CHAPTER-7-Retirement-Planning-1.pdf

Chapter 7 : Syllabus . Retirement & Pension Planning CHAPTER 8 Prepared by: Nur Liyana Mohamed Yousop Introduction to Retirement Plan PRINCIPLE OF RETIREMENT PLAN Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve t...

Chapter 7 : Syllabus . Retirement & Pension Planning CHAPTER 8 Prepared by: Nur Liyana Mohamed Yousop Introduction to Retirement Plan PRINCIPLE OF RETIREMENT PLAN Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program and managing assets. Future cash flows are estimated to determine if the retirement income goal will be achieved. PRINCIPLE OF RETIREMENT PLAN Creation of awareness of financial requirements for retirement • Most Malaysian are unaware of retirement plan Some principles involved in retirement planning are: Retirement needs plan • Most of Malaysia do not have concrete plans on the target amount and how much they need to set aside Impact of inflation • Should save more money in future PRINCIPLE OF RETIREMENT PLAN Overcoming the following obstacles to retirement saving: Some principles involved in retirement planning are: • Tendency to use income to support current standard of living • Unexpected expenses • Inadequate insurance coverage • Tendency to use retirement funds to other purposes Retirement objectives need to be ranked • • • • • Maintaining pre retirement standard of living Maintaining economic self sufficiency Minimizing taxes Retiring early Passing wealth to others 4 STEPS RETIREMENT INCOME PLANNING PROCESS Planning for Retirement PLANNING FOR RETIREMENT There are a few basic needs that you will require in your golden years. You will definitely need a place to live and enough money to cater for expense such as day-to-day expenditure as well as some ‘reserves’ to take care of unplanned needs such as medical bills and emergencies. Depending on the lifestyle you are used to, you may have a longer list. IMPORTANCE & FITFALLS Importance of Retirement Planning • To live a comfortable standard of living during retirement • To determine level of income needed during retirement Pitfalls to Sound Retirement Planning • Start to late • Put away too little • Invest too conservatively PLANNING FOR RETIREMENT One thing that you don’t need when you retire is unsettled debts. This is all the more reason for you to start planning for your retirement early. As you work towards securing all that you want to have in your retirement years, you may need to take up loans to finance your purchases. Ideally, all these loans should be settled by the time you retire so that you will be free of debt. PLANNING FOR RETIREMENT Employers Insurance companies Retirement plans may be set up by: The government or other institutions Personal investment Employees Providence Funds (EPF) PLANNING FOR RETIREMENT • In Malaysia, one piece of good news is that the Employees Providence Fund (EPF) can help. • Although your EPF savings is primarily meant for your use in your retirement years, you are allowed to utilize part of the savings to help you prepare for that eventuality. OVERVIEW OF THE EPF The EPF is a social security institution formed according to the Laws of Malaysia, Employees Provident Fund Act 1991 (Act 452) EPF provides retirement benefits for members through management of their savings in an efficient and reliable manner. EPF also provides a convenient framework for employers to meet their statutory and moral obligations to their employees. WHO ARE EPF MEMBERS? Private and NonPensionable Public Sector employees. The EPF, as at December 2015, has a total of 14.55 million members. The total number of active and contributing members is 6.79 million. The total number of active employers is 536,489. EPF MANDATORY CONTRIBUTION A contribution constitutes the amount of money credited to members' individual accounts in the EPF. The amount is calculated based on the monthly wages of an employee. Current contribution rate is in accordance with wage/salary received. For employees who receive wages/salary of RM5,000 and below, 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% EPF INVESTMENT ALLOCATION • Your monthly contributions are invested in a number of approved financial instruments to generate income. • They include Malaysian Government Securities, Money Market Instruments, Loans & Bonds, Equity and Property. EPF DIVIDENDS • The EPF ensures that your savings are secure and receive reasonable dividends. • In fact, it guarantees a minimum of 2.5 Per Cent Dividend annually. • To ensure dividend payments, the EPF invests your