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Malaysians not saving enough
Thursday February 19, 2009
Survey: Malaysians not saving enough
By LEONG HUNG YEE
KUALA LUMPUR: Malaysians are not saving enough and they are not prepared to face a financial meltdown should they lose their job or be retrenched.
According to the latest findings from Citi’s Financial Quotient (Fin-Q) 2008 survey, only two in five (39%) Malaysians actually save and less than one-in-three (28%) make and stick to a monthly budget.
Timothy Johnson Citibank Bhd head of segment and marketing, retail bank Timothy Johnson said the results from Malaysia show an average Fin-Q score of 51 points out of a possible 100 points, with 54% of Malaysians scoring 50 points and below.
A majority of Malaysians reported in the survey saved up to 20% of their monthly income - excluding the 11% in the Employees’ Provident Fund - and 12% said they do not save anything at all.
In the event of a job loss but with continued regular expenses, one-in-five indicated their savings would last for only four weeks.
On average, Malaysians reported having 11 weeks of savings in reserve,
“Against the backdrop of the current challenging economic environment, these findings are quite worrying,” Johnson said in a briefing yesterday.
He said although the Fin-Q scores in seven of the 11 subject areas have shown improvement, it was not.
“We believe that a lot more needs to be done to ensure Malaysians are truly financially savvy as the detailed survey results revealed that there is still room for improvement,” he added.
The Citi Fin-Q survey comprised 500 online interviews of 40 questions each, rolled out to determine the level of understanding among Malaysians about their personal finances and financial practices. The survey was conducted from Oct 15 -30.
Johnson said more Malaysians were taking an interest in their finances and the recent economic crisis had made saving for emergencies an important element for them.
According to the survey, 56% are somewhat better off now than they were a year ago. Nevertheless, 37% were worried about their financial future. While 86% of Malaysians attempt to follow a budget, less than one-in-three (28) actually stick to the budget.
The Fin-Q also revealed that 30% Malaysians indicated they would “know exactly” and 60% have a “good idea” what to do if they were given six months salary to invest. There was also a 6% increase in the number of Malaysians who have a formal retirement plan and 56% are confident or somewhat confident that their savings will lead to a comfortable life in retirement.
Asked how much would be needed for retirement, Johnson said it was very subjective. He said the answer required thorough thinking and planing as the amount of money you need in retirement had a direct correlation to the style of living you wish to have.
“If you want to retire in Bahamas, you will need a bigger amount compared to living in a house in suburban area,” he said, adding that to gauge the figure, one should look at the current expenses and estimate how they might at retirement.
Johnson also pointed out a fascinating finding in the survey. He said 35% Malaysians believed that money can buy happiness.
He said the Fin-Q was a snapshot of our current level of financial literacy and what we all need to do to better control our finances. Malaysians needed to be disciplined and have good financial management to ensure enough savings, he said.
“I believe Malaysians should provide additional focus on developing and enhancing their level of financial literacy, more so given the current challenging environment.”
Don’t rely on your EPF
Don’t rely on your EPF
Many Malaysians believe their retirement can be funded by their Employee Provident Funds (EPF) savings. This is unrealistic. By relying solely on your EPF savings, you underestimate the amount needed to retire and overestimate how much you can withdraw once retired.
Malaysia’s pension scheme is meant to provide contributors with the basic necessities. Unless you plan to make drastic lifestyle changes after you retire, there is a big chance of exhausting all your funds in just a few years, with escalating living costs and increased longevity.
Living on a quarter of your income
The amount that we have in our respective EPF accounts depends on how much we make. For salaried employees, the mandatory contribution rate to the country’s pension fund is 23% of the employee’s monthly salary; 12% is contributed by the employer and the rest is deducted from the individual’s pay. At age 55, contributors can opt to take the sum along with annual EPF dividends declared to finance the rest of their life. Any withdrawals made before this age, such as to buy a property or pay for medical and educational expenses, will reduce the amount that you receive at retirement age.
