Deep, deep dive
Step 3: Choose where to invest your retirement savings
How you invest for your retirement depends on your age. The closer you are to your retirement, the less risky your investments should be. This is because if your risky investments go sour, you won’t have much time before you retire to rebuild your retirement fund.
Option 1: EPF
Your mandatory EPF savings should be considered the bare minimum that you should have put aside towards your retirement. As we know, only 18% of Malaysians with an EPF account will have enough savings for their retirement.
Additionally, if you wish to contribute more money per month towards your retirement savings, an easy step to take would be to increase your contribution rate or voluntarily put in more money into your EPF savings.
Remember, EPF is a safe place to invest your money and promises a guaranteed 2.5% returns (for conventional account holders). In fact, over the last 10 years, it has delivered returns of around 6% each year.
Option 2: Private retirement schemes (PRS)
PRS is a voluntary long-term savings and investment scheme to allow people to build up their retirement fund. However, don’t mistake this as a substitute for the EPF scheme. PRS are not capital guaranteed (the principle is not shielded from losses) nor do they have the same guarantees on dividend levels like your conventional EPF savings.
PRS like EPF imposes restrictions on the amounts that you’re able to withdraw. Like with EPF, PRS contributions are also divided 70:30 into two sub-accounts: Sub-Account A and Sub-Account B. Only when you reach the retirement age of 55 years, or in the case of death or emigration, can you fully access your PRS savings. Before you retire, withdrawals can only be made from Sub-Account B, and you’ll be charged an 8% tax penalty.
Types of PRS Funds
There are two methods of choosing how your savings get invested in a PRS. You can opt for the default option in which your provider will allocate you to a core fund based on your age.
Or you can self-select your preferred funds for your savings to be invested.
These are the returns for the top 20 performing PRS funds over a 5 year period. Click here to see the rest.
Source: Morningstar, retrieved on 22 October 2019
PRS also have a fee structure that can be quite similar to unit trust funds, like sales fees, management fees, and transfer fees. Some PRS providers charge sales fees of up to 3.00% and annual management fees of up to 1.80% in some cases with additional transfer fees if you switch between providers.
Remember fees will eat into your returns!
Contributing to PRS will also allow you to qualify for tax relief of up to RM 3,000 (https://www.ppa.my/prs-tax-relief/).
Employers also have the option of making PRS contributions on behalf of their employees or matching their contribution. Similar to the tax savings for employees, employers that do so will also be eligible for certain tax deductions.
Comparison to other investments
Compared to EPF
PRS does not offer guaranteed returns, so you’re taking a greater risk by investing in PRS compared to EPF. As mentioned earlier, PRS should act as a complement to your EPF savings rather than a substitute for it.
Compared to Unit Trusts
The primary benefit of a PRS over unit trusts is that it gives you the option of taking a hands-off approach to your investment. PRS funds have a default option that allows the fund manager to automatically adjust your risk allocation so it’s more conservative as you get older.
Option 3: Other investments
You can also consider investing in other investments such as unit trusts and exchange-traded funds to fund your retirement. But remember, for these investments your capital and your returns are not guaranteed.
The further away you are from retirement, the more scope you have for more risky investments as you can afford the risk (if your investments do not perform well, you have many more years of working to make up for it), and can use this in order to accelerate the growth of your retirement fund.