Having learnt the importance of discreet choice of investment tools for a stable asset growth, we can now proceed with the actual financial planning for retirement.

Gap Analysis is a useful tool when it comes to making your initial step in retirement financial planning. Establish the goal of your retirement financial planning, list your current and future financial sources, before you draft a long-term estimation based on reasonable and circumspect assumptions, in order to figure out whether your wealth can meet your retirement goals.

Steps to follow when using Gap Analysis for your retirement planning:

1.    Make reasonable assumptions on:
a. Inflation rates
b. Deposit interest rates
c. Average annual rate of investment returns prior to retirement (including MPF, one-off lump sum investment, and regular saving investment plan)
d. Average annual rate of investment returns after retirement
e. Estimated life expectancy

2.    Find out your expected standard of living during retirement (based on your current living standard)

3.    List your current assets and estimate the amount of wealth that would have accumulated by your retirement age

4.    List your current regular saving investment plans, and estimate the amount of wealth that would have accumulated by your retirement age

5.    List your current family expenses and income, and estimate the surplus that would have accumulated by your retirement age

6.    Compare the sum targeted for your retirement and the estimated accumulated asset and see if there are discrepancies between the two

7.    If the estimated amount doesn't match your target sum, try to find suitable measures to make up for the difference; you may need to consider delaying your retirement age or adjust your standard of living for retirement accordingly

8.    Even in cases where no discrepancies are observed, it is still wise to adopt suitable measures to ensure your retirement goals can be met

Assuming your current age is 55 and you plan on retiring at 65 (with 10 working years ahead), with a targeted retirement living standard equivalent to what a monthly expenditure of HK$20,000 can provide right now (based on the current price level). In the scenario of an average annual inflation rate of 5%, you'll need to reserve HK$41,600 for monthly expenses (or HK$499,000 for yearly expenses) to sustain a desirable living standard 10 years from now. If this amount yields an investment gain similar to the inflation rate (5% per annum), you'll need to have saved HK$9,770,000 (the value of your current residence excluded) by 65 years old, in order to afford 25 years of retirement expenses (until aged 90).

Don't be disheartened by these figures, though, as you'd have worked for over 20 years if you're aged 55 now, and you'd have accumulated a certain level of wealth. Top that with the family surplus (total family income minus necessary expenses) from the coming 10 years, provident fund or MPF, you would well be able to meet your retirement reserve target with astute investment and planning.

At the end of the day, what really matters is to understand the importance of planning for your retirement finance, so that you can consolidate your investment decisions and invest in appropriate items, and accumulate the amount of money needed for your retirement by reaping the harvest from long-term investment growth (note: your emphasis shouldn't be on extremely high rate of return). Be vigilant with your investment portfolio: spread the risks over different classes of assets to avoid irretrievable losses resulting from risky, concentrated investment. What you should be paying attention to are tools that can yield stable growth and serve as your source of retirement income.

Author:
Steve Lo
Certified Financial PlannerCM
Senior Vice President of ING Financial Planning

Steve Lo has more than 18 years of experience as an investment consultant and financial planning advisor, and his advice on investment and financial management has been shared via numerous media interviews, as well as investment symposiums where he was speaker. Steve has penned over 200 articles on personal investment and financial planning for Hong Kong Economic Journal between 1998 and 2008. Some of the articles were edited into two books ("Mutual Fund Investment: A Practitioner's Perspective" and "Financial Planning: A Practitioner's Perspective") offering invaluable advice on fund investment and financial planning.

Steve has also served as instructor for the various Continuing Professional Development courses of the Hong Kong Securities Institute and Institute for Financial Planners of Hong Kong between 2001 and 2010. In addition, Steve sat as one of the judges for the SCMP/IFPHK Financial Planner Awards and Benchmark Wealth Management Awards between 2005 and 2012.

Continuous reading:
Retirement Planning (Part 1)