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  • Aug 22, 2014
  • Updated: 3:09pm
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PERSONAL FINANCE RETIREMENT

When time is money - and you don't have any

PUBLISHED : Monday, 17 September, 2012, 12:00am
UPDATED : Monday, 17 September, 2012, 3:36am

A recent Justin Timberlake science-fiction movie called In Time had the premise that, in the future, people will only live as long as they can pay for time. If your credit expires, so do you. The movie was not up to much, but the concept was compelling.

It reflects the fact that people need cash to live, and that extreme poverty in old age leaves people vulnerable. So, while people don't expire the minute their credit runs out, as in the Timberlake movie, there is certainly a link between money and longevity.

That's the scary part about pension planning. It's freighted with thoughts about mortality and fears of some bleak, impoverished finale. The good news is that retirement is manageable and affordable for most, provided you take a few commonsense steps.

So, how much does a Hongkonger need to retire comfortably? A financial adviser with  a rich client base will recommend retirement savings of HK$8 million-plus.

Someone born in Hong Kong who owns their own property and can rely on the support of family would need much less.

"Retirement will usually be by the far the most expensive event in a person's life, so the sooner they start planning for it, the better," says Robert Flux, director of Simmonds (International) Financial Associates.

The first stage of retirement planning is to work out how much you are likely to need each month to live comfortably. People wrongly assume they will need a lot less money during retirement compared with when they are working. But this is often not the case.

While you may no longer have some financial commitments, such as mortgage repayments, spending on groceries and utilities is unlikely to change, and the amount you spend on medical expenses and leisure will probably increase.

"In retirement, you have twice as much time to kill as when you are working. The misconception is that people think they will need less money because they are a little bit older and they don't do as much. The exact opposite is proving to be the case, with golden years tourism booming," says  Angelo Dilibero, director of financial services at Alliance Group International.

Alex Chu, director and head of employee benefits at HSBC insurance in Hong Kong, says people should aim for a pension of about 65 per cent of their salary immediately before they retire, assuming they have paid off their mortgage and want to maintain their existing lifestyle. Higher earners will need to maintain a lower proportion of their final salary.

You also need to consider at what age you want to retire, as this will give you a broad idea of how long your retirement pot will have to last.

Chu says men in Hong Kong generally live to 80, and women until 85. Someone who gives up work at 65 will need to have enough money to fund themselves for at least 15 to 20 years. Once you have set a target monthly income and retirement age, the next stage is to establish the size of the lump sum you will need to generate this income.

In general, for those aiming to retire at age 65, and with a pension equivalent to HK$25,000 at today's purchasing power, would need to save about HK$6 million. Those aiming for spending power of HK$35,000 a month would need about HK$8.4 million.

For most people, these sums will sound shockingly high. But they are achievable, assuming you start early enough and you invest.

"If your pension fund is growing at seven per cent to 7.5 per cent on average your fund is roughly doubling every 10 years," says Flux. 

Someone who starts saving into a pension when they are 25 would need to set aside just HK$2,300 a month to reach a target sum of HK$6 million by the time they are 65, assuming average investment growth of  seven per cent a year.

Those starting a pension at 35 would need to save HK$5,000 a month to get the same sum, while starting at 40 would need to save HK$7,500 a month.

The other advantage of starting to save early is that you can afford to pursue a more aggressive investment strategy. Risky assets can fluctuate widely in value. But over decades, the returns even out and they typically outperform less volatile investments, such as bonds. A long investment time frame gives an ability to ride out downturns, and the comfort to invest in higher risk assets with higher  returns.

If a 25-year-old saved HK$2,500 a month into a fund that returned an average of eight per cent a year, their retirement pot would be worth about HK$8 million in 40 years, 25 per cent more than if they had only managed seven per cent growth.

If you are not saving enough, one of the simplest steps is to plan to retire later in life. This extends your savings time frame, and cuts the retirement period you have to fund.

You can also simplify. People who have most of their spare capital in a property can sell it for something cheaper and live off the potentially large capital gain.

"There are two ways we arrive at the amount people should save. One is a target figure  … the other is an affordability rate: how much can you realistically and comfortably save to begin to build towards that," says Dilibero.

Hong Kong is actually a good place to become very old, thanks to a heavily subsidised, world-class medical system, and cheap domestic help. People in Western countries get walloped in old age by medical costs and the high cost of retirement homes, but this is less the case in Hong Kong.

But whatever one's expectations, a little planning goes a long way.

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