PRS On Early Re­tire­ment Sav­ing

Start Early for Your Re­tire­ment

Insurance - - FORSIDE - Text Pri­vate Pen­sion Ad­min­is­tra­tor Malaysia

WE OF­TEN HEAR THE ADAGE THAT “THE EARLY BIRD CATCHES THE WORM.” IN THE AS­PECT OF RE­TIRE­MENT PLAN­NING THIS IS ES­PE­CIALLY TRUE. BUT, IN THIS DAY AND TIME, YOUNG ADULTS WHO JUST STARTED WORK ARE FACED WITH A MUL­TI­TUDE OF COM­MIT­MENTS AND CHAL­LENGES.

Most of the time, young work­ing adults are just too dis­tracted by the new op­por­tu­ni­ties in their work­ing life. In ad­di­tion, they are of­ten faced with con­flict­ing pri­or­i­ties on their cur­rent life­style and the need to set aside sav­ings for their fu­ture. As such, re­tire­ment plan­ning may not be on their pri­or­ity list. How­ever, the re­al­ity is that the mo­ment you step into the work­ing world and pur­sue your ca­reer, the minute the clock starts click­ing to­wards your even­tual re­tire­ment at age 60. Most young work­ing adults are al­ready aware of what re­tire­ment means, as they can see the ex­pe­ri­ence of their re­tired par­ents, rel­a­tives and friends liv­ing out their re­tire­ment. The re­al­ity of re­tire­ment cer­tainly is driven home. and the big ques­tion is for these young adults to bet­ter plan for their re­tire­ment, if they don’t like what they see from their re­tir­ing par­ents, rel­a­tives or friends. As such, it is not the case of young adults not know­ing what re­tire­ment is all about, but of how to go about plan­ning and tak­ing ac­tion now to se­cure a bet­ter re­tire­ment for them­selves. While in the past, young work­ing adults may not have paid much at­ten­tion to re­tire­ment plan­ning, the newly launched Pri­vate Re­tire­ment Scheme (PRS) Youth In­cen­tive has cer­tainly cre­ated a buzz amongst those aged 30 years old and below. An­nounced by the Prime Min­is­ter dur­ing the tabling of Bud­get 2014 to en­cour­age young work­ing adults from ages 20 to 30 years to start sav­ing early for their re­tire­ment, the PRS Youth In­cen­tive will pro­vide PRS con­trib­u­tors who make a min­i­mum con­tri­bu­tion of RM1,000 within a cal­en­dar year a govern­ment one-off in­cen­tive of RM500. The govern­ment recog­nises the im­por­tance of pro­vid­ing a sup­port­ive in­cen­tive struc­ture to en­cour­age young adults to al­lo­cate re­tire­ment sav­ings early in their work­ing years to en­able them to have a fi­nan­cially se­cured re­tire­ment. The in­cen­tive, which ef­fec­tively started in 2014 for a pe­riod of five years, is also a timely boost to es­tab­lish­ing the PRS as the vol­un­tary 3rd Pil­lar of the coun­try’s pen­sion frame­work. Ac­cord­ing to the United Na­tions, a coun­try is deemed an ag­ing na­tion when 10 per cent or more of its pop­u­la­tion is above 60 years old. Based on the Pri­vate Pen­sion Ad­min­is­tra­tor (PPA) re­search, Malaysia is ex­pected to be an ag­ing na­tion with more than 10 per cent of its pop­u­la­tion over the age of 60 in year 2020. The govern­ment is mind­ful of the im­pend­ing con­cerns of an ag­ing na­tion which will have pro­found im­pli­ca­tions on the econ­omy and so­ci­ety, and as such is en­cour­ag­ing Malaysians to save suf­fi­ciently for their re­tire­ment by vol­un­tar­ily sup­ple­ment­ing their manda­tory pen­sion sav­ings through PRS. A twothird re­place­ment ra­tio of last drawn in­come is needed to main­tain ex­ist­ing life­style in their re­tire­ment

MALAYSIA IS EX­PECTED TO BE AN AG­ING NA­TION WITH MORE THAN 10% OF ITS POP­U­LA­TION OVER THE AGE OF 60 IN YEAR 2020 Based on the Pri­vate Pen­sion Ad­min­is­tra­tor (PPA) re­search Most young work­ing adults are al­ready aware of what re­tire­ment means, as they can see the ex­pe­ri­ence of their re­tired par­ents, rel­a­tives and friends liv­ing out their re­tire­ment

