Best Retirement Plan in Malaysia 2022

According to The Edge Malaysia published on 6th/December/2021, only about 1.9 million people in Malaysia have at least the minimum amount saved up for retirement as of 2020.  Among these 1.9 million people, 1.6 million of them are civil service pensioners, whereas the remaining or only about 250 thousand out of 14 million EPF contributors have more than RM500,000 savings.

In a forum in October/2021, EPF chief strategy officer Nurhisham Hussein said that 54% of EPF members aged 54 have less than RM50,000 in their savings account; a majority of those who withdrew their entire EPF savings upon reaching age 55 would use it up within two to three years!  Worse still, the Covid-related withdrawals namely i-Sinar, i-Lestari and i-Citra, and the special withdrawal facility of RM10,000 since the Covid-19 pandemic resulted in the EPF savings of many members below age 55 reaching critically low levels.

Now coming to the million-dollar question: What is the best retirement plan in Malaysia?

With the current market environment in 2022 still dominated by VUCA(Volatile, Uncertain, Complex, Ambiguous), do you think now is the right time for us to plan for our future dream retirement? Do you have any plans in mind? Let us find out some of the best retirement plans in Malaysia.

1.  Employee Provision Fund(EPF)

As one of the oldest and largest retirement funds in the world which is established in 1951, EPF’s Investment Assets have reached the size of RM1.01 trillion as of 31 December 2021.  If you are an employee in Malaysia, like it or not, it is mandated by law to contribute 11% of your monthly salary to the Employee Provision Fund(EPF).

Your employer will contribute another 12% or 13% statutory rate, which makes up 23% to 24% of your monthly salary. Any employer who fails to make the contribution on or before the 15th of every month shall be liable to imprisonment for a term not exceeding 3 years or to a fine not exceeding RM10,000, or both.

If you are a Malaysian citizen below age 60, and a self-employed individual who derives income from your own work and is not an employee, you are eligible to opt to contribute under i-Saraan.  This voluntary contribution is up to RM60,000 yearly.

What about the profit you can gain from this scheme?  For the past 10 years, the average EPF dividend rate is about 6.1% per annum for Simpanan Konvensional.  Whereas for Simpanan Shariah, the average dividend rate is about 5.6% per annum over the past 5 years.  This is indeed sufficient to out beat the inflation in Malaysia.

Even though you can only have full discretion on what you want to do with your EPF savings upon age 55, the EPF is still one of the most preferred retirement plans due to its good track record and decent dividend rate.  Besides, the EPF contribution is also tax-deductible up to a maximum amount of RM4,000.

Most importantly, do you know how much you can save by contributing to EPF alone?  Can we save at least RM1 million for our retirement?  Let’s find out by the below 2 scenarios.

Scenario A : Mr. Adam starts working from the age of 23, and plans to work until 60 years old.  His starting pay is RM2,000.  At his retirement age of 60, he will have approximately RM2 million in his EPF account.

Scenario B : Ms. Sofia starts working from the age of 22, and plans to work until 55 years old. Her starting pay is RM2,500. At her retirement age of 55, she will have approximately RM1.8 million in her EPF account.

(Assumptions: the average salary increment is 6% per annum, the expected annual bonus is 1 month’s salary, the return rate of the retirement scheme fund is 6% per annum, and no partial withdrawal from the scheme)

From the above scenarios, it is possible to be a millionaire by only saving in the employee provision fund!

2.  EPF Member Investment Scheme (MIS)

If you have sufficient savings and can tolerate some investment risk, you may consider diversifying some portions of your retirement savings in EPF Account 1 to invest in the Member Investment Scheme(MIS) or EPF approved funds via the appointed Fund Management Institutions (FMIs), including Unit Trust Management Companies and Asset Management Companies.

At the time of writing this blog, there are more than 150 EPF approved funds or unit trusts you can select to invest in.  As for the investment cost or upfront charges, 0% to 0.5% will be imposed by FMI for investments transacted via i-Invest in EPF i-Akaun, while for investments made through unit trust consultants or agents, the charges is up to 3%.(subject to change by EPF)

For the EPF members who are below the age of 55, there are 2 main criteria to be fulfilled in order to invest in the MIS : (a) eligible investment amount is up to 30% of the total savings exceeding the Basic Savings in Account 1, and (b) minimum investment amount is RM1,000.  There is also a calculator in the KWSP website to ease you to calculate the amount that can be invested by just inputting your age and the balance in Account 1.

How frequent can you invest in MIS? The amount of investment eligibility is updated every three months. For instance, if you invest the entire eligible amount at a time, you will have to wait three months before the eligible amount is updated and made available in the system. Do note that the amount you invest in the MIS will not receive any dividends declared by the EPF, and the EPF will not be liable for any loss of your investment in MIS.

If your main objective of opting in the MIS is to outperform the EPF dividend rate, then you must do sufficient due diligence in fund selection and investment strategies. Alternatively, you may seek advice and discuss with a licensed financial planner or consultant before making informed decisions.

Another important question you might ask is, typically, how much extra money potentially can we save by investing in MIS? Let’s check it out!

