MPU3353 – Personal Financial

Planning in Malaysia

Topic 13- The Retirement Planning

Process
 Learning Objectives

 Understand the changing nature of retirement planning.

 Set up a retirement plan.
 Contribute to a tax-favored retirement plan to help fund
your retirement.
 Choose how your retirement benefits are paid out to
you.
 Put together a retirement plan and effectively monitor it.

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 Why Retirement Planning?

MISCONCEPTIONS ABOUT RETIREMENT PLANNING

–My expenses will decrease when I retire

–My retirement will only last 15 years

–Social Security & my company pension will pay for my

basic living expenses

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 Why Retirement Planning?

– My pension benefits will increase to keep pace with

inflation

– My employers health insurance plan and Medicare will

cover my medical expenses

– There’s plenty of time for me to start saving for

retirement

– Saving just a little bit won’t help

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 Why Retirement Planning?

THE IMPORTANCE OF STARTING EARLY

To take advantage of the time value of money
 If from age 25 to 65 you invest $300 a month (@ a
9% return), then at age 65 you’ll
have a nest egg of $1.4 million
 Wait ten years until age 35 to start $300-a-month
investing and you’ll have about $550,000 at age 65
 Wait twenty years to begin investing $300-a-month at
age 45 and you’ll have only $201,000 at age 65

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Sources of
Retirement Income

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 Key retirement planning
decisions
 Which retirement plan to pursue. If your
employer offers a retirement plan, it should be
the first plan you consider because your
employer will likely contribute to it.

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 Key retirement planning
decisions
 How much to contribute.
Some retirement plans give individuals the freedom to contribute
as much as they like up to a specified maximum level. While
you do not necessarily know how much money you will need
at retirement, you can calculate the amount of your savings
based on annual contributions. Variables to consider when
deciding how much to save are whether you will be supporting
anyone besides yourself at retirement, your personal needs,
the expected price level of products at the time of your
retirement, and the number of years you will live in retirement.

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 Key retirement planning
decisions
How to invest your contributions.
With a defined-contribution plan, you do not need to worry about the tax
consequences of your investment; all the money you withdraw at
retirement will be treated as ordinary income for tax purposes.

Most financial advisors suggest a diversified set of investments. In

general, stocks generate higher long-term returns, but bonds provide
some balance in case stocks perform poorly. Your retirement plan should
consider the number of years to retirement.
If you are far from retirement, riskier investments that bring higher returns
are in order. As you get closer to retirement, your investment choices
should become more conservative.

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 Employer-Sponsored
Retirement Plans
 Defined-benefit plans
 Specifies monthly benefit you will receive at retirement
 Defined-contribution plans
 Specifies amount you pay today
 Future benefits are uncertain
 Allows you to invest the funds as you wish

 Supplementary savings plans - Private Retirement Scheme

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 Employer-Sponsored Retirement
Plans
 Designed to help you save for retirement
 Employees and/or employers contribute
 A penalty is imposed for early withdrawal
 Your contributions are tax-deferred, but
taxed as ordinary income when withdrawn
after retirement if age is below 60.

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 Employer-Sponsored Retirement
Plans
Pensions received by an individual are exempt under
the following conditions:
Retires at the age of 60 or at the compulsory age of
retirement under any written law; or
Retires due to ill health.

For an employee in the public sector who elects for

optional retirement, his pension will be taxed until he
attains the age of 60
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 Employer-Sponsored
Retirement Plans (cont’d)
 Defined-benefit plan: an employee-sponsored
retirement plan that guarantees you a specific
amount of income when you retire based on
your salary and years of employment
 Vested: having a claim to a portion of the
money in an employer-sponsored retirement
account that has been reserved for you upon
your retirement even if you leave the company

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 Defined-Benefit Plans

 You receive a promised or “defined”

payout at retirement.
 Usually non-contributory retirement plans,
where you do not need to pay into them.
 Payout is based on age at retirement,
salary level, and years of service.

