IN BRIEF

• J.P. Morgan’s Hong Kong Retirement Readiness Survey findings reveal a major generational gap in expectations about retirement.
• Millennials expect to be able to retire earlier and with lower savings than their older counterparts. That may not be realistic. 
• Be practical in preparing for your retirement years: Invest early and regularly, diversify and stay invested.

Have you ever thought about when you will retire, what you want out of your retirement and, ultimately, how much savings you will need to maintain your desired lifestyle in retirement?

Many people give little thought to these questions. But they should. Studies have shown that the happiest retirees tend to have a calendar filled with social engagements, be they volunteering or pursuing new hobbies. Having a plan for your time can also help you better prepare financially to make the most of your retirement years. 

A GENERATIONAL GAP IN RETIREMENT EXPECTATIONS 

Findings from J.P. Morgan’s Hong Kong Retirement Readiness Survey reveal a major generational gap when it comes to retirement expectations.

Survey respondents aged 30 to 40 anticipate being able to retire, on average, by the age of 61 and expect that HKD 3.6 million in savings will be sufficient to support their retirement. In contrast, respondents aged 51 to 60 don’t expect to be able to retire before age 64 and estimate needing at least HKD 4.3 million in savings—a gap of HKD 700,000 (Exhibit 1). Not surprisingly, only half of the younger respondents have started saving for retirement beyond what is required under the Mandatory Provident Fund (MPF) scheme or Occupational Retirement Schemes Ordinance (ORSO), compared with 95% among the older cohort.

Hong Kong's millenials expect to retire earlier on lower savings
EXHIBIT 1: EXPECTED RETIREMENT AGE VS. ESTIMATED AMOUNT NEEDED TO MAINTAIN LIFESTYLE IN RETIREMENT

Source: J.P. Morgan Asset Management’s Hong Kong Retirement Readiness Survey, December 2019.
Sample size for this survey is 514 retail investors aged 30 to 60 who have at least five years of continuous investment experience, with liquid assets in excess of HKD 200,000. The survey was conducted in October 2019.

Simply put, Hong Kong’s millennials expect to be able to retire earlier with lower savings, even though they are likely to live longer than their older counterparts. As it stands today, life expectancy for a 65-year-old in Hong Kong is around 85 years for men and 90 years for women¹. Members of the younger cohort are expected to have an even longer life span, which means their likely smaller holdings of retirement assets would need to be stretched over a longer retired life, exposing them to greater longevity risk (the risk of outliving their savings).    

Our survey findings show that millennials, though likely to need a higher growth portfolio to meet their eventual requirements, are actually more conservative when it comes to investing for retirement. On average, their retirement portfolios have a 36% allocation to cash and insurance. That is the case even though millennials generally have more time on their side and can take on more risk than their older counterparts.

Although cash and insurance options may be perceived as “safe,” they tend to have lower return potential than a more diversified portfolio incorporating some mix of stocks and bonds. Ultimately, such seemingly safe investments, in the earlier stages of the journey to retirement, may not grow enough to meet inflation-adjusted spending needs in retirement.    

A WAKE-UP CALL?

Our findings suggest that younger members of the workforce may not have realistic expectations about retirement, raising concerns about their preparedness. Waiting too long to gain a more realistic idea of your retirement spending and savings needs may mean losing the advantages of time, risk capacity and the power of compounding to grow your assets while these factors are most clearly on your side.

Those nearer to retirement generally have a sharper picture of what retirement life will entail. You can learn from them—even if you are in your 40s or 50s. Consider taking these findings as a wake-up call to invest early and regularly, diversify, stay invested—and help ensure you arrive at retirement with the assets you need.    

FACING REALITY: HOW MUCH DO I NEED TO SAVE FOR MY RETIREMENT?

As you start your retirement planning journey, a natural question is “How much savings do I need to maintain my lifestyle in retirement?”

To put things in perspective, let’s use a hypothetical example to explain the level of monthly retirement spending that HKD 3.6 million in assets might be able to support in the future (Exhibit 2). A prudent retirement plan should account for 30 or more years of living expenses. Taking into account the impact of inflation, stretching HKD 3.6 million across 30 years would equate to a monthly spending budget of HKD 12,700. That monthly total would drop to just HKD 7,200 if the retiree simply held retirement savings in cash at a low interest rate. This underscores the importance of staying invested to generate required returns. Of course, just like any investment, there is no guarantee. If markets underperform, the annualized returns will be lower and investors may be subject to losses.    

Not investing can mean a lower standard of living in retirement
EXHIBIT 2: HOW MUCH MONTHLY RETIREMENT SPENDING MIGHT A HKD 3.6M NEST EGG PROVIDE?

Source: J.P. Morgan Asset Management; analysis as of February 2020.
Assumes retirement spending amount increases with inflation annually to maintain purchasing power over 30 years in retirement. Nominal return of investment (4.5%) is based on J.P. Morgan Asset Management’s proprietary 2019 Long-Term Capital Market Assumptions (10-15 years) for a portfolio of 12% MSCI Zhong Hua, 23% MSCI AC World, 65% U.S. Aggregate bonds (HKD). Nominal return for cash is based on the Hong Kong bank deposit rate over the past 15 years (2003–2017). Forward-looking inflation average estimate (2.7%) utilizes Hong Kong CPI from 2003 to 2018. For illustrative purposes only. There is no guarantee of returns. Investors may be subject to losses. The spending amounts supported could be lower. The exact allocation of the portfolio would also depend on an individual’s circumstance and risk appetite. Investment involves risk.  This hypothetical example is for illustration only, subject to change from time to time and does not represent any fund performance. Different investments have different volatility patterns. Not to be construed as an investment recommendation or advice.

