" Should you invest for potentially higher returns (by exposing your EPF money to higher risks) or should you just be content with the EPF dividend rate?
Firstly, let’s look at why EPF introduced such a scheme. According to the EPF website, the “EPF Member’s Investment Withdrawal scheme allows you to withdraw part of your savings in Account 1 for investments to increase your retirement fund to support your life after retirement.”
This means that you are given the opportunity to make your EPF money work harder for you.
The second reason is actually the most important. Inflation erodes your purchasing power. Over the last five years, EPF has distributed an average of 5.4% dividend annually while the inflation rate averaged 2.7%.
Thus you should make the best use of the withdrawal scheme allowed by EPF to ensure that you preserve the purchasing power of your EPF money in future.
Thirdly, you should let the power of compounding work for you.
Albert Einstein famously said: “Compound interest is the eighth wonder of the world. He who understands it, earns it.”
Thus you should let some of your EPF money compound at a higher rate of return.
Even a small positive difference in annual return can make a big difference over time. To give you a better idea of the power of compounding, let’s use the Rule of 72.
If your money earns 5% a year, it will double in 14.4 years. If it earns 7% pa, it will double in 10.28 years. For 9% pa return, your money doubles in eight years. If your return is 11% pa, it doubles in 6.55 years. If you earn 13% a year, your money doubles in just 5.54 years. (To calculate the number of years for your money to double, divide 72 by your rate of return.) "
Source: http://thestar.com.my/news/story.asp?file=/2011/9/30/sarawak/9603071&sec=sarawak
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