Last week, I wrote about my appointment with EPF’s Retirement Advisory Service (RAS). The post grew to a girnomous length, so I broke it up into two. So do read Part 1 first.
In Part 2, I will highlight what I discussed with the RAS officer and how I came to solidify my retirement strategy.
Since I’m a personal finance geek, I peppered the officer with questions, so we discussed the following:
What’s the right way to withdraw from EPF after retirement?
Many folks withdraw a huge chunk of money once they reach the age of 55, and while there’s no wrong or right strategy, this means missing out on some advantages. If you withdraw a huge chunk, or even, all your money, that could mean that your retirement money won’t last as long. Why not try to make that money last as long as you could?
The trick is to keep the principal amount in the account high enough so that you can enjoy healthy dividends every year. Meaning, you’ll live off your dividends instead of chewing up your principal at one go.
For example, let’s say you withdraw only 4-5% from your EPF yearly. If you have RM1mil in your account, that means RM40,000 per year. If you withdraw this on a monthly basis, that means RM3.3K per month. Meanwhile, you continue to earn dividend on your principal, which will ensure that your principal does not go down much. So goes the theory.
Anyway, I decided that I’ll treat my EPF savings as a pension of sorts, withdrawing a certain amount monthly, to benefit from the dividends and to retain my capital for as long as I can.
Blue chip stocks
How should we invest in stocks? He taught me the difference between a “real” investor and a speculative one. Speculators tend to want to time the market while investors are in it for the long haul. Speculators chase after “hot stocks” while investors study the fundamentals of a stock/investment before taking out their wallets.
Is it wise to pay off your mortgage early or should you invest the money instead? Should you withdraw your EPF upon retirement to pay off your loans? (In my opinion - not a good idea!) It’s better if you pay off your loan early - say in the first ten years of your mortgage - than at the tail end of the mortgage. This is to save up on the interests you have to pay to the bank.
How to select a good and ethical unit trust agent, and how to invest the EPF fund in unit trusts. Many make the mistake of dumping a huge chunk of money in unit trust at one go. (Many agents do that to get that yummy commission.) Instead, use the dollar cost averaging method to ride the ups and downs of the market. Even then, he cautioned, there’s no guarantee, so members need to scrutinise their funds despite having an agent to “take care” of them. Basically, the RAS officer said that one needs to take control of their finances rather than have others make decisions for them, no matter how tempting it is!
So, should you invest your EPF money into unit trusts?
Ah, the million dollar question!
Here’s my personal opinion: It is rare to find a unit trust fund that will outperform EPF. While the sales charges is only 3% for EPF unit trust investing, investors still have to pay management fees (1-2% a year) and switching fees. This will eat into your profits.
EPF, meanwhile, has no service charges, has delivered dividends in the 6% range over the years and promises to give a guaranteed dividend of 2.5%. Unit trusts, on the other hand, while it may give you more than 6%, can also give you negative returns.
In fact, in 2006, the Government was alarmed over the half billion ringgit losses suffered by EPF members who invested their EPF money into unit trust.
Unless the unit trust fund promises more than 6% every year, it may not be worth investing in.
It’s kinda like playing Russian Roulette with your retirement money, don’t you think?
Unit trust is great if you have "extra cash” lying around to play with and you want to hone your investment skills. But don’t play-play with your retirement nest egg and miss out on the yearly 6% dividends!
So, my strategy, now, is to leave my EPF money alone and to top up as much as I can.
Note: You can top up your EPF contributions up to RM60,000 a year, and you get tax breaks for doing so too.
PS: I’m not giving financial advice, yah. Just my personal opinion.