We Cannot Rely on MPF For Retirement
Many of you might have wondered, can MPF provide enough security to meet our retirement needs? Suppose you start your MPF program at 21. The scheme allows you to save up to HK$2,000 per month. When you retire at 65 you should have saved HK$1.08 million. Given the rising life expectancy over time, let's assume your life expectancy is 85. What will be the retirement expenses for those 20 years? Can you rely on MPF to meet this amount? It's only possible with a very high investment return, which is unrealistic.
Retirement Planning is Increasingly Important
Perhaps not many of you have realized the increasing importance of retirement planning. The society is ever changing, and the traditional Chinese thinking of relying on their children to support their retirement is no longer valid. At the same time, Hong Kong's population is aging. Those who are currently at their thirties or forties can live to 80 without much doubt. Those at the age of 20 have more than half chance of reaching the age of 85. What is more, people tend to retire earlier than they used to be. Nowadays many people plan to retire at age 55. These translate into a retirement life of 20 to 30 years. How can we support our retirement life for such a long time if we don't plan and save ahead?
3 Pillars for Retirement
So how should we plan our retirement? The Word Bank recommended governments to enforce 3 pillars for retirement: provident fund schemes with compulsory contribution, social security by the government, and personal voluntary savings plan and insurance. Let's look at the situation in the US. US Treasury Dept conducted a survey in 1993. The findings on retirees' financial sources for retirement are: 23% from social security, 19% from pensions, 32% from personal savings, 24% from continued working, and 2% from others. Americans used to have a low savings rate, and their social security system is better than Hong Kong's. Yet one-third of their retirement expenses come from personal savings. You can probably understand the importance of having personal savings in addition to MPF.
Save 10X Your Annual Income for Retirement
How much do we need for retirement? There is no definite answer because different people have different living standards. Generally speaking, an average person's retirement expenses will be about 70% - 80% of the pre-retirement expenses. Suppose you retire at 65 and have 20 years to live after retirement. The living expenses for those 20 years will be 12 to 13 times your pre-retirement annual income, given that your expenses are 80% of the income before retirement. Personal finance professionals in the US and Europe advise people to save least 10 times their pre-retirement annual income. If it happens that your savings are less than 10 times this annual income, what can you do? You probably have to postpone your retirement, or to work part time retirement, and/or spend less with a tight budget.
How Much Should the Monthly Savings Be?
Suppose you take immediate action and start to save for retirement today. What amount do you need to save every month to reach the target of 10 times your pre-retirement annual income? Assume your salary increases in line with inflation, you may refer to the table and check how much you should save. If you are under 45, your reference average annual real return is 5%. If you are over 45, you need to be more conservative and take 3% as the benchmark. Suppose you retire at 65. You need to save 12% of your salary if you start at the age of 30. If, say, you start at 40, then you have to save 22% of your salary. MPF saves 10% (or $2,000) for you, the balance has to be from voluntary savings. |
