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The importance of these savings initiative should not be lost on investors.
For example, item (iv) above, the exemption from income tax means substantial benefits for investors as seen from Table 1
Take the savings rate for Mayban Finance which is at 4.25% after tax exemption. If the tax was imposed , say at 20% , your account would have to earn about 5.31% to enable you to get 4.25%. The same goes if the tax imposed is 30% , your account needs to earn at least 7.26% to actually enable you to receive an interest of 4.25%.
Another example is item (v), tax relief for EPF contribution and life insurance premiums increased to RM7,000 makes policy cost substantially cheaper. In other words a portion of the insurance premium is effectively subsidized by the Government.
Most investors are aware that our EPF savings can go a long way to helping them have sufficient for retirement. But will EPF savings be enough?
Mr. Investor : A 25 years old clerk earning RM600 per month with annual increments of 4% per year in tandem with the rate of inflation. Assume EPF's dividend is 7.5% p.a.
At retirement Mr. Investor will have RM579,905 savings with EPF. This sure sounds a lot and based on today's costs it appears Mr. Investor will have a very comfortable retirement.
Mr. Investor retires at 55 years of age and he survives another 15 years until the age of 70. From retirement onwards he will have about RM3,200 per month for his living expenses from EPF. However after the effects of inflation of just 4% per annum , RM3,200 is only equivalent to a mere RM987 per month in today's ringgit.
From the above example it is apparent that Mr. Investor's EPF savings will probably not be enough. If you want to have a comfortable retirement then you must supplement your EPF with other savings.
The Government's encouragement for you to increase your savings rate has two spin-off effects :