How much do we need to save for retirement?

August 09, 2019 11:28
There are many variables to consider in planning for financial security in retirement. Photo: Reuters

Retirement is a key part of our financial planning, since it will determine the quality of life in our later years.

Given the limited retirement benefits the government offers, Hongkongers can only rely on themselves.

The foremost question is this: just how much do we need to save for retirement?

There are a few key variables we need to consider, such as the age of retirement, or more precisely the number of working years left before retirement, life expectancy, inflation and expected investment returns.

Despite all the uncertainties, we can at least make an educated guess using some assumptions.

Most people usually retire between 55 and 65 in Hong Kong. And life expectancy was 82.2 years for men and 87.6 years for women last year.

Let’s say you are 40, and you want to retire at 60, and expect to live until 90. The expected annual inflation rate is presumably 2.5 percent, and investment return around 5 percent.

To ensure HK$10,000 per month in available spending (based on the current purchasing power), you need to have a savings of HK$4.19 million when retirement starts. If you want a higher living standard, just increase the target amount accordingly. If the inflation rate is assumed to be higher, again you need to save more.

The ceiling of mandatory provident fund contribution is now set at HK$3,000 a month. Unless one is still very young, this sum is certainly far from enough.

The earlier one starts saving for retirement, the better, because stock markets usually move upward in the long run. It’s thus more likely to get positive return if we stay invested for longer time.

Another factor is the compounding effect, where the duration of investment has great impact on the total return.

This article appeared in the Hong Kong Economic Journal on Aug 8

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist