Financial Planning: Avoid dipping into retirement savings if possible, say financial planners

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 4, 2020 - May 10, 2020.

Photo by Haris Hassan/The Edge

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Retirees have been among the hardest hit by the restrictions on movement taken to contain the Covid-19 pandemic as their nest eggs shrink along with the dramatic decline in asset values. Even those who still have a job have seen their incomes plummet, making it harder for them to save and forcing many to tap into their retirement savings.

But is it wise to treat retirement savings as an emergency fund? While it is tempting and necessary in some circumstances, licensed financial planners Felix Neoh, Joyce Chuah and Marshall Wong advise people to hold out for as long as they can.

Wong likens the current Movement Control Order (MCO) to what retirement will look like. “No income, but we still have to put food on the table,” he points out.

That is why employees should not apply for the Employees Provident Fund’s (EPF) i-Lestari withdrawal facility, available since April 1, if they still have a job and some income coming in. “This scheme is timely for those who have no savings and no income as it provides them the option to withdraw money from their EPF account. However, if you do not need the extra RM500 a month to survive, do not apply,” says Wong, who goes by the social media moniker PlanNERD.

The government has sanctioned withdrawals of up to RM500 a month from EPF members’ Account 2 for Malaysian citizens, permanent residents and non-Malaysians aged 55 and below. It has also allowed those who have invested in Private Retirement Schemes (PRS) to withdraw up to RM1,500 from their sub-account B from April to December without incurring a tax penalty.

According to news reports as at April 17, some 1.5 million of the 2.8 million i-Lestari applications for May have been approved by EPF, involving withdrawals of RM702 million. The total withdrawals are estimated to reach RM40 billion.

Pension and provident funds in Australia, Brunei, India, Indonesia, the Philippines and Thailand have also introduced measures to alleviate the burden of their members.

“The i-Lestari scheme will help certain groups of people, but it will definitely create a dent in their retirement fund. If a person applies for the scheme and withdraws RM500 for the next 11 months, he would have about RM17,000 less than he would have originally had [without the withdrawals] in 20 years, assuming an average dividend rate of 5.6%,” says Wong. 

Chuah, who is CEO of Success Concepts Sdn Bhd, believes that retirement savings should be “put behind bars” until one reaches retirement. “EPF already allows for so many withdrawals. You can withdraw from Account 2 when you are buying a house or paying for your education. So, it is really not advisable to use it as an emergency fund,” she says.

Sometimes, however, long-term considerations are a luxury and the sheer necessity will force you to dip into your retirement savings to put food on the table today rather than think of the impact of these withdrawals 20 years from now. 

“If you cannot [save] and your cash flow situation is in doubt, then determine whether you are eligible for any of the benefits offered under the government’s Bantuan Prihatin Nasional,” says Neoh, who is director of financial planning at Finwealth Management Sdn Bhd.

However, if this is still insufficient, you can decide whether you should take advantage of the available schemes to access your own long-term savings — EPF and PRS withdrawals — or defer your regular financial commitments (such as loan payments) to weather the storm.

“To do this, you need to be aware of your cash flow situation. Is your income at risk? Are you in a cash surplus or deficit position? Is it possible for you to cut back on expenses or look for ways to boost revenue during the MCO period? If the answer is that you are still facing negative cash flow, then by all means go ahead and take up the available funding schemes to shore up your immediate financial position. However, if you decide to proceed, take only what you need,” says Neoh. 

According to EPF, members will need to have at least RM240,000 in their accounts by the age of 55 to support their basic needs for up to 20 years after retirement. 

“The withdrawal of up to RM5,500 under i-Lestari [if one were to apply for the maximum RM500 a month for 11 months] is 7% of the basic savings target, or 1.4 years’ worth of basic expenses. So, if you choose to withdraw from your EPF account, you will have to ensure that you increase your savings at a later stage or you may need to retire 1.4 years later than expected,” says Wong.

Alternatively, assuming that one withdraws the maximum amount of RM6,000 (from April 2020 to March 2021) and foregoes the benefit of compounding the savings at 5.5% per annum, one would have relinquished RM10,249 in 10 years and RM17,506 in 20 years, says Neoh. “While this may not seem like much, it is a sizeable sum when you compare this with EPF’s minimum basic savings amount at age 55, set at RM228,000, which only 31% of its members reportedly manage to achieve by the time they reach that age.” 

That is why Chuah says those who dip into their retirement fund should treat the money as a loan and replace it when possible. “If you have to break into your nest egg, please put it back when you can. You are not obligated to do so but when things are better, draw up a plan to replenish it. Look at it as a temporary loan, even though it is your money.”

Neoh also warns against making a monthly withdrawal of RM500 a part of one’s regular commitment going forward. “While making the i-Lestari withdrawal — for any purpose beyond making ends meet during this challenging time — remains an option, it should be given careful consideration. If you can justify and ensure that the funds will be channelled towards productive avenues to increase your net worth in the future, then it is a possible alternative,” he says. 

“However, you should ensure that the withdrawals do not become part of your monthly commitments going forward. Otherwise, you will face cash flow issues when the i-Lestari scheme comes to an end.” 

This is not the first time the government has resorted to reducing employees’ EPF contributions during challenging times, albeit in a bid to spur economic activity. “This happened in 2001, 2003, 2009 and 2016. The impact of accepting a similar scheme once may not seem overly disadvantageous, but the habit of taking it every time it is made available will indeed be negative on one’s retirement savings in the long run. Thus, members should inculcate the practice of prioritising their EPF savings to ensure retirement security,” says Neoh. 

Wong stresses the need for financial education. “It is important to remind Malaysians that their retirement fund is as important as their health. We may not be able to work forever. In fact, the implementation of the MCO is a good simulation of what retirement will look like if you do not have a sufficient pool of money.”