contribution in approved financial instruments for optimum returns. • Dividends are paid annually into your account. The dividend rate declared by the EPF is subject to the returns from investments made in the approved instruments. • Annual Dividends, on the one hand, are calculated based on the opening balance of your savings as at 1 January of each year. • Monthly Dividends credited into your account, on the other hand, are based on the monthly contributions received. WHY YOU SHOULD BECOME AN EPF MEMBER? As an employee, you are required to contribute to the EPF under the EPF Laws, which are intended to protect your interest beyond your working life. In the absence of source of income or savings, the EPF savings will at least provide some financial security for you when you are no longer employed. With adequate savings, you will be able to have a comfortable retirement life and need not depend on others for financial support. MAKING NOMINATION EPF allows member to make nomination to cater for the unfortunate event. Through nomination, rest assured that savings in the EPF account will be distributed to the loved ones the way we would have wanted it to be when we are no longer around. Encouraged to make nomination as soon as possible – need to be 18 years old and older to be able to make nomination. Can change the nominations any time before retire. For Muslim Members, the nominated person will be the administrator who will manage the withdrawal of the savings in the event of your death. EPF Withdrawals TYPES OF EPF WITHDRAWALS HOUSING WITHDRAWALS HOUSING WITHDRAWALS TERMS & CONDITIONS Link:  Withdrawal to Purchase a House (2016)  Withdrawal to Build a House EPF WITHDRAWALS • Scenario 1: Individual purchase + housing loan Encik Adim bought a house costing RM100,000 and obtained a housing loan of RM90,000. His balance in Account 2 is RM30,000. The amount that he can withdraw is: House Price (-) Housing Loan The Difference (+) 10% of The House Price Amount Eligible for Withdrawal Balance in Account 2 Amount can be Withdrawn RM100,000 90,000 10,000 10,000 20,000 30,000 20,000 EPF WITHDRAWALS • Scenario 2: Individual purchase + without housing loan Encik Adim bought a house costing RM100,000 without a housing loan. His balance in Account 2 is RM30,000. The amount that he can withdraw is: House Price (-) Housing Loan The Difference (+) 10% of The House Price Amount Eligible for Withdrawal Balance in Account 2 Amount can be Withdrawn RM100,000 0 100,000 10,000 110,000 30,000 30,000 EPF WITHDRAWALS • Scenario 3: Joint purchase + housing loan Encik Adim and Puan Lili bought a house costing RM220,000 obtained a housing loan of RM200,000. The balance in Account 2 for Encik Adim, is RM15,000 and Puan Lili has RM10,000. The amount that he can withdraw is: House Price (-) Housing Loan The Difference (+) 10% of The House Price Amount Eligible for Withdrawal Balance in Account 2 Amount can be Withdrawn RM220,000 200,000 20,000 22,000 42,000 25,000 25,000 EPF WITHDRAWALS • Scenario 4: Buying a piece of land or housing lot and build a house simultaneously (within 2 years) Encik Adim bought a piece of land costingRM50,000 on January 1, 2016 and took a bank loan of RM40,000. On March 2016, he took a housing loan from the bank for RM100,000 and signed an agreement with a contractor, who charged him construction cost of RM110,000 to build the house. He has RM20,000 balance in Account 2. EPF WITHDRAWALS • Scenario 4: Buying a piece of land or housing lot and build a house simultaneously (within 2 years) • The amount that he can withdraw is: Land Price (+) House Construction Cost Total of Land Price and Construction Cost (-) Total Loan for Buying Land and Construction Cost The Difference (+) 10% of the Total Costs Amount Eligible for Withdrawal Balance in Account 2 Amount can be Withdrawn RM50,000 110,000 160,000 140,000 20,000 16,000 36,000 20,000 20,000 EPF WITHDRAWALS • Scenario 5: Buying a piece of land or housing lot and build a house simultaneously (more than 2 years) Encik Adim bought a piece of land costing RM50,000 on December 2013 and took a bank loan of RM40,000. On November 2016, he took a housing loan from the bank for RM100,000 and a contractor charged him construction cost of RM110,000 to build the house. He has RM20,000 balance in Account 2. EPF WITHDRAWALS • Scenario 5: Buying a piece of land or housing lot and build a house simultaneously (more than 2 years) • The amount that he can withdraw is: Land Price (+) House Construction Cost Total of Land Price and Construction Cost (-) Total Loan