Chapter 18

Starting Early: Retirement Planning

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 18 Learning Objectives

1.  Recognize the importance of retirement planning

2.  Analyze your current ______________________ for retirement

3.  Estimate your retirement ______________ needs

4.  Identify your retirement needs

5.  Determine your planned ___________________

6.  Develop a balanced budget based on your retirement income

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Why Retirement Planning?

Objective 1: Recognize the importance of retirement planning

Misconceptions about Retirement Planning •  My expenses will _______________ when I retire

•  My retirement will only last _______ years

•  Social Security & my _________ will pay for my basic living expenses

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Why Retirement Planning? (continued)

Misconceptions about Retirement Planning (continued) •  My pension benefits will increase to keep pace with

inflation •  My employers _________ insurance plan and

Medicare will cover my medical expenses •  There’s plenty of time for me to start saving for

retirement •  _________ just a little bit won’t help

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Why Retirement Planning? (continued)

THE IMPORTANCE OF STARTING EARLY

•  To take advantage of the time value of money

–  If from age 25 to 65 you invest $300 a month (9% return), at age 65 you’ll have a nest egg of $_________

–  Wait ten years until age 35 to start and you’ll have about $_____________ at age 65

–  Wait twenty years until age 45 and you’ll have only $______________ at age 65

–  See Exhibit 18-1

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Why Retirement Planning? (continued)

•  People are spending more years (16-30) in retirement

•  A private pension and Social Security are often _____________ to cover the cost of living

•  Inflation may diminish the ____________ power of your retirement savings

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Why Retirement Planning? (continued)

THE BASICS OF RETIREMENT PLANNING: •  First analyze the current assets and liabilities, and

then estimate the spending needs and adjust for inflation

•  Next evaluate the planned ________________

•  Finally increase income by working part-time if necessary

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Conducting a Financial Analysis

Objective 2: Analyze your current assets and liabilities for retirement

REVIEW YOUR ASSETS

•  Housing –  If owned, probably your biggest single asset –  If large equity, a _________________________

could provide additional retirement income –  You could sell your home, buy a less __________

one, and invest the difference

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Conducting a Financial Analysis (continued)

•  Life Insurance

–  Life insurance cash value can be converted into an ___________

•  Other investments

–  Review investments, such as _______________ Consider taking the income from them

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Retirement Living Expenses Objective 3: Estimate your retirement spending

needs •  Spending patterns, where & how you live will probably

change •  Some expenses may go down or stop, MPF

retirement fund contributions –  __________ expenses - less for gas, lunches out. –  __________ expenses - fewer and more casual –  Housing expenses - house payment may stop if

your house is paid off, but taxes and insurance may go up

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Retirement Living Expenses (continued)

•  Estimate which expenses may go up: –  Life and health insurance unless your employer

continues to pay them –  __________________ expenses increase with age –  Expenses for _____________ activities may go up –  Gifts and contributions may increase –  See Exhibit 18-5

•  Inflation will cause your expenses to increase over the course of your probable 16-30 years in retirement 18-11

How an “Average” Older (65+) Household Spends its Money

U.S. Bureau of Labor Statistics, Consumer Expenditure Survey, Accessed June 3, 2008 18-12

Planning Your Retirement Housing

Objective 4: Identify your retirement housing

needs •  Think about _______ you want to live

•  Consider the cost of living, taxes & moving

•  Consider the ___________ aspects of moving (proximity to children or relatives)

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Planning Your Retirement Housing (continued)

•  Type of housing and changing needs –  92% prefer to stay in their own home –  A universal designed home is built to allow for

potential _________________ limitations –  If not built using universal design, home may

need to be retrofitted –  Continuing care retirement community provide

increasing levels of care

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Planning Your Retirement Housing (continued)

AVOIDING RETIREMENT HOUSING TRAPS (continued) •  If you plan to move when you retire…

–  _____________ what your utility, health care, auto insurance, food, and clothing costs would be in the area

–  Rent for awhile instead of buying immediately

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Planning Your Retirement Income

Objective 5: Determine your planned retirement income

Social Benefits •  Most widely used source of ________________ •  Meant to be part of your retirement income, but not

the sole source •  Retirement benefits at age ______.

