Ask Melanie: Can you retire on HK$10m?

Melanie Nutbeam, a certified financial planner based in Hong Kong, addresses common personal finance queries. Send your questions to

PUBLISHED : Monday, 15 October, 2012, 12:00am
UPDATED : Monday, 15 October, 2012, 1:10pm

My wife and I will retire in a couple of years and will live off investments worth about HK$10 million.

We aim to replace our salaries with dividends from blue chip stocks (30 per cent), rent from property (30 per cent) and interest from four A-rated bonds in different currencies (30 per cent). We also own gold (4 per cent), have an MPF (3 per cent) and a pension (3 per cent).

We own our home and have no debt. We want to generate cash income of HK$400,000 per year. Is this a realistic target and how might we improve our returns? (Name withheld)

On the face of it, your expectation of earning HK$400,000 per annum from HK$10 million seems realistic. That's 4 per cent per annum from a portfolio spread almost equally across the three main asset classes - bonds, shares and property, which average real returns of 3 per cent to 7 per cent per annum.

But if we drill down and look at current returns on the securities you expect to hold, things are different.

The Hang Seng Index is a good barometer for your Hong Kong blue chips. It shows average dividend yields of 3.4 per cent. You might have done better if your stocks were in the financial sector, where returns averaged 4.03 per cent.

Overseas stocks may also have done a little better, but those returns involve currency risk. My guess is you hold Hong Kong blue chips precisely to address this risk.

If the annual rent you're earning from your investment property is more than 3.5 per cent of the value of the property then it's punching above its weight. The Rating and Valuation Department reports 3.5 per cent per annum as the average return (gross yield) on A-grade property at the moment.

The costs of owning property are higher than for shares and bonds: you need to factor maintenance and management fees into the property's contribution to your target income.

With your four A-rated bonds, annual returns should range between 3 per cent and 6 per cent, depending on the currency.

You don't mention how your gold, MPF and pension funds are invested. If the gold is a physical holding, it won't add to the income.

So, overall, your returns might nudge home your target return, but only just. And if we take into account that inflation is around 3.7 per cent for the year to date, the purchasing power of your income over your retirement years will be in decline.

Your returns are sparse given the higher levels of risk with such concentrated holdings.

You're planning to hold only four bonds, which is a high currency risk for the foreign-currency bonds given they make up 8 per cent to 16 per cent of your portfolio.

A spread of 12 Hong Kong and international blue chips is also a bit thin. Each stock makes up 3 per cent of your total portfolio so you are taking on a lot of stock-specific risk (risk that a firm's stock collapses).

You say you don't plan on selling your shares unless the company gets into serious trouble but, by then, the damage will be done and you will exit with a capital loss. Shares require active management and you will need to stay abreast of company activity to ensure your shares are sold well ahead of any problems.

A friend's mother's retirement portfolio was a handful of blue chip US banking stocks that delivered handsome dividend payments. She died just as several of those banks folded in 2008, taking her legacy capital, and income, with them.

You could restructure the portfolio to improve returns while cutting risk through diversification. Add Hong Kong government iBonds, which protect against inflation and which paid interest of just over 5 per cent in July (assuming you bought the bonds at par value).

If you're keen on holding individual shares then do so, but add diversification with some good international funds or ETFs. Given you own your Hong Kong home, consider selling your investment property while values are strong and spread the proceeds across high-yielding real estate investment trusts - the Hang Seng Reit Index records average yields of 5.95 per cent. Incidentally, volatility on reits is about one third less than that seen for Hong Kong shares.

You are on the right track in diversifying across the main asset classes but you also need to diversify across underlying securities. This will help you cut your security-specific risk and improve returns.

Finally, you ask whether you will generate enough income from your investments. You haven't mentioned whether you are prepared to sell down your investments as you age. Your ages and expected longevity will influence the stage at which it might be prudent to start spending some of your capital. This drawdown of capital can then supplement your income. It will also enable you to lower investment risk.

The views presented are of a general nature. For specific advice, talk to a professional planner. See the column archive at