We all know that the money in our Employees Provident Fund (EPF) account is to be used for our retirement but what if we need the money now?
This year has been extremely challenging for Malaysians who lost their jobs due to the pandemic. According to the Social Security Organisation (Socso), 90,000 workers have applied for unemployment benefits with the organisation so far this year. In total, there are over 700,000 people who remain unemployed this year.
For those who have no income or unable to find enough income now, it’s hard to even think about next month, let alone retirement years later.
In this year alone, the government had announced additional withdrawals under i-Lestari and i-Sinar for members to have access to their EPF savings in the event that they lost their job or have suffered reduced income. The EPF contribution rate for employees had also been reduced from 11% to 7% from April to December this year, and 9% from January to December next year.
Though necessary, these pandemic-related initiatives could potentially leave a long term impact on your retirement savings.
If you had a chance to tell EPF what to do with your savings, what would you want EPF to change?
What happens if you use your retirement savings early?
With the widespread job losses and salary cuts this year, it’s no surprise that many people would be tempted to use their retirement savings. When your home is in danger of being auctioned or your car repossessed right now, it doesn’t help if you can only make use of your retirement savings 20 years later.
However, you need to decide if the benefit gained by using your retirement savings is more than the cost of losing out on the potential dividends you stand to gain if you don’t withdraw it.
EPF members who withdraw their savings may lose out on the benefits of compounding returns they could have achieved over a number of years.
So, how much will you stand to lose?
For example, starting December 21, EPF members who qualify can withdraw between RM10,000 to RM60,000 under the i-Sinar programme.
If you keep your RM60,000 in retirement savings instead of withdrawing it to spend, here’s how much you’ll have after five years based on just 4% interest earned per year.
| Year | Value of retirement savings | Interest earned | Value at year end |
|---|---|---|---|
| 1 | RM60,000 | RM2,400.00 | RM62,400.00 |
| 2 | RM62,400.00 | RM2,496.00 | RM64,896.00 |
| 3 | RM64,896.00 | RM2,595.84 | RM67,491.84 |
| 4 | RM67,491.84 | RM2,699.67 | RM70,191.51 |
| 5 | RM70,191.51 | RM2,807.66 | RM72,999.17 |
Compound calculator: https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
If you add up the total compounded interest earned in five years, you’ll have an additional RM12,999.17!
On the other hand, if you withdraw from your retirement savings and you use it to reduce an outstanding loan where the compounding interest you have to pay is higher than what you would earn if you keep the money in your EPF savings, then it would make sense to do it.
But don’t forget to pay yourself back what you took out of your EPF savings in the coming years because you will still need that money when you retire.
What you should know before withdrawing your savings
Besides i-Lestari and i-Sinar, EPF currently allows withdrawals based on these categories:
Source: EPF Public Consultation Survey 2020
Most of the non-retirement withdrawals allowed are from Account 2 while the money in Account 1 is really intended for use only when you reach retirement age with only death, total disability or leaving the country for good as the only exceptions.
The money in your retirement savings should be for the purpose of getting you through your entire retirement. So, what would justify withdrawing it before you retire?
There are times when withdrawing money from your retirement fund can prevent a financial disaster, like losing your home, your insurance coverage or compounding high interest debts.
Before you tap into your retirement funds, ask yourself:
- Can you take out a short-term loan at a lower interest compared to your EPF dividends?
- Can you convert to cash some of your net worth or assets?
- If you own property, have you considered refinancing?
- Have you made use of all the financial assistance provided by the government like Penjana and Kita Prihatin?
Using your retirement savings should only be the last resort when you have run out of options.
What does EPF do with your money?
The EPF Act 1991 states that it provides a “scheme of savings for employees’ retirement and the management of the savings for the retirement purposes. So, the money you stash away in EPF is for the purpose of retirement planning. This is different from financial planning.
When you are still young and working hard to earn more money, you may be more focused on financial planning to grow your wealth through investments while still saving money for various short and long term goals, However, you are actually planning for your retirement too when you put part of your monthly income into EPF.
Planning for retirement is a lot more than just saving money. You need to make sure the money you put aside for retirement can help pay for your living expenses once you stop earning an income. This means figuring out how this money and any other assets you own can still create a monthly income for you when you stop working.
When you retire, it’s your money that must continue working. This is what EPF does with your contributions. There are investment services, advisory services and managing members savings in relation to tax relief, death, and disability benefit as well as protection against bankruptcy.
Source: EPF Public Consultation Survey 2020
While EPF has done a good job with growing your savings, is the scheme ready for the changes we are seeing in the employment landscape?
According to the Department of Statistics (DOSM), more than a quarter of the Malaysian workforce are now freelancers and the gig economy’s growth is estimated to be faster than that of the conventional workforce.
Can the existing EPF scheme still help the Malaysian workforce of the future to grow their retirement savings?
For example, to help you reach your savings and retirement goals, should there be a maximum limit for voluntary contribution by members given the changing nature of jobs today?
What about imposing a different dividend structure to the retirement part of your savings (Account 1) compared to the more flexible conditions for Account 2. Besides the services listed above, should EPF be involved in managing other services to help you grow your investments?
It’s time to let EPF know what has been done right and what changes you want to see.