All things being equal, with a monthly contribution of 23%, those relaying solely on EPF funds for their retirement will have to live on slightly less than a quarter of their current income every month. Is it possible to live frugally on this sum?
Even EPF officials have consistently highlighted the need for contributors to supplement their retirement funds with other sources of income. According to Deputy Finance Minister Datuk Seri Ahmad Husni Hanadiah, the average Malaysian will have approximately RM120,000 in their EPF account at the age of 55. This amount provides the retiree with RM500 a month to live on for 20 years. While it can be argued that this meagre sum can be stretched to provide for basic necessities (families earning this amount are classified “hardcore poor” and are eligible for government aid), it is not sufficient to provide for those that live beyond the age of 75.
Inflation Surpasses Returns
Inflation is another reason why you should not depend solely on your EPF funds for your retirement.
Inflation pushes up the cost of living. At the very core, inflation means we have to pay more for the same amount (and quality) of goods and services consumed. It eats away the value of your EPF funds. For example, a yearly 5% dividend declared by EPF translates to a real return of 1% if inflation for that particular year averages out at 4%.
As shown in Table 1, the EPF’s annual dividends have been just slightly more than the country’s inflation rate, which is measured by the consumer price index (CPI).
Table 1: EPF and CPI
| 2005 | 2006 | 2007 | 2008 |
EPF Annual Dividends | 5.00% | 5.15% | 5.80% | n/a |
CPI | 3.1% | 3.6% | 2% | 5.7%* |
*Bank Negara’s estimate
Source: EPF and Bank Negara
However, one criticism of the CPI is that it does not reflect the actual consumption patterns of different regions and different income groups. This is could be due to controlled prices for a generic brand of several items in the CPI’s basket of goods and services, including cooking oil, white bread and rice. Controlled prices do not reflect actual market prices paid by the majority of Malaysians, especially those living in cities.
Revisions to the CPI basket are also infrequent - the last revision was in 2005. Recognising these shortcomings, the government reportedly reassessed the composition of the CPI and is considering publishing separate inflation rates for urban and rural areas.
CPI is also a poor reflection of inflation experienced by individuals. In June 2008, the CPI jumped to a 26-year high of 7.7%. However, in reality, most people experience a jump in prices which exceed 7.7%. It is more likely that the good and services purchased, especially in the urban areas, reflect the 40% increase in fuel prices and the 18% increase in electricity tariffs.
As more and more producers start passing down rising transportation cost to consumers, we believe inflation will continue at higher levels for some time. This will eat into the value your EPF savings, especially if annual returns declared for this year do not surpass 5.7%, the estimated inflation rate for 2008.
What Can Be Done?
The first step is to stop depending on the EPF. Take responsibility for your retirement and invest with a clear goal in mind. The objective is to invest in assets such as equities that have historically been able to provide inflation-beating returns.
To get started, here are some tips:
1. Invest now.
The sooner you start investing, the sooner you start building your wealth. Take a long-term view and invest small sums over a long period.2. Take a look at how much you will need to retire.
This is, at best, a guesstimate of the expenses that you will incur when retired. Aim for a higher percentage of your current income, for example 65% to 80% of what you are earning now to sustain the same lifestyle once you stop earning.3. Diversify.
This can be easily done with unit trust funds. It is possible to invest your EPF funds in approved local funds but your selected investments must make better returns than EPF’s annual dividends. However you still need to diversify your portfolio with different asset classes and geographical coverage.4. No matter what happens – whether the market falls or climbs - always keep retirement as a financial goal and stay invested.
http://www.fundsupermart.com.my/main/research/viewHTML.tpl?articleNo=5
Maximising savings
Saturday October 2, 2010
Maximising savings
By DALJIT DHESI
daljit@thestar.com.my
The worst case scenario will be that retirement savings will run out in a couple of years if one has to finance their children’s tertiary education and pay for private medical bills.
So what should a person do to boost his or her EPF savings without losing out on their retirement savings?
Prudential Assurance Malaysia Bhd chief executive officer Charlie Oropeza says depending on a person’s risk appetite, investment time horizon and income, one can opt to invest in, among others, properties, equities, unit trusts and investment-linked insurance plans.
