Here’s Why I Am Lowering My EPF Contribution For 9 Months
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The government recently announced the 2020 Economic Stimulus Package. Apart from tourism-related tax reliefs and digital vouchers, part of the package also includes lowering the minimum Employee Provident Fund (EPF) contribution by employees from 11% to 7%.
My boss wrote a piece about why he’s choosing the 11% contribution. While he makes some good points, I’m still choosing to lower my EPF contributions to 7%. Here’s why.
Potentially higher returns elsewhere
EPF’s historical performance has been pretty good, averaging at around 6% p.a. for the past 30 years. It’s also technically risk-free, as the government guarantees a minimum rate of 2.5% a year – although dividend rates haven’t been that low since the fund’s inception in the 1950s.
If you earn RM5,228 a month (the median household income, according to the Department of Statistics), and if you have a long investing horizon, here’s how your 4% ‘savings’ can potentially grow under EPF.
| Salary | RM5,228 |
| Normal EPF contribution (11%) | RM575.08 |
| Special EPF contribution (7%) | RM365.96 |
| Difference (April to December) | RM209.12 x 9 months = RM1,882.08 |
| RM1,882.08 invested for 35 years, at 6% annual return | RM14,465.83 |
That’s a nice chunk of money.
But as someone whose (meagre) life savings exists mostly in the form of EPF savings, 70% of which are invested in assets in Malaysia, I’m thinking of diversifying more overseas. Specifically, in the US stock market. It’s one of the world’s best performing stock markets, with an annualised return of 9.96% (including dividends) over the past 30 years. While past performance does not guarantee future performance, the US is the world’s biggest economy, and is home to some of the most valuable brands.
Yes, the American stock market has tumbled recently – but it’s only a dip in its decades-long history. By keeping the money invested over decades, I could potentially ride out any market volatility.
If this outperforms EPF returns, it could lead to more retirement savings. A slightly higher return of 7% could mean a difference of a few thousand ringgit:
As a retail investor with limited capital, I’m thinking of putting my 4% savings in a robo advisor that invests largely in US equities. This means that I’ll be subject to an annual management fee, and as a foreign investor, the dividends I receive from US equities may be subject to a 30% withholding tax – so my returns with the robo advisor will have to take into account these costs and beat EPF’s 6% estimated return. Yet, with the political uncertainties recently, the sluggish local stock market and depreciating ringgit, I’d feel more comfortable diversifying overseas.
Other than investing it in a robo advisor, here are other ways I’ve considered maximising the money:
- Invest in PRS. By investing in a Private Retirement Scheme (PRS) fund, I could claim tax relief of up to RM3,000 a year, up until the end of 2021. However, most of the funds available seem to underperform compared to EPF’s dividends, there are upfront sales charges (up to 3%) and annual management fees (up to 1.5% p.a.).
- Invest in domestic equities. The KLCI has hit a nine-year low, which means that there are potentially many stocks trading at a discount. But I’m not sure if I’m confident enough in my ability to outperform the EPF.
- Invest in…myself? It’s cliched advice, but upskilling myself or getting a professional certification could lead to monetary payoffs like a raise or better job opportunities (editor’s note: don’t we pay you enough?).
Does this mean forgoing EPF tax relief?
If you’re filing taxes this year, you can claim tax relief for EPF contributions of up to RM4,000. This means you could be losing out on tax relief if you choose to contribute less to your EPF.
But if you earn around RM4,200 a month or above, you can choose the 7% contribution rate and still max out your EPF tax relief – assuming you can still claim up to RM4,000 next year. Here’s how the math works out:
| Salary | RM4,200 |
| Jan - March EPF contribution (11%) | RM462 x 3 months = RM1,386 |
| May - Dec EPF contribution (7%) | RM294 x 9 months = RM2,646 |
| Total employee EPF contribution for 2020 | RM4,032 |
It’s not for everyone – and that’s okay
I’m lucky enough to not need an extra 4% to help me get through the month. I can choose not to pocket the savings, and invest it somewhere else instead.
But some of you may not have that choice. Maybe you need it to get through the next few months. That’s okay – as long as you’re aware of its impact on your retirement fund in the future.
Or maybe, like my boss, you prefer to keep your contributions at 11%. Perhaps you’re a more conservative investor, or someone who is nearing retirement, and want to keep your money somewhere less risky. That’s okay, too.
Don’t stress yourself out too much about it though. If you find yourself really torn about whether to maintain or lower your contribution, just stick to 11%. For many of you, 4% of additional savings may not make a lot of difference. Instead of spending a lot of time thinking about how to maximise it, you could be better off focusing on the big stuff – like finding ways to cut down on unnecessary spending or increasing your income.
