Brick or treat? Life's hard choices
Building a nest egg to achieve financial security inevitably involves making a few hard decisions along the way. Take the fictional Wong family, for example, who have a three-year-old child, a joint monthly income of HK$95,000, combined savings of HK$200,000 and who own a stock fund worth HK$100,000.
The Wongs pay HK$20,000 per month in rent. They would like to buy their own property, send their child to a good private school and buy a car.
They also enjoy eating out at expensive restaurants, take regular holidays and appreciate drinking fine wines. The 35-year-old husband and 33-year-old wife are in good health but wonder if they need to buy health and life insurance.
Their parents, all in their 60s, are retired and in good health and their finances are in relatively good shape, but not great. The husband and wife worry they may have to substantially support the parents in old age.
Phil Neilson, a financial planning commentator and chief executive of Elite Capital Solutions Hong Kong, says for a middle-class family in Hong Kong, financial security usually means having accumulated net worth of between US$2 million and US$4 million.
His rationale is based on roughly US$1 million needed to buy a Hong Kong flat, US$500,000 for an offshore property and between US$1 million and US$2 million to invest. With a 5 per cent return, these funds would produce US$50,000 to US$100,000 of annual income in retirement.
'The Wong family are doing well by having monthly household income of HK$95,000. While they have started to accumulate wealth by having saved HK$200,000 [US$25,000] they clearly have a long way to go to achieve financial independence and must be very disciplined in their future money management,' Neilson says.
He says that the husband and wife need to focus on maximising their savings for the next 20 years to achieve financial security. 'Once our couple understand their specific financial objective, they are in a better position to plan their strategies.'
He believes the couple should consider the money management principle of 3, 3, 3, 1. This is a practical way to manage their monthly income by allocating 30 per cent (of combined household income) to be saved, 30 per cent spent on rent or mortgage payments for a flat, 30 per cent on lifestyle and 10 per cent for tax.
'As the current apartment is only 21 per cent of their combined income, they have the opportunity to increase their savings to 39 per cent,' Neilson says.
Sheila Dickinson, senior vice-president at ipac Financial Planners, believes the fictional family needs to make some lifestyle adjustments to achieve their financial goals.
'For example, what is more important to them - owning a car, eating out and luxurious holidays or owning their own home and sending their child to a good school?' Dickinson says.
They also need to work out their expenses to determine what surplus income they have each month. Is the surplus enough to help them meet their goals of buying a home, buying a car and saving for their child's education - all while maintaining a high lifestyle and giving their parents a safety net?
'In most cases what we want is rarely met by our income, and we have to make trade-offs,' she says.
Dickinson says most people find they need 75 per cent of their final salary as their annual income during retirement. Depending at what age the couple wish to retire, they need to multiply the 75 per cent by the number of years until they retire. Taking into account their Mandatory Provident Fund savings, if current savings are not enough to achieve their retirement goals, the Wongs would need to save more, using a monthly investment scheme such as mutual funds.
'Whether you are in your 20s, 30s, 40s or 50s, your investment plan should seek to accumulate and secure a sum of money that will enable you to live the life you wish to lead,' Dickinson says.
She says a sensible investment plan goes hand in hand with the individual's personal life plan, which includes a proper review of insurance protection needs. For those in their 20s or 30s, Dickinson says it would make sense for a portfolio to have 75 per cent in global equities, 15 per cent in global property and 10 per cent in global bonds.
By the time people reach their 50s, it makes sense for pre-retirees to keep 25 per cent of their investments in global equities, 15 per cent in global property and 35 per cent in global bonds, and hold 25 per cent in cash.
'Remember to ensure your plan is flexible and is reviewed at least annually to make sure it is still relevant. Starting early to save for long-term goals such as an education plan is a great idea as the monthly contribution amount can be smaller as compound interest is on your side,' Dickinson says.
She says, assuming the cost of sending a child to a British university for four years will be HK$500,000 in today's money, in 15 years' time the cost will be HK$778,983 (if inflation remains at 3 per cent).
To save the amount required over 15 years, Dickinson offers two scenarios. Saving via cash at zero interest or saving via investing (with a goal of obtaining 7 per cent interest returns).
Starting with HK$20,000 today and supported with regular monthly contributions, the cash method would generate HK$778,983 at HK$4,237 per month for 15 years.
Meanwhile, saving via investment, assuming a 7 per cent return, would require just HK$2,400 per month for the same 15 years.
Karen Hui, assistant associate director at Convoy Financial Services, believes the Wongs are spending far too freely on their social life and need to get a grip on their budgeting.
'In their current situation the Wongs would not be able to raise the deposit to buy a property. If they structured their spending to live off one salary, they would be in a far stronger position to buy an apartment, a car, and budget for their child's education and save to look after their parents,' Hui says.
She says once the deposit is saved, the Wongs should start looking at flats in the HK$4 million range. This way, at current interest rates, the HK$20,000 they currently spend on rent would cover a mortgage payment.
Once they buy a flat, Hui suggests the Wongs divide their monthly income by spending HK$45,000 on the household and personal expenditure, and investing HK$30,000 in a fund portfolio structured to generate a 9 per cent annual yield.
The remaining HK$20,000 could be divided by putting HK$5,000 into an education fund, HK$5,000 saved to help parents and HK$10,000 as an emergency cash flow. She advises the Wongs should also invest in a critical health insurance plan.
'For many, the retirement years account for about a quarter of their life, therefore it is important to ensure they spend their retirement years happy with sufficient funds to cover their living, social and health needs,' Hui says.
Even when the savings engine is humming smoothly, financial planners still recommend holding cash. Depending on outgoings and liabilities, having six to 12 months of income in liquid assets is recommended to insulate against illness or job loss.
Hui says it is easy in youth to disregard planning one's life finances but, as the years roll by, financial security may be lost.
'People in their 20s tend to be at the initial stage of their earning potential. They are also likely to have limited liabilities and live in consumption mode with few thoughts about building wealth,' she says.
However, it is a different situation for people in their 30s, when career development starts to drive earning ability at the same time as liabilities start to increase. 'Wise planning is critical at this stage, because many of the decisions made by people in their 30s could affect the amount and way they need to prepare for financial security in later life,' Hui adds.
Arun Abey, author of How Much Is Enough?, a book about wealth and happiness and the co-founder of ipac Financial Services, says over the years that is the one question he has constantly asked.
He believes achieving financial happiness depends on finding the balance between wealth and well-being that works for the individual, staying focused on what is important, and becoming master of your own fate.
'For a start, we can do some simple planning, looking within instead of to others, and asking the right questions,' he says. 'Instead of asking: 'How much money do I need to be happy?', we can try asking: 'How can I be truly happy?' Secondary is: 'How much money will I need to support me in pursuit of my true values and goals?''