for Buying Land and Construction Cost The Difference (+) 10% of the Total Costs Amount Eligible for Withdrawal Balance in Account 2 Amount can be Withdrawn RM50,000 110,000 160,000 140,000 20,000 11,000 31,000 20,000 20,000 EPF WITHDRAWALS • Scenario 5: House purchase + other withdrawals Encik Adim bought a house costing RM100,000 RM90,000. and obtained a housing loan of At the same time, he intends to withdraw RM5,000 to support his children’s education fees. His balance in Account 2 is RM30,000. EPF WITHDRAWALS • Scenario 5: House purchase + other withdrawals The amount that he can withdraw is: House Price (-) Housing Loan The Difference (+) 10% of The House Price Amount Eligible for Housing Withdrawal (+) Education Withdrawal Total Amount to Withdraw Balance in Account 2 Amount can be Withdrawn RM100,000 90,000 10,000 10,000 20,000 5,000 25,000 30,000 25,000 PAST SEM QUESTIONS December 2013, Q4c (10 marks) June 2013, Q3a(ii) (7 marks) INVESTMENT WITHDRAWALS INVESTMENT WITHDRAWALS TERMS & CONDITIONS Link:  Member’s Saving Investment Withdrawals BASIC SAVINGS Basic Savings is a pre-determined amount set according to age in Account 1 to enable members achieve a minimum savings of at least RM196,800 when they reach age 55. Prior to reaching age 55, members are not allowed to withdraw their savings. The Basic Savings quantum is benchmarked against the minimum pension of RM820 per month for 20 years to support their basic retirement needs. BASIC SAVINGS The Basic Savings Schedule as follows:- EPF SAVINGS WITHDRAWALS Question: 1. Determine whether these members are eligible to withdraw their Account 1 for investment purposes 2. Provide reasons why they are eligible or not eligible Member Ibu Age 52 Savings in Account 1 (RM) 82,000 Basic Savings (RM) 102,000 Ayah 55 140,000 120,000 Kakak 27 36,000 12,000 Abang 32 43,000 22,000 Adik 19 11,000 2,000 EPF SAVINGS WITHDRAWALS Member Age Savings in Account 1 (RM) Basic Savings (RM) Computation: (Savings in Acct 1 – Basic Savings) x 20% Ibu 52 82,000 102,000 - Ayah 55 140,000 120,000 (140,000 – 120,000) x 20% = RM4,000 Member’s Eligibility Not eligible Savings < Basic Savings Eligible 1)Savings > B.Savings 2)Amount to withdraw > RM1,000 3)Balance a/c 1 = 140,000 -4,000 = RM136,000 EPF SAVINGS WITHDRAWALS Member Age Savings in Account 1 (RM) Basic Savings (RM) Computation: (Savings in Acct 1 – Basic Savings) x 20% Kakak 36,000 12,000 (36,000 – 12,000) x 20% Eligible = RM4,800 1)Savings>B.Savings 2)Amount to withdraw > RM1,000 3)Balance a/c 1 = 36,000 -4,800 = RM31,200 27 Member’s Eligibility EPF SAVINGS WITHDRAWALS Member Age Savings in Account 1 (RM) Basic Savings (RM) Computation: (Savings in Acct 1 – Basic Savings) x 20% Abang 43,000 22,000 (43,000 – 22,000) x 20% Eligible = RM4,200 1)Savings>B.Savings 2)Amount to withdraw > RM1,000 3)Balance a/c 1 = 43,000 -4,200 = RM38,800 32 Member’s Eligibility EPF SAVINGS WITHDRAWALS Member Age Savings in Account 1 (RM) Basic Savings (RM) Computation: (Savings in Acct 1 – Basic Savings) x 20% Adik 11,000 2,000 (11,000 – 2,000) x 20% Eligible = RM1,800 1)Savings>B.Savings 2)Amount to withdraw > RM1,000 3)Balance a/c 1 = 11,000 -1,800 = RM9,200 19 Member’s Eligibility INVESTMENT WITHDRAWAL The amount of savings that can be invested must not be less than RM1,000 and not more than 20 per cent of the amount exceeding the required basic savings in Account 1. Investment withdrawals can be made every 3 months after the date of the last application is approved, subject to the availability of the required balance in Account 1. SCENARIO • Hayyu is 40 years old and has RM150,000 in his EPF Account 1. • She wishes to invest in Amanah Saham Malaysia. • She is trying to calculate the maximum that she can invest and also she wishes to continue investing every three(3) months starting September 2015 until May 2016. • Show details of the amount available and the amount she can invest in ASM for the period mentioned. SOLUTION September 2015 RM150,000 44,000 (150,000 – 44,000) x 20% = 21,200 December 2015 RM128,800 44,000 (128,800 – 44,000) x 20% = 16,960 May 2016 RM111,840 48,000 (111,840 – 48,000) x 20% = 12,768 Minimum amount to be invested 1,000 1,000 1,000 Maximum amount to be invested 21,200 16,960 12,768 Balance in Account 1 150,000 – 21,200 = 128,800 – 16,960 = 111,840 – 12,768 = 128,800 111,840 99,072 Balance in Account 1 Basic Savings Amount eligible to withdraw (Balance – basic savings) x portion of investment withdrawal PAST SEM QUESTIONS June 2013, Q3a(i) (9 marks) •June 2012 Q5a (7 marks) END OF CHAPTER 8