expectancy, the EPF has made the decision to revise the Basic Savings upwards to RM228,000 from RM196,800.
Accordingly, members will now be required to have higher savings in their EPF account in order to be eligible to participate in the EPF Members Investment Scheme (EPF-MIS). The scheme provides members with an option to enhance their retirement savings through placing a portion of their EPF savings in Account 1 to be invested in unit trust funds or via private mandate managed by the appointed Fund Managers Institutions (FMI) under the EPF-MIS.”
Nurini Kassim, EPF Head of Corporate Affairs Department
How can I start planning for my retirement?
For starters, start getting into the habit of saving. Think about your retirement and have a plan of action as early as your 20s. Why? Because the earlier you start saving, the better. Your money will grow because of compound interest, or interest on interest (on interest). You will see greater returns over the 30-year tenure (assuming you start saving at the age of 25).
“Not being able to afford retirement is scary to me. I can’t imagine how unbelievably stuck that must feel. I don’t want to be 60 and in pain but have to push myself to go to work every single day just to be able to pay for medical bills.
This is why I am a big fan of EPF, PRS and achieving financial freedom. And if the maths say I must start now, in my 20s, then I guess I must start now. Maths doesn’t lie!”
Suraya Zainudin, Personal Finance Blogger, Ringgit Oh Ringgit
Retirement aside, we aren’t even financially stable to take care of ourselves if we lose our jobs. Think about it – if you were to lose your main source of income right now, would you have any emergency savings to help see you through at least 3-6 months?
According to the “The State of Households II” report by the Khazanah Research Institute, only 10.8% of households in Malaysia are resilient to financial shocks caused by factors such as unemployment, physical impairment, death, divorce and changes in interest rates or financial markets.
Adding to that, Bank Negara’s Financial Inclusion and Capability Study in September shows that only 18% of Malaysians could survive more than 3 months if they lost their main source of income, and only 6% were able to survive for more than 6 months. To make matters even worse, over the past 5 years, more than 20,000 Malaysians have filed for bankruptcy. Shocker!
The key takeaway here? Save, save, save.
“Don’t save what is left after spending; spend what is left after saving”.
Warren Buffett
See also: Steps To Take If You Lose Your Job and Have No Savings
Grow your wealth with retirement savings
The simplest and most effective way to ensure your financial future upon retirement is through savings that grow via investment vehicles like EPF and other retirement schemes.
But know this, saving money is not enough anymore. You need to grow your wealth, you need to ensure the money you’re setting aside every month, brings you more money. And that, in turn, multiplies to bring you even more. And it just keeps growing until you accumulate enough to survive beyond employability.
TIP: Please try not to drown yourself in debt! All your savings amount to nothing if you’re raking in debt at a higher monthly interest rate.
For example, if you get 6% returns on your savings, but you also have debts that require you to pay 18% interest on, your savings mean nothing! You would need savings that amount to triple your debt just to offset the interest payment. Pay off your debts first, or better yet, manage your finances well enough to not get into large amounts of debt in the first place!
Read more about that here.
“EPF is the most effective saving tool that serves the majority of our working adults in Malaysia. People tend to go for instant gratification instead of delaying it. If you leave it to the general public to determine their own destiny, it will always be the same result everywhere: only 1% will ever get rich, another 4% can be financial independent, and the rest are pretty much screwed.
By abiding the law that every employee contributes to EPF, your money is being forced to be set aside – for the long term. Then compound interest can work its magic so you will be able to enjoy the money later during retirement. But when you finally unlock the money, it very much depends on your own financial intelligence.”
KCLau, Personal Finance Blogger and Founder of KCLau.com
How does EPF work?
Your EPF is deducted directly from your monthly salary every month. You don’t need to do any transfers (unless you’re self-employed) and you know that either 8% or 11% of your income is set aside in an account that is not very accessible, meaning you’re less inclined to make withdrawals for petty purchases.
Each EPF member is designated a unique ID and this never changes no matter which company you work for – so you know your funds are accumulating even when you job hop. If you ever need to reference the amount deducted from your salary into your EPF account, just look at your pay slips.
There are two accounts with EPF – Account 1 and Account 2. 70% of your EPF contribution goes into Account 1 and 30% goes into Account 2. Account 1 is strictly off-limits until you’ve reached the retirement age of 55 years. Account 2 offers withdrawal options for big ticket items. We’ll get into that more in our later articles, so keep an eye out for it.
How much do I contribute – 8% or 11%?
