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The Malaysian Government announced a RM7 billion stimulus package for the Malaysian economy after cutting its economic growth forecast for 2009 from 5.4% to 3.5% (source). Some of the goodies this package offered were RM1.5 billion Investment Funds, RM1.2 billion of low and medium cost houses, RM600 million to upgrade roads, bridges and community halls in rural areas and RM500 million to upgrade schools and hospitals.

While these may not seem to have much impact or benefit to the urban worker and investor, the package did have a few highlights targeted to help the man on the street. Workers can now opt to reduce their contributions to their Employees Provident Funds to 8% from 11% in 2008 and 2009 and those with existing housing loans can choose to extend their repayment periods from 25 to 30 years now.

While these may seem like an incentive on the surface, are they really going to benefit you in the long run? Read more below.

The Employees Provident Fund (EPF) is essentially a pension fund or superannuation for Malaysian employees. Generally, employees contribute 11% of their monthly income to this fund together with their employer’s contribution of 12% to 16%. This contribution is automatically deducted on a monthly basis and the employee is not supposed to have access to the bulk of the fund until they retire at age 55.

Considering that this is a retirement fund, employees should be trying to put as much as they can in there during the peak of their working years to ensure that they have enough funds to retire comfortably on in the future. Some financial experts have calculated that the average city dweller will require over RM1 million to retire on comfortably and this is not even taking inflation into account!

To boost consumer spending, he (Deputy Prime Minister and Finance Minister Datuk Seri Najib Razak) said employees can opt to cut their contribution to the Employees Provident Fund to 8% from 11% in 2009 and 2010. If all EPF contributors do that, it will free RM4.8 billion a year for them to use. (source)

While this may seem like a good thing, consider looking at it from the other side of the coin and you will see that keeping your EPF contribution at 11% could essentially mean additional savings of RM4.8 billion a year for all EPF contributors which will be going towards their retirement. Multiply that by 2 years and it is almost RM10 billion additional funds these EPF contributors can look forward to having!

Although we often complain about the low dividends being paid out by the EPF, it is still a forced saving each employee is required to make each month. If you are earning a decent salary now, it might surprise you how quickly these contributions can add up over time and if you check, you might be pleasantly surprised at the amount that is now sitting in your EPF account.

Ultimately, it is a toss-up between instant gratification and delayed gratification. Cut your contribution by 3% and you might enjoy some extra cash each month. However, before you rush to reduce your EPF contribution, do consider the impact this reduction will have on your overall retirement funds, taking into account the compounding interest that will be paid on it every year.

After all, the Malays have a saying that one should “bersusah dahulu, bersenang kemudian” which is loosely translated to “Suffer a little now, enjoy more later”. Make the right investment choice!