What Can You Do With Your EPF Savings During This Recession?
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The coronavirus pandemic may be under control, but we’re still grappling with its economic effects. For some of us, that could mean having to look for employment opportunities or getting through the month with reduced income. It could also mean worrying about how the current stock market volatility could affect our retirement portfolios.
So how does this relate to your Employees Provident Fund (EPF) savings?
Throughout the year, the EPF has introduced a few measures to help Malaysians cope financially during these challenging times. Here’s what you can do with your EPF savings during this recession, depending on your financial situation:
1. If you’ve opted for the 7% contribution rate
Back in March, the minimum statutory contribution rate for employees was reduced from 11% to 7%. However, EPF members were given the choice to maintain it at 11%. If you had not chosen to maintain your contribution at 11%, your monthly take-home pay will increase by 4% until December 2020.
There are two ways you can use your additional discretionary income:
- Spend it. If your cash flow is tight, it can help you cover household necessities, basic needs or clear off high-interest debts (such as credit card debt). Try to limit unnecessary spending.
- Save it. Consider saving your additional pay if you don’t have trouble covering your basic needs. This is a good time to build your emergency fund, which gives you some savings to fall back on if an unexpected expense comes up.
2. If you are facing financial difficulties
If you’re having trouble covering essential expenses, consider withdrawing from your EPF account. From April 1, 2020 onwards, you can withdraw up to RM500 a month from Account 2 under the i-Lestari scheme. This is available for a period of 12 months only.
But before you do so, consider its impact on your retirement plan. If you have a long way to go until retirement, withdrawing your savings now could mean missing out on bigger savings later.
To illustrate, here’s how making withdrawals can affect your EPF savings. Let’s use an example of two EPF members, Taufik and Farid:
- They both have RM50,000 in their EPF Account 2.
- Taufik withdraws RM6,000 (RM500 every month for 12 months), while Farid doesn’t make any withdrawals.
- Their EPF savings grows at 4% p.a.
Here’s how their savings will be affected:
| Balance in Account 2 | Taufik (RM6,000 withdrawal) | Farid (no withdrawal) | Difference |
|---|---|---|---|
| After 1 year | RM45,760 | RM52,000 | RM6,240 |
| After 5 years | RM53,533 | RM60,833 | RM7,300 |
| After 10 years | RM65,131 | RM74,012 | RM8,881 |
| After 20 years | RM96,409 | RM109,556 | RM13,147 |
| After 30 years | RM142,709 | RM162,170 | RM19,461 |
In the example above, withdrawing RM6,000 from your EPF account could mean having RM19,461 less in retirement savings after 30 years.
However, if times are tough in the present, it may be necessary to withdraw from your EPF savings. Before you do so, it could be helpful to list out what expenses these savings could cover, so you only spend on what is needed.
3. If you are comfortable making your own investment decisions
If you already have an emergency fund, have all your essential expenses covered, and are looking for investment opportunities during this recession, here’s what you can do with your EPF savings.
Consider diversifying your retirement savings with i-invest, EPF’s online investment platform. This allows you to invest part of your EPF savings in approved unit trust funds, without having to go through a Fund Management Institution (FMI) agent.
Diversifying through i-Invest has a few benefits:
- Lower upfront fees. You will incur 0% upfront fees for investing through i-Invest until April 30, 2021. Paying less fees allows you to maximise your investment returns.
- Potentially higher returns. If your unit trust fund investments outperform EPF’s performance (about 6% a year over the past decade), you’ll have a larger retirement portfolio.
- Greater control. You can invest in many types of unit trust funds, and with multiple FMIs. You could diversify across different sectors, commodities, financial securities and more – this gives you more control over how your retirement savings are being invested.
However, you should not invest your EPF savings if you are not comfortable investing on your own, or if you do not want to take on more risk. When you invest in unit trust funds, there is no guarantee that your investments will provide positive returns or outperform EPF. On the other hand, if you leave your EPF savings alone, you’ll enjoy a guaranteed minimum dividend of 2.5% a year (for Conventional Accounts).
4. For everyone else
If you have no problem covering essential expenses, and you don’t want to take on more risk by diversifying your EPF funds, you don’t need to do anything with your EPF savings.
Just keep contributing to your retirement portfolio as usual. Over the long run, the stock market moves on an upwards trend and you’ll have a better chance of riding out short-term market volatilities.
If you can afford to do so, you could even consider increasing your EPF savings by making a self-contribution. You can contribute any amount up to a maximum of RM60,000 a year. This means setting aside more savings for your retirement portfolio and letting EPF do all the hard work of growing your investment, without having to worry about it yourself.
Don’t forget your budgeting basics
We hope these tips help you navigate the financial uncertainties of this recession. As you figure out how to manage your EPF savings this season, don’t forget your budgeting basics. This includes having an emergency fund (six months of living expenses), being aware of where your money is going every month, limiting unnecessary expenses and avoiding high-interest debt where possible. These financial practices can help you weather the recession and emerge stronger and more resilient when it finally passes.
