Planning your retirement early

 

Apart from the Government's intention to alleviate her financial burden on social welfare, one of the purposes in setting up MPF schemes in Hong Kong is to encourage the working population planning their retirement at an early stage. The sooner we start saving, the better our retirement life will be.

Whether this can be achieved will depend very much on how early he starts to save and how much he can achieve on his investment return.

The following example will demonstrate the importance of the timing when an employee starts his investment plan.

At the age of 25, Mr. Nice graduated from the university and joined a company with a monthly salary of HK$10,000. At the same time, he also joined the Companyˇ¦s provident fund scheme. It is a defined contribution scheme of which both the employer and the employee each contribute 5% of the salary. Suppose there is no salary increase throughout his employment and suppose the annual return of the fundˇ¦s investment is 10%, the total amount he will receive at his retirement at the age of 65 will be approx. HK$6.38 million. This is equivalent to about 53 times his current annual salary.

Using the same example, if Mr. Nice only joined the Companyˇ¦s provident fund scheme when he was 40. Suppose the contribution amount is the same and the investment return is also the same, the total sum he will receive at the age of 65 is only HK$1.34 million.

As you can see from the above example, Mr. Nice will be able to maintain a much better living standard after retirement or even taking an early retirement if he can start saving early.

In the next chapter, I will discuss the importance of choosing an appropriate investment strategy for your retirement plan.

 

 

Written by John Cheung on 31 Jan., 2000

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