Should we withdraw EPF to invest in unit trust funds?

Referring to the previous article regarding EPF announcing 5.8% dividend, we continue to discuss about should we maximize the return of our EPF before we are age 55. Normally, we are not allowed to withdraw our EPF before 55, and EPF will give dividend to fight the inflation, in order to ensure we have more retirement fund in future.

However, the fact shows that our EPF is no longer sufficient for our retirement life and most of us still need to work after age 55. There is example that 70% of our EPF fund will be finished by us in 3 year after we retire. Thus, we should not solely depend on EPF dividend, but have to work out something to maximize our EPF fund.

Let me briefly explain about our EPF account structure and conditions of withdrawing EPF for investment. We have 2 accounts in our EPF, which account 1 contributes 70% and account 2 contributes 30%. It means that our EPF payable (together with employer) will be divided into two portions, 70% credited into account 1 and 30% credited into account 2. Normally, we can withdraw from account 2 for the purposes such as, house downpayment, housing loan payment, tertiary education fee and so forth. Account 1 is mainly for our retirement fund, which we only can withdraw after age 55. Anyhow, we are allowed to withdraw from this account 1 for unit trust investment with some conditions.

What are the conditions? The first condition is, you need to have a certain amount of money in your EPF account 1 to be able to withdraw for investment. This is varied based on your age. Normally, the amount you can withdraw each time will be less than 15% of your total amount of account 1. This condition avoids us from withdrawing too much for investment, as there is always risk in investment. Besides, we are only allowed to withdraw once every quarter for unit trust investment. For example, you withdraw an amount for investment today, your next withdrawal must be 3 months after today.


What is the benefit to withdraw EPF for unit trust fund investment?

1. Limitation on the investment amount
EPF limits the withdrawal amount according to our age and account 1 balance. This is to avoid investors from a big lump sum investment at the wrong market timing. A big lump sum investment can easily trap investors when the market is turning down.

2. Limitation on the withdrawal
EPF only allows us to withdraw once every quarter and make sure we are not investing too frequent. Invest once every 3 months in the long term can average our buying price. This is the Dollar Cost Averaging concept, where we can lower down our buying price during the market downturn. This method cannot maximize our return, but to average our buying price, where we can breakeven faster once market recovers from bad time.

3. Long investment horizon
Account 1 can be only withdrawn at age 55. For investors who are in the range of age 20-40, we have a very long time horizon to invest using our EPF. Investing periodically in long term definitely can lower the risk exposure of our investment, as market is going upward trend in long term. Time is a very important factor in investment, as investment can grow bigger and faster during long term. By having sufficient time, we can always wait for the good time to leave the market and get back cash.

4. Better feelings
Unit trust funds price is moving according to the volatility of the stock market. The volatility is always causing investors to be in greedy or scary mode. In my experience, EPF investors are steadier than cash investors when market is turning down. The main factor should be EPF investors will not feel the pain as the money is not coming out from their pocket, but from their EPF account, which they are aware that they cannot touch this money before age 55. Normally, they will continue the EPF investment every quarter regardless of the market movement. During low market, they always buy in more units with same withdrawal amount. Once the market is recovering, they start to earn positive return. In contrast, cash investors normally are very alert about the market movement. They will stop topping up when the market is turning down to wait for the best timing to top up. In fact, they always miss out the best timing, as best time will only be realized when it was past. Cash investors normally wait till the market recover to a certain level, only they will continue to invest. They always miss out to buy more units during low price. When market is recovering, they are hoping their investment to breakeven and they always invest again when their investment breakeven. Again, they buy the units at higher price. At the same time, the EPF investors are already earning positive return when cash investors waiting for breakeven.

5. Lower service charge
This is not a very significant benefit, but it is still lower than cash investment. EPF investment service charge is 3% and cash investment service charge normally is 5.5%.

After all these pros above, are there any cons that we should take into consideration? Yes, this is for sure. Unit trust fund investment is an investment scheme with risks. Although long term periodically investing can lower down the risk exposure, it still cannot eliminate the risk of investment. When looking at the return, there is difference between EPF investment and cash investment. For cash investment, we are earning if there is positive return, but this is not the case for EPF investment. EPF will give dividend every year to our EPF fund, thus our EPF investment return must be able to beat this dividend rate. If our return from the investment is less than the EPF dividend, we are considered losing. This is the opportunity cost.

At last, we are reminded that this EPF investment will be credited back into your account 1 after you repurchase your funds. Investors are not able to get this in cash, as this is our retirement fund in future.

Happy Investing!!!

