Sunday, October 10, 2010

Maximising savings

WITH longer life expectancy, escalating medical and education costs, most people’s Employees Provident Fund (EPF) savings will diminish over time.

The worst case scenario will be that retirement savings will run out in a couple of years if one has to finance their children’s tertiary education and pay for private medical bills.

So what should a person do to boost his or her EPF savings without losing out on their retirement savings?

Prudential Assurance Malaysia Bhd chief executive officer Charlie Oropeza says depending on a person’s risk appetite, investment time horizon and income, one can opt to invest in, among others, properties, equities, unit trusts and investment-linked insurance plans.

It is important to invest in the right financial instruments to ensure a comfortable retirement.

Citing a retirement survey commissioned by Prudential, Oropeza says Malaysians tend to be conservative when it comes to the type of investment tools they use to save for retirement.

He says most people rely heavily on low yielding bank savings or fixed deposit accounts to grow their retirement nest egg.

Contrary to the common belief that keeping money in the bank is the best way to preserve capital, Oropeza says this may not be good enough given that interest rates of bank deposits can hardly outrun inflation.

He says regular investing and saving is an effective and convenient way to help one reach his retirement goal.

“Even a little money saved regularly can grow to a tidy sum over time. The easiest way to reach your financial goals is to start investing through a regular savings plan. By setting aside an amount each month, you will be well on your way to developing substantial funds for retirement,“ he says.

Besides putting money aside regularly, he says choosing the right fund and diversification of portfolio is equally important to ensure successful retirement savings.

Portfolio diversification helps spread the risk so that the retirement portfolio is not heavily impacted by one investment. Diversify within the asset class and among several assets, Oropeza advises.

Robert Foo, who is principal consultant of MyFP Services Sdn Bhd, says EPF funds should also be invested into unit trusts. He says investments should be diversified into different funds.

Although EPF has limited the upfront sales charge on unit trust investments to a maximum of 3% of the investment amount, Foo says it is still too high and should be reduced to 1%. Another alternative, he says is to spread this 3% over three years instead of having the investor lose the whole 3% upfront.

If possible, investors should invest through fee-based financial planners who can get funds at net asset value (meaning 0% upfront sales charge), which will be a substantial savings for them, he says.

If the Government is serious about providing ways for Malaysians to fund their retirement, they should allow EPF contributors to invest into offshore funds for greater choice and diversification.

Foo recommends buying a home if one does not own one yet because it is indirectly an investment. He, however, cautions not to over commit and buy a house that will stretch a persons’s finances too much.

Licensed financial adviser Jeremy Tan of Standard Financial Planner Sdn Bhd says another option available for EPF contributors is to withdraw for the purchase of owner-occupied home or settlement of mortgages.

It would only be wise for them to withdraw for this purpose, especially the latter, if the mortgage rate charged by the bank is higher than the average EPF dividend rate.

Based on current mortage interest rates, Tan says it will be more appropriate to keep the monies in EPF to harness the return rather than withdraw for repayment purposes.

On unit trusts, Tan says although this asset class is an option to grow savings, it may or may not provide an increase in returns higher than the EPF’s dividend rate.

The strategy to adopt is to invest regularly and diversify into different asset classes of mutual funds taking into consideration one’s risks appetite, to potentially gain higher returns than EPF rates, he says.

Great Vision Wealth Management Sdn Bhd associate director for tax and financial consulting Darian Lim says those who are not quite sure which unit trusts fund to invest into (there are about 223 approved unit trusts funds) and who “cannot stomach” the market volatility, might be better off just leaving the funds in EPF since it gives reasonable returns at much lower risk.

From EPF’s findings, Lim says about 72% of the members who withdraw their savings at age 55 tend to spend all the money within three years.

He says: “Proper retirement planning is of utmost importance as we slowly move towards a developed nation with better healthcare and medical advancement. People around the world are living longer with those in developed nations having an average mortality age beyond 80.

“As such, everyone needs to have sufficient funds to retire comfortably. It helps to find ways to maximise returns from EPF investments to increase one’s retirement fund.”


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