MICHAEL Leong, 54, has been a self-employed mechanic for the past 20 years. Having raised three children up to university level, setting aside some savings for retirement has been a challenge.
“Being self-employed, I’m not eligible to be a member of the Employees Provident Fund (EPF) which provides retirement benefits for its members,” he tells StarBizWeek.
Leong adds that one of the drawbacks of working as a mechanic is that he’s exposed to a “not so conducive environment” on a daily basis.
“It’s not the best working environment. Vehicle exhaust fumes, dusty elements and long working hours over the last two decades-plus has taken its toll. On days that you are sick and can’t work, you don’t make money and medication isn’t exactly cheap.
“My children have all grown up, live overseas and have families of their own. I don’t want to rely on them, and neither do I want to bother them,” he says.
Meanwhile, M. Devi, 57, a retired nurse who used to work with a private hospital in Kuala Lumpur, is currently working with a clinic near her house to support her four children, who are still schooling.
Devi, now a single mother, married late. Given that her children are still schooling, she realised quite soon after retiring from the private sector that her savings under her EPF won’t be enough to sustain her into her retirement years.
“My oldest child is in college while my youngest is in primary school. I need to continue working a while more to see my children through college,” Devi says. She knows of the private retirement scheme (PRS) and wishes that it was available sooner.
“If the PRS was made available when I was still working, I probably would have invested in it to help supplement my EPF savings.”
According to the EPF’s annual report for 2011, the average savings for active members at the age of 54 stood at RM149,216. Meanwhile, the average savings in EPF for inactive members is RM23,389.
Are we saving enough?
Despite the fact that Malaysians are earning more currently, their capacity to save has not improved and many are still not prepared for retirement, say wealth advisors.
“People are saving their money. However, many are still not prepared for retirement,” says MyFP Services Sdn Bhd managing director Robert Foo.
“Many rely on their savings that they have in their fixed deposit account or returns from their unit trust investment. But sometimes, these things aren’t enough to sustain you through your retirement years.”Foo says many people just don’t plan for retirement.
“They need to realise early on that once they retire, they need to prepare for a reduction in income. Once that happens, they need to determine if they can continue to earn money – perhaps continue working or start a business of their own?”
Standard Financial Planner Sdn Bhd’s Jeremy Tan also concurs that many Malaysians are not prepared for retirement, adding that many individuals do not have enough in their EPF savings to sustain them into their retirement years.
“On average, Malaysians have around RM100,000 in their EPF by the time they retire. If your lifestyle and expenses amount to RM5,000 a month, then that’s RM60,000 a year. How is the RM100,000 going to sustain you for the next 15 to 20 years?”
He says accumulating health bills, home loans still pending, and children’s education fees are the top reasons why many retirees face problems sustaining themselves once they retire.
“What these people need to do is create an investment portfolio for themselves so that it can generate different kinds of returns. If you just rely on your savings in your fixed deposit account, it will be eroded by inflation over time.”
How much savings do we need
The Private Pension Administrator Malaysia (PPA) chief executive officer Datuk Steve Ong feels that individuals need to take better care of their finances.
The PRS provides an added security blanket for those saving towards their retirement. “It’s better to be safe than sorry,” he says.
The rule of thumb is that a person needs at least two-thirds of their last drawn pay to continue with the current standard of living. Ong says one-third of a person’s salary should be put away now, in order to achieve two-thirds post retirement.
If a person is employed, he has already set aside 23%-24% of his pay via employee and employer contribution to the EPF.
“For example, if a person can put that 11% into any dedicated instrument that can generate 6% per annum, then by the time you retire you can draw down a good sum. This is the message of the PRS,” he says.
Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui says individuals need to increase the amount they save every month to be able to be “comfortable” once they retire.
“You should be saving at least 30% of your income every month.
On top of the 11% you contribute to your EPF, you need to save an additional 19%.
Only then will you be in a comfortable position to retire.”
Yap adds that individuals who are self-employed need to save at least 35% every month.
“The earlier you save this amount in your career, the better.”
Yap adds that the increase in retirement age within the private sector to 60 from 55 previously is a positive step.
“With the increase, there is now more time for individuals to accumulate their savings. More working years also means shorter retirement years.”
The retirement age for the private sector was increased from the current 55 to 60 under the Minimum Retirement Age Act, which was passed in June and gazetted in August last year. It came into force last month.
Fortunately for Leong and Devi, they have the opportunity to take up the PRS, a voluntary long-term investment scheme designed to assist individuals to accumulate savings for retirement.
The PRS framework resulted from recommendations made by the Securities Commission (SC) to the Government to accelerate development of the private pension industry in Malaysia.
It forms the third pillar of Malaysia’s multi-pillar pension framework after the civil servants pension fund and the Employees Provident Fund (EPF). Ong says the PRS gives contributors added security for their retirement years.
As the country moves towards achieving high-income nation status by the year 2020, Ong adds that it is also important to have a high savings rate.
“By 2020, 10% of the nation’s population would be aged 60 and above, representing some 3 million people,” he says.
The PPA was approved by the SC and set up in July last year to administer, oversee and promote the PRS industry.
The PPA functions as a record keeping and resource centre for data on all transactions performed by contributors. It will facilitate transactions and promote efficient administration.
Ong warns that one risks falling into old age poverty if no preparation is done to secure the retirement years.
“If you’re young but poor, it’s alright, as you can still do something about it. But when you’re old, you may not be as healthy and not be able to do something about it,” he says.
The Government first proposed the PRS under the Capital Market Masterplan 2 to complement the mandatory retirement scheme that is the EPF. The PRS also acts as an alternative mechanism to increase voluntary savings.
The scheme is open to all individuals aged 18 and above, regardless of their employment structure. Because participation in the PRS is voluntary, it is targeted at all segments of the population, especially the employed and self-employed who have a disposable income.
For individuals already contributing to the EPF, the PRS acts as an additional and complementary avenue to save, while for people like Leong, the scheme is to ensure that they save for their golden age.
Out of the 38 unit trust fund providers, only eight were approved for the PRS. Among them are AmInvestment Management, American International Assurance, CIMB-Principal Asset Management, Hwang Investment Management, Kenanga Investors Bhd, Manulife Unit Trust, Public Mutual, and RHB Investment Management.
Participants or contributors to the PRS have the option of contributing to more than one fund under a PRS or contributing to more than one PRS, offered by the different PRS providers.
The SC regulates and supervises all intermediaries in the PRS industry, namely the PRS providers, the PPA, the scheme trustees and distributors of PRS. This is to ensure that it functions in a proper manner as well as to protect members. Each PRS will include a range of retirement funds, allowing individuals to select based on their own retirement needs, goals and risk appetite.
A default option is available for individuals who are unsure of which funds to invest in. The default option pairs individuals with the appropriate fund for their age, whether it is a growth fund, moderate fund or conservative fund.