BUS20486 (Personal Wealth Management) (Semester B 2018-19)

Week 11 Exercises Suggested Answers (Pension Products & Retirement Planning; Group C)

1. List the factors which will affect the pension needs of an individual/a family. Give brief
explanation for each of these factors.

The factors that will affect the pension needs of an individual are :

Age
- Present age determines the time to retirement and the period remaining to accumulate
enough fund for retirement.
- It also affects the level of contribution needed to produce the required pension.
- The earlier the retirement age, the greater is the need to combat inflation for the pension.

Income
- Earned income is a key determinant of the level of pension required at retirement.
- Income also determines the amount of money available to contribute to the retirement
fund.

Number of Dependents
- The number of dependents & their ages will affect the individual’s financial planning
priorities and the amount of money available for contribution.
- It will also affect the pension amount required upon retirement.

Other Assets & Liabilities

- The amount of existing assets helps reduce the amount of retirement income that has to
be generated from pension schemes.
- The liabilities, on the other hand, will have similar effect.

Other Pension Arrangements

- These are known as ‘retained benefits’ and they are important to pension arrangement as
they can reduce the amount of pension provision that still has to be provided.

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2. Fidelity is one of the largest MPF providers in Hong Kong. Visit their website
(https://www.fidelity.com.hk/en/our-funds/mpf) and check the details of the funds available
(e.g. mixed assets fund). Suppose you are in late-30s and just started planning for your retirement
and you will be relying partly on your MPF. What may be your allocation in your MPF account
among all the funds available ? Justify your preference and make necessary assumptions.

You should note that there are several types of funds available from different MPF providers.

They are : Conservative funds, Guaranteed funds, Money market funds, Equity funds, Mixed-
assets funds, Bond funds, Index funds

3. Refer to the case on page 43 of the lecture notes, how much additional fund, if applicable, Mr.
and Mrs. Lee has to save/invest per year until they retire so that they have sufficient funds for
retirement ? In your answers, you should state all necessary assumptions.

Now assume that, for some reasons, they are not able to keep regular annual savings but they
will inherit a 15-year old residential property from their parents in a few years. Are there any
alternatives for them to ensure that they will have sufficient funds for retirement ?

Three-Steps Retirement Planning :

Step 1 : Estimating the amount of funds required at retirement

Annual expenses after retirement : 60% x HK$800,000 = $480,000

Period from retirement to death : 30 years
Discount rate : 7% (assume this is the average rate of return and includes inflation rate)

Retirement funds required at age 60

= Sum of PVs of all future expenses from 60 to 90 (assuming end-of-period payments for
simplicity)
= PV of a series of equal amount each of HK$480,000 for 30 years (an annuity)
= HK$5,956,340

Step 2 : Additional funds required

Assume :
A = Lump sum pension at retirement (age 60)
B = FV of current resources available of HK$500,000 at age 60
C = Additional funds required (if necessary)

Retirement funds required at age 60 = A + B + C

A = HK$1,200,000
B = HK$500,000 x (1 + 0.07)25 (7% annual return for a total of 25 years from 35 to 60)
= HK$500,000 x 5.43
= HK$2,715,000
C = HK$5,956,340 – A – B
= HK$5,956,340 – HK$1,200,000 – HK$2,715,000
= HK$2,041,340

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Step 3 : Annual savings / investment required to get C

FV = C = HK$2,041,340
Annual return = 7%
No. of period = 25 years (from 35 to 60)

Annual savings / investment required = HK$32,275

If they are not able to save annually, they may consider selling the property later and buy a
smaller one to keep the remaining funds for retirement. They may also consider to apply for a
reverse mortgage for regular income after their retirement.

End

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