Retirement planning is critical to everyone looking forward to a comfortable retirement life. There are certain pitfalls one should consider while planning for retirement. Here are five common ones to avoid.
1. Underestimate life expectancy
Hong Kong’s life expectancy is amongst the highest in the world, with an average of over 80 years. With medical technology advancements and improved living conditions, life expectancy continues to increase. As such, we must consider longevity risk. The more we are able to set aside for retirement, the more financially sound we will be during retirement years.
2. Underestimating medical expenses
Medical cost increases with age and it is one of the biggest expenses one may face during retirement years. Yet medical cost keeps rising at a faster pace than the general inflation, and it is important to factor in medical cost when working out your retirement expenses. If you plan to use medical insurance to cover your medical cost, bear in mind that the older you get, the higher the medical insurance premiums. Also, you should consider whether the protection coverage is sufficient and suits your needs.
3. Underestimating inflation
Hong Kong’s average annual inflation rate in the past decade was about 2-3%. Let’s take 3% as an example, an expense of HK$10,000 will become HK$13,439 in ten years time and HK$18,061 in twenty years time - that is a 34% and 80% increment from now. Inflation is a key risk for retirement. The longer your retirement period, the bigger the impact inflation will be.
4. Overestimating investment return
When it comes to retirement investment, many people tend to be overoptimistic about the return. This could run the risk of not having sufficient reserves to support your retirement life as the actual accumulated retirement savings could be smaller than expected. Retirement investment period can last up to several decades, making it extremely difficult to continuously achieve high year-on-year growth. Also, as we approach retirement age, we should reduce the risks of the investment portfolio and subsequently the expected return. Retirees’ investment portfolios should be more conservative and risk-averse.
5. Assuming retirement is far away
For many people, retirement may seem a long way away. So even though they understand retirement planning is important, they would not think about it until later. If you only start retirement savings in your 40s or 50s, it may be difficult to accumulate the desired amount given the shorter investment horizon. Another key problem of starting late is that there is not enough time to grow wealth and benefit from the power of compound interest. Therefore, it is always better to start saving earlier because the longer the investment period, the more you will benefit from the effect of compound interest.
Don't know how to start? Try the IFEC Retirement Planner now! Simply answer a few questions about your savings and investments, retirement schemes, the lifestyle you expect to lead during retirement, and you will be provided the expected amount required when you retire, the expected accumulated savings and also the important factors to consider when planning for your retirement.
In addition, you can consider building your retirement savings via Qualifying Deferred Annuity Policies (QDAP) or Tax Deductible MPF Voluntary Contributions (TVC) which could entitle you to tax deductions. The deduction cap is $60,000 per year covering both products. Based on the prevailing highest tax rate (i.e. 17%), the maximum tax savings can reach up to $10,200 every year! Watch the Retirement Planning and tax-deductible products talk to learn more (in Cantonese only).