It is important to invest in the right financial instruments to ensure a comfortable retirement.
Citing a retirement survey commissioned by Prudential, Oropeza says Malaysians tend to be conservative when it comes to the type of investment tools they use to save for retirement.
He says most people rely heavily on low yielding bank savings or fixed deposit accounts to grow their retirement nest egg.
Contrary to the common belief that keeping money in the bank is the best way to preserve capital, Oropeza says this may not be good enough given that interest rates of bank deposits can hardly outrun inflation.
He says regular investing and saving is an effective and convenient way to help one reach his retirement goal.
“Even a little money saved regularly can grow to a tidy sum over time. The easiest way to reach your financial goals is to start investing through a regular savings plan. By setting aside an amount each month, you will be well on your way to developing substantial funds for retirement,“ he says.
Besides putting money aside regularly, he says choosing the right fund and diversification of portfolio is equally important to ensure successful retirement savings.
Portfolio diversification helps spread the risk so that the retirement portfolio is not heavily impacted by one investment. Diversify within the asset class and among several assets, Oropeza advises.
Robert Foo, who is principal consultant of MyFP Services Sdn Bhd, says EPF funds should also be invested into unit trusts. He says investments should be diversified into different funds.
Although EPF has limited the upfront sales charge on unit trust investments to a maximum of 3% of the investment amount, Foo says it is still too high and should be reduced to 1%. Another alternative, he says is to spread this 3% over three years instead of having the investor lose the whole 3% upfront.
If possible, investors should invest through fee-based financial planners who can get funds at net asset value (meaning 0% upfront sales charge), which will be a substantial savings for them, he says.
If the Government is serious about providing ways for Malaysians to fund their retirement, they should allow EPF contributors to invest into offshore funds for greater choice and diversification.
Foo recommends buying a home if one does not own one yet because it is indirectly an investment. He, however, cautions not to over commit and buy a house that will stretch a persons’s finances too much.
Licensed financial adviser Jeremy Tan of Standard Financial Planner Sdn Bhd says another option available for EPF contributors is to withdraw for the purchase of owner-occupied home or settlement of mortgages.
It would only be wise for them to withdraw for this purpose, especially the latter, if the mortgage rate charged by the bank is higher than the average EPF dividend rate.
Based on current mortage interest rates, Tan says it will be more appropriate to keep the monies in EPF to harness the return rather than withdraw for repayment purposes.
On unit trusts, Tan says although this asset class is an option to grow savings, it may or may not provide an increase in returns higher than the EPF’s dividend rate.
The strategy to adopt is to invest regularly and diversify into different asset classes of mutual funds taking into consideration one’s risks appetite, to potentially gain higher returns than EPF rates, he says.
Great Vision Wealth Management Sdn Bhd associate director for tax and financial consulting Darian Lim says those who are not quite sure which unit trusts fund to invest into (there are about 223 approved unit trusts funds) and who “cannot stomach” the market volatility, might be better off just leaving the funds in EPF since it gives reasonable returns at much lower risk.
From EPF’s findings, Lim says about 72% of the members who withdraw their savings at age 55 tend to spend all the money within three years.
He says: “Proper retirement planning is of utmost importance as we slowly move towards a developed nation with better healthcare and medical advancement. People around the world are living longer with those in developed nations having an average mortality age beyond 80.
“As such, everyone needs to have sufficient funds to retire comfortably. It helps to find ways to maximise returns from EPF investments to increase one’s retirement fund.”
Source - http://biz.thestar.com.my/news/story.asp?file=/2010/10/2/business/7126852&sec=business
New funds added to EPF-MIS
With effective from 1-Sept-2010, there are a list of new funds will be added to the EPF-MIS (EPF Member Investment Scheme). These funds carry maximum of 30% foreign exposure.Personally, I would recommend a must buy, which is Public Ittikal. This fund comes with free insurance.
http://www.publicmutual.com.my/page.aspx?name=epf_approved_2010
