EPF rate cut is a wake-up call! The “It’s still better than the rest” argument will not wash!

Published: March 25, 2022 at 6:00 am

The reduction in the EPF interest rate from 8.5% to 8.1% for FY 2021-2022 is a wake-up call for the retail investor. Particularly the young earner. The “EPF rate is still higher than other instruments” argument is of little use for most investors.

As discussed several times before, the fiscal prudence of EPFO is far from optimal and that is putting it gently. See: Higher EPS Pension: Can EPFO pay Higher Pensions or will it go bust?

Every year it defaults on interest rate payments. The March 31st payment is honoured only in Nov or Dec. due to lack of funds. See: Delay in EPF interest payment: Is there a loss to subscribers? The only reason we accept this is because “EPF = govt”. We assume govt cannot default on their debt although it happens again and again in history!

The EPF rate reduction is a long overdue eventuality. There is simply not enough money to sustain rates much higher than current long term bond yields.  Last year, we saw a fleeting glimpse of what the PPF rate ought to be (may as well become a reality in the next few days). This is a tragedy only for those who buried their head under the sand and hope the govt will save them! See: The govt is not going to help us or save us! We have to do that ourselves!

What should investors do?

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    • Get rid of the resignatory “EPF rate is still the highest compared to other instruments” attitude and look at your asset allocation.
    • For those who are on the right side of 40, there is still one last chance to considerably increase equity allocation for retirement. Naturally, this has to be done while being aware of risks, but it has to be done. The risk associated with an EPF heavy portfolio is much higher than equity volatility.
    • For those who are less than 50, there is still some time left to have a crack at equity to a small extent.
    • Do not voluntarily invest more in PF (VPF) unless you have the desired equity allocation in place.
    • For some inspiration see: Why I redeemed from EPF to invest in Equity MFs.

    But inflation is only 6% or so today; I expect the EPF rate to be always higher as it is an “election issue”

    The inflation rate published by the govt does not reflect the ground reality. Particularly those associated with amenities and services like hospitalisation, travel, hospitality, gadgets etc. So if we wish to maintain our health and lifestyle after retirement, two aspects are essential: (1) We need to invest a lot more than the mandatory EPF deduction and (2) Our overall portfolio should outperform EPF after taxes.

    We don’t need to be visionary and predict change before it happens for success. But when we see change happening and do not react, we can blame no one but ourselves.

    There is no point cribbing over lower interest rates. Hard as it may be to digest, it is a sign of our economy flourishing. See FAQ: How inflation affects our ability to manage money. These are instances of life telling us to wake up and smell the coffee. If we don’t take the necessary action, only the cribbing and whinging shall remain.

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