Scenario A : Mr. Adam who is 40 years old this year decides to invest RM10,000 yearly from his retirement scheme for the next 20 years in MIS which will give a projected annual return rate of 8%. At the end of the 20th year, the investment amount will grow to about RM494,000.

Scenario B : Ms. Sofia who is also 40 years old this year decides not to follow Mr. Adam’s move and remain all her contribution in the retirement scheme which gives her an annual dividend rate of 6%. At the end of the 20th year, the amount of savings that she could have invested in MIS(RM10,000 yearly) will grow to about RM390,000 in the retirement scheme.

From the above scenarios, after investing in MIS for 20 years, the extra money or reward Mr. Adam gained over Ms. Sofia is about RM104,000!

3.  Private Retirement Scheme (PRS)

While you have savings in the mandatory scheme(EPF), it may be insufficient for the lifestyle that you desired for your retirement. Reports show that most retirees deplete their mandatory scheme savings within five years after retirement.

To supplement the shortfall, you may consider a voluntary long-term plan called Private Retirement Schemes (PRS) administrated by PPA. This scheme was first launched in July 2012 to offer Malaysian employees and the self-employed an additional avenue to save for their retirement.

Unlike MIS which is invested by EPF Account 1, you can only invest PRS in cash.  Currently, 8 PRS providers are approved by the Securities Commission Malaysia, and a total of 62 funds or unit trusts with different risk ratings are available in the market.  Besides, the PRS investment is also tax-deductible up to a maximum amount of RM3,000.

Similar to EPF, if you are below age 55, you can partially withdraw your PRS savings for housing or healthcare purposes. However, you can also make a partial or full withdrawal for other reasons below 55 years old, but will be subject to an 8% tax penalty.  The tax penalty is implemented with good intention to remind the PRS members that the money saved in the PRS is specifically for their retirement.

To know more about the Private Retirement Scheme(PRS), you may look for a Private Retirement Scheme Consultant who is duly registered with the Federation of Investment Managers Malaysia(FIMM) .

Question : How much extra money can you possibly save by PRS? Let’s find out by another scenarios below.

Scenario A : Mr. Lim who starts working at the age of 22 decides to invest RM3,000 yearly into PRS from the age of 30 until his desired retirement age of 55. After 25 years, Mr. Lim will have about RM203,000 extra money for his retirement.

Scenario B : Ms. Guna also starts working at the age of 22 and decides to invest RM3,000 yearly into PRS without delay for 25 years and let the PRS fund(s) grow until she reaches her desired retirement age of 55. After 33 years, Ms. Guna’s PRS fund(s) will grow to about RM348,000 ! She will have RM145,000 more than Mr. Lim for her retirement, although both of them invested the same amount of money RM3,000 x 25 years = RM75,000.

(Assumptions: the average annual return rate of the PRS fund is 7%)

From the above scenarios, we can see that it is possible to take home up to a 6-figure amount of money by just investing RM3,000 a year in the PRS for the long term. The earlier you start investing, the more you can gain. Thanks to the compounding effect.

4.  Unit Trusts

With only 8 PRS providers offering limited choices of PRS funds, investing in unit trusts or mutual funds with your excess cash is another smart choice to further diversify and grow your money to approach a comfortable retirement life.  There are totally more than 1,000 funds available in the market in Malaysia at the time of writing this blog.

As one of the most popular investments not only in Malaysia but globally, these funds are managed actively by professionals called fund managers. Their main role is generally to help the investors(unit holders) to manage the fund(s) by analysing, buying and selling the underlying assets or securities like stocks, bonds, money market instruments, cash, etc.

Thus, the unit trusts are normally charged with management fees to be paid mainly to the fund manager who manages the fund, as well as for the other expenses like operation costs, taxes, etc.  In return, the investors expect the funds under management to outperform a selected index or benchmark.

If you are interested in the unit trust investment, you can opt for a DIY platform, or you may look for a licensed financial planner or unit trust consultant who is duly registered with the Federation of Investment Managers Malaysia(FIMM) to market and distribute the unit trust scheme.

5.  Exchange Traded Funds (ETFs)

ETF was first introduced in 1993 and gaining popularity since then with investors looking for an alternative to unit trusts or mutual funds.  Like the unit trusts, it holds a basket of securities like equities, bonds, commodities, etc., and offers easy portfolio diversification by exposure to any market, geographical region, industry or sector, asset class or investment strategy.

Instead of being actively managed by the fund manager for unit trusts, ETFs are passively managed.  It is designed to track and follow the performance of a specific index which do not require stock analysis, and hence the ETFs do not impose sales charge, and the expense ratios which consist of management fees are also relatively lower than the unit trusts.

One of the most popular ETFs is the S&P 500 ETF which gives us the opportunity to diversify and invest in the top 500 companies across various industries in the U.S.  However, in some situations, the ETFs including the S&P 500 ETF are of less diversification in which the investors might be heavily concentrated to the large-cap stocks, i.e. the top 10 companies represent about 30% of the S&P 500 index.

