The introduction of Account 3 within the Employees Provident Fund (EPF) earlier this year sparked a wave of interest among Malaysians. This new account offers the flexibility to access a portion of their savings for emergencies, settling debt, or immediate needs, which is a welcome addition. However, many are also curious about its potential for investment purposes.
Perhaps you’re drawn to the possibility of accelerating your wealth growth, yet unsure if the security offered by the EPF is outweighed by possibilities elsewhere. Maybe you’re excited about the influx of new investment options, but worried about falling victim to scams.
This guide walks you through 4 key considerations to protect and grow your retirement funds effectively if you’re planning to utilise your EPF Account 3 as part of long-term investment planning.
Why Some Malaysians Keep EPF Savings Intact
- Security: EPF protects your savings from fraud, scams, and bankruptcies.
- Predictability: You benefit from minimum guaranteed dividends of 2.5% and historical returns of 5–6%.
- Peace of Mind: Your money is managed conservatively without requiring you to actively monitor investments.
Still, EPF alone may not be enough to meet your retirement funding goals if your personal inflation exceeds your returns.
Limitations of EPF
1. Returns May Not Keep Pace with Inflation
While the EPF offers a secure and low-risk environment for your retirement savings, it’s important to acknowledge a potential limitation: keeping pace with inflation.
The EPF’s historical returns, typically ranging from 5–6%, might not always outpace inflation, particularly in urban areas where the cost of living can be higher.
For instance, if you receive a 5% return on your EPF savings but your personal inflation is running at 6%, your money’s purchasing power is effectively stagnant. Even though the balance shows a positive return, it won’t buy you the same amount of goods and services as it did the previous year.
This is where exploring alternative investment options outside the EPF becomes a consideration for some individuals. These individuals might be seeking potentially higher returns, like a 9% return.
In such a scenario, even after accounting for inflation (say 6%), you would still experience a net gain of 3% and achieve some level of compounding growth for your retirement savings.
2. One-Size-Fits-All Investment Approach
Another limitation of the EPF system is its one-size-fits-all approach to investment. The EPF employs a general investment strategy that may not align with your individual risk tolerance or financial goals.
For instance, if you’re young and have a long time horizon until retirement, you might be comfortable taking on a higher risk profile to potentially achieve greater returns. In such a scenario, the EPF’s conservative strategy might not be ideal.
Additionally, the EPF may not cater to the latest investment trends like robo-advisors, cryptocurrency, or artificial intelligence (AI)-powered investment options. These options, while potentially risky, might appeal to individuals seeking a more cutting-edge approach to growing their wealth.
4 Critical Factors Before Investing Your EPF Account 3 Funds
As such, if you plan to invest out of the secure environment that EPF has provided and are considering investing your Account 3 money elsewhere, here are some things you need to know:
1. Safety of investment – The SRB approach
When exploring investment options outside the EPF, safety remains a paramount concern.
Drawing from Whitman’s SRB standard for retirement investing, there are 6 key criteria that should be considered when evaluating the safety of an investment for your retirement funds:
Regulated Investment Product: Regulated by the Securities Commission (SC) or Bank Negara Malaysia (BNM).
Third-Party Trustee or Custodian: Look for investments that hold your money with a third-party trustee or custodian.
Avoid Leverage/Margin Financing: Steer clear of investments that utilise leverage or margin financing.
Clear and Solid Underlying Assets: Choose investments that focus on tangible asset classes with a proven track record of continuous growth over time (may include bonds, stocks, real estate, or commodities).
Moderate Risk/Return Profile: Balance risk with potential rewards. Aim for a moderate risk/return profile, targeting an annualised return of around 7-9%, which offers a balance between growth and security for your retirement savings.
Regulated Provider or Platform: Be wary of online scams and dubious investment platforms. Only invest through platforms regulated by local authorities like the SC or BNM.
Remember, a secure investment approach is critical when dealing with your hard-earned retirement savings.
Key takeaway – the 6 criteria of a safe investment using Whitman’s SRB model:
- Is it a regulated investment product?
- Is there a third-party trustee or custodian?
- Does it avoid leverage or margin financing?
- Does it have clear, solid underlying assets?
- Does it offer a moderate risk/return profile?
- Is the provider regulated?
2. Target Return Outpaces Inflation with Growth Potential
When investing, it’s essential to choose options that can outpace inflation and offer growth potential.
A typical mistake many individuals make is withdrawing funds from their EPF accounts and placing them in fixed deposits (FD). Fixed-income options like bonds or fixed deposits (FDs) may provide security, but their returns, often around 4%, may not be sufficient to keep up with inflation over the long term.
To avoid this pitfall and achieve your desired retirement savings, target investments with annualised returns of around 8-10%, such as stocks, unit trusts, ETFs, or robo-advisors. These options offer greater potential to outpace inflation and ensure your money grows effectively over time.
Key takeaway: Choosing investments that outpace inflation is key to retirement optimisation and preserving your lifestyle.
3. Investment Must Rise and Be Sustainable in the Long Term
Focus on investments with a proven track record of steady growth, such as blue-chip stocks from well-established companies (these companies consistently provide dividends and increase in share price over the long term, making them more suitable for your retirement savings) or real estate in high-demand areas (thorough research on location and market trends is essential before investing in property).
Conversely, avoid high-volatility investments like small-cap stocks, which can experience significant price fluctuations and may not see substantial growth over 20 years.
Key takeaway: Prioritise investments with a history of stable, long-term growth and reliable income so your savings can grow confidently alongside inflation.
4. Focus on Long-Term Retirement Goals
Always remember, when you invest your EPF money, you’re committing to a long-term time horizon.
These funds are meant to grow steadily and securely for your future retirement, not for short-term spending sprees. Avoid the temptation to invest these funds in short-term desires like a European vacation or a home renovation (goals with a 2-year timeframe).
While investing for a trip or renovation might seem like a good use of your money in the short term, these have a vastly different time horizon compared to retirement planning. The time horizon is a crucial aspect of your retirement fund. You must prioritise long-term growth over short-term gains.
Key Takeaway: 4 Things To Consider Before Investing Your EPF Account 3 Funds
- Safety Of Investments (Use Whitman’s SRB Approach)
- Choose Investments That Can Outpace Inflation (Target Investments With 8-10% Annual Returns)
- Focus On Investments with a Proven Track Record of Steady Growth
- Prioritise Long-Term Growth Over Short-Term Gains
Navigating your investment options
To sum it up, if you’re considering utilising Account 3 to invest for potentially higher returns and greater diversification, remember that the investment world can be complex and confusing. Losses are a possibility, as shown by recent investment scams involving even national athletes. It’s crucial to be vigilant and have a solid investment plan.Consulting a qualified independent financial advisor can help you navigate investment options, manage risks, and make informed decisions. By taking a prudent and well-informed approach, you can harness the benefits of both EPF and external investments to secure a comfortable and prosperous retirement.
This article is based on a published editorial. Read the full article: Investing Money from Your EPF 3rd Account for Better Returns