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!!!
