Retirement Planning: EPF, PRS, Replacement Ratio and Funding Gaps
What this domain tests
Accumulating and decumulating retirement capital: EPF mechanics, PRS, replacement ratios, inflation and longevity risk, and quantification of the funding gap.
Core rules
- EPF: employee contributes 11% of wages, employer 12% (13% for wages at or below RM5,000). Accounts are split between retirement and pre-retirement purposes; full withdrawal is available at 55, with monthly or lump-sum options thereafter. Dividends are declared annually and are not guaranteed.
- PRS: voluntary, RM3,000 annual tax relief, default and self-selected funds, and pre-retirement withdrawal is restricted with penalties for early exit.
- Replacement ratio: target 60–80% of pre-retirement income, adjusted downward for lower retirement spending and upward for healthcare.
- Distinguish longevity risk (outliving assets), sequence-of-returns risk (poor early years in drawdown), and inflation risk (purchasing power erosion over 20–30 years).
Worked example
Client aged 45, retiring at 60, current spending RM60,000 a year, inflation 3%. Spending at retirement = 60,000 × 1.03^15 = 60,000 × 1.558 = RM93,480. Using a 25× multiplier (approximately a 4% initial withdrawal) gives required capital ≈ RM2,337,000. Projected EPF RM1,100,000 plus PRS RM150,000 = RM1,250,000 → gap RM1,087,000. At 6% nominal over 15 years, the monthly factor is ((1.005^180 − 1)/0.005) ≈ 290.8, so the required monthly saving is 1,087,000 / 290.8 ≈ RM3,738.
Traps that cost marks
- Quoting a retirement target in today's ringgit but funding it with a nominal return.
- Treating EPF dividends as a guaranteed rate in projections.
- Ignoring pre-retirement withdrawals for housing or education that reduce the corpus.
- Testing sustainability over 15 years when a 60-year-old may need 25–30 years of income.