Retirement Decisions for Mickey and Minnie (June 2008)

1. Retirement Decisions forMickey and Minnie (June 2008) Prepared by : Janet Ng, Stanley Tam, Calvin Wong, Joanne Yeung, Omar Yip, Patrick Yiu

2. Table of Content • Brief Summary • Client’s Background • Financial Status • Financial Review Objective • Assumptions Review • Income Requirement for Retirement • Recommendations

3. Client’s Background • Mickey & Minnie is a typical HK middles class • Mickey is age 38 & Minnie is 36 • DINKS ( double income no kids) • They tend to enjoy their life after work • e.g. red-wine, watch, car and golf

4. Mickey works as a senior engineer The industry comes across ups and downs The long working hour makes them stressful. stomach problems Minnie teaching in private secondary school for over 10 years wants retire simultaneously with husband Working Background

5. Financial Background • No Property • Travel overseas several times per year • No financial burdens apart from support for parents • Mickey & Minnie’s mother is age 78 & 75 separately • Their parents’ allowances are equally shared with other sisters and brothers • Believe they can take care of their own finance • 2 years ago, they started up investment for retirement

6. Financial Background • The current portfolio is around HK$1M • Mainly in blue-chip shares and mutual fund • Monthly save of HK$10,000 through mutual fund since last year • Their coverage is only contain life insurance • All living benefit such as critical illness and medical are not existed.

7. Financial Status • Current Income

8. Financial Status • Monthly Expense HK$ % Food $ 7,200 8.00% Housing $ 19,800 22.00% Clothing and Personal Care $ 7,200 8.00% Medical Expense $ 1,800 2.00% Transportation $ 6,750 7.50% Miscellaneous $ 15,750 17.50% Insurance $ 4,500 5.00% Gift and Contribution $ 900 1.00% Tax $ 13,500 15.00% Parental support $ 11,700 13.00% Total Expense <per month> $ 89,100 100.00%

9. Financial Status • Asset and Liabilities Current Value Expected Return Future Value Expected Return Future Value Cash 200,000 Shares 1,000,000 10% 6,115,909 12% 8,612,762 Unit Trust 500,000 10% 3,057,954 12% 4,306,381 MPF/ORSO 600,000 3,000,000 3,000,000 2,300,000 19yrs 12,173,863 19yrs 15,919,143 Face Value in Insurance HK$ Life – Husband 3,000,000 Life – Wife 1,000,000

10. Financial Review Objective • Client’s original retirement plan • Sole objective is : sustain to pre-retirement living standard when retired • Retire after 19 years from now • life expectancy of 30 years of retirement • When reach retirement age, their investment return to 4% p.a.

11. They believe • Their investment • accumulate HK$12M to HK$16M for their retirement • average of 10% ~ 12% return p.a. • Their income is very secure • Their salary will increase at 2% p.a. • Inflation is 3% p.a. • Spending scale-down when retirement

12. Assumptions Review • Inflation Issue • Investment return 4% p.a. when retired. • Adjusted 3% to 3.5% CPI. • Needs +/- HK$3.14M (3% p.a.) • +0.5%pa=HK$220,000,per HK$10,000. • HK$3.14M to 3.36M. • HK$220,000 x 9 times = +/- HK$2M

13. Assumptions Review • Inflation Issue • 2nd concern is in macro-economic level. • China inflation over 8.7%. • HK dollar is pegged to US dollar. • Fuel Inflation. • Medical inflation pressure

14. Assumptions Review • Retirement Age • Planning for retirement 19 years from NOW. • 10% to mutual fund investment monthly. • Mickey-Golden handshake incentive offer. • Minnie-psychological pressure.

15. Assumptions Review • Life Expectancy

16. Assumptions Review • Risk versus expected return • Heavily invest in stocks & emerging market mutual funds • Not only to the expected return • Dollar cost averaging • Suggest annuity products to reduce the overall risk

17. Assumptions Review • Emergency funds prior to retirement • 6 months of monthly expenditures • Buying extra accidental insurance • Insurance can withdrawal $$$ when emergency • Critical illness insurance • If no longer work

18. Assumptions Review • Retirement Home Issue • Currently renting an apartment • Financing a home • Close to retirement age, home to feel more secure • Relocate to smaller home or back to China

19. Assumptions Review • Medical and long term care issues • Employer’s group medical • Insurability ??? post retirement • Long term care Insurance

20. Income Requirement for Retirement • Expense Method Approach • Forecast spending pattern • Current spending pattern • Voluntary reduction • Some spending will increase • Suggest accumulate asset no less than HK$39.7M • Best for pre-retirees who are close to retirement age

21. Income Requirement for Retirement • Replacement Ratio Approach • Final salary close to 70% of the last income. • Changes in spending pattern • Not the deterioration in standard of living • Change in retirement spending habit • Suggest accumulate asset no less than HK$39.2M • Compare the two figures from two approaches

22. Recommendations • Solution to retirement shortfall • Shortfall HK$24M • Buy a home immediately • Mortgage loan: • HK$3M • 20 years • 5% interest rate (i.e. HK$20,000 per month) • Mortgage repayment offset by the home rental payment • Reduce retirement expense by 22%

23. Recommendations • Solution to retirement shortfall • Over-relay on investment return • Set aside extra HK$10,000 / month HK$26.5M • Scarify their holiday from 3 times a year to 2 times a year

24. Recommendations • Solution to retirement shortfall • Not suggested delay their retirement age • Although deferring a retirement schedule reduce the need for asset accumulation • Post retirement hobbies • Identity and contribution to the society • Consult expertise for recurring income

25. Which method is better estimate? Expense method vs. Replacement Ratio method • Final salary vary a lot industry or environment • Current seniority supply versus demand • Exogenous changes greatly influence • Greatly reduce current pressure additional saving • Step up rate salary increases • Salary increase extra distribution saving for retirement