Investing for your Retirement

  • Investing for your Retirement

    A report from Deloitte on ageing population revealed that people aged over 65 in Asia will surpass the population of the Eurozone and North America combined by 2042. The ageing population will grow from 365 million in 2017 to more than 520 million in 2027 in Asia.

    When you retire it is not just your life that changes gear, your investment portfolio should as well.

    Your pre-retirement portfolio is likely to be geared towards chasing growth, but once you stop working, the focus typically shifts to capital preservation and generating an income. What types of the assets you may want to consider holding during retirement? Let’s take a look of it.


    Is cash king?

    Most people will hold at least some of their assets in cash once they have retired. The advantage of cash is that it gives you easy access to your savings if you have an emergency. It is also classed as a low-risk asset, giving you peace of mind. But there are downsides to cash too. In the current low-interest rate environment, it is difficult to get good returns on cash. At the same time, inflation may cause the value of your savings to fall each year in real terms, unless you can earn an interest rate that is higher than the current rate of inflation.

    Know your bonds

    Corporate bonds often form part of a retirement portfolio. The advantage of corporate bonds is that they generally offer higher returns than cash, but as an asset class they are considered to be less volatile than equities. On the downside, historically low interest rates, low inflation and the asset buying programmes of central banks have depressed returns on bonds. It is also important to do your research and understand exactly what you are getting into, as corporate bonds can have very different risk profiles. As a general rule, once you have retired it is a good idea to stick to high-grade corporate bonds, and avoid riskier high yield ones, dubbed junk bonds.

    Bond with the government

    Like companies, governments also issue bonds to raise money. In Hong Kong, this is done through the Government Bond Programme. Another popular type of government bonds are the Treasury Inflation Protected Securities, known as TIPS, issued by the US government. The return you earn on government bonds varies according to which government is issuing them and their duration, but as an example, a recent 10-year Government Bond in Hong Kong paid annual interest of 1.25%.

    One of the advantages of government bonds is that because they are issued by governments, they are generally considered to be low risk. The returns are also often higher than you could earn by keeping your money in a savings account. But there are downsides too. Hong Kong Government Bonds tend to be oversubscribed, so they can be difficult to obtain. Once you take one out, your money is generally locked away for the duration of the bond, although some can be traded on secondary markets. TIPS are denominated in US dollars, so if you invest in these but still live in Hong Kong, you have the added risk of currency fluctuations.

    Dividend drivers

    Equities generally make up a large component of portfolios while people are saving for retirement, but this often changes once you give up work. While equities have traditionally generated higher returns than cash and bonds, they are also classified as a more volatile asset. As a result, they are often considered less suitable for retirement portfolios.

    That said, as long as investors are comfortable with the volatility, they can still have a place in a balanced portfolio. One of the advantages of equities is that they provide both growth, through rising share prices, and an income, through the dividends they pay. As a result, they can be a good way to protect your portfolio from inflation. But it is important to pick shares carefully during retirement. Financial advisors often suggest people putting money into equities during this phase of their life should stick to those of blue chip firms with a good track record of paying dividends.

    Bricks and mortar

    Like equities, property is another asset that can offer both growth and income. If you have enough money, buying an additional apartment to rent out can be a good way of generating an income during retirement. Rents generally rise as the cost of living increases, so it can also help protect you against inflation. But it is important to remember that you will have no income during periods in which your flat is not let, while you are also likely to face additional costs, such as maintenance and agency fees. Property is also a highly illiquid asset.

    Keeping your balance

    Wherever you invest your money during retirement, it is important to keep a balanced portfolio and spread your cash across different assets. We have all heard the phrase ‘don’t put all your eggs in one basket’, and this is particularly true when it comes to your nest egg.

    In Hong Kong, the government is working out a proposal to scrap the current system of allowing employers to make severance and long-service payments from the MPF scheme before 2020. However, it encountered confrontation from the business sector. It is believed that it will still take a while to compromise with a win-win solution. That said, we better plan our retirement with smart financial planning earlier to protect our quality of living.