Saturday, April 11, 2015

EPF's contribution: How many Malaysians contribute until 55?

I have been hearing a lot on many Malaysians do not save enough for old age. According to the latest report by EPF, only 22% of people will actually have more than RM196,800, the minimum amount required to retire. This is assuming that many do not have savings elsewhere. It went on to say that 68% of Malaysians at 54 of age has less than RM50,000 in their EPF account. The below will justify that these are true (as it come from EPF) but they are just some ridiculous reasons to tell us that the savings situation by Malaysian is in dire strait. Why? A Malaysian who earns minimal income but worked for their entire life as a salaried worker would have at least RM196,800 in their account, AND in no circumstance would they have less than RM50k in their EPF account. The below tells why.

While I do see that many in Malaysia do have challenges post-retirement, but some of the numbers that are provided does not really reflect what may be the actual situation.

I am just wondering how many of the EPF's contributors in the list that are still active contributors towards the EPF fund? I think most people will fully withdraw when they reach 55 years of age, but by the time they withdraw their money, were they still actively working. They may be working but not contributors anymore as they are probably working for themselves and are not required to contribute towards the fund.

To answer some of those I have put up a hypothetical calculation. Assuming a person works for 32 years from age 24 to 55. If that person retires in 2014 (last year), this means that he started work from 1983. Below are the EPF's rates from 1983 to 2014.

Average return for last 32 years was 6.737%

The table above shows the historical contribution by EPF over the last 32 years. On average, the percentage contribution over the period is 6.737%. If I were to take one of the lowest earning individual and take below assumption:

  • he started with salary of RM415 (no overtime salary). Final salary is RM1247;
  • his EPF contribution is according to statutory rate i.e. 11% employee, 12% employer;
  • increment per year 3.5% - which is minimal. This means not much promotion at all;
  • he does not get any bonuses;
  • he does not stop work at any point of time;
  • started work at age 23 and retires at 55;
  • average EPF dividend earned 6.737%.
What would be the savings in his EPF by the time he retires at age 55? See below. He has RM197,349. This number is higher to the one that was the amount needed for one's retirement as proposed by EPF i.e. RM196,800.

Now, remember my assumption is quite conservative - i.e. no bonuses, no promotion with increment of 3.5% per year. The person started with salary of RM415. Note that by the time he retires at 55, his final salary would be RM1247.

While EPF provides some data which tells that many Malaysians do not have enough in their EPF savings to retire, I am just wondering whether these can really be applied overall in general...From these, one will know that the 68% group which has less than RM50k in their EPF savings are the outliers as they only worked partially as salaried employees in their life. We can't just throw in numbers for numbers sake.

Another exercise, if I were to take the group that have less than RM50,000 in their account how much on average would they have earned and for how many years have they contributed actively to EPF?

Diagram 2: The group that have less than RM50,000 in EPF
Based on above Diagram 2, those group would have earned average RM850 per month, earned 6.737% dividend and worked for only 13 years! In fact, I have yet to add in the yearly dividend they earned after their retirement (age 36) until 55 years of age. If I were to add that in, they would have RM160,319 by age 55! (Do that multiplier by multiplying 6.737% to RM49,581 - Year 0 - cumulative every year from 36 to 55.)

While I do not have all the facts, I would think that many Malaysians have either stopped contributing to EPF after certain age and do not do this until 55 i.e. stopped working entirely or along their working life, they may be working in areas which they do not contribute anymore. They may also have withdrawn a substantial amount for housing, health, education etc. along the way. But those that can be withdrawn are now in Account 2 and they only comprise of maximum 30%.

In any case, I am still questioning the data that was presented as the database I think is based on all the people that have EPF account - and that could be many as long as in their working life they are required to open an account. Hence, I am made to think that every Malaysian that have worked before would own a EPF account although they may not be working or work for themselves later on in life. I had mine opened at age of 18 when I was working part-time for a restaurant and I later went on to further studies for several years.

We also know that about 10% of working Malaysians actually pays individual income tax - it does not seem right. Those numbers could also mean that there are a group whom may not declare their actual income. I would like to be proven wrong.

Even today, there is an article on The Star headlined "Save or Suffer". To me they are using a set of data that are overused, wrongly interpreted and may not be scrubbed through well.


  1. The tools that I have used are all available from the net.
  2. I still feel that RM196,800 of savings is a challenge for many to survive through old age but I am also not sure what EPF intends to implement i.e. allowing full withdrawal at 60 only is going to change much as compared to 55. What should be done is to provide financial education, not withholding people's own money. The days of government knows best should be re-thought.
  3. Let's be more transparent on the data and while it is critical for people to save, I do not think the current situation is as bad as being shared.
  4. If one no longer actively contributes actively towards EPF, chances are they do not pay personal income tax as well. You also see the advantage of having GST although many would be against it now.
This article does not mean I do not understand the predicament of current inflation, hard conditions for retirees if one does not save enough - but the above were based on usage of a set of data which one do not scrub through to identify the outliers.

1 comment:

Unknown said...

Nice. You are actually one of the few who realizes that the figures touted makes very little sense. Here's the answer, which you have actually came quite close to - non-active EPF members at age 54 is two times larger than the active ones. Just check the statistics page in EPF's annual report and also past news reporting.

You also took the right approach in doing some calculations of your own, but the conclusion omits the fact that we are talking about wages from 30 years ago. Nevertheless, kudos for asking the right questions.