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 Defined-Benefit Plans

 Employer bears investment risk – you’re

guaranteed the same amount regardless
of how the stock or bond markets perform.
 Plans lack portability – cannot take the
plan with you when you leave.
 Not all are funded pension plans, with
unfunded plans paid out of firm’s earnings.

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 KWAP (Kumpulan Wang
Persaraan Perbadanan)

 This is a government pension plan for civil servant

.
 It is a defined benefit retirement plan. Rate of
Contribution is 17.5% of the pensionable
employee's basic salaries.
 KWAP or the Retirement Fund (Incorporated) was established
on 1st March 2007 under the Retirement Fund Act 2007(Act
662) replacing the repealed Pensions Trust Fund Act 1991
(Act 454).

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 Functions of KWAP

The functions of KWAP are as follows:

Management of contributions from the Federal Government,
Statutory Bodies, Local Authorities and other Agencies;

Administration, management and investment of the Fund in

equity, fixed income securities, money market instruments
and other forms of investments as permitted under the
Retirement Fund Act 2007 (Act 662).​​
​

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Employer-Sponsored
Retirement Plans (cont’d)
 Defined-contribution plan: an
employer-sponsored retirement plan
that specifies guidelines under which
you and/or your employer can
contribute to your retirement account
and that allows you to invest the funds
as you wish

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 Defined-Contribution Plan

 Your employer alone, or in conjunction

with you, contributes directly to an
individual account set aside for you.
 It is like a personal savings account but
your eventual payments are not
guaranteed.
 What you receive depends on how well
the account performs.
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 Employee Provident Fund
(EPF/KWSP)
 The Employees Provident Fund Act 1991 (Act
452) provides retirement benefits for members
of the EPF through management of their
savings contributions.
 The EPF (also called the KWSP) is a social
security institution which administers their
members retirement fund using a defined
contribution plan

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 Employee Provident Fund
(EPF/KWSP)
 EPF is different from a government pension
which is a defined benefit retirement plan.
 The main difference is that with the EPF, your
final payout is determined by the contributions
(from both you and your employer) and the
investment returns, and with a public pension the
final payout is fixed and your pension becomes a
liability to the Public Services Department

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 Employee Provident Fund
(EPF/KWSP)
Rate of Contribution to the EPF

For employees earning below RM5,000, the portion

of employee's contribution is 11% of their monthly
salary while the employer contributes 13%.
For employees who receive wages/salary exceeding
RM5,000 the employee's contribution of 11%
remains, while the employer's contribution is 12%.

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 Employee Provident Fund
(EPF/KWSP)
Dividend
Your contributions kept in the EPF will accumulate
and draw dividends every year. Thus, your
savings will increase from year to year until you
retire and withdraw all your savings. The EPF
act guarantees a minimum of 2.5% Dividend
annually.

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 Income entitled to EPF
Contributions
 Salary
 Payment for unutilised annual or medical leave
 Bonus
 Allowance (except travelling allowance)
 Commision
 Incentive
 Arrears of wages
 Wages for maternity leave
 Wages for study leave
 Wages for half day leave
 Other payments under services contract or otherwise

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 Employee Provident Fund
(EPF/KWSP)
Tax Incentive
Your share of contributions to the EPF is tax deductible up
to RM6,000 (inclusive of life insurance premiums).

In addition, the savings that you withdraw under the

various withdrawal schemes are also exempted from
income tax.

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Private Retirement Scheme
(PRS)

PRS is a defined contribution pension

scheme which allows people (or their
employers) to voluntarily contribute
into an investment vehicle for the
purposes of building up their retirement
income.

