Retirement is expensive. Financial experts estimate that you will need at least two-thirds of your post-retirement income to maintain your current standard of living when you stop working.
Many Malaysians have started to plan for retirement via the compulsory Employees Provident Fund (EPF) for the salary-workers. Your EPF account is where all your monthly contributions from your income (11%) and that from your employer (12%) are credited, separated into Account 1 and Account 2. These accounts are created for different purposes and different types of withdrawals are applicable on each account.
EPF’s primary aim is to provide a measure of security for old age retirement to its members. However, according to EPF statistics, while the average life expectancy of the Malaysian population is 75 years, 50% of its retired members spend their entire EPF savings within five years after withdrawal.
With adequate financial planning, you can avoid becoming part of the statistics and secure a sound financial future. There are certain ways you can boost your EPF funds to generate higher financial returns. Here are some options you can consider:
1. Invest in unit trusts
Taking your EPF savings and investing it can be a profitable move — only if you are putting it in an investment that generate higher yield that EPF. Currently, you are allowed to withdraw part of your savings from your EPF Account 1 for investments to increase your retirement funds. However, you are limited to not more than 20% of the total amount in excess of your basic savings in Account 1 and will need to seek approval through appointed fund management institutes that are recognised by the Ministry of Finance.
In 2013, EPF gives a dividend of 6.35%, hence if you plan to boost your EPF savings, the investment you choose should provides a higher return.
Investing in unit trusts is one way you can combat the ravages of inflation by making your money grow. Some unit trust funds can potentially generate up to 8% to 10% returns per annum.
In theory, if you contribute the same amount monthly (23% of your monthly income) in a unit trust fund with an average rate of 8% per annum, you stand to earn roughly RM19,877.32 (or 28.9% returns) at the end of the same period.
Unit trust investments are generally recommended for the long-term, of up to five years or longer. If you sell your units in less than a year, you will probably not have earned anything as you will need to pay for the service charge. Charges can range from 5% to 6% depending on your transaction costs, such as RM50 for every RM1,000 you invest.
2. Buy property
Investing in property has become increasingly popular over the past few decades and has become a common investment vehicle. Historically, the appreciation of residential property prices in the Klang Valley has been around five to 10% per annum.
While property investment may sound like an ideal avenue to help your money grow, the real challenge lies in finding a property unit you can actually afford.
Consider this: A 1,000-square-foot condominium unit in prime locations like Petaling Jaya can command the starting price of at least RM550,000 today. With 4.35% interest over a 35-year loan tenure, a buyer will need to fork out at least RM2,297 every month (90% margin of finance) for the most basic unit.
This can be difficult for many Malaysians, who make a mean monthly household income of about RM5,000, according to the 2012 findings by the Household Income Survey (HIS).
However, for those who can afford to purchase property, especially in the city centre, the returns can be incredibly rewarding. Hypothetically, a RM550,000 property with an annual appreciation rate of 10% can amount to RM885,780 (or a 61% increase in value) by the end of a five-year period.
The current EPF scheme allows you to make withdrawals from your EPF Account 2 to pay the down payment of your first house or to settle the balance of your housing loan. Withdrawal amount is subject to whatever amount is available in the applicant’s Account 2.
3. Go back to school
Believe it or not, going back to school can actually make you richer. Recent statistics on PayScale, an online salary comparison site showed that employees with postgraduate qualification earn nearly three times more than those with a bachelor’s degree.
Employees with a master’s in business administration (MBA) degree with five to nine years of working experience were found to earn an average of 2.6 times more than bachelor’s degree holders in similar fields and with similar years of experience.
Master’s degree holders in Information Technology (IT) with five to nine years of working experience were also found to make an average 1.4 times more than their bachelor’s degree-wielding peers with similar years of working experience.
The disparity in salary between master’s and bachelor’s degree holders may be attributed to employer perception that employees with postgraduate qualification have better leadership qualities and decision-making abilities, and are therefore paid accordingly.
The EPF saving scheme currently allows its members to withdraw their savings from their Account 2 for further studies in local or overseas institutions for their children or for themselves.
Members may withdraw the maximum amount of the total schooling fees or the entire amount in their Account 2, whichever is lower. Members may also apply for withdrawal in each academic year provided that there is balance left in their Account 2.
When invested wisely, your EPF savings can be used to generate some substantial monetary returns. However, treating your EPF savings like an ATM may have dire consequences and interrupt your long-term financial goals.
While exploring ways to make your money grow, it cannot be stressed enough the importance of having sustainable retirement funds. Besides utilising your EPF savings, you may consider other means of investments such as Real Estate Investment Trusts (REITs) and Private Retirement Schemes (PRS) to boost your retirement funds. Such initiatives will help ensure greater financial stability and security well into your golden years.
Young working adults with a bigger risk appetite may consider investing in stocks while retirees in their later years may consider low-risk investments to grow their life’s savings.