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Planning Your Retirement Income

FUTURE OF SOCIAL SECURITY •  Many people are concerned about the future of Social

Security •  Longer ___________________ means retirees collect

benefits longer •  People are retiring ________ and entering the system

sooner and staying longer •  The baby boomers will begin retiring soon and the

ratio of workers to retirees is doing down

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Planning Your Retirement Income

•  Annuities –  An annuity provides guaranteed _______ for life –  You can buy an annuity with the proceeds of

MPF, company pension, or as supplemental retirement income

–  You can buy one with a _________________ or with periodic payments

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Planning Your Retirement Income

Annuities (continued) –  You can also buy an annuity by converting the

______________ of your life insurance policy into an annuity

–  Immediate annuities: payments begin ________________

–  Deferred annuities: income payments begin at some ___________

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Planning Your Retirement Income

Annuities (continued)

–  Options in annuities allow you to decide which is best for your situation

–  A _____________ annuity provides more income

than any other type, but payments stop when you die

–  The _____________________ option guarantees the number of payments

–  A ____________________ annuity pays until the last survivor you designate dies

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Living on Your Retirement Income Objective 6: Develop a balanced budget based on your

retirement income

•  Make sure you receive all retirement income to which you are entitled

•  Develop a spending plan for retirement

•  If you have the ____________________, do some things yourself that you used to hire others to do

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Living on Your Retirement Income

Investing for Retirement –  _______________ your investments –  Invest some of your retirement income for growth, to

allow for inflation and increased health care costs Dipping into Your Nest Egg

–  Dip into savings with caution, since you do not know how long you will live

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Hong Kong: MPF

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Copyright ©Cengage Learning. All rights reserved. 17 - 24

Mandatory Provident Funds in Hong Kong

Mandatory Provident Funds Schemes Authority

http://www.mpfa.org.hk/eng/main/index.jsp The MPFA is a statutory body established on 17

September 1998 under section 6 of the Mandatory Provident Fund Schemes Ordinance (“MPFSO”) (Chapter 485, Laws of Hong Kong).

強制性公積金計劃管理局（簡稱「積金局」） http://www.mpfa.org.hk/tch/main/index.jsp

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The Launch of MPF System In the World Bank’s 1994 report, "Averting the Old-Age Crisis: Policies to Protect the Old and Promote Growth", a three-pillar approach was recommended to protect the aged. The “Three Pillars of Old Age Protection” as envisioned by the World Bank are: 1.  a ______________, tax-financed social safety net; 2.  a mandatory,____________________, fully funded contribution scheme; and 3.  ______________ personal savings and insurance.

Background

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The MPF System in Hong Kong was designed to form the second pillar of this approach: a mandatory, privately managed, fully funded contribution scheme. To help the ageing workforce save for their retirement, the Mandatory Provident Fund Schemes Ordinance (“MPFSO”) was enacted in 1995 and later supplemented by subsidiary legislation in 1998, 1999 and 2000. The MPF System was launched in ______________ .

The Ageing Population and Retirement Protection

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Before the implementation of the MPF System, only about ____________ of the Hong Kong workforce had some form of retirement protection. With the MPF System in place, around ____% of the total employed population is now covered under either MPF schemes, ORSO schemes , or statutory pension or provident fund schemes (such as those for civil servants or public school teachers).

Employed Population Covered by Retirement Schemes

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Employed Population Covered by Retirement Schemes

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April 2011 10-year Investment Performance Review of the MPF System was published (1 December 2000 - 31 December 2010) 4 May 2011 Enactment of the Mandatory Provident Fund Schemes (Amendment) Ordinance 2011 to protect MPF ______________ in a registered scheme upon bankruptcy of scheme members

Milestones (2011 to now)

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1 November 2011 Increase of the minimum level of relevant income for MPF contributions from $5,000 to $___________ 1 June 2012 Increase of the maximum level of relevant income for MPF contributions from $20,000 to $___________

Milestones (2011 to now)

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21 June 2012 Enactment of the Mandatory Provident Fund Schemes (Amendment) Ordinance 2012 to provide for a statutory regime for regulating MPF intermediaries

17 July 2012 Enactment of the Mandatory Provident Fund Schemes (General) (Amendment) Regulation 2012 to put in place an automatic levy triggering mechanism for the Compensation Fund

Milestones (2011 to now)

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1 November 2012 Launch of the MPF ____________________ ________________ 1 November 2012 Statutory regulatory regime for MPF intermediaries came into operation

Milestones (2011 to now)

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Types of MPF Schemes

Master Trust Schemes Participants: the most common type of MPF scheme, open to the employees of participating employers, self-employed persons and persons with accrued benefits to be transferred from other schemes. Characteristics: by pooling together contributions from various employers and their employees, and contributions from self-employed persons, master trust schemes have a high degree of efficiency in terms of scheme administration due to economies of scale.