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 Private Retirement Scheme
(PRS)

 In a Malaysian retirement framework, it is to be

complemented with (and not a substitute for)
the mandatory contributions made by both
employee and employers to the EPF scheme.
 Having a voluntary scheme in addition to the
EPF also allows private company employees
and self-employed persons to voluntarily
contribute towards their retirement in a
systematic way.
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 Similarities of PRS with the
EPF:

1. Retirement Purpose: Both the EPF and PRS

schemes are for building up a person's
retirement assets and income.
2. Tax Benefit: Tax relief is given for contributions
to both schemes (up to RM6,000 a year for
EPF, a seperate RM6,000 for PRS)

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 PRS Providers

The PRS Providers are fund management firms which are approved by the
PRS administrators to manage the investment vehicles that contributions get
paid into.
The eight PRS Providers approved (as of 25th April 2013) are:

AmInvestment Management Sdn Bhd;

AIA Pension and Asset Management Sdn. Bhd

CIMB-Principal Asset Management Berhad

Affin Hwang Asset Management Berhad

Manulife Asset Management Services Berhad 

Public Mutual Berhad

RHB Asset Management Berhad

Kenanga Investors Berhad

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 Tax Benefits

 In the Malaysian Government's Budget

2012, there is a specified tax relief of up to
RM3,000 for 10 years beginning 2012 for
contributions to the PRS. This is similar to
the tax relief given to EPF contributions.
 A tax exemption is also given on all income
generated by the PRS Funds.
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 PRS vs EPF: A Summary
PRS vs EPF: A Summary

PRS vs EPF
Feature Differences PRS EPF
Contribution Type Voluntary Mandatory

No statutory minimum or Statutory minimum (11%

Contribution Amount
maximum Employee, 12-13% Employer)

Contribution Frequency No statutory interval Statutory Monthly Contribution

Contribution Paid to Individual PRS Providers EPF Directly

Yearly Personal Tax Relief RM3,000 RM3,000

From Sub-Account B only, and Account 2 only, specific reasons

Partial Withdrawal
8% Tax Penalty no penalty

Freedom of Selection (among Freedom only on Partial Amount

Selection of Fund Investments
PRS Providers) (EPF-MIS)

No statutory minimum
Dividend Policy (depends on Fund Minimum 2.5% p.a.
performance)

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 Your Retirement Planning
Decisions
 Which retirement plan should you pursue?
 An employer-sponsored plan is usually the best
choice if your employer contributes
 How much to contribute?
 As much as you can as early as you can!
 Social Security will not provide sufficient funds
 Increase contribution as salary increases

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 Facing Retirement – The
Payout

 Your distribution or payout decision affects:

 How much you receive
 How it is taxed
 Whether you are protected against inflation
 Whether you might outlive your retirement
funds

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An Annuity or Lifetime
Payments
 Single Life Annuity – receive a set
monthly payment for your entire life.
 Annuity for Life or a “Certain Period” –
receive payments for life. If you die
before the “certain period,” your
beneficiary receives payment until that
“certain period.”

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An Annuity or Lifetime
Payments
 Joint and Survivor Annuity – provides
payments over the lives of you and your
spouse.
 Options:

 50% survivor benefit – pays 50% of

original annuity to surviving spouse.
 100% survivor benefit – continues to
benefit the surviving spouse at the same
level.
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 Annuity

Advantages Disadvantages
 Receive benefits  No inflation protection.
regardless of how long  Not flexible in the case
you live. of an emergency.
 May pay medical  Difficult to leave money
benefits while payout is to heirs.
being received.

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 A Lump-Sum Payment

 Receive benefits in one single payment.

 You must make the money last for your

lifetime, and for your beneficiaries after you
are gone.

 You can invest the money as you choose.

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 Putting a Plan Together
and Monitoring It

 Most individuals will not have a single source

of retirement income.
 Investment strategy should reflect investment
time horizon.
 As retirement nears, switch to less risky
investments.
 Monitor before and after retirement.

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Pay Now, Retire Later

Step 1: Set Goals

 Figure out what you want to do when you retire.