Instant gratification is the way of life for millennials. We’re impatient and we want to enjoy the fruits of our labour now. We want results now and we want to live dangerously while we can. We don’t see the value of growing our wealth, we rather indulge in our wants and buy that new pair of shoes or that new iPhone 7, with money that we don’t even have. It’s ok if we get ourselves into debt, we’ll pay it off, eventually. #YOLO!
Delayed gratification has its sweetness too – imagine setting aside 11% of your monthly income towards EPF, and watch that money grow year-on-year until you retire with a hefty sum that you can use to fulfill your retirement dreams.
Here, let me break it down for you with a sample:
*Bear in mind the shift to 8% is applicable only until December 2017. Contribution by employers will remain at 12% (for employees earning above RM5,000) and 13% (for employees earning RM5,000 and below).
The above sample is assuming Amy and Sanjeev start to contribute at the age of 25 and at the stagnant income of RM3,500 over the course of 19 months (March 2016 to December 2017), which is the duration the 8% option will be available for.
While the extra RM105 that Amy enjoys may be a nice-to-have and she can probably enjoy 7 cups of Starbucks a month with that (assuming each is RM15), Sanjeev is clearly the long-term winner with over RM2,000 more funds in his EPF account by December 2017! That’s about 37% more than Mei Cher.
Ask yourself, is that instant gratification really worth missing out on the larger piece of the pie?
Here’s a guide to help you benchmark your minimum EPF basic savings as you progress through your career
But, what happens to my money with EPF?
Your monthly contribution of either 8% or 11% is invested in a number of approved financial instruments to generate income. They include Malaysian Government Securities, Money Market Instruments, Loans & Bonds, Equity (shares issued by companies) and Property.
Your money is invested by officers who work in EPF and have been granted the authority by the higher powers that be in the management team. Rest assured, your money is handled with care and it’s in safe hands.
“As a retirement savings fund, our investments have always emphasized sustainability of returns over a long term horizon as opposed to short-term gains,”
EPF chairman Tan Sri Samsudin Osman
It can be a little scary not really knowing how it all works but here’s a simplified breakdown.
Investment proposals are assessed for the risks and returns across the different financial instruments to ensure the safety of EPF investments.
The EPF Management Investment Committee will thoroughly review each investment proposal prior to presenting it to the Investment Panel.
The EPF Investment Panel, in turn, assesses the analysis of each proposal before its approval. The panel includes the EPF Chairman; representatives from Bank Negara Malaysia, the Ministry of Finance; three professionals from the private sector; and the CEO.
Dividends are then approved by the Minister of Finance and to members declared after the end of the financial year, on 31 December of each year.
It’s about discipline – start saving today for a happier life tomorrow
Unless you want to be a slave to your job for the rest of your life, this should matter to you. If 98% of rural households and 86% of urban households do not have savings, there is a very high chance you’re one of those statistics… And this means you’ll be working well past your retirement.
With shocking reports from EPF that state 50% of retirees exhausted their savings within five years of retirement, this should be a wake-up call for everyone.
I for one know that if I don’t get into the habit of saving now, I probably won’t ever get into the habit. I’m most likely to spend all my disposable income on retail therapy, and eventually it’s going to bite me in the @$$.
“I think that EPF is underrated by most people who invest. Sure, the returns aren’t spectacular (5-7% over the past few years), but they also have been very consistent. Probably only second to Amanah Saham funds in terms of consistency. Most people also don’t realize that the EPF is required by law to pay at least 2.5% dividends every year. It’s about as low risk a fund in Malaysia as you’ll get.
The other great thing about the EPF is its free to invest in it. They don’t charge you a Sales fee or a Broker fee, which means that your returns aren’t diluted.
Most people touch their EPF money way before retirement, which is understandable. After all, people have bills to pay and children to feed. But to really feel the effects of EPF, one needs to allow money in there to keep compounding over a very long period of time.
For example, if you deposit RM 550 a month to the EPF and never touch it, (assuming it returns 6% every year), you would have a cool RM 1 million after 40 years. Even if you adjusted that figure for inflation (assuming 3% a year), it would still work out to about 320K of today’s money equivalent.
And you’ve definitely heard this before, but there’s magic in allowing money to compound over long periods of time. As Albert Einstein reportedly said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Moral of the story: the earlier you start to invest and plan for retirement — the better!”
Aaron Tang, Personal Finance Blogger, Mr-Stingy
Recap of key takeaways
About Nadia Khan
This article was posted by Nadia, who is the Content Manager at CompareHero.my. You can find more of her articles here.
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