ERADICATING our liabilities, permanently, is an effective way to enhance long-term personal financial health. Hold that thought as I outline a change in the Malaysian superannuation landscape which may help millions of people do better financially.
THE CHANGE
There has been a surge of coverage in the Malaysian media on our Employees Provident Fund's new initiative, the EPF Account 3 called "Akaun Fleksibel".
Mighty EPF has more than RM1.1 trillion under management, was established in 1951, declared its first dividend in 1952, and is well run.
Interestingly, this isn't the first time EPF has divided the funds of its contributing members into three accounts. I'm old enough to remember a time, decades ago, when we EPF members had three accounts.
Those were subsequently consolidated to the two: Account 1 and Account 2, which most of us have grown accustomed to over the bulk of our working careers.
Those "old" splits we've just said goodbye to were 70 per cent and 30 per cent of all inflowing funds from (1) statutory contributions by employers and employees; (2) additional tax-efficient contributions from employers; and (3) voluntary contributions made by proactive and smart EPF account holders subject to a maximum of RM100,000 a year.
Then, from May 11 this year, EPF members under the age of 55 once again have three accounts. The splits applicable to the new EPF Accounts 1, 2, and 3 — officially called Akaun Persaraan, Akaun Sejahtera, and, as mentioned, Akaun Fleksibel — are 75, 15, and 10 per cent.
Confession: I would have preferred it if the change had not occurred.
RETIREMENT FUNDING TRAINWRECK
At the end of 2023, EPF had 16.07 million members. Of those, 8.52 million were active members — comprising about half of Malaysia's 17 million-strong workforce.
Our country has 34 million people, with half of us working and the other half too young, too old, or too reluctant to do so. Of the productive working half (17 million people), half of those are active EPF contributors, making up the referenced 8.52 million people.
Most of my professional work in my financial planning practice involves helping younger clients prepare for eventual retirement, and structuring private pension inflows for older clients to fund their retirement decades.
The new Account 1 structure will absorb 75 per cent of the fresh inflows, up from 70 per cent previously.
That five percentage point bump represents a 7.14 per cent increase in the total EPF inflows meant solely for retirement.
The new Account 2 takes in 15 per cent, down 15 percentage points (pps) from its previous 30 per cent allocation.
Of that 15-pp reduction, a third has been re-channelled to Account 1 and two-thirds into the new Account 3.
All Account 3 balances will start at zero, and moving forward will receive one-tenth of all EPF inflows.
As mentioned, I would have preferred it if the restructuring had not occurred because I suspect millions of contributors — with low salaries or low levels of financial literacy (FL) — will regularly tap their Account 3 funds for spending money. That is not wise, but it will happen.
Note: Malaysia is facing a metaphoric retirement funding trainwreck for two reasons:
1.Low earnings by Malaysians because of our public education system's inability to produce English language-proficient young adults with high critical thinking skills. Both criteria are generally required to secure better paying jobs in Malaysia and abroad; and
2.Low levels of FL among Malaysians. Thankfully, organisations like FPAM (the Financial Planning Association of Malaysia) and FIMM (the Federation of Investment Managers Malaysia) are devoting vast resources to redress that dire FL shortfall among adult Malaysians; nonetheless, much more must be done in our schools.
Remember my opening sentence?
Eradicating our liabilities, permanently, is an effective way to enhance long-term personal financial health.
RETIREMENT PREPAREDNESS
EPF members who choose not to touch their Account 3 and instead leave it to compound at EPF's respectable dividend rates will be 11.1 per cent better prepared for retirement than those who empty Account 3 regularly for ongoing living expenses.
However, those who choose to use their Account 3 funds — rarely but exclusively — to pay off cash flow-sucking debt like car loans, personal loans, and unpaid rolling credit card balances MAY end up in better financial shape, but only IF they don't take on new debts to replace their old repaid ones.
As mentioned, though, I have a bad, sad feeling many EPF members with low levels of FL or, frankly, self-discipline will squander this freed up one-tenth of monthly EPF inflows and will end up poorer than they would have under the older, more constrained system.
Personal responsibility is crucial for retirement preparedness — now more than ever.
My advice, therefore, is to consider money that flows into EPF as extra precious, and to thus establish an external personal EBF, or Emergency Buffer Fund, through cash savings in the bank or a pure money market fund, and a self-funded S.I.P., or Savings and Investment Portfolio, to augment your EPF savings at the end of your working career.
Will you heed my advice? I ask because most people won't.
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).