 How costly a lifestyle will you lead?
 Do you want to live like a king?
 Do you have costly medical conditions?
 Will you relocate or travel?

 Decide on the time frame for achieving your

goals.

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 Pay Now, Retire Later

Step 2: Estimate How Much You Will Need

 Turn your goals into dollars by estimating how much
you will need.
 Begin with living expenses, calculate the cost to
support yourself, and don’t forget about paying
taxes.

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 Pay Now, Retire Later

Step 3: Estimate Income at Retirement

Once you know how much you need, figure out how
much you’ll have.
Estimate Social Security benefits and determine what
your pension will pay.

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 Pay Now, Retire Later

Step 4: Calculate the Inflation-Adjusted Shortfall

Compare the retirement income needed with the retirement
income you’ll have.

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 Pay Now, Retire Later

Step 5: Calculate How Much You

Need to Cover This Shortfall

Know your annual shortfall.

Decide how much must be saved by retirement to
fund this shortfall.

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 Pay Now, Retire Later

Step 6: Determine How Much You Must

Save Annually Between Now and
Retirement

 Put money away little by little, year by year.

 Cannot make up the shortcoming in all at once.

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 Pay Now, Retire Later

What Plan Is Best For You?

 Many options are available.
 Most plans are tax-deferred, earnings go
untaxed until removed at retirement.
 Advantages of tax-deferred plans:
 Contribute more because they may be untaxed.
 Earn money on money that would have gone to
the IRS.

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 Estimating Your
Future Retirement Savings
Estimating the future value of one investment
Example:

You consider investing $5,000 this year, and this

investment will remain in your account until 40
years from now when you retire. You believe that
you can earn a return of 6% per year on your
investment. Using FVIF, you expect the value of
your investment in 40 years to be:
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 Estimating Your Future
Retirement Savings (cont’d)
Value in 40 years = Investment x FVIF (i = 6%, n = 40)
= $5,000 x 10.285
= $51,425

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Estimating Your Future
Retirement Savings (cont’d)
 Estimating the future value of a set of
annual investments
 Relationship between size of annuity
and retirement savings
• If you invested $3,600 per year for 40
years, your return at 8%, you would have:
$5,000 x 259.06 = $1,295,300

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Estimating Your Future
Retirement Savings (cont’d)
 Relationship between years of saving
and your retirement savings
• If you invested $5,000 for 30 years
instead of 40 years, your savings would
be only $395,000 (assuming a 6% annual
return)

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 Possible Complications
Checklist
 Changes in inflation can have drastic effects on your
retirement.
 Once you retire, you may live for a long time.
 Monitor your progress and monitor your company.
 Don’t neglect insurance coverage.
 An investment planning program may make things easier.

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 Key retirement planning
decisions
1) Which retirement plan to pursue. If your
employer offers a retirement plan, it should be
the first plan you consider because your
employer will likely contribute to it.

13-51
 Key retirement planning
decisions
2) How much to contribute.
Some retirement plans give individuals the freedom to contribute as
much as they like up to a specified maximum level. While you do not
necessarily know how much money you will need at retirement, you
can calculate the amount of your savings based on annual
contributions.

Variables to consider when deciding how much to save are whether

you will be supporting anyone besides yourself at retirement, your
personal needs, the expected price level of products at the time of your
retirement, and the number of years you will live in retirement.

13-52
 Key retirement planning
decisions
3) How to invest your contributions.
With a defined-contribution plan, you do not need to worry about
the tax consequences of your investment; all the money you
withdraw at retirement will be treated as ordinary income for tax
purposes. Most financial advisors suggest a diversified set of
investments. In general, stocks generate higher long-term returns,
but bonds provide some balance in case stocks perform poorly.
Your retirement plan should consider the number of years to
retirement. If you are far from retirement, riskier investments that
bring higher returns are in order. As you get closer to retirement,
your investment choices should become more conservative.

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End of Lecture

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