Cash Doesn't Pay When it Comes to Retirement Saving

A survey of Hong Kong investors has found they are failing to put aside enough to fund their retirement - facing the same issues as savers across the globe

Emma Wall 7 June, 2018 | 7:44AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Future-Proof." I'm Emma Wall and joining me today is Retirement Strategist for JPMorgan Wina Appleton.

Hi, Wina.

Wina Appleton: Hi, Emma.

Wall: So, we've recently heard a survey produced by you at JPMorgan about the retirement sector in Hong Kong. What were the key findings?

Appleton: Sure. So, we interviewed 500 people in Hong Kong recently and what we found was people are generally quite comfortable and confident about achieving their retirement goals. And seven out of 10 people have already started saving and investing for retirement, which is a positive thing, very encouraging. That said, there are three key findings that I'd like to share, Emma, with you today.

Number one is, Hong Kong people are not saving enough compared to what they want to save to maintain their lifestyle in retirement. And secondly, many of them may not be investing wisely, relying mainly on stocks or even cash to build their retirement portfolio. And these two findings of not saving enough and not investing wisely are even more prominent when it comes to women, which is another interesting topic to talk about.

Wall: I think what's really interesting is, we are sitting here in Hong Kong talking about this Hong Kong-based survey, but we could be having this conversation in New York, in London, in Sydney, in Paris. These are traits that are seen across the developed world of people not saving enough, being over reliant on cash and having a disconnect between the expectation of their requirements in retirement and the reality. So, firstly, let's have a talk about cash, because that really is a theme that we've seen across the world. Why are people so over reliant on cash?

Appleton: Yeah, you are absolutely right. From the surveys that we have found and done across different countries around the world, a big thing that we have found out. And if you look at the real return for cash, it's either negative or very low. And yet, if we look at the average household in Asia, more than 40% of their assets are in cash. And in Hong Kong, we are talking about inflation of about 3%. So, if you think about $1 million Hong Kong dollars in a bank account, effectively every year, you are losing $30,000 Hong Kong dollars worth of purchasing power. If you divide that up by 12 months in a year and 30 days in a month, effectively, you are losing $100 Hong Kong dollars worth of purchasing power every single day. That's a nice lunch, like nice dim sum even in Hong Kong, right? And yet, people are feeling that, oh, maybe it's safe, it's not as volatile and really putting over reliance on cash, exactly the point that you are mentioning.

But to invest wiser, it's important to look across over to different asset classes. If you look at equities, diversified portfolio or even bond, the real return is much more attractive compared to cash. And that is something that people should look to, to put their money to work and invest to grow the portfolio that they need for their retirement and that's where I think they should be looking at.

Wall: And they can afford to do this in terms of the risk they can take on what it's saving for retirement. I understand if you have a one-year, two-year, even three-year goal of some financial, be it a holiday or a house purchase, you may want to remain cautious, you may want to keep things in cash because of the capital preservation element. But retirement, you are looking at a multi-decade saving horizon. And so, therefore, you can afford to weather the ups and downs that equities may have in order to get the end result of that better return in the long-term?

Appleton: You are absolutely right. And people may not necessarily think about it, because for your longer-term goals, in a way you've got much higher capacity to take on risk and because of that you really should be taking advantage of the time that you have, to put your money to work hard for you and make sure that you are not the only one doing all the heavy lifting yourself and just having to save more and more, because effectively if you compare saving in cash versus putting your money to work for whatever retirement nest egg that you want, it could mean having to save a lot more, two times, three times, four times more for your retirement. So, it's important to definitely get invested.

Wall: And let's talk then quickly about the disconnect between reality and expectation. We see this in the UK in a recent survey where people were expecting that they would die at age 70 where actually the national average life expectancy is considerably more than that. You are retiring at 60 and you think, oh, I only have to fund 10 years retirement. Actually, it could be 20, even 30 years retirement and you are seeing that in Hong Kong as well, aren't you?

Appleton: Yes, absolutely. A lot of the times when people think about life expectancy, they think about average life expectancy at birth, which may come to like 80 to 81 to 87-years-old, or something like that. But actually, two things. Number one, that is average life expectancy at birth. When it's an average life expectancy at 65-years-old, it's a much longer time that you will be living in retirement. So, what we always say is the longer you live, the longer you live.

The second thing is that average life expectancy means that there's still a 50% chance that you will live longer than that age. So, it is definitely important to plan for at least 30 years in retirement. And if we look at across different countries, the probability of a couple living beyond 90-years-old is about 40%, 50%. So, it is definitely important to plan for at least 30 years in retirement to make sure that we do not outlive our savings in retirement.

Wall: Wina, thank you very much.

Appleton: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.


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Emma Wall  is former Senior International Editor for Morningstar

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