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How much do I need to retire?
Different people have different answers to the question, but it doesn't mean you can't think ahead and plan early to work out your budget for your golden years.
To know how much you need to live comfortably after you stop working, you have to first think about the age you want to retire at, the dreams to fulfil, a lifestyle you want and expenses to cover. Sound complicated? Don't worry, we will show you how to take your first steps to meet your retirement financial goals with savings, investment and protection.
Based on our FinFit Study in December 2020, even though a quarter of the respondents want to retire early before 55, only half of them know how much they need. Not to mention a mere 36% of all respondents were confident they'll have the funds ready for retirement.
Knowing when you want to stop working is not enough. If you want to achieve financial freedom and truly enjoy your retired life, you have to start thinking about your retired lifestyle.
The more affluent your lifestyle, the more money you need – this is easy to understand. Our FinFit survey also found out that Hong Kong people estimated an average of HKD 4.7 million to retire comfortably. But different people fancy different lifestyles, so the average number may not reflect your realistic amount. So, how much do you need to sustain your lifestyle after you have stopped working?
According to our HSBC Retirement Monitor report in early 2021, retired singles who aim at making ends meet and maintaining a basic life need about HKD11,000 for their monthly expenses. But if you fancy an affluent life and want to travel the world, then you'll probably need approximately HKD39,000 each month to support your lifestyle.
Let's say you plan to retire at 65 and live a simple life after. Based on the average life expectancy for men in Hong Kong, you will need HKD2,000,0001 to support yourself to the age of 82. Women tend to live longer than men, so you may need to save HKD2,600,000 to support yourself to 88.
If you prefer a more affluent lifestyle, you might need HKD7,000,0001 if you're a man, or HKD9,150,0001 if you're a woman. You can calculate a more realistic budget based on these numbers. For now, this is only a start.
Here's a problem with calculating how much you need to retire when you take into account the average life span: you could underestimate how much you actually need.
With average life expectancy increasing globally, it is possible you might live longer than the current expected life span. Therefore, using the current data to plan your future retirement fund could stretch you very thin in your later years.
Simply put, the longer you live, the longer you have to save and invest to support your ideal lifestyle. Therefore, it is all the most important to start planning your retirement early and reviewing your progress regularly.
When you no longer have to spend a huge chunk of your time working, you can finally be a full-time dreamer and live your life to the fullest. Want to take cello lessons? Plan to become a florist? Don't forget to take the cost of hobbies into account when drafting your retirement plan.
Moreover, as you getting older, you'll need more health care support. If you suffer from critical illness, the medical bills could be astronomical. That's why you should also plan early to cover the cost of long-term health care.
On top of that, if you plan to start a family, be sure to think about the cost involved in passing down your assets.
Use our Retirement Planning Calculator to see whether your current savings and investments will generate enough income for your retirement. If your fund falls short, you can head over to "7 key steps for retirement planning" and learn how to secure your lifestyle after you stop working.
Now that you know how much you probably need after retirement, how do you make your money work so you can move closer to a fulfilling golden life?
One thing you should know – the cost of saving is lower when you start earlier. Let's say you want to retire at 65 and start saving at 40 instead of 30. Assuming a 5% annual rate of return and a 3% annual inflation rate, the amount you need to save is actually 30% higher – all because you have missed 10 years of investment return.
In other words, having a late start will shorten your investment period and decrease overall returns. So the later you start to save, the harder it gets. And don't worry if you can only start with little money, you can still start early and build up your reserves bit by bit. FlexInvest allows you to do exactly that. You can start investing for your retirement fund with as low as HKD100.
Moreover, investing early doesn't just prevent your money from being eroded by inflation. It can also help you capture the compound effect, so you can have more time to jumpstart your retirement savings. Let's look at an example to see how.
Let's say you're 25 years old now, but only plan to invest HKD1,000 each month when you reach 30. With an annual investment return of 5%, if you plan to retire at 65, you would have accumulated around HKD1.1million after 35 years.
But if you invested same amount of money at 25, you can pump up the amount by nearly HKD400,000 to HKD1.5 million2. To know how to start working towards this goal, head over to our Wealth Starter hub for more tips on financial management and investing to prepare ahead.
To avoid your hard-earn reserves being discounted by healthcare and medical bills, you should incorporate insurance coverage into your retirement as early as possible. It is even more important if you are at a high risk of developing inherited diseases (such as diabetes) as some insurance companies could deny coverage.
For people who want to start a family, insurance plans that cover with critical illness and life are essential. So if anything unfortunate happens to you, it can minimise the financial impact to your loved ones. Don't assume life insurance isn't for you, just because you're young. No one knows when accidents will happen, so staying protected is a definite priority. Our coverage calculator is at hand so you can easily find out how much protection you need.
Annuity plans also let you secure a steady income after you've stopped receiving regular paychecks. For practical tips in choosing a suitable insurance plan, we'll here to guide you: "How do I choose the right insurance plans as I start work?".
As you pursue your career ambitions, don't forget to plan early for your golden years to continue to live your best life in retirement.
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