Young work­ing adults who start PRS sav­ing in their 20s for their re­tire­ment are cer­tainly at an ad­van­tage due to 30 to 40 years of sav­ings and com­pound­ing re­turns. The sig­nif­i­cant amount of funds saved and in­vested in PRS, to a big ex­tent, will help to ad­dress the con­cerns of ad­e­quacy (of the two-third re­place­ment in­come ra­tio as monthly in­come), suf­fi­ciency (to last the en­tire re­tire­ment pe­riod) and sus­tain­abil­ity (to en­sure sav­ings is not eroded by in­fla­tion) to re­place their earned in­come dur­ing their re­tire­ment years. To ad­dress the af­ford­abil­ity is­sue of con­tribut­ing to PRS, young adults can make it easy for them­selves by start­ing to set aside 5% of their monthly pay into their PRS ac­count. The RM1,000 con­tri­bu­tion works out to only about RM85 a month. Think of it as set­ting aside just RM3 daily as fu­ture spend­ing for their dream re­tire­ment. With the RM500 in­cen­tive, mem­bers stand to in­crease their PRS sav­ings from RM1,000 to RM1,500. In ad­di­tion, the RM1,000 con­tri­bu­tion is also el­i­gi­ble for tax relief. Based on PPA’s re­search, we have found that if the ear­lier young re­tire­ment savers start con­tribut­ing to the PRS, the greater the ben­e­fits they will en­joy. Young adult who start sav­ing in PRS be­tween the age of 20 and 25 at the rate of 5% of monthly salary (as­sum­ing start­ing salary of RM2,000), he or she would ac­cu­mu­late RM612,000 at re­tire­ment age of 60. Of the RM612,000 saved, a whop­ping 64% ac­tu­ally comes from com­pound­ing growth (as­sum­ing av­er­age yearly re­turn of 6%), while the re­main­der 36% is the cap­i­tal from reg­u­lar monthly sav­ings con­trib­uted. The longer they take to start their re­tire­ment sav­ing, the magic of com­pound­ing growth will di­min­ish and of course, they will also need to in­crease their rate of sav­ings (re­fer ta­ble below). The PPA, as the coun­try’s cen­tral ad­min­is­tra­tor for vol­un­tary Pri­vate Re­tire­ment Schemes (PRS), has been ap­pointed to ad­min­is­ter dis­burse­ment of the RM500 PRS Youth In­cen­tive (YI 500) for young work­ing adults. To be el­i­gi­ble for the RM500 one-off in­cen­tive, con­trib­u­tors must be Malaysians be­tween the ages of 20 to 30 (based on birth­date). PRS mem­bers, be it new or ex­ist­ing, must ac­cu­mu­late a min­i­mum of RM1,000 in a sin­gle PRS fund within a cal­en­dar year. PPA is re­spon­si­ble for dis­burs­ing the in­cen­tive to el­i­gi­ble PRS con­trib­u­tors twice a year by mak­ing dis­burse­ments to mem­bers PRS ac­count with their re­spec­tive Providers. The RM500 in­cen­tive will be given as ad­di­tional PRS con­tri­bu­tions in units and cred­ited into mem­bers’ ac­counts. To pro­mote PRS YI 500 and reach out to the na­tion’s 4.2 mil­lion Malaysians aged be­tween 20 and 30, PPA has launched an A&P cam­paign which com­prises of ad­ver­tise­ments in on­line and so­cial net­work­ing me­dia. So far, re­sponse to­wards the PRS Youth In­cen­tive has been very en­cour­ag­ing. Since the PRS Youth In­cen­tive started in Jan­uary 2014, PRS mem­bers from the age group 30 and below in­creased from 8% in end De­cem­ber 2013 to 14% in May 2014. PPA is con­fi­dent that we will meet our tar­get of 20% by year end.

(*Note – As­sum­ing start­ing pay at RM2,000; av­er­age an­nu­alised re­turn of 6%. The above com­pound growth re­turns are for il­lus­tra­tion pur­pose only. Ac­tual per­for­mances may be higher or lower.)

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