PROTECTING YOUR RETIREMENT AGAINST INFLATION IN MALAYSIA’S ECONOMY

Protecting Your Retirement Against Inflation in Malaysia’s Economy

The effect of inflation to retirement fund

In Malaysia, many people are waking up to a harsh reality: inflation is eating away at their retirement savings, leaving them with much less than they had anticipated. What many don't realize, however, is that this problem has deeper roots—roots that stem from a lack of financial education and poor decision-making. For years, the Employees Provident Fund (EPF) has been the cornerstone of retirement savings for Malaysians, but in the face of inflation, the value of money saved in EPF has significantly diminished, making it less effective in securing a comfortable retirement.

This issue is compounded by inflation, which not only erodes the purchasing power of money but also contributes to the rising costs of living. Together, they form a perfect storm, leaving many Malaysians vulnerable to a retirement disaster.

How to beat inflation in Malaysia

The content of this blog is summarized in the YouTube video below. Feel free to watch the video first, or take a quick read through the article and watch the video afterward for added clarity.

The Root Cause: Lack of Financial Education

One of the main reasons many Malaysians find themselves unprepared for retirement is the lack of financial education. The financial literacy rate in the country remains low, and many people do not fully understand how inflation works or how it can impact long-term savings. Without this knowledge, people often make poor financial choices, such as under-saving or mismanaging their EPF funds. 

The Malaysian government and financial institutions have made some efforts to increase awareness, but financial education is still not a mandatory part of the curriculum in schools. As a result, many individuals don’t develop the skills to properly plan for their retirement, leaving them unprepared for the rising costs they will face later in life.

The Double Blow: Inflation and EPF Savings

Let’s look at the EPF—a key pillar of retirement savings in Malaysia. For many Malaysians, the EPF is seen as a reliable way to save for retirement. However, over time, the value of the money saved in the EPF diminishes due to inflation. Simply put, inflation causes the cost of goods and services to rise, meaning that the same amount of money will buy you less in the future. 

For example, if you have RM 100,000 saved in your EPF today, in 20 years, that RM 100,000 may only have the purchasing power equivalent to RM 50,000 today, depending on the inflation rate. If inflation is consistently high (as it has been in recent years), the gap widens, and your EPF savings lose value much faster.

Don't let inflation eat your savings!

This is the first blow to retirement planning: the money you saved over decades loses purchasing power over time.

The second blow is the rising cost of living itself. In Malaysia, inflation has been steadily increasing, especially in essential areas like food, healthcare, and housing. These higher living costs are making it more difficult for retirees to live comfortably on their savings. Many retirees find themselves in a difficult position: their EPF savings have lost value, and at the same time, the costs of daily life are higher than ever.

A Failed Attempt: EPF as a Retirement Safety Net

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While the EPF is a vital component of retirement savings in Malaysia, it is not enough on its own to guarantee a comfortable life after retirement. The EPF’s returns are relatively modest, and the money saved in it may not be enough to outpace inflation over the long term. 

Consider this: The current average annual return on EPF savings is around 5-6%, while Malaysia's inflation rate in recent years has ranged between 2-3%. Although the EPF's return rate has outpaced inflation in some years, it is not guaranteed that this will always be the case. As inflation rises, there’s a real risk that EPF savings will no longer be sufficient to maintain one's standard of living.

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In addition, many people tend to withdraw large sums from their EPF account, especially when they hit the age of 55. While this might seem like a reasonable option, withdrawing too much too soon can leave retirees with insufficient funds to last throughout their retirement years. In effect, the EPF, despite being a solid financial buffer, has become a failed attempt to prepare for the future for those who rely solely on it without additional financial planning.

The situation is even worse for individuals without EPF contributions. Whether due to self-employment, irregular work, or simply opting out of the system, the lack of EPF savings means that they have no safety net when they reach retirement age. For them, inflation is an even greater threat, and the absence of a reliable income source after retirement puts them at a severe disadvantage.

The Impact of Inflation: Understanding the Magnitude

Inflation isn’t just a theoretical concept—it’s something that affects every part of our daily lives. Over the past decade, Malaysia has experienced periods of inflation, particularly in food prices and housing. In 2023, Malaysia's inflation rate was around 3.6%, but in 2022, it hit a higher rate of 4.4%. With inflation, the cost of living increases year after year, and the value of your savings declines.

For instance, if inflation continues at an average of 3% per year, a product that costs RM 1,000 today will cost RM 1,348 in 10 years. In 20 years, the same product will cost RM 1,813. These increases apply to everything—from groceries to healthcare and utility bills. The reality is that, without effective financial planning, retirees could find their savings are not enough to keep up with these increased costs, forcing them to make difficult lifestyle changes or even rely on family members for support.

Strategies to Protect Retirement Against Inflation

While inflation is a powerful force, there are steps you can take to protect your retirement savings:

1. Diversify Your Investments

EPF alone won’t cut it, so it’s important to diversify your savings and investments. Look into options like unit trusts, stocks, and bonds. By investing in assets that have the potential to outperform inflation over time, you can protect the value of your retirement savings. 

