Your financial planning adopts a new goal as you approach the pre-retirement stage of your life (50 to 60 years old). Instead of capital gains, you should now plan your finance to ensure stable retirement income, comprehensive medical protection, and befitting estate planning. Let's explore the ways to build your retirement income in this section. 

Building Your Retirement Income

Personal financial planning is often adjusted to meet the needs of the different stages of your life. As you near or enter your retirement stage, you should target your financial planning on protecting the value of your capital (to avoid loss) and establishing a long-term and reliable income source instead of capital gains. There are four main tools that can help protect the value of your capital:

1.    Deposit

This includes the savings account, time deposit and Certificates of Deposit offered by banks. It's important to note that while these options pose lower risks, equally low is the return, which often can't even compensate for the inflation rate, making it harder to maintain a long-term purchasing power of your capital. Leaving a big part of your asset as deposit is therefore not the best idea.

2.    Bonds

Direct investment in bonds has increased in popularity with the availability of small-scale retail bonds, issued in small denominations. Such an investment ensures retirees a stable income and the reclamation of the bonds' book value at maturity. The risk of bonds lies in whether the issuer would pay the fixed amount of interest and book value upon maturity as stipulated in their policy. While a bond by a private issuer may yield higher dividends, financial difficulties of that company could result in a breach of contract, and sizeable financial loss for investors. It's also worth noticing that the secondary bond markets in Hong Kong are rather stagnant, meaning difficulties and even concessions when redeeming your bonds before stated maturity.

3.    Bond Funds

By investing in a collection of bonds and debt securities, bond funds help spread the risks over various institutions. However, since the prices of bond funds are adjusted according to the market value of the bonds they invest in, there are no guarantee and maturity for the total return (the sum of dividends, price gain and loss). While the performance of government bond funds and rated bond funds are intricately tied with the cycle of interest rate, investment in high-yielding or emerging markets bond funds could experience more volatile fluctuations. With a return performance tied with the performance of the local economy, bond funds are not a suitable investment option when it comes to generating a reliable income.

4.    Annuity and Universal Life Insurance

Traditionally, annuity is a financial contract in which an insurance company makes a series of future payments to an investor, for as long as he/she lives, in exchange for a payment made prior to the contract. Like the pension received by civil servants, investors can be assured a guaranteed source of income and truly enjoy a worry-free retirement.

But that's not to say annuity products are flawless. First off, the return of guaranteed life income is minimal and often can't compensate for the inflation rate. Although an annuity product promises fixed income, it remains questionable whether the income can compensate for the inflation rate over 30 years' time and ensure the retiree a desirable standard of living. Also, you are not allowed to cash out your capital once you've invested it in life income, which means you'll be financially stranded if new investment opportunities or emergent cash needs arise. 

The good news is, recent years have seen some insurance companies launching the more flexible universal life insurance with more attractive returns. With the lump sum invested by the investor, this type of policy credits the cash value with attractive interest rates (around 5% to 6% annually for the past decade or so) every year, and the investor is allowed to choose between regular withdrawal to pay for retirement expenses, reaping the interest gains, and one-off redemption anytime he/she wishes. Some policies even provide a minimum guaranteed interest rate to ensure a stable long-term growth of the investment.

Find out what are the two other things you should note when planning for your retirement finance in my next article.

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:
Need to Know – Financial Planning for Retirement (Part 2)