EPF announces distribution of 5.80% for YE2010

In year 2010, the local stock market has a bull run and the KLCI is approaching to break the historical peak level at the end of year 2010. The KLCI closed at 1518.91 points on the last day of year 2010. In Jan 2011, the KLCI has broken the historical peak level. As a result, EPF announces that they have earned from the bullish market in year 2011, and the distribution of year 2010 is 0.15% higher than the previous year, from 5.65% increase to 5.80%.

Is this distribution rate satisfied the people? Comparing to the low Fixed Deposit interest rate of 3% now, this 5.80% distribution is considered good. Moreover, the BLR now is not as high as past. However, it is a fact that our EPF is no longer enough for our retirement in future, whereby most of the people spend 70% of their EPF within 3 years after they retire. So, there is a need for us to maximize our EPF in order to have more retirement fund in future.

Time is an important factor in investment. A long term investment with the compound effect will bring a significant return to us. Most of us still have 20-30 years to be retired, so we should utilize this period of time to maximize our EPF fund. It a wise choice to consider investing our EPF into unit trust funds to maximize our EPF fund, so that we will have more fund for your retirement life.

The table below shows the return in year 2010 of all the EPF approved unit trust funds from Public Mutual:

I will share my opinion on why we should withdraw EPF to invest in unit trust funds soon…

EPF announce 5.65% dividend for 2009

As the share market is going up since early of year 2009, most of the stocks have gained during the last year. EPF announces 5.65% of dividend for year 2009, which is 1.15% higher than year 2008. Year 2008 is a bad year for share market, where there was economy crisis, especially the subprime mortgage crisis in western countries.

Looking back at the last 10 years, what is the dividend rate announced by EPF???

2009 - 5.65%

2008 - 4.5%

2007 - 5.80%

2006 - 5.15%

2005 - 5.00%

2004 - 4.75%

2003 - 4.50%

2002 - 4.25%

2001 - 5.00%

2000 - 6.00%

From the trend, EPF is no longer announcing dividend rate which is higher than 6% for the past 10 years, and I believe they will not annouce a dividend higher than that in recent years. (year 2006-2007 is a very bullish year in share market)

So, be aware of this, and think about our future. EPF is no longer enough for our retirement fund, and we need to figure out some other channels to prepare for our future retirement fund. Investing in unit trust funds, stock market as well as properties will be a wiser choice for us to accumulate more wealth.

Besides, you may consider to invest using our EPF as well...just find out the best way of your own.

EPF Reduced from 11% to 8%

Recently, our Finance Minister announces that the EPF (Employee Pension Fund) is reduced from 11% to 8%, so that the people have more money every month, and increase the purchasing power. I believe the aim of this new policy is to increase the purchasing power and boost the economy. The question is, can this move really improve the purchasing power, and boost the economy?

Reduction from 11% to 8% means that we have extra 3% of our salary every month. 3% is not a huge amount, but also help a bit to ease our burden in this high inflation era. This is the direct benefit that we can see, but did we think in depth, what is the implication of this move? Is this really benefit to people like us?

EPF is our pension fund, and this will be the main income when we are retired. In fact, EPF is already not sufficient for our retirement fund. When we pay less 3% every month now, this means that our retirement fund in future will be lesser. Do not think that this 3% is just little. When we consider the compounding effect of the EPF dividend, this may make you lose quite a lot in future. Even RM100, after 30 years with dividend 5% per year (conservative assumption), this RM100 will become RM432, which is 4.32 times. This is the first thing we should consider.

Another more important aspect is the tax. Maybe most of us did not aware about the tax when we heard about this reduction in EPF. EPF is tax-deductible. We can minus out the EPF amount that we paid when we calculate for our taxable income. Now, we pay less to EPF, so that the deductible amount is also less. If your monthly income is in the range of RM2400 to RM6300, this reduction of EPF may increase your tax payable. People with income less than RM2400 a month, normally is not taxed. People with higher income than RM6300, their tax-deductible amount is already maximum. (EPF tax-deductible amount is RM6000 maximum)

Maybe you will think that 3% is not much, even you are taxed more, but the amount is still a small amount. In fact, you may get wrong. So, please check about your income if your salary range is between RM2400 and RM6300. In tax, there is a tax rebate RM400 for those who have taxable income less than RM35,000. If your taxable is just exceeded this RM35,000, because of the reduction of EPF, then you will need to pay RM400 more to Income Tax. Check back your last year BE Form, if your taxable income is around RM30,000, then you must be careful. With the increment of salary this year and next year, your taxable income may be closed to the RM35,000. If you choose to pay less to EPF, your taxable income may exceed RM35,000 and you will be taxed RM400 more. The reduction is automatic, so you should consider properly and apply to remain the same 11% deduction if you think you need to.