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Thursday, January 29, 2009
EPF vs KLCI - Part 2
I'm continuing from where I left last year regarding this topic .....links. No doubt, EPF is the safest bet for our retirement besides FD, which is why it is necessary for us to save some money in EPF. So this means that EPF is necessary.....only as retirement fund in which I would assume it will not be sufficient as well.
The debate on EPF and KLCI is actually started when our DPM announced that EPF contribution by employee can be reduced to 8% where the extra 3% can be use to spur the economy ....as if the 3% would make a different. Unless your annual income is more than RM75k, reducing to 8% only benefits the government. You only pay more income tax by reducing it to 8%. Take the following scenario:-
Annual income = RM55 000
a) EPF contribution (11%) = RM6 050 (max income tax deductable capped at 6k)
b) EPF contribution (8%) = RM4 400 (RM1 600 extra is taxable)
From the above scenario, by just changing the EPF contribution 3% less, you will have RM1600 extra, which is taxable, though you can invest the balance of the money on stock market.
Back to the topic, EPF vs KLCI. If I'm not mistaken, EPF gave high dividend before, which is about 6%-7%. And that is only for a year. After that, the dividend rate has been going down. So, we can have the assurance that given the best scenario, the EPF payout will be about 5%-7%, which will be almost the same as dividend counters at KLCI (this, provided you choose the correct counter). But with dividend counters, you can earn from two things....the dividend yield annually and the capital appreciation. So, in this case, which one is better? EPF or KLCI?
One might say that stocks will fluctuate according to the market environment. When the market is bearish, it will go down. The same actually applies to EPF. Where do you really think EPF make money from? The stock market actually. Think of EPF as a very very big capital unit trust or funds, then you'll get the picture. Which one would you prefer? Funds or stocks? For most, funds will yield better return due to lack of knowledge in the stock market, but for some, it will be like...."Why pay others when you can do it on your own?".
The conclusion is there is no right or wrong in this debate. EPF can yield more for those who do not really understand stock market, while for some, it will be KLCI getting better yield. It all boils down to own personal risk management. But given the current situation where we can reduce our EPF contribution to 8%, my advice is unless you are earning more than RM75k per annum, it will be wiser for you to stick with the current 11% plan as most of your additional 3% 'disposable income' will be taxed.