One-third Savings For Two-third Retirement Income

It is important for us to ensure that we have the recommended two-third replacement income of last drawn salary as monthly retirement income to continue to enjoy the lifestyle we have become accustomed to. For most of us who are employed in the private sector, the Employees Provident Fund (EPF) is the main source of our retirement funds, but the mandatory contributions may not be adequate to replace two-third of your last drawn income. This has also been reported in numerous articles highlighting the need to save more for retirement beyond the contributions made to the EPF.

At the national level, Malaysia’s current replacement income ratio stands at 30%, compared to the 57% average for Organisation of Economic Corporation and Development (OECD) countries. With Malaysia moving towards an ageing society by 2020, with 11.3% of the population in retirement age, we need to address this issue both nationally and individually before it become a socio-economic problem for the average Malaysian who may not be able to achieve the replacement income of two-third of their last drawn income.

So, how can Malaysians achieve that? According to Private Pension Administrator’s (PPA) research, the average Malaysian will have to set aside a third of your monthly income to achieve that. While this may seem to be a “tall order” with the current income levels and cost of living concerns, it is not impossible. As Malaysians, we are fortunate to have the mandatory minimum EPF contributions of 23% (namely 11% from employee and minimum 12% from the employer), you will possibly need to contribute an additional 10% or more, to make up the one-third or 33% savings for our retirement fund.

With the launch of the Private Retirement Schemes (PRS) in July 2012, it’s become even easier to address the current 30% replacement income ratio, Malaysians now have the voluntary third pension pillar to help them with making the additional 10% savings to supplement their EPF. In time to come, Malaysians will have two pillars for their retirement savings, with the bulk of their funds coming from EPF and the additional savings from the PRS.

Given that we will have to replace our earned income in our retirement years, we will have to build our retirement funds to generate income, within the time frame left before hitting the retirement age at 60. The objective then is to build up our retirement funds to the desired level which can then generate a passive retirement income stream to replace two-third of our last drawn income.

Building up our future retirement funds requires us to pay attention to the following:

• Set aside time to invest in our retirement plan to accumulate the adequate funds required as income replacement for our retirement.
• Find how much EPF funds we have accumulated to date and other savings for retirement and what additional savings we need to make.
• Determine the additional savings to make up the one-third current retirement contribution requirements to achieve two-third of last drawn income for future replacement income.
• Start your PRS account to place the additional savings contributions into a PRS fund that will provide potential compounding growth.

Retirement must be addressed as early as possible to allow time to accumulate enough funds. The more we put off planning for it the harder it gets as the shorter timeframe to retirement will require you to make even higher contributions and limit the compounding growth of investment returns.

It can be a daunting task to determine how much your last drawn income would be before your retirement. To find out what your projected last drawn income might be when you retire at 60, you can easily make the computations with PPA’s retirement calculator and you will find out how much additional savings you need to make on top of your EPF.

The projected last drawn income will give you an indication of how much income you need to retire and how long it will last, as well as what the projected amount of retirement funds you should have in order to generate the required income. We recommend that you review this annually to reflect changes to your current income and financial circumstances.

Find out what are the three biggest retirement income issues you need to avoid.

For more questions on how PRS can help you address these retirement income issues, leave a comment below!

Dato’ Steve Ong is the chief executive officer of the Private Pension Administrator Malaysia (PPA). He is a seasoned professional with 30 years of experience in the financial services industry, with 21 years involvement with the life insurance business and nine years in the fund management industries. Prior to his move to PPA, he was the CEO of one of the country’s leading fund management companies, which he started and grown.