Free lunch for Malaysian retirees

Regular Malaysian readers probably have been waiting for a ‘free lunch’ from this blog for quite some time since the free lunch on shares investment given to readers living in Europe and the US. It is difficult to provide a free lunch on the stock market since our government has been shoring up the KLSE index instead of allowing it to ‘freefall’ like other countries. Let us then talk about something else.

If you are about to retire or have just reached the retirement age, think twice before taking the entire sum out of the Employees Provident Fund (EPF) unless you really need to use the money. Comparatively, the EPF is safer than banks. And the last paid dividend by the EPF doubled the annual rate for fixed deposits payable by banks.

Malaysian retirees who have taken their entire lifetime savings out from the EPF upon reaching the age of 55 would find it difficult in the current investment environment to park this large sum of money, relatively speaking, risk free and get the same or better returns than what the EPF pays.

Furthermore, the Malaysian government two years’ guarantee of monies held with banks and other financial institutions, if not extended, will be over by the end of 2010. The guaranteed amount will then revert to RM 60,000.

For those who had withdrawn the entire retirement sum and still have money left, unless you think that the banks are safe it is a better and a risk free bet to place the funds in special bonds issued by Bank Negara, the country’s central bank. Since the global financial crisis to date Bank Negara has issued two special bonds with a coupon rate of 5% (doubled the then annual FD rate) for retirees and/or the public.

As the lender of the last resort to banks in Malaysia, and guaranteed by the government like in all other countries, where is the risk in parking your money with Bank Negara? You are also allowed to take out the entire or smaller sum(s) from the amount invested in the bond after the conditional holding period (of three months in the case of the recent bond for retirees).

If you have missed out on the two bonds, wait for another opportunity. These special issues are, in a way, subsidies for the Malaysian retirees and the public, and subscribing for them also helps Malaysia – since at the time the foreign bond holders were taking their monies out of the country.

If finance is not your forte or if you are not savvy enough in foreign currency exchange, do not be enticed by the banks and use the retirement sum to dabble in foreign currencies or the so called carry trades, you can lose your shirt and your well earned retirement especially amid the current global currency war – where the US and the Euro zone want to lower their respective currency values to make their goods cheaper for foreign buyers.

When hedge funds or large investment funds can lose billions in foreign currency trades even before this currency war, chances are slim that you can make good gains from such investment.

Those borrowing the Japanese Yen for carry trades would be hammered when the currency last week reached its highest value in 15 years against the USD. Besides that have you considered the hidden cost of the exchange rates quoted by banks when you convert the Ringgit into foreign currency deposits and back again on maturity?

Since the banks and the industrial titans in the US and Europe are flush with trillions of cash with the recent quantitative easing (QE) by their governments, some monies have found their way to Asia including Malaysia to seek for higher returns in relative safety.

For example a 3% coupon rate payable for a Bank Negara Ringgit bond provides a better return than holding a US Treasury Bond paying half a percent or less, especially since the investors know that the US dollar will lose its value with more QE planned by their government authorities.

That is why the Malaysian Ringgit has appreciated against the USD, the Euro, and Pound Sterling, over the past few months. And some Asian countries like Thailand are already trying to slow the inflow of this hot money into their economies. These particular Asian countries have learned the lessons of the 1997/ 98 financial crisis well.

Meanwhile park your Ringgit in relative safety or in good low risk investments, as discussed above, until opportunity strikes again. And do your homework before you invest, please.