7 key steps for retirement planning

The average age millennials expect to retire is 61¹, which given a longer average lifespan these days, means you'd have a longer period to enjoy your life after you stop working. But how do you get to that ultimate goal of financial freedom and ensure your retirement years are as secure as possible? The answer lies in retirement planning. Here are 7 key steps:

It's a common misconception that you should only start thinking about retirement when you're close to your final working years, or once grey hairs start appearing across 80% of your head. Retirement isn't just about your golden years; it's any time you choose to stop working or drawing a regular pay cheque - in other words, it's financial freedom. Why plan early for retirement? Well, the sooner you start to amass your retirement savings and the longer you can hold your investments, the more time you'll have to take advantage of opportunities. In fact, our "The future of retirement: Shifting sands" report found the average age millennials started saving for retirement was 26¹, which just goes to show more and more youngsters are seeing the value in planning for financial freedom earlier.

It's also more likely you'll have higher disposable income between the ages of 30-40, as compared to when you were just starting out as a fresh graduate, so that means you'll have more to put aside for retirement. After 40, you may find yourself with greater financial commitments, such as paying for your children's education or servicing a home mortgage, so if you only start saving or investing for retirement at this point, you may have missed out on the chance to really pad up your nest egg.

Is it your dream to move to Bali and live in a house by the beach? Do you want to go to culinary school? Is going around the world in 80 days your goal? Do you want to finally get to writing that book yo've always said you were going to write? Or do you simply want an early retirement?

Everyone has different aspirations, goals and lifestyles they want to pursue after they stop working, and being clear about what exactly you want is an important step in planning for retirement. Here are a couple of basic questions you'll need to answer as you chart out your goals:

Once you establish more clarity on the kind of life you want to be leading during retirement, you can work backwards to plan the savings and investments you'll need in order to hit those targets.

Once you have your retirement goals in place, it's time to start putting aside money regularly for it. It's sometimes tempting to take money you meant to save and put that towards a new bag or a holiday, but it's important to properly commit to your savings plan.

In order to help you get into the habit of saving for retirement, it might be a good idea to set up a direct debit to transfer a dedicated portion of your savings to an account you've set aside specifically for retirement or towards a retirement saving product. Don't worry if you have to start small; you can always add more to the pot later when you're able to; the most important step is to get a regular savings plan going as early as possible.

Building up a healthy level of savings is a key step in retirement planning, but in doing so, you should also factor in inflation. There may be a higher opportunity cost to saving if the return on your savings is lower than inflation levels. The average yearly inflation rate in Hong Kong between 1982 and 2019 sits at 4.3%², higher than the interest rate generated from most ordinary savings accounts. Depending on what your goals are, you may wish to consider investing for potentially higher returns that can go towards your funds for retirement.

Another risk you'll have to think about is longevity risk. As we see medical technology improve by leaps and bounds and standards of living rising globally, the average life expectancy of humans has also increased. Longevity risk is the possibility your financial resources or savings aren't sufficient for a longer lifespan and may be exhausted prematurely. In fact, the life expectancy of people in Hong Kong came out top of the list in 2018 - standing at an average of 85 years³. This means the average person will spend more years in retirement than before, so you'll need to ensure you have enough resources and funds for the life you want to lead after you stop working.

One way to handle inflation is to incorporate investments into your retirement plan, instead of purely putting your money into a savings account. The most pivotal question you'll need to answer when deciding which investment tools to choose is: what investment tools are most suitable for long-term growth that will at least beat inflation and get you to the retirement lifestyle you want to lead?

Aside from that, you'll also need to assess your personal risk appetite and tolerance: how much investment risk are you willing to accept and what is your tolerance towards short-term market volatility? If you're more adventurous, you might find yourself investing more in equities or high-yield bonds, which are riskier assets that also carry higher potential returns. If you're more cautious and risk averse, then perhaps bonds or other fixed income tools might be a better fit.

As you're building up your investment portfolio aimed for retirement, you can also consider tax-deductible retirement products, including qualifying deferred annuity plans (QDAPs) and MPF tax-deductible voluntary contributions (MPF - TVC). With QDAPs or MPF - TVC, all or part of your investment capital can be offset against your taxable income. The savings you'll get from such tax breaks can then go towards upping the disposable savings pot for your post-retirement life.

Retirement planning is not a one-time exercise. Review your retirement plan, goals and your progress at least once a year, making appropriate adjustments to that plan as your age and life conditions change. Your financial situation in your 30s is undoubtedly going to be different from when you're entering your 50s. Also, the amount of risk you may want to and can afford to take may change as you age. It's a good idea to periodically adjust your retirement portfolio to ensure your plan doesn't get left behind as these changes take place.

Retirement planning isn't only about saving and investing. A huge part of your plans should go towards making sure you and your loved ones are well protected in case anything unexpected or untoward happens. Our retirement report found that 79% of working age people believe retirees will have to spend more on healthcare costs in the future¹, so it's even more important to incorporate insurance coverage into your retirement plan. Besides life insurance and medical coverage, there are retirement insurance policies that provide a steady income for when you stop getting your monthly pay cheque, such as annuity retirement solutions. Some of these annuity plans (ie: QDAPs) are also tax deductible.

Retirement planning essentially sets you up for the chance to achieve your goals and live the life of your dreams when you stop working. Your retirement plan will be the key to get you to your ultimate goal of financial freedom, so there's really no better time than the present to get started on future planning.

Footnote

¹ "The Future of Retirement: Shifting sands", Hong Kong Report, HSBC

² Source: Development of inflation rates in Hong Kong, World Data

³ Source: "Ranking of the 20 countries with the highest life expectancy as of 2018", Statista