In fact, even HKD 12,700 per month would require a tight budget. Hong Kong’s 2014–15 government census data² shows that an average retired couple in Hong Kong typically spent HKD 20,000 a month that year (the figure would likely be higher today). Sustaining that level of spending in retirement would require at least HKD 5.6 million in retirement savings. Moreover, this is only an average; every retiree is different. 

PAYING YOUR FUTURE SELF FIRST

In addition to investing in a diversified portfolio, an important principle is to “pay your future self first.” For example, regularly invest 10% of your salary toward retirement each month. Developing this savings discipline can help you prevent emotions from interfering with sound investment decisions and avoid the temptation to time the markets. Investing regularly means you will buy more shares when prices are low and buy fewer shares when prices are higher, spreading out the cost and risk and removing the worry of when to invest. There are many platforms available that allow you to set up an automatic program to invest your money on a systematic basis. A March 2019 survey we conducted in Hong Kong found that investors who saved regularly for retirement or set up automatic investment programs were more confident about achieving their retirement goals (Exhibit 3). 

Saving regularly helps investors feel more confident about reaching their retirement goals
EXHIBIT 3: CONFIDENCE IN ACHIEVING RETIREMENT GOALS AND REGULARITY OF SAVING

Source: J.P. Morgan Asset Management’s Hong Kong Investor Confidence Index, May 2019.
Sample for this survey consisted of 512 retail investors aged 30 to 60 who had at least five years of continuous investment experience, with liquid assets in excess of HKD 200,000. The survey was conducted in March 2019.

A SAVINGS CHECKPOINT

In reality, spending needs in retirement vary across individuals, largely due to differences in pre-retirement household income. In general, those who earn more spend more—before and after retirement—and will require larger retirement nest eggs. 

Based on J.P. Morgan Asset Management’s in-depth research, we have developed a checkpoint table to help you gauge the invested assets you should have today to be on track to maintain your lifestyle through 30 years of retirement, given your age and household income level. As an example, if you are 40 years old with a household income of HKD 50,000 per month, you need to have roughly HKD 3 million invested today specifically for your retirement (Exhibit 4). 

The amount you need to invest for retirement varies by household income
EXHIBIT 4: RETIREMENT SAVINGS REQUIRED TO MAINTAIN AN EQUIVALENT LIFESTYLE IN RETIREMENT

How to use:

• Go to the intersection of your current age and your closest current household gross monthly income.
• This is the amount of invested assets you should have today, assuming you continue contributions of 10% for retirement going forward. Example: A 40-year-old with a household monthly income of HKD 50,000 should have HKD 3,030,000 invested for retirement today. 

Source: Hong Kong Census & Statistics Department, Social Welfare Department, J.P. Morgan Asset Management; analysis as of June 2019.
For details on income replacement rate methodology, see Principle 2.2 in “Principles for a successful retirement,” J.P. Morgan Asset Management, June 2019.
* 10% annual contribution rate assumed for all income levels.
**J.P. Morgan’s model is based on J.P. Morgan Asset Management’s proprietary 2019 Long-Term Capital Market Assumptions (10-15 years). Pre-retirement portfolio is defined as 22% MSCI Zhong Hua, 43% MSCI AC World, 35% U.S. Aggregate bonds (HKD); post-retirement portfolio is 12% MSCI Zhong Hua, 23% MSCI AC World, 65% U.S. Aggregate bonds (HKD). This portfolio is customized by J.P. Morgan Asset Management Multi-Asset Solutions.
†Forward-looking inflation average estimate utilizes Hong Kong CPI from 2004 to 2018.
Lower forward-looking returns may require higher savings going forward. This chart is for illustrative purposes only and must not be used, or relied upon, to make investment decisions. Allocations, assumptions and expected returns are not meant to represent J.P. Morgan Asset Management performance. Given the complex risk/reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. References to future returns for either asset allocation strategies or asset classes are not promises or even estimates of actual returns a client portfolio may achieve. Currency in HKD. Investment involves risk. The hypothetical example is for illustration only and does not represent any fund performance. Different investments have different volatility patterns.

Your checkpoint value assumes your retirement nest egg is fully invested and that you continue to regularly invest 10% of your income for retirement. When it comes to investment, being diversified and staying invested for the long term are key practices with the potential to provide better risk-adjusted returns with lower volatility over time.

And as you can see, the earlier you get invested, the less you may need to save. This is largely because starting early allows you to take advantage of the power of compounding, helping you achieve your long-term goal at a lower cost.

KEY TAKEAWAY

Invest early and regularly, diversify and stay invested to better prepare for your retirement years.

CONCLUSION

For millennials, as you start your retirement planning journey, it is worth borrowing a page from your older counterparts to help bridge the retirement gap; get invested early to reap the benefits of compounding returns to grow your assets. If you’ve delayed investing or are not investing regularly, start now; you will never have more time on your side. Remember to diversify and stay invested along the way, for smoother returns over varying market cycles and, ultimately, for greater peace of mind in retirement. 

¹ “World Population Prospects: The 2019 Revision,” United Nations, Department of Economic and Social Affairs, Population Division, 2019.
² 2014/2015 Household Expenditure Survey, Hong Kong Census and Statistics Department, Government of the Hong Kong Special Administrative Region.

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