Invest ahead to generate extra money after retirement.
WHEN I was growing up, I aspired to join the Government. The main reason so was that I could be eligible for a pension scheme. This came from the fact that my parents were both civil servants and they got to enjoy the benefits of a pension when they retired. They still do.
While it’s not much, it’s comforting for them that at their age, they would continue to have an income for as long as they lived. I wanted to be able to look forward to that as well.
Alas, fate – or was it free will? – had a hand to play in my career choice and I ended up taking a job in the private sector. Seeing as I’m having fun doing what I do, I don’t see myself switching careers any time soon. So there goes my plan of getting a pension.
Time to switch to Plan B, namely, the Employees Provident Fund (EPF). It is intended to help employees from both private and non-pensionable public sectors save a fraction of their salaries in a contribution scheme. The contributions are invested to generate income and the funds in the contributors’ accounts are to be used in the event that the employee is temporarily or no longer fit to work.
It primarily applies to retirement, but sickness, disabilities or unemployment are also covered. The EPF also provides a framework for employers to meet their obligations to employees.
As a retirement plan, money accumulated in EPF savings can only be withdrawn when members turn 50, during which they may withdraw only 30% of their balance. Members who are 55 or older may withdraw the entire sum.
Recently, the EPF board declared a dividend of 5.65% for the financial year ended Dec 31, 2009, up 115 basis points over the 4.5% paid for 2008.
According to Fundsupermart.com Malaysia, over the past five years, EPF has been distributing an average annual dividend of 5%. The average real dividend rate for the past five years was 1.7%, after reflecting an average inflation rate of 3.4%.
With that, the important question to ask is: Will the savings from our EPF be enough to sustain us in our retirement years?
Expert advice
In his Personal Investing column, “Enough money for retirement?” last year, MRR Consulting investment adviser and managing partner Ooi Kok Hwa says as the average Malaysian lived to about 75, those who retire at 55 would need to manage their EPF savings for 20 years. But most retirees spend all their EPF money within three years of retirement, he claims.
Ooi provides a breakdown of how a retiree can manage his EPF savings for 20 years.
“We will assume a starting pay of RM1,500, growing at the rate of 8% per annum; an average bonus of two months per annum, average EPF returns of 5%, total EPF contribution of 23% (employer: 12%, employee: 11%) and inflation rate of 3%.
“Our analysis shows that if we are able to live with just one-third (or 33%) of our last drawn salary, the EPF money should be able to support us for 20 years until we pass away at 75.”
According to Ooi, if a person’s last drawn salary is RM13,976 at 55, he can only afford to spend one-third or RM4,612 per month after retirement (1/3 x RM13,976).
He stresses, however, that the computation was based on the assumption that a person would still be able to generate 5% returns after retirement.
“Everyone has different financial situations. If possible, we need to build our own investment portfolio apart from the EPF savings. We may need to seek some part-time jobs after retirement if our financial resources do not permit us to stop working,” he wrote.
“Besides, we need to clear all our outstanding debts before retirement. We also need to buy enough life and medical insurance for ourselves as well as set up education funds for our children.”
Financial planner Wilson Low says a person who’s concerned about his or her future financial well-being has one clear option – invest.
“Anyone who’s worried about not having enough money in their old age should do something about it, to make sure that you do have money to sustain you when you’re old and not working any more,” he adds.
“The obvious thing to do is to invest in something that can help generate an income for you when you’re older. There are various investment avenues out there and with proper planning and research, financial independence is not an impossibility.”
What some have done
Rita (not her real name), is a retired nurse. After working for the Government for 30 years, she worked in the private sector for a further nine years because she needed the money.
However, she admits that without her pension, it would be difficult to make ends meet. “There are things like your children’s education or repairs to the house that you need to think about. Without the pension, the EPF definitely would not be enough.”
Rita adds that as a former civil servant, she will always be eligible for free treatment at government hospitals. “This is especially important since most medical expenses will come up as one gets older,” she says.
Rita adds that EPF also used to declare higher dividends, between 6% and 7% in the 1990s.
Kamala (not her real name) was a former employee of the Rubber Research Institute of Malaysia. A Government-based organisation initially, it was privatised in the 1990s and its employees were asked to chose either a pension or EPF scheme as a retirement option.
Kamala chose the EPF scheme, a decision she claims she regrets. “The money finished quickly as I had many financial obligations like my children’s education and housing loan. I also had to undergo an expensive operation, the cost of which would not have been an issue if I were a civil servant.”
She is however thankful that today, her children have all grown up and give her husband and her money on a monthly basis. “We have also invested our money in property. So financially we are all right.”
Meanwhile, Kong, an information technology executive in his early 40s, says he spends about RM4,000 a month on household expenses, his children’s education and an outstanding home and car loan, among other financial obligations.
“I’m spending so much every month that I hardly have enough to save. Fortunately my wife is also contributing. After 55, it’s definitely not going to be easy. I’ll probably have to continue working until my kids can support themselves,” he adds.
