By LEE KEE CHUAN
THE money in your EPF account is the money that will feed you and your family from the day you retire until you pass on. It will be good if your children give you monthly allowances when you retire, but it may be prudent to plan your own retirement financial security.
Your EPF money, therefore, deserves your serious attention. There are unit trust fund promoters who will approach you to draw it out to invest in their EPF-approved unit trust funds.
The question is: Should you invest for potentially higher returns (by exposing your EPF money to higher risks) or should you just be content with the EPF dividend rate?
Firstly, let’s look at why EPF introduced such a scheme. According to the EPF website, the “EPF Member’s Investment Withdrawal scheme allows you to withdraw part of your savings in Account 1 for investments to increase your retirement fund to support your life after retirement.”
This means that you are given the opportunity to make your EPF money work harder for you.
The second reason is actually the most important. Inflation erodes your purchasing power. Over the last five years, EPF has distributed an average of 5.4% dividend annually while the inflation rate averaged 2.7%.
Thus you should make the best use of the withdrawal scheme allowed by EPF to ensure that you preserve the purchasing power of your EPF money in future.
Thirdly, you should let the power of compounding work for you.
Albert Einstein famously said: “Compound interest is the eighth wonder of the world. He who understands it, earns it.”
Thus you should let some of your EPF money compound at a higher rate of return.
Even a small positive difference in annual return can make a big difference over time. To give you a better idea of the power of compounding, let’s use the Rule of 72.
If your money earns 5% a year, it will double in 14.4 years. If it earns 7% pa, it will double in 10.28 years. For 9% pa return, your money doubles in eight years. If your return is 11% pa, it doubles in 6.55 years. If you earn 13% a year, your money doubles in just 5.54 years. (To calculate the number of years for your money to double, divide 72 by your rate of return.)
But before you start picking up your handphone to call your unit trust agent or if any overzealous unit trust agent shows you this article to convince you that you should invest with him or her, please finish reading the rest of this article.
Let me give you a word of caution first. To invest your EPF money successfully in unit trusts, you must follow the advice below as investing in any unit trust fund carries investment risk, meaning the price of unit may go up as well as down.
To help you decide whether using your EPF money to invest in unit trust is for you, I bring up these two points to help you.
Firstly, by withdrawing your EPF money and investing in unit trust, it will not earn you any EPF dividend. Add in the upfront sales charge by the fund house of 3%. This is the opportunity cost that you need to consider.
Secondly, there is the investment risk of unit trust funds that you must consider. There was a report in www.thestar.com.my way back in Aug 8, 2006 that reads: “The Government, alarmed over the more than half billion ringgit losses reported from investments in unit trusts involving Employees Provident Fund (EPF) contributors, has directed the EPF to impose stricter conditions on such investments.”
The same report also mentioned: “A Malay daily reported over the weekend that EPF contributors who invested an estimated RM600mil in unit trust schemes had suffered losses.”
Having said that, it is still a good idea to invest your EPF money in unit trust schemes to earn potentially higher returns. However, you must ensure the following few points are adhered to when you invest.
You must have an investment method to start with. The dollar cost averaging (DCA) is a good one to start but make sure you stick with it for years.
Those who withdraw a few times and then see if they make money will not benefit from cost averaging.
There was a case of an investor who religiously withdrew his EPF money every three months to invest in unit trusts in the last 11 years, starting in year 2000.
When he reviewed his investment in August this year due to the recent market turmoil, he was glad that his unit trust investment using his EPF yielded 6.95% compounded return.
This case shows that you must stick with a method that invests at regular intervals consistently over a considerable period to be successful in making your EPF money grow and increase your retirement fund.
This is because a regular investing method such as DCA can reduce the investment risk by diversifying the timing risk of investing.
How about investing your EPF money using value averaging (VA) regular investing method? If you have read my article two weeks ago in this column, you will know why VA is the smarter version of DCA.
By using the reconstructed data from the same case I mentioned above, the back testing done using value averaging on an EPF-approved Malaysian small cap fund is really interesting.
The VA method yielded annual compounded return of 13.21% over the similar period.
The result is consistent with the research done by Professor Paul Marshall, who concludes that value averaging does show a performance advantage over dollar-cost averaging, without incurring additional risk.
Value averaging investors sleep soundly at night. You deserve a good night sleep too. Start using VA.
• Lee Khee Chuan is a Chartered Financial Consultant, Certified Financial Planner and a Fellow of Life Management Institute, USA. He is a graduate in political science, psychology and economics from National University of Singapore. He can be contacted at 016-888 0138.
source: The Star