Friday, December 19, 2008

EPF: Statutory Retirement Savings Fund

Sharing a thought...

Am sure many EPF contributors have had made their decisions regard to whether to heed the Gov's call to reduce their statutory retirement savings fund (EPF) contribution from 11% to 8% effective January 2009. The call was made with the aim to increase the circulation of cash in the economy to mitigate recession. The suggestion no doubt may increase the people's purchasing power as they have the extra cash in their hands to spend but at whose expense later? Would the Gov that has encouraged its citizen to reduce their retirement fund now (which every one knows is insufficient due to the effect of inflation) bail the same group of people out later from poverty when they are unable to support themselves due to old age/health/lack of savings? Am sure those who decide to reduce their contribution are those who belong to the lower income group as their current take home pay may not be enough to support the ever increasing cost of living but is this wise?

Of course it does not mean that we should not support the Gov's effort to "save" the country from recession, but am sure there are better alternatives than to look for a quick short term solution which may lead to greater problem for its citizens in the future. The Gov needs to put on their thinking cap and work hard on solving this economic crisis otherwise what's the use of electing them and remunerating them with the tax payor's money?

Furthermore, there are numerous articles written regards to the same issue and there was one
(1) The writer did not mention at all about the inflation factor in his article which all of us know is higher than EPF's average return thus is insufficient if we are to rely soley on EPF's conservative investment approach with a return of about 5%. If EPF which is meant for our retirement (say 20-40 years later) does not address the inflation factor but prefers a "safe approach" it ultimately means that we are allowing our EPF value to shrink caused by high inflation rate!

(2) the amount allowable to be withdrawn from EPF to invest is very little. Therefore the risks that EPF contributors are subject to is low as the negligible amount is used to invest in different portfolios which no doubt has more risk than EPF's but pottentially has higher return (high risk, high return or no risk, no gain)

(3) in Unit Trust investment, customer is able to switch their funds from one to another fund depending on their investment objective, strategy and risk profile. They are being assisted by a trained UT Consultant to achieve this.

(4) being a responsible person, investing using EPF is a necessity (not an option) to ensure that we have sufficient in the future instead of relying on our loved ones to support us or to continue slaving till we reach our grave? When does one actually retires?

(5) investment is a necessity to protect the value of what we have been working for 30 - 40 years which if left unattended will deminish in value due to inflation (a silent killer)

(6)EPF is also a fund manager who seeks ways to earn income for its contributors and one of the method is through equities acquisition.

(7) UT investors are advised to invest for the mid (min 3 years) to long term. Therefore, investors are usually advised to wait for their investment value to improve in the event the market is not performing even after the age of 55. However, prior to their golden age, their investment portfolio may have already been changed to reduce their exposure from equity market to income type of funds eg bond/money market and some into equity which are dividen in nature.

On the other hand, if a retiring investor has opted to do some investment, he would have been advised to choose those funds that do not have much equity exposure or dividen in nature in order to safe guard his retirement fund.

As a reminder, there are basically 3 types of funds namely

(a) equity fund (60-95% in share mkt, 5 - 40% in money market, bond, treasury bills)
(b) balance fund (60% in share, 40% in money market, bond, treasury bills)
(c) bond and money market

To reiterate, as a person nears his retirement age, his equity exposure would be lowered. However, it depends on the person's risk profile and strategy - which he has to discuss with his UT Consultant or financial planner.

As all of us know, we need to diversify our investment to create/protect our wealth and UT is one of the best managed investment tool that you could have/use.

Always think long term and ponder on the effect of inflation on your retirement fund and the benefits of compounded interest.

Savings and investing is a necessity. One has to undertake it to create and protect his wealth from inflation. Instead of tapping on your savings / retirement fund to support your current lifestyle, try managing your expense better (reduce it if needed) and increase your income by increasing your own productivity or supplementing it.

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