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Types of MPF Schemes

Employer-sponsored Schemes Participants: membership in this type of scheme is limited to the employees of a single employer and its associated companies. Characteristics: because of its restriction in membership, it is only cost-effective to run an employer-sponsored scheme if the number of employees is large.

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Types of MPF Schemes Industry Schemes Participants: schemes specially established for employees of the ________ and ________ industries, particularly casual employees (i.e. workers employed on a day-to-day basis or for a fixed period of less than 60 days). Characteristics: casual employees do not need to change schemes when they change jobs within these two industries, so long as their previous and new employers have registered with the ________ Industry Scheme. [Learn more from the website below]

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http://www.mpfa.org.hk/eng/mpf_system/schemes/industry_schemes/index.jsp

MPF Funds and Their Features

The following types of funds are available in many MPF schemes: 1.  M________________ 2.  G________________ 3.  B________________ 4.  M________________ 5.  E________________ 6.  Others

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Money Market Fund 貨幣市場基金

MPF Conservative Fund 強積金保守基金 Each MPF scheme is required by law to provide at a minimum an MPF Conservative Fund. An MPF Conservative Fund is essentially a ______________ Fund which invests exclusively in Hong Kong-dollar assets either in short-term bank deposits or ______-term bonds. By its nature, an MPF Conservative Fund is a ______ investment product. It should be noted, however, that on some occasions (historically in times of high inflation), the returns on an MPF Conservative Fund might not be able to beat inflation and may even be ___________.

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Money Market Fund 貨幣市場基金

Money Market Fund 貨幣市場基金 A Money Market Fund invests generally in short-term, high quality interest bearing securities, with the aim of earning an interest rate higher than that of savings deposits. The risk of _______ in a Money Market Fund is generally considered to be low as the fund is generally restricted to investment instruments of short maturity (on average, not over 90 days).

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Guaranteed Fund 保證基金

A Guaranteed Fund (“GF”) provides some form of guarantee to scheme members investing in the fund, usually on the capital invested or on a minimum rate of return. The guarantor usually charges a guarantee fee or reserve charge for providing such a guarantee. A GF can be ______________, in which case the fund return is based on the performance of fund assets, or ___-investment-linked if the return does not hinge on asset performance.

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Bond Fund 債券基金

A Bond Fund is an MPF fund that invests in bonds or debt instruments issued by governments, public organizations, banks, commercial organizations or supranational agencies like the World Bank. The acquired bonds must meet the ________ or listing requirements stipulated in the MPF legislation. Returns are generated by recurrent interest earned from the underlying bonds and any profit earned from trading the bonds in the market.

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A Mixed Assets Fund invests primarily in a mix of bonds and equities. Mixed Assets Funds have different risk levels, depending on the ________ between equities and bonds, and generally lie somewhere between the risk of a Bond Fund and an Equity Fund, with higher risks associated with greater investment in stock. Always read the _________ document and other fund updates to ensure that you fully understand the risks attached to a particular fund.

Mixed Assets Fund 混合資產基金

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Equity Fund 股票基金

An Equity Fund seeks a higher rate of return through _____________________ of stocks (or shares), traded mainly on approved stock exchanges. The risks of an Equity Fund are generally higher than those of other types of funds. Returns may be affected by factors such as the _________ of stock markets and fluctuations in exchange rates. If the fund invests in stocks denominated in a foreign currency, the depreciation of that foreign currency may also lead to a drop in the price of the fund.

Others

Index Fund (指數基金) An Index Fund has the sole investment objective of tracking the performance of a particular market index such as ____________ Index, ________ 500 or an iBoxx bond index. A typical Index Fund is __________ managed, which means that constituent securities of the relevant index are bought and sold within the fund in accordance with their respective weightings in the index. This enables the fund to perform largely in line with the underlying _________________.

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Four-tier Protection under the MPF System To ensure that the interests of scheme members are adequately and properly protected, MPFA has a comprehensive approval and monitoring system, which includes: 1.  ____________________________criteria 2. On-going monitoring 3. Professional _____________________ 4. Compensation Fund

Four-tier Protection

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End of Lecture

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