Using EPF as a long-term savings instrument

 

The EPF serves as a cornerstone of Malaysia’s social security system that enables Malaysians to afford a dignified retirement and support essential life needs.

Currently, EPF contributions are divided, with 70% directed to Account 1 designated for retirement (Persaraan), and 30% to Account 2, known as the Sejahtera account, that offers pre-retirement withdrawals for education, healthcare, insurance, and housing.

Last week, EPF announced plans to introduce a third account, the Flexible Account, along with adjustments to contribution allocations across the three accounts.

Under the proposed changes, contributions will be apportioned 75-15-10 for Accounts 1, 2, and 3, respectively. The Flexible Account grants members the ability to withdraw funds as needed.

These developments in the EPF system represent positive and welcomed shifts in the social security landscape.

The increased allocation to the Persaraan account addresses concerns about insufficient retirement savings.

To illustrate its significance, let’s examine two scenarios: that of a median-wage worker and a minimum-wage worker, earning RM2,600 and RM1,500 respectively, and both having worked for 30 years.

Median-wage workers currently contribute RM624 to their EPF, of which RM338 comes from their employers and the other 11% is deducted from their salary.

Of this sum, 70% is directed to Account 1 and over 30 years, they would amass nearly RM160,000. Assuming an annual compounding interest of 5.5%, reflective of the EPF board’s consistent dividend payouts above 5% annually, the retirement savings for a median-wage worker would grow to approximately RM380,000.

On the other hand, minimum wage workers, having contributed RM90,000 to their retirement account over three decades, would see their savings grow to RM220,000 with compounding interest by retirement.

The revised EPF rates would raise these figures considerably.

The typical median-wage earner would see a substantial increase of RM27,000 in their retirement nest egg, while the minimum-wage earner would enjoy an additional RM16,000. Such enhancements could substantially stretch their financial security by years during their retirement.

Furthermore, the flexibility offered by Account 3, coupled with attractive interest rates, positions EPF as an attractive savings instrument for addressing unforeseen financial exigencies.

In the past few years, we have seen the prevailing uncertainties of the Covid-19 pandemic, escalating job insecurities and other unforeseen circumstances putting many into financial desperation. The new EPF structure would serve as a reassuring safety net.

However, despite the allure of using surplus funds from the flexible account for daily expenses, EPF shouldn’t be viewed merely as a regular bank.

Its primary purpose is to serve as a safeguard against retirement and unforeseen emergencies. Members must exercise prudence and weigh the long-term consequences of withdrawing from the flexible account.

With its high interest rates and the power of compounding, EPF remains a crucial long-term savings tool, and members should strive to preserve their funds for retirement and unexpected contingencies.

Continuing our example of median and minimum wage workers, the new scheme will allocate an excess fund of RM748.80 annually for median earners. If left untouched, this surplus could accumulate to approximately RM9,641.06 over a decade, more than 3.5 times their monthly salary.

Such reserves could serve as a robust safety net in emergencies or during sudden unemployment. Minimum wage workers would similarly benefit, with an annual surplus of RM432 and an estimated accumulation of RM5,562.15 over 10 years, assuming no withdrawals.

With the increased allocation to the retirement account and the introduction of the flexible option, which signify positive shifts, Malaysians now have greater opportunities to leverage the EPF scheme for financial planning.

It’s imperative to shift our perspective regarding Account 3 from a mere withdrawal account to recognising its potential for long-term savings and financial management.

In that sense, voluntarily topping up the EPF presents an appealing option. A yearly top-up of RM500 could yield almost RM8,400 in additional retirement income, RM1,600 in the Sejahtera account, and RM1,120 in the flexible account over 15 years.

The total benefit of such top-ups would amount to RM11,200 during this period.

This contrasts significantly with keeping the same amount in a standard bank account, where the savings would only reach RM7,500 without interest or RM9,300 with a 3% fixed deposit rate. Additionally, voluntary EPF contributions offer potential tax savings.

In conclusion, the changes in Malaysia’s EPF system offer Malaysians a chance to enhance their long-term financial security.

By capitalising on the increased allocation on the retirement account and exercising prudence in utilising the flexible option, individuals can enhance their prospects for a secured and dignified retirement. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.