Retirement Decisions forMickey and Minnie (June 2008)

Prepared by : Janet Ng, Stanley Tam, Calvin Wong, Joanne Yeung, Omar Yip, Patrick Yiu

Table of Content

• Brief Summary• Client’s Background• Financial Status• Financial Review Objective• Assumptions Review• Income Requirement for Retirement• Recommendations

• 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

Client’s 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

Working Background

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

• 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 Background

• Current Income

Financial Status

Mickey MinnieAge 38 36Monthly Salary HK$70,000 HK$30,000Occupation Senior Engineer TeacherTarget retired age 57 55

• Monthly Expense HK$ %Food $ 7,200 8.00%Housing $ 19,800 22.00%Clothing and Personal Care $ 7,200 8.00%Medical Expense $ 1,800 2.00%Transportation $ 6,750 7.50% Miscellaneous $ 15,750 17.50%Insurance $ 4,500 5.00%Gift and Contribution $ 900 1.00%Tax $ 13,500 15.00%Parental support $ 11,700 13.00%Total Expense <per month> $ 89,100 100.00%

Financial Status

Financial Status

• Asset and Liabilities

Current Value Expected Return Future Value Expected Return Future Value

Cash 200,000 Shares 1,000,000 10% 6,115,909 12%

8,612,762Unit Trust 500,000 10% 3,057,954 12% 4,306,381MPF/ORSO 600,000 3,000,000 3,000,000 2,300,000 19yrs 12,173,863 19yrs

15,919,143

Face Value in Insurance HK$Life – Husband 3,000,000 Life – Wife 1,000,000

Financial Review Objective

• Client’s original retirement plan– Sole objective is :

sustain to pre-retirement living standard when retiredsustain 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

• 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

Year

Age at Future / Expected Age

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– 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

• 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