Retirement Decisions for Mickey and Minnie (June 2008) Prepared by : Janet Ng, Stanley Tam, Calvin Wong, Joanne Yeung, Omar Yip, Patrick Yiu
Jan 06, 2016
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