# Time Value of Money: Computing the Retirement Fund in EPF Account of an Employee

In order to be smart and calculative in personal finance matters, understanding the time value of money is an essential part of the learning process.

I will be posting a series of computation methods related to time value of money on every Wednesday. Today, we will learn to calculate the total retirement fund in the EPF (Employee Provident Fund).

In this case, we have to make some assumptions in order to compute the value

• the amount of deposit will increase over time at a constant rate (the normal salary increment rate)
• interest are paid at year end and always at the same rate

## Common Problems

You started your career as an engineer at 24 years old with a starting pay of RM2500 per month. Contractual bonus is one additional month. The average salary increase during your lifetime is estimated at 7% per year. EPF pays an average annual dividend of 5% p.a. Your contribution to EPF is 11% of your salary and 12% is contribution from your employer. How much will you get when you retire at age 55?

## Theory

Use the formula below:

$EPF calculation formula$

where i = EPF dividend rate;
n
= number of years;
A = initial amount of deposit
g = rate of salary growth
FV = future value of EPF account

## Solutions

You started your career as an engineer at 24 years old with a starting pay of RM2500 per month. Contractual bonus is one additional month. The average salary increase during your lifetime is estimated at 7% per year. EPF pays an average annual dividend of 5% p.a. Your contribution to EPF is 11% of your salary and 12% is contribution from your employer. How much will you get when you retire at age 55?

Photo by wmjas

First step is to find out the various variables.

The initial amount of deposit, A = RM2500 x (12+1 months) x (11+12)%

A = 2500 x 13 x 0.23
= RM7475

The number of years, n = 55-24 = 31 years

The EPF dividend growth rate, i = 5% p.a. = 0.05

The salary growth rate, g = 7% p.a. = 0.07

Substitute the variables in the formula above.
The total fund in EPF, FV = RM1.379 million

In order to give you convenient tools, there are several web-based EPF calculators developed:
EPF calculator by RHB BANK

## Exercise

Tan started his career as an executive in a local firm at age 18 with a starting pay of RM1200 per month. The average salary increase during his lifetime is estimated at 5% per year. EPF pays an average annual dividend of 5% p.a. His contribution to EPF is 11% of and his company contributes 13%. How much will Tan entitled to withdraw at age 50? (Assuming EPF withdrawal rules still remain the same as year 2007)

Post your answer in the comment section. The first commenter who posted the right answers will get a special 3D birthday card sponsored by Pigeon Card.

## Previous Tutorial on Time Value of Money

• Tan will entitle to withdrawn RM 171,000 at age 50.

• My calculation shows RM153,981.23