When retirement savings are taken out of the equation, it is clear that Malaysia’s savings rate is low
by NUR HANANI AZMAN / pic by MUHD AMIN NAHARUL
THE dependence on Employees Provident Fund (EPF) savings to tide over during the Covid-19 pandemic resulted in many more Malaysians having lower savings, which may force them to work longer post-retirement age.
Pre-pandemic retirement savings rate of Malaysians was already low as EPF statistics showed that two out of three EPF members aged 54 have retirement savings of less than RM50,000, putting them at risk of living below the poverty line.
What the pandemic did was exacerbate the situation further with the provision of various withdrawal schemes. EPF recently revealed that Covid-19-related withdrawals over the past two years have had a massive impact on the savings of EPF contributors as currently, only 3% of contributors can afford their retirement.
IPPFA Sdn Bhd licensed financial planner Kuah Soo Yee said with insufficient EPF savings, people will need to work longer and delay their desired retirement age. With the delay of retirement, our labor market will transform with more and more older people remaining in the job market.
She stressed that social benefits and the healthcare system will need to be adjusted to cater to the needs of the ageing population, these are the cascading effects from Covid-19 pandemic.
“Low-income earners (if they remain the same) will continue having difficulty in saving money, since they are struggling with basic living expenses and no excess money for saving.
They will need to increase their earning capability to be able to start saving money.
“People with good earnings might not be able to save money due to poor financial management. Many are spending lavishly and ending up living paycheck to paycheck. Proper cashflow management and financial discipline are needed for these people to start saving money,” she told The Malaysian Reserve.
The Malaysian Financial Planning Council immediate past president Michael Kok said to be fair, the various withdrawal schemes were necessary, especially for those who have lost their jobs, as many Malaysians were suffering (and are still) with insufficient money for everyday living needs.
However, he worries about EPF members who did not need to withdraw from the schemes announced, but took out money anyway mainly due to poor financial behaviour.
“When retirement savings are taken out for other ‘wants’ instead of ‘needs’, it causes longer-term effects on an individual’s savings rate.
“Any form of premature withdrawals will affect the returns which are meant to be used for one’s retirement.”
Kok said without financial discipline, Malaysians’ golden years are going to be challenging.
“They will have to depend on their children or the government for assistance. On a macro perspective considering Malaysia’s debt level, some form of new tax must soon be introduced so as to better manage Malaysia’s debt service charges’ level.
“As the nation is already plagued with this macro situation, they will be hard pressed on providing any financial assistance to private sector’s retirees.”
According to Kok, the replenishment of retirement savings must be done during active earning years.
For individuals who have taken out money through any of the permitted schemes, as the situation recovers, they must strive to voluntarily contribute the amount withdrawn back into their EPF accounts.
He said individuals must not only strive to top-up their savings to match the total withdrawn amount, but they must commit at least an additional 10%-15% of the total withdrawn amount to compensate for the lower compounding interests due to the withdrawals.
“Also, optimisation of EPF savings is possible for those who are financially literate. The fund generally pays out between 5% and 6% returns, however, they permit members to invest savings in Account 2 under Members Investment Scheme. Members who have a higher risk profile can optimise their savings by doing so.
“For those who are not financially literate, you must take initiatives to learn financial literacy. Financial knowledge is crucially important to ensure golden years are well taken care of. I am of the view that when planning personal finances, individuals look holistically on the best approach for their money.
“In Malaysian society, many prefer real estate investments which may be providing a lower yield. One important concept of financial planning is optimisation of resources,” Kok added.
The pandemic has sent a clear message that the savings threshold of Malaysians is low. Malaysians must be reminded of the need to allocate a portion of their earnings to their savings fund.
Based on World Bank data, Malaysians’ saving rate was at 26.12% of GDP in 2020.
Kok said the personal savings rate is the clearest sign of an individual’s financial health and one must be made aware of protecting their financial nest to attain financial wellbeing, starting with better savings behaviour.
He said we must bear in mind that this savings rate reported includes mandatory savings in EPF (retirement savings). As such, when retirement savings are taken out of the equation, it is clear that Malaysia’s savings rate is low.
Kok said based on a study commissioned by the Capital Market Development Fund in collaboration with Universiti Putra Malaysia (2020), one third of Malaysians have more debts than assets.
“Other findings of this longitudinal research are 52% of Malaysians have barely sufficient income to serve their basic needs.
“The emergence of the zero down payment schemes, a reduction in vehicle prices and the misconception that affordability is as long as one can pay the monthly repayments has encouraged Malaysians to incur debt in car purchase.”