Retirement planning is one of the most important aspects of personal financial planning. It takes into account how one spends his/her money in the next decade or two.
If people don’t plan well ahead or save enough for retirement, they might struggle to maintain the quality of living they desire in retirement.
In Hong Kong, retirement planning is even more important as the government only offers very limited social welfare.
The first question that people need to ask themselves is, “How much income do I need to maintain my current lifestyle in retirement?” Most people need about 70 to 80 percent of their current income in retirement.
Then we need to take into account the present value of future expenses, that is translating future monthly costs into their present value. Generally speaking, we need to save up to 10 times our annual income before approaching retirement.
However, it’s very difficult to make an accurate calculation as it’s difficult to determine our retirement expenses or income before retirement.
There are other uncertainties that could make retirement planning even more complex. These include the time left before retirement, life expectancy, inflation and estimated investment returns.
Simply put, people need to save more for retirement if they live longer amid high inflation.
Investment returns and inflation levels appear to be really unpredictable.
For example, major central banks directly intervened in the financial markets after the global financial crisis. And most may have overlooked the fact that those marginal changes could have a real impact on retirement planning.
Assuming that you have 10 to 40 years to save for retirement, and the inflation-adjusted real investment return is around 3 to 7 percent, then you need to save 5 to 86 percent of your monthly income for retirement.
If you plan to work another 25 years, and your investments earn 5 percent per year, you only need to save some 20 percent of your income to reach the goal.
The Mandatory Provident Fund is far from sufficient for retirement unless one has more than 35 years to save or the investment can earn over 5 percent.
You need to save HK$3 million to HK$7 million for living through to the age of 90 if you plan to maintain monthly expenses at around HK$10,000 at present value.
If you are a 35-year-old company employee, you need to save HK$4.74 million if you plan to retire at 60. You need to invest up to HK$45,000 if you want your investment to earn 7 percent per year.
Otherwise, you only need to save HK$5,900 to reach the same goal if you have no other asset classes to pay for retirement.
This article first appeared in the Hong Kong Economic Journal on April 2.
Translation by Julie Zhu
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