Hongkongers must save 12 times their annual salary to afford pre-retirement lifestyles at 65, says Fidelity
- Employees must save an additional 20 per cent of annual income on top of MPF contribution, says pensions provider
- Adopt a diversified portfolio and change composition according to employee’s age
Hongkongers saving for a pension need to save an amount 12 times their annual income to retain their pre-retirement lifestyle at the age of 65, pension provider Fidelity International said on Wednesday.
This means an employee with the city’s median monthly income of HK$16,800 (US$2,145) as of last year will need about HK$2.4 million to maintain their current lifestyle once they retire.
This also shows that Hong Kong’s Mandatory Provident Fund, the compulsory retirement scheme with 2.8 million members, is far from adequate. Its members had only HK$380,000 saved on average at the end of September, 2018, according to data provided by the Mandatory Provident Fund Schemes Authority.
October stock market slump puts Hong Kong’s MPF on track for worst year since 2011
To fill the gap, Fidelity said each employee will need to save an additional 20 per cent of their annual income on top of their MPF contribution. The scheme, launched in 2000, requires that employers and employees each contribute 5 per cent of an individual’s monthly salary up to a maximum contribution of HK$3,000.
“It is important for employees to start saving as early as possible. The public should voluntarily contribute much more to their MPF, or other pension schemes, at a younger age,” said Luk Kim-ping, head of Hong Kong defined contribution business at Fidelity International.
“It is especially true for the younger generation, as the longer they save the more they benefit from the effects of compound interest,” he said.
The Hong Kong government is going to introduce tax incentives for retirement contributions of up to HK$36,000 a year, which Luk said will push people to contribute more to their pension schemes voluntarily.
Hong Kong’s MPF languishes among the bottom three such schemes globally, not meeting the future needs of pensioners, according to a worldwide study published last month by pension consultancy Mercer.
Equity should take up at least 70 per cent of millennials’ investment portfolios
Luk said employees in Hong Kong should adopt a diversified portfolio and change its composition according to their age. He said many members between the ages of 20 and 40 were too conservative in their investments, as they invested less than 50 per cent of their MPF contribution in stocks.
The MPF allows employees to allocate their contributions to stocks, bonds, mixed-assets funds as well as deposits. According to MPFA data, 66 per cent of MPF assets were invested in stocks, 20 per cent in bonds and the rest in cash.
“Equity should take up at least 70 per cent of millennials’ investment portfolios for them to attain a favourable return in the long term,” said Luk. “Even amid a market downturn, younger employees can afford the volatility, as they will only collect their MPF investment returns 30 or 40 years later.”
Investors generally have become more cautious this year amid a volatile stock market. Hong Kong’s benchmark Hang Seng Index has dropped about 13 per cent this year, while mainland China benchmark Shanghai Composite Index is down by a fifth.
Hong Kong’s MPF ranks near bottom of the class globally when it comes to adequate savings preparation, consultancy says
“Young people should be happy when the stock market tumbles, because you are buying shares when the prices are low,” said Luk.
The MPFA has urged scheme members to remain calm and rational in the face of market volatility.
“When deciding how to allocate their MPF assets, they should consider factors such as their risk tolerance level and the life stage they are at, and should not try to time the market,” the authority said in a statement on Wednesday, as it released the latest data for the scheme.
The MPF is poised to have its worst performing year since 2011. In the first 10 months this year, it has suffered an average loss of 7.38 per cent in 430 funds, according to data by Refinitiv Lipper.
