PRS On Early Retirement Saving
Start Early for Your Retirement
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.)