Can you experience a happy retirement?
After a busy working life, diligent Hongkongers naturally expect a life of relaxation and leisure during retirement. Schroders Hong Kong recently undertook a retirement research based on interviews with 700 people who are approaching or already in retirement. Overall, participants aim to save an average of HK$2 million for retirement, and they expect to spend on average HK$12,800 per month when they stop working. Can this target achievable in reality?
Hongkongers are known for their longevity, with Hong Kong men expected to live to an average of 81 years and women to 87 years, both rank the highest in the world1. For a person planning to retire at 65, HK$2 million will be drawn down in around 16 years, assuming a 4% - 5% annual return on their savings. The participants on average expect around 11% returns over a three-year period. However, their investment strategies are relatively conservative, allocating near 40% of their assets in cash and time deposits, with the remainder being invested in bond, stock, MPF and insurance products. In the current low yield environment, returns from cash and time deposits cannot beat inflation, it is unrealistic to provide a double-digit target return, and they are not adequate to cover one’s future life expenses and medical bills.
Unrealistic expectation of investment return
Half of the participants stated that they would withdraw all of their pensions at once and allocate 47% of them to cash assets. However, according to data from the Mandatory Provident Fund Schemes Authority, MPF offers an average return of 4.8%2. Turning their back on a potential return of 4.8% for cash with a lower return reflects that Hong Kong retirees and those approaching retirement may not have an adequate financial plan.
The Schroders Retirement Research also showed that about 80% of the people rely on relatives and friends for recommendations, and only 54% would seek advice from bank relationship managers or financial advisors. This poses the risk of being exposed to a mix of information that may not be professional advice and may leave Hong Kong people vulnerable to having their individual character traits influence their ability to make rational investment decisions.
To bridge the gap between a desirable retirement life and the reality, we believe there are two solutions. The first solution is to prepare for retirement early. Based on the research, those who had a plan for retirement started thinking about retirement at age 43 while those who did not, considered it only at age 59. Overall, those who make a clear financial plan for retirement would save around twice the amount compared with those with no plan. Therefore, those who start saving earlier can achieve their target more easily. The second solution is not to completely de-risk at retirement and invest in suitable growth assets via a diversified approach, which offers the ‘Goldilocks’ of investment trade-offs: neither too much risk, nor too little return. In addition, other retirement products, such as the recently proposed Hong Kong Mortgage Corporation (HKMC) annuity scheme and “multi-assets” funds, could be considered.
Click here to find out more about Schroders' 2018 Hong Kong Retirement Research.
1 2017 global life expectancy ranking, Ministry of Health, Labour and Welfare, Japan. http://zh.cn.nikkei.com/politicsaeconomy/politicsasociety/26257-2017-07-27-16-19-32.html↩
2 MPF annualised return from December 2000 to December 2017, Mandatory Provident Fund Schemes Authority. http://www.mpfa.org.hk/tch/main/speeches/files/2018-02-08-speakingnotes-c-Chairman.pdf↩
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