A multi-income journey into the emerging high-yield potential
Income investors like us have stayed the course as we ride through the four seasons. Where do we see income opportunities?
The internet is full of viral videos showing novelty shortcuts for increasing productivity. There are so-called ‘life hacks’ for everything from household chores to academia.
What about life hacks for retirement planning? These are commonly overlooked, but they may be the most critical for your future.
The best way to get started is to focus on what you can control – how much you save and how you invest.
Hong Kong households tend to be good savers, however, their good savings behaviours are handicapped by the fact that a large portion of savings are in cash3, an asset class that has delivered negative real returns against Hong Kong’s Consumer Price Index over the past 15 years4. This could curb investors' chances of accumulating sufficient wealth to achieve their retirement goals, especially young investors with a long runway before retirement who can and should use time to their advantage to improve their savings growth potential.
To help Hong Kong residents better prepare for retirement, the government introduced the Mandatory Provident Fund (MPF) scheme in 2000 which mandates employers and employees to each contribute 5% of the employee’s income to the scheme. However, the total is capped at HK$3,000 per month, which may not allow individuals to build a big enough retirement nest egg.
According to our June 2018 survey on investor retirement sentiment5, Hong Kong investors estimate they will need HK$4.1 million by the time they retire to maintain the same lifestyle after they stop working. However, they feel that they are only able to achieve HK$3.4 million by the time they retire - a shortfall of 17%.
Last year, the Hong Kong government launched a HKMC Annuity Plan for retired people in the city. Residents aged 65 years or above can apply for the plan by paying a single premium in exchange for guaranteed monthly annuity payments for life. Let’s say you are 65, you can pay a single premium of HK$1 million for monthly annuity payments of HK$5,300 to HK$5,800 for life6. These payouts alone very likely won’t be sufficient to maintain your lifestyle in retirement, let alone allow you to enjoy the retirement lifestyle you want. This public annuity payout and other insurance solutions may help provide you a floor – meaning a basic income in retirement to cover your basic spending needs.
To enrich your lifestyle and enjoy the retirement you want, you need to take control and put your savings to work by investing in growth assets in a diversified2 way and balancing current income with long-term growth.
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There are three retirement life hacks that can help:
To meet your retirement goals, it is important to invest in long-term growth assets to protect against the eroding effects of inflation.
When you are young and saving for retirement, investing in growth assets allows you to use the power of compounding to achieve your long-term retirement goals at a lower cost compared to cash savings.
As you shift into retirement, it is natural to prioritise income, but growth is equally important to keep up with inflation, especially healthcare inflation. Healthcare cost inflation in Hong Kong outpaces general inflation, making it a significant future expense. Mercer Marsh Benefits’ 2018 Medical Trends Around the World survey7 showed that Hong Kong’s medical costs grew by 9% in 2017, which was six times the location inflation rate of 1.5%.
In our June 2018 survey on investor retirement sentiment, 76% of participants indicated they are worried that health care expense will become their biggest retirement expense in retirement5.
So, even in retirement, you can’t just look for income and not consider growth investing. You will need a balanced approach that includes equities for growth to cover future healthcare expenses.
As market conditions change, you should be well-diversified to protect your wealth.
With the ever-changing market environment, there is not one single asset class that can consistently outperform every year. But investing in a diversified portfolio over the long term could help generate a more stable risk and return profile compared to holding only one asset class. A well-diversified long-term portfolio is better placed to protect against today’s market uncertainties while growing your wealth for future spending needs.
Most people have other priorities for their time that don’t include active investing. Using investments such as multi-asset funds1 to participate in the market, and thereby tapping into the stock-picking and asset allocation expertise of a professional for a small fee, could save the expense of your time and be a less complicated way of preparing for your future and saving towards retirement.
When it comes to investing, many Hongkongers generally seek to maximise current income, regardless of their age. One way to achieve this is by investing in multi-asset income strategies1. This flexible investment approach balances income and growth by seeking income opportunities globally, aiming to provide stable, risk-adjusted income and long-term growth potential.
While you may be tempted to chase the highest yield, it is important to not overreach as it can expose you to higher risks. Look for managers who focus on risk-adjusted returns in an effort to deliver strong income and growth potential in a balanced way – without overextending for it. At different points in life, you will have varying needs and face changing risks. Multi-asset income investing can play a role no matter where you are in your retirement journey.
When you are young, it is important to maximise growth. Reinvest your income, so that you can put more of your money to work towards your future. When you are in retirement, you may want a consistent income stream to cover your day-to-day expense, whilst at the same time growing your principal and protecting your wealth.
No matter how near or far you are from retirement, planning for your future should be a priority. Even if you haven’t focused on it, it’s never too late to begin speaking to a financial advisor to explore what investments options may be right for your retirement planning goals. The simple retirement life hacks here can help towards the goal to make your retirement all you hope it will be.
1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
2. Diversification does not guarantee investment return and does not eliminate the risk of loss.
3. Source: Stock Investor Survey (2006) by the Hong Kong Securities and Futures Commission, J.P. Morgan Asset Management. Guide to the Markets – Asia – On the Bench. Data reflect most recently available as of 31.03.2019.
4. Source: J.P. Morgan Asset Management. Real total rate of return over the past 15 years (2004-2018) of cash was -2.1%. Inflation (Hong Kong Total Consumer Price Index) over this time period was 2.6% compared to cash returns (Hong Kong bank deposit rate) of 0.5%. Currency is HKD.
5. Source: J.P. Morgan Asset Management, “Hong Kong Investor Confidence Index”, June 2018.
6. Source: HKMC Annuity Limited.
7. Source: Mercer Marsh Benefits, June 2018.
Investment involves risk. Investors should consult professional advice before investing. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.