THERE are pros and cons to withdrawing the allowable RM10,000 from your Employees Provident Fund (EPF) member account.
Of course the government has given the green light but bear in mind that this is no special fund or incentive the government is giving out.
What you are doing is withdrawing your own EPF funds which is essentially meant for your retirement.
Unless you are in dire need of funds, the advice of many experts is not to use your EPF savings. Even if you have to withdraw now, devise a plan to replenish it later.
“The EPF special withdrawals help to provide temporary financial help. It keeps you afloat while you get back on your feet if your work or your business was affected by Covid-19. It is good for families or individuals who are struggling financially to survive and are in need of cash,’’ said IPPFA Sdn Bhd licenced financial planner Kimberly Law.
However, it is rather subjective if you plan to withdraw now to pay your debts, loans and bills.
“Sometimes it works and sometimes it does more harm to your retirement. If you are incurring high interest rates or late penalty charges for accumulating outstanding amounts and have no other means to pay back, then this special withdrawal might help you,’’ she said.
“But don’t take out the money if the interest amount remains the same whether you clear the loan and bills early and you have enough current assets like cash or investments to liquidate to clear it off.
“If you are in a situation where you have no food or shelter, then this special withdrawal helps you get some comfort. It is important to prioritise and spend wisely,” she adds.
“Do not take out the money and use it for a down payment for a house or vehicle, especially when there are so many irresistible promotions out there. Nor should you use it to upgrade your lifestyle like pay for your wedding, vacation or buy nice furniture.
“You should be saving from your cashflow to make these purchases. Better money management and budgeting will help you save for these big ticket items,’’ Law said.
The EPF recently announced a dividend of 6.10% for its conventional fund and 5.65% for the syariah fund. So it is good to keep your retirement money in the EPF.
If you want to use the RM10,000 to invest then it would be best if it came from your cash flow.
“Withdrawing from the EPF to invest is like taking money from your left pocket and putting it into your right pocket. It doesn’t have too much of a difference after factoring the fees,’’ she said.
You can consider doing so if your EPF is in the hundreds of thousands of ringgit. If you choose another form of investment, it is best to do it early while you are young, not close to retirement. There are hundreds of funds available and you need to make sure you choose a good fund, she adds.
However, this amount, she explains, is coming out from your future savings fund that you are spending now. So, it is best to keep it in EPF depending on your current situation.
“If you keep withdrawing from EPF and do not set aside alternative retirement funds, you may not have enough when you retire. It is also much harder to work after you reach the age of 60,’’ she said.
She said, let’s assume EPF dividends averages around 5.5% per annum and are compounded over the next 10 years. Today’s RM10,000 is estimated to be worth RM17,311 in 10 years. If compounded for 20 years, it is a more significant difference at RM29,966 based on the same interest rate.
“If you are young and have a long way to retirement, then leave it in EPF,’’ Law said.
If you keep using your savings now with no replenishment, it is likely you will be financially constrained later.
“To avoid this, start planning early because you have time now. Besides, we should not rely 100% on EPF for retirement. EPF alone is insufficient for a comfortable retirement. You need to supplement your EPF with alternative retirement funds,’’ she said.
A diversified portfolio is ideal to have enough for retirement and bearing in mind the inflation rate, some forward planning is necessary.