Retire with fire
How much do you really need for your pension? Liana Cafolla outlines some base-case scenarios
At some stage in most people's lives, the spectre of how to plan your financial future raises its unwieldy head. Some see a future where financial security is assured thanks to a plethora of well thought out savings and investment strategies and maybe even a golden egg in the shape of a trust fund. For others, the future looks grim, with the cupboards of financial protection looking particularly threadbare.
For those in the latter group, it may be time to turn to sage advice from a financial adviser. But how much help can they offer to a financial novice?
To find out, I devised a fictitious simple personal scenario and asked two reputable financial advisers to take a look at the figures and provide some feedback.
Both were told that I am a 40-year-old sole breadwinner with an income of HK$70,000 per month, and two children aged 12 and 10. My spendings are roughly HK$20,000 per month on rent, HK$10,000 on school fees, HK$14,000 on food and bills, HK$13,000 on entertainment, clothes and transport, leaving HK$13,000 per month for savings or investment.
They were also told that I have no pension plan, no assets and no shareholdings. My priorities are to fund third-level education for my children in Hong Kong and fund my retirement. I plan to work for the next 25 years and retire at 65. I would like to have an income of HK$40,000 per month when I retire to cover my living expenses.
No financial adviser worth trusting will give you worthwhile financial advice without a lengthy face-to-face fact-finding meeting designed to find out about your finances, expenses, plans and aspirations in detail, and both of the advisers interviewed for this article emphasised the importance of that meeting before they would give professional advice.
Paul Pong is a certified financial planner and managing director of Pegasus Fund Managers. David de Lacy Staunton is managing director of the Capstone Financial Group, an independent offshore investment consultancy firm. The company is authorised by the Securities and Futures Commission, Hong Kong's main markets regulator.
Staunton, who has been in the business for more than 10 years, says ensuring adequate protection is essential.
"The most important part of financial advising is to make sure that all eventualities are taken care of, and the cornerstone of that is normally protecting assets," he says. "The most valuable asset you have really is yourself and your income."
In my case, as the family's sole breadwinner, that makes life insurance a priority.
If I die suddenly, "your financial goals will have disappeared, but those of your family will still be maintained and there will be no income to provide for them," says Staunton.
As a very bare minimum, I should be looking for a payout of 10 times my annual salary - which in my case is HK$8.4 million.
Staunton typically suggests term insurance, and can provide quotes from various companies based on personal details and the type, level and term of cover required. This is easy to do online at www.mymoney.com.hk Hong Kong's first life insurance comparison website, recently launched by Capstone.
While life insurance is the cheapest option, medical insurance, critical illness and income protection are just as important, stresses Staunton.
Pong agrees, noting that the longer I wait to buy medical insurance, the more expensive it will be. He suggests switching between the two if I can't afford both at the same time - maintaining life insurance to ensure my children's education and lifestyle at least for the next 10 years, and then switching to medical insurance once the children are grown up.
Both advisers say that I also need to set up a rainy day fund in case I lose my job, get sick or need some ready cash for an emergency.
Staunton suggests an amount equivalent to six months' income or six months' spending. Pong notes that I will also need to save to pay my tax bill, and to cover unexpected expenses such as emergency travel or celebrating weddings or birthdays.
I am just about in time to fund my retirement, says Pong, adding that 40 is typically an age of heavy financial burdens with most people funding their children's education. Also, it's not easy to move further up the career ladder at such an age. Remuneration is likely to be flat, or to rise in low increments, or only in line with inflation. Inflation will also increase the costs of education, rent and food, and I should factor that into the calculations for my financial needs. Staunton says inflation could halve the value of my money every 25 years.
If I want an income of HK$40,000 per month, or HK$480,000 per year, when I retire, that will have to come from the investments I hold at retirement. Staunton and Pong agree that a benchmark return of 5 per cent is feasible over the longer term. If HK$480,000 is the 5 per cent income that needs to be generated each year, the total investment amount would be HK$9.6 million. That works out at a whopping HK$64,000 per month - almost my entire income. But that figure is based on a 0 per cent return, notes Staunton. Nonetheless, I should consider cutting my expenditure and increasing my savings, suggests Pong.
He points to an interesting difference between Asian and Western savings habits.
Westerners tend to deduct their spendings from their income, and save the remainder. Asians, he says, calculate differently. They start with their income, and deduct the amount they need to save to reach their education and retirement targets.
"After you subtract this, whatever's left you can spend," says Pong. "Asian people try to save for a target, especially concerning education for their children."
I could also consider working part-time after retirement, he suggests, and not just for the added financial benefits.
"First of all, it keeps you young and healthy," he says, and adds that it can also save me money.
"If you spend more time working, you have less time for spending. If you have more leisure time, you find ways to spend," says Pong.
When choosing my investments, I should prioritise flexibility, advises Staunton.
"We believe that flexibility should be very, very important," he says. "Even if someone's got a really long-term goal, we would look at the shortest-term vehicle in the offshore marketplace. Regular savings vehicles in Hong Kong tend to range from five to 30 years in length."
A five-year plan ties me up only for that length of time, leaving me free at the end of the term to switch to other products that may have emerged in the meantime.
Committing to such a plan will also keep my financial adviser on his toes, says Staunton.
"Knowing that you're going to have that flexibility in five years is going to make me do my job better during those five years," says Staunton.
"It gives you a sort of added level of accountability over your financial adviser, which I think is important."
Finally, he advises making a will to ensure that whatever assets you do have by the time you die can be passed on to your beneficiaries at a very painful time in the fastest, easiest and cheapest way.
So what can a good financial adviser do for you?
The answer is: a lot. Just talking about your financial future can encourage you to take it seriously, which is the first step to actively planning for it.
"Some clients don't always end up doing anything, but just the process of going through the financial analysis can be quite beneficial in itself because most people never think about these things," says Staunton.