Retirement Decisions for
Mickey and Minnie (June 2008)
Prepared by : Janet Ng, Stanley Tam, Calvin Wong, Joanne Yeung, Omar Yip, Patrick Yiu
Table of Content
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Brief Summary
Client’s Background
Financial Status
Financial Review Objective
Assumptions Review
Income Requirement for Retirement
Recommendations
Client’s Background
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Mickey & Minnie is a typical HK middles class
Mickey is age 38 & Minnie is 36
DINKS ( double income no kids)
They tend to enjoy their life after work
– e.g. red-wine, watch, car and golf
Working Background
Mickey
• works as a senior
engineer
• The industry comes
across ups and downs
• The long working hour
makes them stressful.
• stomach problems
Minnie
• teaching in private
secondary school for
over 10 years
• wants retire
simultaneously with
husband
Financial Background
• No Property
• Travel overseas several times per year
• No financial burdens apart from support for parents
• Mickey & Minnie’s mother is age 78 & 75 separately
• Their parents’ allowances are equally shared with other
sisters and brothers
•Believe they can take care of their own finance
• 2 years ago, they started up investment for retirement
Financial Background
• The current portfolio is around HK$1M
• Mainly in blue-chip shares and mutual fund
• Monthly save of HK$10,000 through mutual fund since
last year
• Their coverage is only contain life insurance
• All living benefit such as critical illness and medical
are not existed.
Financial Status
• Current Income
Age
Monthly Salary
Occupation
Target retired age
Mickey
38
HK$70,000
Senior Engineer
57
Minnie
36
HK$30,000
Teacher
55
Financial Status
• Monthly Expense
Food
Housing
Clothing and Personal Care
Medical Expense
Transportation
Miscellaneous
Insurance
Gift and Contribution
Tax
Parental support
Total Expense <per month>
HK$
$ 7,200
$ 19,800
$ 7,200
$ 1,800
$ 6,750
$ 15,750
$ 4,500
$
900
$ 13,500
$ 11,700
$ 89,100
%
8.00%
22.00%
8.00%
2.00%
7.50%
17.50%
5.00%
1.00%
15.00%
13.00%
100.00%
Financial Status
• Asset and Liabilities
Current Value Expected Return Future Value Expected Return Future Value
Cash
Shares
Unit Trust
MPF/ORSO
200,000
1,000,000
500,000
600,000
2,300,000
Face Value in Insurance HK$
Life – Husband 3,000,000
Life – Wife
1,000,000
10%
10%
19yrs
6,115,909
3,057,954
3,000,000
12,173,863
12%
12%
19yrs
8,612,762
4,306,381
3,000,000
15,919,143
Financial Review Objective
• Client’s original retirement plan
– Sole objective is :
sustain to pre-retirement living standard when retired
– Retire after 19 years from now
– life expectancy of 30 years of retirement
– When reach retirement age, their investment return to
4% p.a.
They believe
• Their investment
• accumulate HK$12M to HK$16M for their retirement
• average of 10% ~ 12% return p.a.
• Their income is very secure
• Their salary will increase at 2% p.a.
• Inflation is 3% p.a.
• Spending scale-down when retirement
Assumptions Review
• Inflation Issue
– Investment return 4% p.a. when retired.
– Adjusted 3% to 3.5% CPI.
– Needs +/- HK$3.14M (3% p.a.)
– +0.5%pa=HK$220,000,per HK$10,000.
– HK$3.14M to 3.36M.
– HK$220,000 x 9 times = +/- HK$2M
Assumptions Review
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Inflation Issue
– 2nd concern is in macro-economic level.
– China inflation over 8.7%.
– HK dollar is pegged to US dollar.
– Fuel Inflation.
– Medical inflation pressure
Assumptions Review
• Retirement Age
– Planning for retirement 19 years from NOW.
– 10% to mutual fund investment monthly.
– Mickey-Golden handshake incentive offer.
– Minnie-psychological pressure.
Assumptions Review
• Life Expectancy
Age at Future / Expected Age
Year
Male
Female
2008
38 / 80.26
36 / 85.64
2027
57 / 83.86
55 / 88.55
2036
66 / 85.71
64 / 89.7
Assumptions Review
• Risk versus expected return
– Heavily invest in stocks & emerging market mutual
funds
– Not only to the expected return
– Dollar cost averaging
– Suggest annuity products to reduce the overall risk
Assumptions Review
• Emergency funds prior to retirement
– 6 months of monthly expenditures
– Buying extra accidental insurance
– Insurance can withdrawal $$$ when emergency
– Critical illness insurance
– If no longer work
Assumptions Review
• Retirement Home Issue
– Currently renting an apartment
– Financing a home
– Close to retirement age, home to feel more secure
– Relocate to smaller home or back to China
Assumptions Review
• Medical and long term care issues
– Employer’s group medical
– Insurability ??? post retirement
– Long term care Insurance
Income Requirement for Retirement
• Expense Method Approach
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Forecast spending pattern
Current spending pattern
Voluntary reduction
Some spending will increase
Suggest accumulate asset no less than HK$39.7M
Best for pre-retirees who are close to retirement age
Income Requirement for Retirement
• Replacement Ratio Approach
– Final salary close to 70% of the last income.
– Changes in spending pattern
– Not the deterioration in standard of living
– Change in retirement spending habit
– Suggest accumulate asset no less than HK$39.2M
– Compare the two figures from two approaches
Recommendations
• Solution to retirement shortfall
– Shortfall HK$24M
– Buy a home immediately
– Mortgage loan:
• HK$3M
• 20 years
• 5% interest rate (i.e. HK$20,000 per month)
– Mortgage repayment offset by the home rental
payment
– Reduce retirement expense by 22%
Recommendations
• Solution to retirement shortfall
– Over-relay on investment return
– Set aside extra HK$10,000 / month
HK$26.5M
– Scarify their holiday from 3 times a year to 2 times a
year
Recommendations
• Solution to retirement shortfall
– Not suggested delay their retirement age
– Although deferring a retirement schedule reduce the
need for asset accumulation
– Post retirement hobbies
– Identity and contribution to the society
– Consult expertise for recurring income
Which method is better estimate?
Expense method vs. Replacement Ratio method
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Final salary vary a lot industry or environment
Current seniority supply versus demand
Exogenous changes greatly influence
Greatly reduce current pressure additional saving
Step up rate salary increases
Salary increase extra distribution saving for retirement