Retirement is a new life stage, during which you can devote more time to personal interests and hobbies. From an investment strategy perspective, the fact that employment-related income ceases may mean that you need to re-evaluate your future strategy as it may differ from that prior to retirement. In this article, we discuss our thoughts on investing your MPF savings after retirement.
According to the MPFA, retirement and early retirement are the most common reasons for the withdrawal of MPF benefits. In the 2nd quarter of 2021, there were 26,300 and 6,600 applications respectively, accounting for 55% of the total number of withdrawal claims. The amount of asset withdrawn at retirement and early retirement was HK$417 million, which is about 50% of the total MPF benefits withdrawn. After members become "eligible" to receive their MPF benefits, how should they make best use of their savings post retirement?
For most people, income reduces significantly after retirement. Some members resist investing their retirement and other savings because they are afraid of losing their money, and instead deposit their savings in the bank to earn interest, or even reuse cans or bottles for cash storage. However, these are not effective ways to manage your savings after retirement as the purchasing power of your cash will be eroded by “inflation”.
Inflation refers to the increase in the price of goods and services over time. Assuming inflation is currently around 3%, this means that an item that was originally priced at HK$100 will increase to HK$103 one year later. In other words, the purchasing power of money has "depreciated" by 3%. If you recall how much a can of soda was in childhood, you will now note that the price today has increased by several times since then. This reflects the long-term impact of inflation on the purchasing power of goods.
If members do not invest and allow their savings to be eroded over time by inflation, members will face difficulty in future in supporting their retirement expectations. Nowadays, the average life expectancy of men in Hong Kong is 83 years old and that of women is 88 years old. Regardless of whether you retire at 60 or 65, there is still a long way to go after retirement. This period is long enough to withstand a certain degree of short-term investment fluctuation. However, the cumulative impact of inflation over this period is likely to be very significant.
In view of this, a member's investment portfolio should include investments which counter the effects of inflation. This might typically include a mix of long-term investments with a heavier weighting to bonds, supplemented by global and Hong Kong equities. This type of investment portfolio is a better choice for anti-inflation and has low volatility. Also, by keeping your MPF balance invested in the MPF account, the effects of compound interest will help to grow your retirement savings over time.
To encourage members to keep their MPF savings invested in the MPF system, the MPFA has allowed members to withdraw their MPF savings in instalments since 2016. Therefore, members now have a choice either to withdraw their MPF balance in a lump sum or over time in instalments. According to the MPFA, about 95% of members take their MPF savings as a lump sum, and only 5% take instalments. As such, only a small number of members continue to invest through the MPF after retirement, and so some of the remainder may miss the opportunity to grow their retirement funds.
Members who withdraw their MPF savings in a lump sum should be aware of the importance of investing after retirement. Some members may prefer other investment channels, but the important point is to continue to make your savings work to counter the effects of inflation. The past returns of the MPF are satisfactory, and the fees are lower than some other investments schemes available in the market. On top of that, the government has strict supervisory requirements for the MPF, and so the MPF is often more diversified and less risky compared to other investments. Further, some MPF providers have already launched, or soon will, retirement income funds specially designed for retirees.
All in all, a certain amount of cash should be retained for ongoing and emergency use after retirement, but a proportion of the remaining savings should be invested to preserve their purchasing power.
This article in English and Chinese is available for download.
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