22 January 2019
Retirees should diversify their investments and brace themselves for stock market volatility. Photo: HKEJ
Retirees should diversify their investments and brace themselves for stock market volatility. Photo: HKEJ

How to plan for your retirement

Retiring early to enjoy life with financial freedom is the goal for many people in Hong Kong.

In a recent survey by HSBC, nearly 60 percent of respondents aged over 45 hoped to retire within five years.

And more than 30 percent believed that goal would be difficult to achieve, because of insufficient savings.

Bank deposit rates remain at historical lows, and investors are scratching their heads amid increasingly volatile financial markets.

To plan for retirement, one has to estimate how much one needs to spend when one retires, and then set up saving and investment plans accordingly.

A two-person family needs HK$8,995 (US$1,155) per month for basic retirement living, HK$28,890 for a comfortable lifestyle and HK$46,435 for an affluent life, an HSBC retirement planning report says.

The amount will be greater if the retirees still need to pay down a mortgage or rent.

So, how much money do we need to save?

For basic retirement living, retirees to save at least HK$2.65 million if they expect to live 24 years after retiring at 60, the annual inflation rate is 1.7 percent and the bank deposit rate, 1.5 percent.

They need save as much as HK$8.52 million if they want to live comfortably or HK$13.7 million if they want an affluent life.

That means one has to save at least HK$4,800 per month from the age of 25 to afford a basic retirement life if one depends only on bank deposits.

Monthly savings should reach HK$15,000 if one plans to live comfortably and HK$25,000 for an affluent life.

That’s not an easy target for most Hong Kong households given that the median family income is around HK$19,500.

One has to make investments if one wants to prepare more easily for retirement.

The annual return of the MSCI World Equity Index was 5.6 percent over the last decade, and the Hang Seng Index returned 7.5 percent annually.

Global bonds offered an annual yield of 3.7 percent, and Asian bonds, 6.6 percent.

All are far above the average bank deposit rate.

To save enough for life after retirement, one has to establish a diversified portfolio, including cash, bonds and equities. Equities and bonds have the potential to offer higher returns.

Those who have already saved enough for retirement could adopt a more conservative approach, by investing in dividend-paying instruments like bonds, equities and funds.

For example, five-year US treasury notes paid an annual yield of 3.5 percent over the last 20 years.

Investors who invested HK$1 million in them over the last 20 years could have gained a monthly income of HK$3,000 apart from their principal.

Retirees should consider some short-dated bonds or certificates of deposit, as the United States kicked off the rate hike cycle late last year.

And they could put money into bonds paying higher yields when their treasury notes mature.

Also, some stocks of firms with stable operations that pay high dividends will offer a steady flow of cash.

For example, the Hang Seng Utilities Index has a yield payout ratio of 3.7 percent, above the bank deposit rate and the interest rate on 10-year US treasury bonds. 

In any case, retirees should diversify their investments and brace themselves for stock market volatility.

They should adjust their portfolio in line with changing market conditions to ensure it matches their investment target and risk appetite.

This article appeared in the Hong Kong Economic Journal on Feb. 12.

Translation by Julie Zhu

[Chinese version 中文版]

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Head of wealth development for Hong Kong, HSBC

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