While individuals, asset managers and governments across the developed world have long focused on retirement planning – i.e. saving and investing for the golden years – surprisingly little attention has been paid to decumulation planning.
As life expectancy lengthens and expected retirement spans extend, the importance of planning how to deploy accrued savings to support retirement has never been more acute.
How to invest while in retirement
How should retirees in Hong Kong invest during retirement given lengthening life expectancies and the increasing risk of higher inflation?
In January 2018, Schroders undertook a study of Hong Kong residents’ views of investment, savings and spending as they look towards retirement. The Hong Kong Retirement Research is based on interviews with 700 people, from those who were eight years before their retirement to those retired.
In the video below, Lesley-Ann Morgan, our Global Head of Defined Contribution and Retirement, shares some of the valuable insights from this latest research and highlights three key lessons to help with those who are starting to think about retirement and also those who have recently retired.
On average, participants in our Hong Kong Retirement Research say they aim to save an average of HK$2 million for retirement, and they expect to spend on average HK$12,800 per month when they have stopped working.
With lengthening life expectancies, HK$2 million is likely to be inadequate. Hong Kong men are expected to live to an average of 81 years and women to 87 years1. For a person planning to retire at 65, HK$2 million will be drawn down in 16 years, assuming a 4-5% annual return on their savings.
Based on our research, those who make a clear financial plan for retirement and start saving about 14 years earlier would save around twice the amount compared with those with no plan. This means that if retirees have a plan for retirement, save and invest suitably, they're likely to be able to retire earlier than those who do not. Our findings also showed that those who had a plan, started thinking about retirement at age 43 while those who did not, considered it only at age 59.
The participants on average expect around an 11% return over a three-year period while allocating near 40% of their assets in cash and time deposits. About 65% said they wanted to leave about HK$2 million, the same amount with which they expected to retire, to their family when they pass away.
An 11% return on investment is unrealistic for a cash-heavy retirement plan. With investment strategies concentrated on low risk and low return assets, a retiree’s reserve may not be adequate to cover the three key risks that people face in retirement: living longer than expected, experiencing higher inflation than expected and getting lower investment returns than expected.
We believe if a portion of an individual’s retirement savings is put into a government-backed annuity scheme such as the recently proposed Hong Kong Mortgage Corporation (HKMC)’s plan, the remainder should be invested in suitable growth assets. The best strategy is not to completely de-risk at retirement. Investing via a diversified approach offers the ‘Goldilocks’ of investment trade-offs: neither too much risk nor too little return. This should help to generate the income and returns that Hong Kong retirees need and want.
For details, refer to Schroders: Post-retirement solutions – Putting your savings to work (August 2017).
The research showed that about 80% of the people rely on relatives and friends for recommendations, and only 54% would seek advice from bank relationship managers or financial advisors.
This poses the risk of being exposed to a mix of information that may not be professional advice and may leave Hong Kong people vulnerable to having their individual character traits influence their ability to make rational investment decisions.
Later this year, the government-owned Hong Kong Mortgage Corporation (HKMC) will launch the city’s public annuity scheme, which would allow elderlies aged 65 and above to invest HK$1 million in exchange for a guaranteed monthly income until death.
Based on our research findings, 19% were either very interested or quite interested in annuities as an investment option.
When asked specifically regarding interest in the life annuity scheme, 30% were either very interested or quite interested. Furthermore, 52% of respondents were either very interested or quite interested in insurance savings plans, many of which have annuity-like mechanism built-in.
Separately 34% of the respondents were ‘neutral’ on the HKMC scheme, which could mean that they were waiting for more information about this programme.
Based on the findings, Hong Kong people generally have quite a high interest in annuities compared to many other regions around the world. The level of interest may be due to the fact that the scheme provides for a monthly income for life.
Based on our research findings, we believe that the optimal post-retirement solution for Hong Kong people would be a combination of cash for immediate spending needs, an annuity and some higher risk investments to provide growth and income for the future. The plan should involve accepting more calculated equity risk as it should substantially improve the chances of maintaining purchasing power against in inflation and growing savings.
Please visit the “Post-retirement solutions” tab for more insights on how Schroders could help structure solutions for retirees.
1 2017 global life expectancy ranking, Ministry of Health, Labour and Welfare, Japan.↩
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