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Malaysia

The Malaysian income and retirement crisis

The Employee Provident Fund (EPF) in Malaysia, established in 1951, stands as a cornerstone of the nation’s commitment to ensuring financial security and retirement benefits for its citizens, with millions of Malaysians contributing a portion of their salaries to the EPF throughout their working lives. Moreover, over the past 14 years, the EPF has consistently delivered an impressive average dividend of 6%, significantly surpassing the returns of many managed funds and unit trusts in Malaysia. This stellar track record underscores the pivotal role the EPF plays in empowering Malaysians to envision and secure a more prosperous retirement.

Source: Ringgitplus

However, recent statistics from the Employees Provident Fund (EPF) have cast a shadow over the retirement prospects of its citizens. These alarming figures shed light on a harsh reality: Most EPF members will find themselves with insufficient savings in their retirement accounts. As of the close of 2022, a staggering 51.5% of EPF members had amassed savings below the RM10,000 mark. Even more concerning, a mere 18% of EPF members are expected to reach the RM240,000 milestone by the time they hit the retirement age of 55.  

The RM240,000 benchmark has long been considered the basic savings target to furnish retirees with a modest average monthly income of RM1,000 for 20 years, and many experts now argue that this figure needs to be revised in light of the relentless rise in the cost of living. According to a recent EPF Belanjawanku report, senior couples residing in the bustling Klang Valley area now require at least RM3,210 per month to cover their necessities. This figure escalates to RM2,520 per month for single retirees, with the bulk of expenses attributed to fundamental needs such as food and housing. These stark numbers underscore the pressing need for Malaysians to reevaluate their retirement strategies and address the growing gap between their EPF savings and the actual cost of living in their golden years.

Source: EPF

Why is this happening?

Low wages: The prevalence of low wages is undeniably a central catalyst behind the burgeoning retirement crisis in Malaysia. Data from the Department of Statistics Malaysia reveals a stark reality: a concerning 82% of employees in the formal sector earn less than RM5,000 per month. This challenge individuals’ ability to meet their day-to-day expenses and severely hinder their capacity to make substantial mandatory contributions toward their EPF retirement accounts. As a result, accumulating substantial retirement savings becomes an uphill battle. In stark reality, these economic circumstances constrain many Malaysians and face the daunting prospect of inadequate financial security in their golden years.

Source: FMT

Early EPF withdrawals: During the challenging times of the COVID-19 pandemic, the Malaysian government took a compassionate step by allowing multiple withdrawals from EPF accounts to alleviate the financial hardships faced by citizens. This move provided immediate relief to those in dire need, enabling them to weather the storm. While these withdrawals were a lifeline for many, they came at a cost.

According to Deputy Finance Minister Datuk Seri Ahmad Maslan, approximately 8.1 million EPF members experienced a staggering 50% reduction in their median savings in 2022 during the height of the pandemic when special withdrawals were permitted.

Source: Department of Statistic Malaysia

Delving into the specifics, the statistic becomes even more apparent in how these withdrawals have affected various races. Around seven million Malay EPF members, who had a median savings of RM16,900 in April 2020, now have an average of only RM5,500 in their EPF accounts. Similarly, other Bumiputera members, numbering approximately 1.4 million, have seen their average savings dwindle to just RM3,300, down from an average of RM10,600.

While these withdrawals were undoubtedly well-intentioned and provided crucial assistance during a difficult period, they have left many Malaysians with substantially diminished retirement savings.

What can Malaysians do?

Here are some steps citizens can take to improve their retirement prospects:

1.   Reject jobs without EPF contributions: One of the first steps individuals can take is to be selective about their employment choices. Reject job offers that do not provide EPF contributions or report such cases to the relevant authorities. Ensuring employers make mandatory contributions toward their employees’ EPF accounts is essential for building retirement savings.

2.   Self-contribution: Malaysians should strongly consider making additional voluntary contributions to their EPF accounts, supplementing their existing mandatory contributions. This is especially pertinent given that the EPF has consistently delivered an impressive average dividend of 6% over the last several years. Additionally, individuals can benefit from tax deductions of up to RM4,000 for voluntary self-contributions. These additional contributions play a pivotal role in helping individuals progress more effectively towards their retirement goals.

3.   Seek better-paying jobs: Higher-paying job opportunities are another way to enhance retirement savings. While this may not be immediately achievable for everyone, it should be a long-term goal. Malaysians should actively look for positions or industries offering more competitive salaries.

4.   Upskill with high-income skills: Developing expertise in digital marketing, software development, data analysis, or any skills in demand can open doors to higher-paying job opportunities, ultimately boosting their income.

5.   Explore remote job opportunities: The remote work landscape presents new possibilities. Malaysians can explore remote job opportunities, especially those that provide salaries in strong foreign currencies. Working for international companies or freelancing for clients abroad can significantly increase their earning potential.

 The fifth perspective

The retirement crisis in Malaysia is a pressing issue that demands attention from individuals, employers, and the government alike. With many EPF members having insufficient savings for retirement, it is crucial to take proactive steps to address this challenge. Simultaneously, the government should consider policy changes that promote all citizens’ retirement security. Together, Malaysians can hope for a more secure and comfortable retirement in their golden years.

Wang Choon Leo, CFA

Choon Leo is a growth-focused investor with an interest in innovative platform businesses that can connect users and fix market inefficiencies. He believes that companies with the most competitive business models will compound in value over the long term. Choon Leo is a CFA charterholder.

1 Comment

  1. Lol, stop joking around. 98% of Malaysians are rich as hell. You can see how many new cars being bought or new orders weekly. Almost every brands of cars in malaysia need to wait 8 months to get the car. Another thing, no matter how expensive the food goes up to, Malaysians till can afford with no complaints. The iPhone 15 comes out, fully out of stock. Malaysia should be rated top 5 richest citizen country in the world.

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