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I know talking about finance is boring as hell, but this is something we all need to know. By "we", I mean everyone who contributes to a retirement fund - EPF (Employees' Provident Fund in Malaysia).
An article from MSN in the USA states that one of the 5 biggest mistakes investors make in a financial crisis is
To halt or reduce retirement contributions
Now, we've been seeing loads of insurance companies advertising that EPF contributions, even with the great interest rate, are not sufficient to ride us into our retirement years. They're right.
Reason:
1. Medical advancements now allow people to live much longer than they used to.
2. Cost of living is escalating.
3. As you get older, your medical bills are going to grow.
So, your 11% EPF contribution + your employers' 12% contribution is good, but not enough.
During a financial crisis, you may think it's a great idea to reduce your EPF contribution so that you have more money to spend NOW.
But the fact is, if you're earning RM2,000 monthly and your EPF is reduced to 8%, you only get an additional RM60 in the bank. If you earn RM6,000, you will only get an additional RM180 in the bank.
Let's assume your salary is in the RM3,000 range and that you reduce your EPF contribution to 8%. To quote a nice round figure, can someone please tell me what you can buy with an additional RM100?
That's right. Jack-shit.
**Updated 19 Nov** thanks to Jerry Soon
Reducing your EPF contribution to 8% has the additional effect of increasing your Taxable Income. Calculation example:
Monthly salary = RM4,000
If EPF is 11%, taxable income = RM3,560.
Tax payable = RM77
If EPF is 8%, taxable income = RM3,680
Tax payable = RM109
Read the MSN article on Investors' 5 Biggest Mistakes
Read the New Straits Times article on the reduction of your EPF contribution
Tuesday, November 11, 2008
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3 comments:
The purpose the govn is doing this is so the people will spend more. The govn needs the people to spend more so that it will stimulate economy growth and movement.
If everyone is keeping their money in the bank and not spending, the economy will collapse.
Quite frankly Sonia, I'd rather go with the 8%, simply because i don't think relying on EPF for the older days is a good idea.
I mean, it's better to have more cash at hand and think about what to invest in rather than keeping them in a bank for retirement.
Maybe that's just me. And i don't believe in insurance, i don't get one unless i really have to. it's just a stupid idea of someone giving you a promise of a life long assurance and when the time comes, they make it difficult.
Insurance knows we need them.
Anonymous:
Understandable. This is my gripe:
1. It's such a small and insignificant amount to the individual. I'm no authority on finance or economics, but there are other ways to keep the economy flowing, I'm sure. What if I am willing to spend that extra without having my EPF contribution cut?
2. Why automate it? Now we have to fill out an application form & submit it so that the contribution is NOT cut. This is going to annoy the hell out of people who have to wait ages in queue. It's a waste of paper, and a waste of time. I bet December will be a slow work month because employees will be busy taking time off work to go to EPF, thereby slowing the economy down!
Hunson:
With only RM100 extra in our bank account, I doubt anyone would rub their hands together in glee and go "Ooh, what can I invest in with all this extra money?!" I believe it's much better off sitting quietly in EPF collecting interest. One day, when you finally decide to take it out to invest, you'll see a nice fat sum there.
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