Should I or Should I Not Reduce My EPF Contribution?

Should I or Should I Not Reduce My EPF Contribution?

With the recent economic slowdown due to the impact of Covid19, Malaysian government has issued a few program to stimulus the economy.
One of the plan is to have your EPF contribution reduced from 11%  to 7%.
Original official statement: Reduction-of-statutory-contribution-rate-for-employees - EPF

So the question for you now is, should you or shouldn't you. Let's weigh in the pro and cons:

Lower income group:
An individual earning RM2,500 in salary would have contributed RM275 to EPF currently. But at the new rate of 7%, he will only need to contribute RM175. He will have the extra RM100 which could be very crucial in his monthly spending.

Slightly higher income group:
An individual earning RM8,000 in salary would have contributed RM880 to EPF. But at the new rate of 7%, he will only need to contribute RM560. He will have the extra RM320 which could be insignificant in his monthly expenditure.

Pros:

1. More cash on hand. The main idea of this program is so individuals would have slightly more cash to spend.
2. Some savvy individuals may divert that money into more savvy investments which will continue the role as retirement fund builder. Example: Buying into PRS, Stocks, Unit trusts, bonds, etc. (Note: for savvy investors who understands the risks of these products)

Cons:

1. Money not saved, means money spent. Not having that RM100 per month in your EPF is potentially a difference of RM45,500 in 20 years. (Compounding interest of 6%, Monthly savings of RM100 for 240 months)

2. That extra RM100 would have easily be used unnecessarily into items which is only temporary satisfaction for the individual. This may 'help the economy around', but not a good plan for that individual in the long run.

3. Your long term retirement plan will be slightly affected, and you will gradually see that there is getting harder and harder to achieve a retirement fund target that you are comfortable with.

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Should you want to maintain you EPF contribution at 11%, there is form for the employer to submit to EPF. You can find the link in EPF's website.


Next, I really should be writing on how to estimate your Retirement Goal.

Cheers
CK Lau

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