Most developed economies are faced with the problem of aging population.
Today, Americans retire on average at 62, in contrast to the situation a century ago when many of their ancestors tended to call it a day at age of 51. And the concept of retirement savings plan didn’t exist in those days.
Nowadays, it’s quite common for people to live another 20 or even 30 years after retiring at around 60.
In Hong Kong, the Mandatory Provident Fund Schemes Authority (MPFA) has set up an Investment Solutions Lab at the beginning of this year. The move was aimed at encouraging service and product providers to come up with suitable long-term investment fund products and to focus not just on short term gains.
The industry intends to introduce wealth management products that can offer stable income or beat inflation.
Portfolio management in retirement is quite different. In particular, it has to strike a delicate balance between short-term stability and long-term growth.
Too much volatility would be problematic because retirees rely heavily on their savings. They may not be in a position to wait for a bear market cycle to end if they need the money in between.
On the other hand, retirees cannot afford not to invest given the extremely low interest rates, as inflation would erode the value of their savings quietly but persistently.
Think about this, an annual inflation rate of 2 percent can halve the purchasing power of your cash pile in 30 years’ time.
Given this, retirees have to accept some degree of risk in order to protect their wealth.
This article appeared in the Hong Kong Economic Journal on July 29
Translation by Julie Zhu
[Chinese version 中文版]
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