2. Consider Property Investment Wisely  

While property is often seen as a good long-term investment, buying a home that you cannot afford is a dangerous financial decision. Ensure that your property investments align with your long-term financial goals, and avoid withdrawing EPF funds to purchase property unless it’s a sound, affordable investment.

3. Increase EPF Contributions

Consider contributing more to your EPF if you're able to. The higher your contributions, the larger your savings will be when you retire, which can help cushion the impact of inflation. Additionally, making voluntary contributions outside of your regular salary can further boost your retirement fund.

4. Prioritize Financial Literacy  

Perhaps the most important step is to improve your financial literacy. Understanding the basics of inflation, compound interest, investment strategies, and retirement planning is crucial for making informed decisions. Malaysians need to educate themselves on how to manage their finances effectively to secure a better retirement future.

5. Avoid Withdrawing EPF Funds Prematurely

Withdrawing EPF funds before the official retirement age of 60 or after 55 for unimportant reasons can significantly affect your long-term retirement savings. Unless absolutely necessary, try to keep your EPF funds intact to ensure you have enough money when you retire.

6. Plan for Healthcare Costs 

Healthcare is an area where inflation can be particularly damaging. As medical costs continue to rise, having a health insurance plan and saving for potential healthcare needs in retirement is crucial. Consider setting aside a separate emergency fund specifically for healthcare.

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How to plan for a Worry-free Retirement

Financial Decisions: The Role of Poor Planning

Inflation isn’t the only culprit when it comes to poor retirement planning. Many Malaysians make financial decisions that directly harm their retirement prospects. For example, purchasing a property they cannot afford or taking out large loans for non-essential purposes can leave them with little savings for retirement. Withdrawing EPF funds before the official retirement age of 55 is another poor practice that can have long-term consequences.

Furthermore, many young Malaysians make the mistake of thinking they have plenty of time to save for retirement. In reality, the earlier you start saving and investing, the better your chances of accumulating enough wealth to counteract the effects of inflation.

Why PRS Should Be Your Go-To Investment for Retirement

When it comes to planning for retirement, many people hesitate to invest — mostly out of fear of risk. The ups and downs of the market can be scary, especially when your hard-earned money is on the line.

That’s exactly why the Private Retirement Scheme (PRS) exists — to provide Malaysians a structured, long-term way to grow their retirement savings with risk in mind.

✅ Built for the Long-Term

PRS is designed to help you save for retirement over time. The long time horizon means it can weather short-term market fluctuations, giving your investments room to grow steadily.

✅ Risk-Aware, Professionally Managed

PRS funds are managed by licensed professionals and offer different risk profiles — from conservative to aggressive — so you can choose what suits you best.

✅ Tax Relief Up to RM3,000

One of the biggest advantages of PRS is the exclusive personal tax relief of up to RM3,000 per year. That’s money back in your pocket while your retirement fund continues to grow.

✅ Encourages Discipline

Because PRS is meant for retirement, it comes with withdrawal conditions before age 55. This helps keep your savings safe and untouched, growing in the background until you really need it.

✅ Start Small, Grow Big

You don’t need a large sum to start. Even RM100 a month can make a big difference when invested consistently.

Invest in PRS:

If you're looking for a smart, disciplined, and tax-friendly way to save for retirement, PRS deserves to be at the top of your list. It’s not just an investment — it’s a plan for your future.

 

 

 

The Bottom Line

Inflation is a major challenge to retirement planning in Malaysia, but it is not the only issue. Financial literacy plays a crucial role in helping Malaysians make informed decisions that can protect their future. Without proper knowledge of inflation, investment options, and financial planning, many will find themselves in financial hardship during their retirement years. 

The time to act is now. Begin by improving your financial literacy, making better financial decisions, and diversifying your retirement savings. If you don’t start planning for your future today, you may become a financial burden on your family tomorrow. Remember, no one will lend you money to fund your retirement—you must plan wisely, or risk facing a bleak retirement.

This YouTube video provides an in-depth analysis of the retirement figures:

Specific Article References:

1. The Star

An article on how inflation impacts the cost of living in Malaysia and how it affects future retirees:  

Live Comfortably In Retirement (https://www.thestar.com.my/starpicks/2023/07/25/live-comfortably-in-retirement)  

2. The New Strait's Times

A recent survey was indicates that 66% of Malaysians may need to postpone retirement due to current financial responsibilities.

Survey finds more Malaysians may delay retirement due to financial constraints

(https://www.nst.com.my/business/economy/2024/10/1125278/survey-finds-more-malaysians-may-delay-retirement-due-financial)

3. EPF

A comprehensive guide from EPF that explores the effect of inflation on savings and investment strategies for retirement:  

Understand the impact of inflation on Your Savings (https://www.kwsp.gov.my/en/w/article/savings-and-inflation)

4. e-Journal UM

A study in the Malaysian Online Journal of Educational Management examines how financial literacy education influences retirement planning among Malaysia's elderly, revealing that factors such as demographic characteristics, financial attitudes, goal-setting, early financial exposure, and financial awareness significantly impact effective retirement preparation.

Financial Literacy Education and Retirement Planning in Malaysia (https://ejournal.um.edu.my/index.php/MOJEM/article/download/11304/7695/22207)