Many Malaysians look forward to enjoying their fruits of labour in their golden years, so it is hardly surprising that a proposal by the Employee’s Provident Fund (EPF) to raise the permissible age for members to withdraw their retirement savings from 55 years currently to 60 years was met with a flurry of objections.
While Malaysia’s minimum retirement age for the private sector has been set at 60 since July 2013, many individuals are rejecting the idea of raising the EPF full withdrawal age to the same age, likening it to an infringement of contributors’ rights to their hard-earned money.
However, many of these strong and hard responses do not take into account EPF’s statistics that suggest that the majority of its contributors prematurely run out of savings post-retirement.
According to EPF, almost 70% of its members had less than RM50,000 upon retirement. Going by this baseline, even if they made do with just RM800 a month (which is below the minimum wage in Peninsular Malaysia), the amount will be wiped out in five years, with the average life expectancy in Malaysia at 75 years.
EPF has worked out that a member will need at least RM196,800 in basic savings in order to be able to survive on a monthly income of RM820 for another 20 years. This is being super conservation, because everyone should aim to have enough to maintain their standard of living post-employment.
EPF claims that by raising the age requirements, members stand to gain greater financial security and sustainability. We take a look at the pros and cons that might follow if the proposal comes into effect:
What do members stand to gain?1. It offers guaranteed returns
Under Malaysian law, employees (11%) and their employers (12%) are required to make monthly contributions from their income into the employees’ respective EPF account.
These monthly contributions are in turn invested in a number of approved financial instruments to generate income. They include Malaysian Government securities, money market instruments, loans and bonds, equity and property.
Dividends generated from these investments are paid annually into your account. While dividend rates declared by the EPF is depending on investment results and can vary from year-to-year, it guarantees a minimum of 2.5% dividend per annum.
The good news is, EPF has shown a yearly dividend return of over 6% on average in the last five years:
2. It gives you compounded dividends
As shown above, EPF offers compounded dividends, meaning that the interest you earn each year is added to your principle. The result is that your balance does not merely grow, it grows at an increasing rate.
Let’s assume that you have RM50,000 in your EPF account at the current age of retirement of 55. If the proposal to raise the full EPF withdrawal age to 60 comes into effect, your EPF savings will increase by about 33.8% or RM16,911in five years, with the average interest of 6% per annum.
Further, EPF dividends outstrip potential returns from other investment options such as savings and fixed deposit accounts. The highest fixed deposit interest rate currently offered in Malaysia is 4.28% compared to EPF’s average return of 6% per annum.
3. You reduce the risk of running out of money sooner
The primary reason why people run out of money in retirement is they spend too much in relative to the amount of financial assets they own.
Without a stable income, any unexpected expenses such as medical bills can cause significant damage to your finances. On top of that, many also see retirement as a license to splurge and enjoy life to the fullest.
The common and unfortunate outcome from this is that many will face the alarming possibility of running out of retirement money in old age.
Raising the withdrawal age will not eliminate such possibilities, but it will help reduce them and can promote better financial sustainability.
What do you stand to lose?1. It reduces your income-generating abilities
Taking your EPF savings and investing it can be a profitable move, especially if you are putting it in an investment that gives you higher yields.
In 2014, EPF gave a dividend of 6.75%. If you plan to boost your EPF savings, the investments you choose should provide a higher return.
Some unit trust funds can potentially generate up to 36% return per annum, easily outstripping the returns that EPF savings offer.
The downside is, these funds often fall into the high-risk category and may not be suitable for retirees or those nearing retirement age, due to their lower risk tolerance and investment timeline.
2. You may need to keep your travel plans on hold
One of the greatest perks about retiring is you now have all the time to do the things you want, and that includes travelling. It is what many people look forward to at this stage of their lives.
Finally, your dreams about tasting wine in Italy or finding spirituality in India are coming true.
EPF’s decision to raise the full withdrawal age could put a stopper to many a retiree’s dream to travel the world at age 55.
Unfortunately, for older adults, time is not always your friend, as deteriorating health often comes with ageing and a difference of five years could make or break your travelling dreams. Many may not be able to fully enjoy the fruits of their labour as a result.
To date, the EPF chief executive officer Datuk Sharil Ridza Ridzuan has announced plans to call for a public consultation for the matter. According to his deputy for strategy, Tunku Alizakri Alias, there will be a series of events to engage members over the proposal.
Many members feel they should have a say in how the fund fulfils its role, while others opine there should be higher dividends and more options to withdraw from their EPF funds if needed.