Written by Professor Francis Lui
The average lifespan of Hong Kong people is among the longest in the world. It is 87 years for female and 82 years for male. But for the elderly who have retired or approaching retirement, the above life expectancy could be an underestimation. With the fast development in medical science, I believe a large portion of the elderly who have just retired could live beyond 90 or even 100 years of age. This particularly applies to women.
While long life is a blessing, it has to be supported by a material base. In other words, we have to ask ourselves: Do we have enough assets to support our day-to-day and medical expenses in the upcoming decades? In Hong Kong, we have an advanced public health system with affordable fees. Despite needing to queue for a relatively long time before patients suffering from certain illnesses can get treatment, most people of Hong Kong do not find the current level of medical expenses too threatening. However, with population ageing, it is doubtful that the government will have enough funds to maintain the present quality of healthcare services. For our own safety, we cannot afford to not set aside a sum of money for medical expenses after retirement in order to reduce uncertainties.
The elderly who are about to retire now are mostly from the baby boom generation. They were born after the war from about 1946 to 1965. This population is vast in numbers and their level of education is by no means low. Coupled with these is their experience of Hong Kong’s economic take-off – so they already know what poverty is, have strong survival instincts and some basic ideas of financial management. If only they pay enough attention, they will have less chance of making mistakes. So what are the things they need to watch out for in financial management?
No two persons has the same conditions when it comes to retirement. There is not a universal approach to financial management that may be applicable to all retirees, yet there are still a few questions that should be asked to begin with: what is our own age and our family members'? How much are the monthly costs for our present mode of living? Do we have properties or other assets? Could we expect our children to provide for us? Do we lack the ability to manage our own finances? How is my own and my spouse's health?
Suppose that we are expecting 30 more years to live and our monthly expenditure is $10,000, and we only manage to maintain an investment return which is proportional to the inflation rate, with no children capable of supporting us. In this situation, we may need about $3.6 million for retirement. If we do not have this amount of money, we would have to cut our expenses accordingly. For example, if our monthly expenditure is $5,000, then you will only need savings worth $1.8 million. The government's Old Age Allowance (i.e. “fruit money”) may be regarded as an additional source of income; so are the periodical contributions from children. Many elderly people are becoming very cautious about spending money nowadays, which is reasonable given the longer life expectancy. If we do not have enough savings, then even though we would be reluctant to cut our expenses, we would still be compelled to do so.
Of course, we would always hope to earn a bit more from investing, but we must work within our means. High-risk investment is something we should avoid after we have retired, in particular making large purchases of derivatives, which could easily put us in a very difficult financial situation. Unless we are in possession of a great fortune so that losing a few millions will not affect us in any obvious way, or else I think the investment of over a quarter of a retiree's total savings in stocks or mutual funds is already hitting the warning line. The objective of investment for retirees should be for preserving one's capital against inflation. It is therefore inappropriate to be overly aggressive. Investing in bonds is relatively low-risk and is suitable for the elderly, while speculations in foreign exchange should be avoided. If one has to invest in foreign exchange, it would be best to first understand the condition of financial markets around the world.
If you have real estate, you may consider reverse mortgage. This investment tool has various minor options, but the main idea is to enter into a mortgage agreement with a bank. One may still live in that property and receive a reliable monthly income but the property will be handed over to the bank once the owner passes away. This kind of plan is not yet popular in Hong Kong, but the government is rather keen to promote it.
While an individual's financial management may not be something grandiose, it is a rather interesting subject and can have a real impact on improving one's standard of living. I have always advocated lifelong learning to the elderly, as life can be much more fascinating if they read some quality books on financial management and make small investments on the side to stimulate their interest. Giving our brains more exercise can help to reduce the risks of brain deterioration too. However, the one thing to bear in mind is to avoid spending so much money in investingthat turns it into some form of a gamble.