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Sunday, November 23, 2008

Which option to take, 11% or 8%?

The most heated argument taking place among working Malaysians today is 'shall we agree to the option given by the government to reduce our contribution to the EPF from 11% of our salary to 8% for two years starting Jan 1, 2009 or not'.

EPF (Employee Provident Fund) is a fund created by the government as a retirement fund once the employees retire. It is made compulsory as for some people, it may be the only source of retirement fund. It is currently fixed at a minimum 11% reduction from the employee's salary and a minimum 12% contribution from the employer.

Lowering the rate of employees’ contribution to the Employees Provident Fund (EPF) temporarily is part of the Government’s bag of tricks to stimulate the economy. The idea is to boost private consumption by putting more money in workers’ pockets.According to Government's estimates, RM4.8bil a year will be freed up for spending in the economy if all EPF contributors opt for the rate cut.

It is indeed a good strategy for the short term and good for the country's economy as a whole. More employees who fall under the lower income bracket welcome this move as they are struggling to make ends meet due to the current hike in essential goods after the petrol price shot up lately to its all time peak suddenly.A little more cash at their disposal would definitely ease their burden.

However, the rest of the group or the 'financially savvy' ones are crying foul over this move.Their reason is that it definitely means lesser retirement funds. Bad move in the long run.

For the past few years EPF has managed to give out dividends at around 5%. If you can really discipline yourself, even if you claim yourself to be in the financially savvy group, this move can be seen as an opportunity. How?

If you are earning RM4000, the reduction of 3% in EPF contribution will amount to RM120. That means an extra RM120 in your pocket. Don't spend it. Instead look for ways where you can save and invest this money so that it can give you a higher dividend than the one given by EPF. I believe an excellent investment instrument for this small amount in monthly basis would be the mutual funds/unit trust where you can do a Dollar Cost Averaging for 2 years with this extra cash. Or you can also pay off any outstanding credit card debts as the interest charged is usually very high.

So, now you have 3 options in front of you:
1. Reduce the deductions and spend the money.
2. Stick to the 11% deductions and leave the money to grow with EPF.
3. Opt for the 8% deductions and invest in places where higher dividends are being paid.

Make the right choice and have a comfortable retirement later!

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