Enjoy life by saving today
As young people become more educated and lead a healthy lifestyle, they are increasingly looking forward to a comfortable and active life after retirement.
Like most Hong Kong employees, younger workers save up for retirement by contributing to the Mandatory Provident Fund (MPF) and have the option to make additional contributions voluntarily. They can ask their employer to deduct the extra amount from their salary or instruct their bank to transfer the sum from their personal account to their MPF account. Some employers have set up employee benefits programmes, where both parties make additional contributions to the MPF.
'The MPF is more beneficial to young people because they have more years to accumulate their wealth. They are well-placed to take advantage of the compound effect of the scheme over the long run,' says Lau Ka-shi, managing director and CEO of Bank Consortium Trust.
'Nowadays, people study more, start working later and live longer. Many young people don't want children. If you don't take care of yourself, who is going to take care of you? Start thinking about retirement and find out more about the MPF.'
According to HSBC's latest survey, the 1,000 MPF members interviewed believe their funds at retirement would only be sufficient to support their basic living expenses for an average of 6.7 years. Alex Chu, director and head of employee benefits at HSBC Insurance, says MPF members should consider making more voluntary contributions.
Chu says that by contributing a fixed amount regularly, regardless of fund prices, MPF members buy more units when prices are low and vice versa. As the market grows over the long term, investors with more units will have more returns. 'This dollar-cost averaging strategy is most beneficial to young people investing in equity funds.'
Luk Kim-ping, head of institutional business at Fidelity Worldwide Investment Hong Kong, says that to lead a basic life during retirement people would need to spend 67 per cent of their monthly income, and 85 per cent of it to enjoy an active and varied lifestyle. Contributing 5 per cent isn't enough to ensure quality living after retirement.
'The MPF population should consider making voluntary contributions as early as possible. They should assess their daily needs, their life stage and how much they need for retirement,' Luk says. 'The majority of young people may consider making voluntary contributions in the second decade of their working life.'
Ken Wong, State Street Global Advisors' equity portfolio strategist, says equity funds provide the best returns on average in the long run. Most young people should invest all their MPF savings in equity funds. They can also explore index-tracking equity funds that may provide better returns net of fees.
'Given the fact that active managers charge a substantially higher management fee than most index-tracking equity funds, and because most managers don't consistently outperform their benchmarks over the long term, it might make sense for young people to make MPF investments in index-tracking equity funds,' Wong says. 'A 1 per cent saving on management fees each year throughout the life of their MPF funds will go a long way to saving a lot more for their retirement.'
Wong says the biggest temptation for young people is to constantly change their MPF allocations among different asset classes.
They should stick to mostly equities and not worry too much about short-term fluctuations because switching MPF schemes can lead to a loss of assets, given the difficultly in predicting the timing of the market.
'When they are 10-plus years from retiring, most MPF savings should be in equities,' he says. 'Once they are about 10 years from retiring, they need a more balanced portfolio with a mixture of bonds and equities. When they are only a few years from retiring, they should start thinking about capital preservation MPF funds to protect most of their assets.'
Chu says MPF members should make voluntary contributions and invest in products such as annuities. 'The MPF is for long-term savings. Investors should not panic on short-term market fluctuations. Retirement planning is a marathon, not a sprint.'
Francis Lui, professor and head of economics at Hong Kong University of Science and Technology, says young people can afford to take more risks. He discourages investing in troubled Europe.
He reminds young people that by contributing to the MPF they are foregoing the flexibility to use the money before they retire. MPF members cannot withdraw the sum prior to retirement unless in certain conditions, such as if they leave Hong Kong permanently.
'You should [make voluntary contributions] only if you believe the fees are low enough and the returns are stable and good. If you think it makes better investment sense to buy a flat, this option is fine.'