Financial Planning | Personal Finance | Article

Is Your EPF Savings Enough To Retire On?

by Marcus Lee | 15 Apr 2021 | 5 mins read

Saving for retirement is a must; we all know that. However, it’s hard to know how much we need to save exactly. We all have different life circumstances, different spending habits, and different needs, hence it’s almost impossible to come up with a one-size-fits-all “retirement number”.

While there’s a minimum retirement savings estimate provided by EPF — RM240,000 — it doesn’t fully account for the economic realities of the average urban Malaysian today.

RM240,000 translates to RM1,000 a month for 20 years in retirement. Given that the national average household expenditure stood at RM4,534 a month in 2019, RM1,000 monthly isn’t even sufficient today, much less in the future when prices of everyday items are expected to rise even higher.

Needless to say, RM240,000 is the bare minimum and most of us should be saving more than that in our EPF. The question is how much should you have in your EPF to ensure you’re on track towards a retirement that best suits your lifestyle and your needs?

Estimate how much you’ll need during retirement

Well, looking at your EPF balance alone wouldn’t tell you if you have enough for your retirement. You’ll first have to figure out how much exactly you need every month to live your ideal retirement.

A rule of thumb is that you’ll need 80% of your pre-retirement salary to pay for your expenses in retirement. This means that if you’re earning RM6,000 a month right before you retire, you’ll probably need RM4,800 a month during your retirement.

Of course, none of us knows with 100% certainty what our pre-retirement income will be, especially when we’re in our 20s and 30s. So, the next best thing would be to look at your current expenses.

With a clear picture of how much you’re spending now, you can determine how much you’ll need to save up to retire comfortably.

Keep in mind that your expenses will naturally change as you grow older and take on more commitments. So make sure to review your budget and savings every year to see if you need to adjust your retirement figure.

Calculate how much EPF savings to expect when you retire

Now that you’ve estimated how much you’ll spend in retirement, you should then calculate how much you should have in your EPF accounts.

Assuming that you’ll spend RM4,000 a month in retirement, here’s a simple back of the envelope calculation of how much EPF savings you need (if you’re only relying on your EPF funds in your retirement years):

RM4,000 x 12 months x 20 years = RM960,000

If you’re looking at your EPF balance right now, chances are you’re still a long way from RM960,000 if you’re in your 20s or 30s. However, as you’ll continue working for the next 30 to 35 years, you still have plenty of time to build your nest egg.

But how much more can your EPF savings grow?

Let’s assume that at 30 years old, your current EPF balance stands at RM100,000 and you’re earning RM5,000 a month.

If your monthly salary remains unchanged until you retire, your annual EPF contributions would total RM13,800 (12% of your salary contributed by your employer + 11% deducted from your gross salary x 12 months).

With a 5% annual return, you’ll have RM997,269 by the time you’re 55 years old.

Congratulations! That RM997,269 can cover your retirement expenses of RM960,000 with RM37,269 to spare!

And if you’re not up to manual calculations, use an online retirement calculator to project how much you’ll have in your EPF based on your current salary.

Do note that the simple calculations above don’t account for:

  1. inflation,
  2. increases in your salary or EPF contributions, and
  3. increases in your expenses due to lifestyle changes and unforeseen circumstances.

EPF dividend rates are also not guaranteed at 5%. According to Section 27 of the EPF Act 1991, the guaranteed minimum dividend rate is just 2.5% per year. Anything above that is subject to EPF’s investment income. But the good news is that EPF rates in the last decade have hovered above 5%.

Despite the caveats to the calculations, doing this is a good starting point to help you visualise whether you’ll have enough in your EPF for retirement.

Not enough EPF savings for retirement? Here’s what you can do

If you find that your EPF savings won’t be enough to cover your expenses in retirement based on the projections you’ve done, you may want to ask yourself these questions:

  1. Are there ways you can cut back on your expenses so that you can put more money towards your savings?
  2. Do you have other investments that can also grow exponentially over time that can supplement your EPF savings?
  3. Are there ways you can earn more money or increase your salary?

Though it’s discouraging to find that you don’t have enough in your EPF to retire comfortably, the good news is that it’s not too late to take action. You have time to build up your retirement savings.

So, map out a plan to cut your expenses, increase your income, and invest your savings. Once implemented, you’ll eventually get back on track towards the retirement of your dreams, whether that’s with your EPF savings alone or supplemented by your savings elsewhere.