Successful retirement means making sure your investment strategy's on track, writes Nicky Burridge
Planning for retirement should be viewed as a lifelong process requiring regular monitoring. Checking to make sure you're putting enough aside, and that the funds are hard at work earning returns in line with expectations, can help to avoid disappointment down the road.
How much do you need?
The first stage of retirement planning is to try to work out how much is needed to cover your desired lifestyle.
This is a complex calculation that depends on a number of factors, including at what age you plan to stop working, where you will live, and spending habits.
As a broad rule, Michael Roberts, head of private wealth at HFS Asset Management, suggests: "If you own your own home and have no debt, you will need [annual income] somewhere between 50 per cent and 75 per cent of your current income."
The next step is to work out what level of savings is needed to generate your desired income. Someone who wants to retire on HK$25,000 a month is likely to need a lump sum of around HK$6 million in today's money.
While this may sound like a daunting target, it is achievable with a disciplined long-term approach.
If you start saving when you are 35, and assume an investment return of 7 per cent a year, you would need to set aside around HK$5,000 a month to have this sum by the time you are 65.
As with all saving, the impact of compound returns means the earlier you start setting aside money the better.
For example, someone who delayed saving until they were 45 would need to set aside around HK$12,000 a month to achieve a lump sum of HK$6 million at 65, more than double the amount if they had started 10 years earlier.
Sheila Dickinson, senior wealth manager at The Fry Group, advises getting an early start when it comes to saving. "You may have 20 to 30 years in retirement and you can't fund that by starting to save in the last 10 years of your working life," Dickinson says.
How much should you save?
There are a number of online calculators that can help determine how much you need to accumulate to achieve your desired retirement income, and how much you are likely to have to save each month.
HSBC has an excellent calculator in the retirement planning section of its online banking website.
But while it is important to have a target sum in mind, any saving has to be affordable.
"The starting point is looking at your budget. By making small changes to spending habits you can see where savings can be made," Dickinson says.
Another approach is to commit to saving a set proportion of your income each month as part of a total financial plan.
As a general rule, advisors suggest those aged between 25 to 34 should save between 15 per cent to 20 per cent of income each month.
Those who begin at 35 to 44 should try to set aside 25 per cent to 35 per cent of monthly income, while those who do not start until 45 to 54 need to save 34 per cent to 45 per cent.
"The reality of retirement planning is unless you have more than 20 years to save, then most of what you accumulate is going to be your savings, there is no magic formula," HFS' Roberts says.
Where should you save?
Your investment horizon and attitude to risk will also affect retirement calculations.
Equities generally offer higher returns, but they are also more volatile and better suited to individuals with a longer investment outlook. Fixed income and money market funds offer lower returns, suitable in instances when investors are seeking lower volatility.
Todd Pallett, partner at EXS Capital, says financial advisers often use something called the rule of 72. Divide 72 by the annual return on your investments to find out how many years it takes for your capital to double.
For example, HK$10,000 earning a rate of 7 per cent will double in value every 10 years, compared with every 35 years if you are earning a rate of just 2 per cent.
Pallett says there are generally three phases to retirement planning.
The first is an asset accumulation phase when you are younger and less concerned about volatility.
This is followed by an asset management phase when you are in your 40s and 50s, have built up some wealth and may no longer want to take the same level of risk.
Finally, there is an asset preservation stage once you have retired and focused on drawing down the retirement assets for income. "If you are looking to invest for a 20-to-30-year period, you really need to consider investing into growth assets, such as equities," Dickinson says. She also advises people to go for open-ended structures that give them a degree of flexibility, rather than products that lock them in for a set period of time.
Pallett at EXS Capital also tends to steer clear of products packaged as retirement plans.
"A lot of these products are manufactured and they have large commissions and fees that are not fully understood," he says.
He prefers putting money into exchange traded funds, which charge annual management fees in the range of 0.2 per cent to 0.8 per cent, making a cheaper option.
He advised taking an active approach to asset allocation, focusing on markets and sectors where there is growth, although these considerations should be weighed against factors that inc- lude risk tolerance and invest- ment experience.
HFS' Roberts urges a slightly different approach. He suggests acquiring income-generating assets to build up a portfolio that can provide income.
"If you needed US$50,000 a year you might buy a property that provides US$10,000 in rent," he says.
"You then buy another property, and keep doing that until you have enough income from your investments to be financially independent,"
One important factor to bear in mind is inflation.
"The money you have today is getting eaten away by inflation at a rate of around 4 per cent to 5 per cent a year," EXS Capital's Pallett says. "This means you need a return of 5 per cent just to break even."
It is also a good idea to try to increase the amount you save each year by at least the rate of inflation.
You also need to ensure that inflation is factored into your calculations on the size of the lump sum you will need when you retire.
Dickinson uses a long-term inflation rate of 3 per cent for pension planning.
This means that someone targeting a pension pot of HK$6 million in today's money would actually need to have saved HK$10.8 million in 20 years' time, once inflation is factored in.
Pallett points out that currency volatility can also make a big difference, particularly if you plan to retire in a foreign country.
One approach is to hedge this risk by allocating a portion of funds to investments denominated in the currency of your planned retirement destination.
It is also important to take into account the personal income tax rate of where you plan to retire. Tax rates in some foreign jurisdictions can be shockingly high for residents who have grown accustomed to Hong Kong's low tax regime.
"There are pension planning structures in Hong Kong that can be beneficial from a tax planning perspective, but careful consideration needs to be given to your own circumstances," The Fry Group's Dickinson says.
If you have left saving for retirement late, there are steps you can take to improve the situation.
One option is to delay retirement. Putting back your retirement from 55 to 65 gives you another 10 years in which to save and benefit from investment growth. Deferred retirement also means revisions to budget calculations which take into account life expectancy and time without income.
Another option is to continue working past the normal retirement age on a part-time basis.
"People may choose to ease down into retirement, such as doing consultancy work or working part-time," Dickinson says.
Shifting to a cheaper lifestyle to help stretch a budget, or downsizing one's home to free up more capital are also potential options.