A lack of exposure to mid- and small-cap companies could also lead to lesser potential growth opportunities compared to its counterpart, the actively managed funds.  To invest in ETFs, you need to open a CDS account and a trading account with a participating organisation i.e. a stockbroking firm registered in Malaysia.

6. Stocks

Unlike the abovementioned schemes or investments in which you have no right to choose the exact underlying assets or investment, the investment in stocks which is one of the most popular investments among Malaysians can give you comparatively more control by buying the exact stock(s) that you prefer.

From the recent research in June/2022, local retailers’ net buying of Malaysian equities grew 294% to RM506 million in May/2022(from RM172 million in April), which recorded the net buy for the first five months of 2022 to RM1.2 billion.

Investing in stocks can also help you build and sometimes maximize your income.  However, it is important to know that there are risks as well.  Stock prices can be volatile, rising and declining quickly by several factors.  Some of the factors affecting the stock prices are, for instance, the profitability of the company, announcement of good news like securing a large project, bad news like employee layoffs, anticipated takeover or merger, overall market conditions, etc.

Do also take note that common stockholders are paid last, i.e. preferred stockholders and bondholders or creditors get paid first if a company goes broke.  So a well-diversified portfolio(owning a group of stocks in different asset classes and industries) should keep you safe or at least mitigate the impact.

If you are invested in stocks for the long term(5 years or more), even when the market has lows, and 2022 has been full of them, you will have the advantage of having the time to recover losses, and even top up to average down your investment during the market or stock recovery.

To decide which stock(s) to buy, you can consider understanding and studying the stock(s) either by fundamental analysis or technical analysis, or both.  The veterans usually also advise the novice in stock investing to understand how to read financial statements(the balance sheet, the income statement, and the cash flow statement) with additional analysis of the company(ies) for investment analysis.

One of the most common ways to analyse and value a stock is to compute the company’s price-to-earnings (P/E) ratio. The P/E ratio equals the company’s stock price divided by its most recently reported earnings per share (EPS). A low P/E ratio implies that an investor buying the stock is receiving an attractive amount of value.

Another reason people find some stocks attractive is the dividend payment which provides a steady stream of income during their retirement, especially those big-cap stocks with a proven record of success.  To invest in stocks, similar to ETFs, you need to open a CDS account and a trading account with a participating organisation i.e. a stockbroking firm registered in Malaysia.

7.  Properties

Many Malaysians love investing in Properties.  Property is preferred not only it is a tangible asset, but it is also a good investment vehicle to provide potential capital appreciation while generating a regular rental income, which can be a regular income stream during their retirement age.

Another reason for having a property investment is it can hedge against inflation, ie. higher inflation, higher property value, and higher rental income.  However, owning a property needs a large sum of capital.  The good news is it can be leveraged by borrowing from banks and institutions.

Before acquiring an investment property, you should assess the property location and surroundings, the track record of the developer(for a new property), property price, legal costs for S&P and mortgage, monthly instalment amount, and the expected rental income before committing yourself to it.  In addition, you should also have a contingency plan in place to cover the loan instalments if the property could not be rented out for a period of time, and might need to cover the instalment shortfall if the rental yield is insufficient to pay the full instalment amount.

Properties are also not liquid to dispose of or sell and might take months or more than a year to complete the sales process.  If you can sell the property with profit, RPGT(Real Property Gain Tax) might kick in as well.  Not to forget there is a credit risk which might affect your credit rating if the loan repayment is not made on time, and in the worst case, have to be forced to sell the property.

Thus, thorough research and due diligence are essential to make your investment decision in the property as it is a long-term commitment for multiple decades.  Alternatively, you can also consider investing in properties without owning the building, in REITs(real estate investment trusts) via Bursa Malaysia, or REIT funds(unit trusts with a basket of REITs that are managed by a fund manager).

Bonus : About FOREX

If retiring abroad is one of your priorities, you might think of saving some foreign currencies, typically the currency of the country that you want to live in during your golden age.  Imagine if you planned to have USD1 million in your retirement home in the U.S. 10 years ago(the year 2012) with the exchange rate of RM3.00 to USD1.00, you need to save RM3 million for your retirement fund.

However, the exchange rate is currently at RM4.50 to USD1.00 in 2022, which means you need to have RM4.5 million now in order to have USD1 million for your retirement fund.  An additional RM1.5 million or 50% of your initial plan due to the loss in foreign currency exchange(FOREX)!  Of course, ones might argue that FOREX is a double edge saw which the favour can go to your side if US Dollar is weaker than Ringgit instead.

You definitely do not want to mess up your retirement dream by betting with the FOREX.  The better move is to accumulate your retirement fund denominated in foreign currency to mitigate the risk of FOREX.

The Bottom Line

We should do sufficient due diligence when deciding on the investment vehicles that suit our objective of having a comfortable and desired retirement in Malaysia or abroad.

Not to forget the other important factors like our investment time horizon(long term or short term), our risk appetite(a risk averse or a risk taker), our present financial status and also the market condition.

Furthermore, everyone should fully understand the information, pros and cons of the investment schemes. Never invest in something that is not regulated in Malaysia, and is too good to be true.