THE 6.1% dividends declared by the Employees Provident Fund (EPF) for 2021 is a handsome payout after two years of enduring the Covid-19 pandemic.

       This is the kind of dividends many hoped for, as it helps grow their EPF savings, which is a good source for retirement planning.

       Last year’s dividend is almost one percentage point higher than that declared for 2020. The highest dividend EPF has paid in recent times is 6.9% in 2019.

       At 6.1% return, it is a lot better than leaving your funds in fixed deposits.

       The question is would you take out the dividend or let it grow, given the compounding effect, if you are retired?

       “In the early decades of wealth accumulation, dividends should be allowed to compound. But when retirement kicks in, most of us lose the luxury of being able to wait because we no longer have an actively earned income to draw on.

       “As such, withdrawing EPF dividends as one source of passive income to help partially pay for retirement expenses makes sense,’’ said Manulife Investment Management (M) Bhd licensed financial planner Rajen Devadason.

       Many are happy with the 6.1% declaration by the EPF, so is Devadason, who added that “EPF is a steady compounder of wealth, which enhances its attractiveness as a major building block of retirement funds.’’

       Salleh (not his real name) is 50 years old and still employed. He said he would not take out the dividends for at least five years after retirement because of the compounding effect.

       Instead, he would use whatever savings he has for five years before opting for monthly payout of dividends.

       For illustration, even at a 5% dividend, he could get RM8,300 per month. He said that would be enough to sustain his lifestyle as he also has some medical insurance and would be debt free by then.

       “The plan is to keep the principal amount in EPF intact and only use the dividends,’’ he said.

       However, one also has to consider inflation and its impact on our purchasing power. That is why some experts suggest a diversified portfolio.

       But if you are retired, the approach should be more conservative compared to when you are younger when you had more time to accumulate wealth.

       Devadason said that over time, if we are genetically predisposed to live long, we will see the compounding effects of inflation erode our purchasing power.

       “This means we need to grow our money even faster than inflation, ideally through a range of instruments that permit us to not put all our eggs in one basket,’’ he said.

       Diversifying our investments across three distinct dimensions is wise, namely across different asset classes, different geographic regions and along a lengthy timeline using a dollar-cost averaging strategy, he added.

       It is a statutory requirement for an employee and employer to contribute towards the EPF and the rate is 11% and 12%/13%, respectively, of your monthly salary.

       During this Covid-19 era, the percentages were revised down but some preferred to maintain the contribution rate to grow their fund.

       Members and/or employers can choose to contribute more than the statutory amount, which together with the compounding effect of dividends would help to increase the size of members’ funds faster.

       Some companies raise the percentages for both for various reasons, up to 30%. That raises your overall savings monthly, and at 30%, it is 6% to 7% more than the statutory requirement.

       Another way to boost your savings is to top up RM60,000 a year into your EPF savings. This is a voluntary contribution on top of your monthly statutory requirement. It can be done anytime in the year and you get dividends for it too.

       It does not have to be a lump sum deposit and you can also save the same amount for your spouse and children. There is no limit on the number of children that a member can top up for.

       Even if you retire, you can earn dividends for the remaining portion of your EPF savings up to the age of 100.

       So putting more money into your EPF savings is a way to boost your retirement fund as it can be a base for funding in your golden years.

       Devadason believes that many Malaysians are fortunate to have our EPF account serve as a rock-solid cornerstone of what should ideally be a well-diversified approach to preparing for our long-term, multi-decade retirement needs.

       He said the accumulation of wealth requires time for compounding to take effect much.

       “Some of my clients opt to retain all their original EPF funds in this excellent superannuation body while others choose to withdraw everything.

       “The majority of my older clients, though, retain between 25% and 75% of their original EPF balances and allocate the remainder elsewhere, depending on their aspirations, expectations and post-retirement specifics,’’ he added.