{"id":42557,"date":"2020-03-10T09:55:10","date_gmt":"2020-03-10T01:55:10","guid":{"rendered":"https:\/\/www.imoney.my\/articles\/?p=42557"},"modified":"2020-03-27T11:01:21","modified_gmt":"2020-03-27T03:01:21","slug":"choose-reduced-epf-contribution","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/choose-reduced-epf-contribution","title":{"rendered":"Here\u2019s Why I Am Lowering My EPF Contribution For 9 Months"},"content":{"rendered":"

The government recently announced the 2020 Economic Stimulus Package<\/a>. Apart from tourism-related tax reliefs and digital vouchers, part of the package also includes lowering the minimum Employee Provident Fund (EPF)<\/a> contribution by employees from 11% to 7%.<\/p>\n

My boss wrote a piece about why he\u2019s choosing the 11% contribution<\/a>. While he makes some good points, I\u2019m still choosing to lower my EPF contributions to 7%. Here\u2019s why.<\/p>\n

<\/span>Potentially higher returns elsewhere<\/strong><\/span><\/h2>\n

EPF\u2019s historical performance has been pretty good, averaging at around 6% p.a. for the past 30 years. It\u2019s also technically risk-free, as the government guarantees a minimum rate of 2.5% a year \u2013 although dividend rates haven\u2019t been that low since the fund\u2019s inception in the 1950s.<\/p>\n

If you earn RM5,228 a month (the median household income, according to the Department of Statistics<\/a>), and if you have a long investing horizon, here\u2019s how your 4% \u2018savings\u2019 can potentially grow under EPF.<\/p>\n\n\n\n\n\t\n\t\n\t\n\t\n\t
Salary<\/td>RM5,228<\/td>\n<\/tr>\n
Normal EPF contribution (11%)<\/td>RM575.08<\/td>\n<\/tr>\n
Special EPF contribution (7%)<\/td>RM365.96<\/td>\n<\/tr>\n
Difference (April to December)<\/td>RM209.12 x 9 months = RM1,882.08<\/td>\n<\/tr>\n
RM1,882.08 invested for 35 years, at 6% annual return<\/td>RM14,465.83<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

That\u2019s a nice chunk of money.<\/p>\n

But as someone whose (meagre) life savings exists mostly in the form of EPF savings, 70% of which<\/a> are invested in assets in Malaysia, I\u2019m thinking of diversifying more overseas. Specifically, in the US stock market. It\u2019s one of the world\u2019s best performing stock markets, with an annualised return<\/a> of 9.96% (including dividends) over the past 30 years. While past performance does not guarantee future performance, the US is <\/em>the world\u2019s biggest economy, and is home to some of the most valuable brands.<\/p>\n

Yes, the American stock market has tumbled recently \u2013 but it\u2019s only a dip in its decades-long history. By keeping the money invested over decades, I could potentially ride out any market volatility.<\/p>\n

If this outperforms EPF returns, it could lead to more retirement savings. A slightly higher return of 7% could mean a difference of a few thousand ringgit:<\/p>\n\n\n\n\n\t\n\n\t\n\t
Investing RM1,882.08 for 35 years<\/th>\n<\/tr>\n<\/thead>\n
6% annual return<\/td>
7% annual return<\/td>\n<\/tr>\n
RM14,465.83<\/td>
RM20,094.18<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

As a retail investor with limited capital, I\u2019m thinking of putting my 4% savings in a robo advisor<\/a> that invests largely in US equities. This means that I\u2019ll be subject to an annual management fee, and as a foreign investor, the dividends I receive from US equities may be subject to a 30% withholding tax \u2013 so my returns with the robo advisor will have to take into account these costs and beat EPF\u2019s 6% estimated return. Yet, with the political uncertainties<\/a> recently, the sluggish local stock market and depreciating ringgit, I\u2019d feel more comfortable diversifying overseas.<\/p>\n

Head on to StashAway to find out more. As an iMoney reader, enjoy reduced fees when you sign up through\u00a0<\/strong>this link<\/strong><\/a>. But as always, remember to do your own research before investing.<\/strong> <\/div><\/div>\n

Other than investing it in a robo advisor, here are other ways I\u2019ve considered maximising the money:<\/p>\n