For a better tomorrow

MANY developed and developing countries have pension schemes or at least retirement saving schemes for workers, and Malaysia is no exception.

The Employees Provident Fund (EPF) helps ensure members of the workforce are not left without a saving when they retire.

Although EPF offers some security, the savings in EPF alone are often not adequate to last throughout one’s retirement. Yet, the majority of Malaysians have all their savings in just this one basket.

A more practical approach to saving for retirement is to have a diversified and balanced investment portfolio. By doing so, you would not only be able to save up for the impending rainy days but also ensure that your money works as hard as you, gaining capital appreciation in the process.

Bursting the bubble

Introduced in 1951, the EPF scheme makes it compulsory for employees to contribute 11% of their salary towards their personal EPF account. Employers are also required to contribute – 13% of the salary for employees earning RM5,000 and below, and 12% if the employee’s salary is more than RM5,000.

Although the guaranteed base dividend rate for EPF is 2.5% per annum, Malaysians have been enjoying an average 6.02% for the last 10 years (2008-2017). This high EPF dividend rate has given many Malaysians a false sense of long-lasting financial security.

The institution suggests that the minimum savings EPF members should have at age 55 is RM228,000. This equates to a monthly withdrawal of RM950 to cover basic needs for 20 years.

However, according to a 2016 survey by the Department of Statistics Malaysia, the average household expenditure of Malaysians was approximately RM4,033.

You should also consider the rate of inflation, which stands at an average of 3.61% from 1973 to July 2018, as reported by Trading Economics.

Even if your financial responsibilities such as your children’s education and all kinds of loans are already taken care of before you retire, can you manage with the meagre monthly income of RM950?

To make matters worse, most Malaysians may not even have this bare minimum upon retirement. EPF reported that only 18% of members have the minimum savings target of RM228,000 in their account by age 55.

According to CIMB-Principal Asset Management Berhad’s chief executive officer Munirah Khairuddin, many individuals procrastinate on building their retirement fund because they think their money can be put to better use for current needs rather than putting it aside for the years to come.

“People worry about the potential returns they can get from investing RM250 but don’t think twice about spending the RM250 on a Japanese meal with friends. With the latter, the money is burned instead of compounding over time,” she says.

Preparing for the unexpected

To ensure a healthy inflow of money during retirement, people should start planning and investing early. This can be done by leveraging on the financial market.

The financial market can be widely classified into equity and debt/money market. The equity market consists of highrisk and high-gain investment possibilities such as stocks, shares and the currency market. The debt market, which includes bonds, offers capital preservation security and low rates of return.

According to Linnet Lee,

CFP, IFP and CEO of

Financial Planning Association Malaysia, “Malaysians today are luckier than the generations before them since there are different asset classes available for investment such as unit trust, PRS, properties, securities and collectibles.”

Here are a few investment options that Malaysians can utilise to secure their future.

Bonds – Offered by government organisations, the public sector and private corporations, bonds offer fixed income in the form of interests and have a maturity tenure as well.

Stocks – Simply put, stock is a share in the ownership of a company. The profit and loss of your invested funds in stock would depend on the company’s performance.

Mutual funds – Many investors entrust their money to fund managers – experts working as financial consultants associated with a bank or an authorised financial planning organisation – to be invested in varied financial instruments such as stocks, bonds and currency for capital gain through high returns.

There is usually no lock-in tenure, but if you want capital appreciation along with returns, let the profits earned be reinvested. The risk of loss in mutual funds is lower since the funds’ allocation is balanced, making this investment a safer option. The returns earned are shared among the investors.

Endowment policies –By investing in endowment policies, you pay an agreed sum of money as premium for a certain number of years and get a lump sum as return after the policy tenure is over.

Private retirement schemes (PRS) – In essence, a fund manager invests the funds you have contributed into different markets to gain capital appreciation.

However, unlike mutual funds, you would have your personal PRS portfolio instead of money pooling.

You can choose where to allocate your funds, but if you are unsure about where to put your money, your fund would be allocated as per the default PRS fund allocation system.

As PRS is meant for retirement, you should look at its benefit from the long-term perspective – the dollar cost averaging would counter short-term losses, if any.

Deferred annuity – This investment option is like planning pension for yourself. You pay a pre-determined amount of money until your retirement.

Once you retire, you stop paying and start receiving the money as monthly payments.

The amount you pay as premiums would depend on the amount you wish to receive after you retire as well as the time left till your retirement.

Amanah Saham – Managed by Permodalan Nasional Berhad, this low-risk government trust fund is an investment option that is open to only Malaysians and offers high dividends. There are 11 funds to consider, with some open only to bumiputras.

It is never too early

It is considered wise to invest more in equity market when you are young as you have enough time to earn and reinvest to mitigate losses, if any.

As you progress in age, you can shift your

To ensure a healthy inflow of money during retirement, people should start planning and investing early.

focus to money market products.

For instance, if you start at 25, your ideal investment portfolio should have close to 80% equity market and 20% debt market investment.

This ratio may continuously change as you age, ending up with approximately 60% equity market and 40% debt market investment by the time you are 40.

This would be completely reversed to 20% equity market and 80% debt market investment by the time you reach your retirement age.

Lee adds, “It is quite common for people to start with unit trusts or PRS, which afford lower entry levels and subsequent regular investments.”

According to her, when savings are not enough to spread over several investment vehicles, the best solution would be to invest in a fund that offers different asset classes (multi-asset class fund).

When the individual has amassed enough, he can strategically rebalance his funds into other suitable options.

The secret is to have a balanced investment portfolio with funds allocated in a way that provides optimum profit while minimising risks.

“A licensed financial planner who is also a CFP professional would be the right person to help customise a suitable portfolio for you after determining what you really need,” says Lee.