The latest HSBC Quality of Life Report revealed that the ideal retirement savings amount of respondents in Hong Kong is HKD 8.6 million. However, based on current savings levels, there is a gap of HKD 6.37 million or 74% required to achieve this goal. As such, it is fairly evident that members will not be able to achieve this savings goal based on their current savings strategy and must therefore seek alternative ways of approaching retirement.
Delaying retirement enhances security
Although there is significant work pressure in Hong Kong, many members wish to retire early. However, the retirement age has a profound impact on retirement savings. The earlier a person retires, the shorter the accumulation and compounding period for retirement savings, which means a longer period of using retirement savings to cover post-retirement expenditure.
Let's consider a 30-year-old male who retires at age 60. He will have a 30-year accumulation and compounding period to age 60. Based on the average life expectancy for a 60 year old male of 84, his retirement savings will need to cover post-retirement expenditure for 24 years. If retirement is delayed to age 65, say, the accumulation period increases to 35 years, and the post-retirement period decreases to 19 years. Therefore, delaying retirement, if feasible in terms of health, can significantly improve the efficiency of one’s retirement savings.
Mandatory contributions provide only a basic level of retirement security
In addition to possibly delaying retirement, members should consider increasing their retirement savings beyond the mandatory minimum level within the Mandatory Provident Fund (MPF) system. The objective of the MPF system at its simplest “mandatory” level, is to provide basic retirement income security. It is not intended to provide a retirement lifestyle equivalent to that enjoyed immediately prior to retirement. For example, with a monthly contribution of HKD 3,000 (the combined employer and employee mandatory contribution limit), and assuming an average return of 3.7% per annum (the average return of MPF mixed asset funds since inception), the accumulated balance after 40 years would be around HKD 3.3 million, less than a half of survey respondent's ideal target amount. To achieve this amount using the same investment return and timeframe, retirement savings contributions would need to increase to approximately HKD 8,000 per month.
Tax-deductible voluntary contributions – a suitable retirement savings vehicle
If one decides to increase monthly retirement savings, it is important to consider the suitability of the retirement savings vehicles that are available.
In addition to having a wide range of investment fund choices, it is important that fees and costs are reasonable and there is flexibility to allow for the easy adjustment between fund choices to allow for changes in members' risk tolerance. Among the many investment choices, Tax-deductible Voluntary Contributions (TVCs) is a vehicle within the MPF system which meets these criteria. According to data from the MPFA (Mandatory Provident Fund Schemes Authority), there were approximately 68,000 TVC accounts at March 31, 2023, representing 79% growth since inception in 2019 . Of these, one-third of TVC accounts are held by members under 45 years old, indicating the significance and recognition of TVCs among the younger workforce.
Tax benefits and low-cost characteristics
TVCs are tax-deductible, allowing members the ability to reduce their tax liability. The tax-deductible limit in any tax year is currently HKD 60,000 (in combination with qualified deferred annuity premiums). Additionally, TVCs are subject to the same withdrawal rules as MPF mandatory contributions and, being part of the MPF system, they enjoy similar benefits, such as low fees and a wide range of investment fund choices.
The annual tax deductible limit effectively translates to a monthly contribution of HKD 5,000, although most policies allow members to contribute in a flexible way during the tax year. If this amount is taken together with the mandatory minimum MPF contribution of HKD 3,000 (making HKD 8,000 per month in total), the target retirement savings of HKD 8.6 million mentioned by survey respondent is achievable based on the aforementioned timeframe and investment return assumptions.
If members are not yet participating in TVCs, they should consider this opportunity and take advantage of the tax deductibility and enhance their retirement security.
