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Accumulating Wealth for Your Retirement

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Risk associated with retirement planning

To meet your retirement needs, you should start to accumulate wealth for your retirement as early as possible. When making plans for retirement investment, it is important to first understand the risks that you are likely to face, and take appropriate measures to manage them.

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Longevity risk

At present, Hong Kong females have an average life expectancy of about 87 years while that of males is about 81 years. This level of longevity means that retirees may live for more than 20 years after retirement. The longer the retirement period, the higher living and medical expenses will be. Therefore, to obtain a certain level of protection for your retirement life, you should start planning as early as possible. It is also worth considering making MPF voluntary contributions to increase your retirement savings.

Inflation risk

Inflation exists in the normal economic growth environment. Inflation causes currency depreciation. If the returns from your savings or investments are lower than inflation, then in the long run your purchasing power will decrease. Therefore, when making plans for retirement investment, you must pay attention to the likely effects of inflation.

Investment risk

To increase retirement savings, some people choose to invest in investment products that have higher expected returns, such as stocks. However, investment products with higher expected returns also carry relatively higher potential risk. The Hong Kong stock market, which in the past has been very volatile at times, provides a good example. The difference between the highest and lowest levels of the Hang Seng Index has exceeded 60% in a single year during the period of financial tsunami in 2008. When this happens, there is a chance of investors suffering a sharp depreciation in their investment portfolio due to market fluctuations.

Investment risks and returns

In choosing your retirement investment portfolio, you should pay attention to the relationship between risks and returns. Generally speaking, investment products with higher expected returns (such as stocks) have higher potential risk of price fluctuations. Whilst stocks should on average deliver higher returns in the long term, there is no guarantee that they will deliver high returns over any given period. On the other hand, investment products with lower potential risks (such as fixed-term bank deposits) are less likely to suffer from significant price fluctuations, and can therefore be more reliable at preserving capital if that is the objective. However, the low expected returns may not keep up with inflation or preserve the purchasing power of capital. For these reasons, a good retirement investment portfolio needs to balance risks and returns.

One of the ways to manage investment risks is through diversification. This involves diversifying your capital across different asset classes (such as stocks and bonds) or regions (such as global markets), according to your risk tolerance level.

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Choosing MPF funds

The MPF is one of the key components of retirement investment. Please click here to know the factors to consider when choosing MPF funds.

Proactive management of your retirement investment portfolio

Retirement investment is a long-term investment. Investors of different ages should all proactively manage their retirement investment portfolios, and adjust them to match with their own needs and risk tolerance level at different times. Here are some examples for reference:

18 to 30 year old investors

Having just started working, their MPF accounts form a large part of their retirement investments as they have not yet begun any other retirement saving. Since there is still a long time before their retirement, they have a very long investment horizon and there is more time available to mitigate the impact of short-term market fluctuations on their investments. They can therefore consider choosing more aggressive, higher-risk MPF funds, such as the Equity Funds or the Mixed Assets Funds with a higher proportion of stocks, in efforts to achieve better returns.

31 to 49 year old investors

While their career is on track and their income is increasing with their experience or job promotions, at the same time their family obligations are probably increasing too. The period of time before their retirement is becoming shorter and so is their investment horizon. They can start considering investing part of their assets in lower-risk investment products such as bonds, to reduce their investment risks and protect their returns in the long term.

50 to 64 year old investors

Approaching retirement, they have an investment horizon that is shorter than that of the investors at the two earlier stages, and their risk tolerance level also decreases further. This being so, there is an even greater need for them to properly manage investment risks as they approach retirement. If they continue to focus on investing in higher-risk products and the market slumps, they will not have enough time to make up for their losses and their investment returns at retirement will be adversely affected. Therefore, as they approach retirement, they can gradually increase the proportion of their investments in conservative assets to ensure that their retirement investment portfolio remains stable and healthy.

Investors of 65 years old and above

At this stage, investors have already begun their retirement life. They need to withdraw their MPF benefits and other retirement savings to cover their retirement expenses. Since they have no regular income during retirement, generally speaking the proportion of conservative assets in their retirement investment portfolio should be higher than that of investors at the three abovementioned stages. This will help preserve their accrued retirement savings as much as possible. On the other hand, longevity may mean that their retirement life lasts for more than 20 years. If their investment returns are lower than inflation, their purchasing power will fall in the long term. Therefore, retirees still need to make appropriate investment during retirement with the aim of ensuring their investment returns can at least keep up with inflation.