Savings strategy for future replacement income


It is important for us to ensure that we have the recommended 2/3 replacement income of last drawn salary as monthly retirement income to continue to enjoy the lifestyle we have become accustomed to.  

For most of us who are employed in the private sector, the Employees Provident Fund (EPF) is the main source of our retirement funds.

The mandatory contributions to the EPF may not be adequate to replace 2/3 of your last drawn income.

This has been also been reported in numerous articles highlighting the need to save more for retirement beyond the contributions made to the EPF. 

At the national level, Malaysia’s current replacement income ratio stands at 30%, compared to the 57% average for Organisation of Economic Corporation and Development (OECD) countries.

With Malaysia moving towards an ageing society by 2020, with 11.3% of the population in retirement age, we need to address this issue both nationally and individually before it become a socio economic problem for the average Malaysian who may not be able to replace their 2/3 last drawn income.

What then is adequate savings for retirement?  PPA’s research suggests that you will have to set aside 1/3 of your monthly income to achieve the 2/3 replacement income.

While this may seem to be  a “tall order” with current income levels and cost of living concerns, to set aside 1/3 of monthly income,  it is nevertheless doable and not as hefty as you think.

As Malaysians, we are fortunate to have the mandatory minimum EPF contributions totaling 23% (namely 11% from employee and minimum 12% employer contribution), you will possibly need to contribute an additional 10% or more, to make up the 1/3 or 33% savings for our retirement fund. 

We are indeed fortunate to have the EPF established as the mandatory 2nd pension Pillar, without which we will all have to deal with setting aside the 1/3 savings from monthly earned income.

With the launch of the Private Retirement Schemes (PRS) in July 2012, to address the current 30% replacement income ratio, Malaysians now have the voluntary 3rd pension Pillar to help them with making additional savings to supplement their EPF.

In time to come, Malaysians will have 2 pillars for their retirement savings, with the bulk of their funds coming from EPF and the additional savings from the PRS. 

Given that we will have to replace our earned income when we retire to provide for retirement years, we will have to build our retirement funds to generate income and within the time frame left before hitting the retirement age at 60. 

The objective then is to build up our retirement funds to the desired level which can then generate a passive retirement income stream to replace 2/3 of our last drawn income. 

Building up our future retirement funds requires you to pay attention to the following:

* Set aside time to invest in your retirement plan to accumulate the funds required to generate income replacement for your retirement. 

* Find how much EPF funds you have accumulated to date and other savings for retirement and what additional savings you need to make.

* Determine the additional savings to make up the 1/3 current retirement contribution requirements to provide for 2/3 future replacement income.

* Start your PRS account to place the additional savings contributions into a PRS fund that will provide potential compounded growth.

It nevertheless needs to be addressed as early as possible before retirement dawns on you.

The more we put off planning for it the harder it gets as the shorter time frame to retirement will require you to make even higher contributions and limit the compounding growth of investment returns.

It can be a daunting task to determine how much your last drawn income would be before your retirement. 

To find out your projected last drawn income might be based on the retiring age at 60, you can easily make the computations with PPA’s retirement calculator.

Just go to www.ppa.my and in a few simple steps find out how much additional savings you need to make on top of your EPF.

The projected last drawn income will give you an indicative feel of how much income you need to retire and how long it will last, as well as what the projected amount of retirement funds you should have in order to generate the required income.

We recommend that you review this annually to reflect changes to your current income and financial circumstances.

Datuk Steve Ong is CEO of the Private Pension Administrator (PPA), the central administrator for the Private Retirement Scheme (PRS). 


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