Investment planning for a fulfilling retirement life
When talking about retirement planning, the typical working individuals in Vietnam often focus solely on having enough savings to support their desired retirement lifestyle.
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However, they often overlook the needs after retirement. It is important to not only plan for regular cash flow to cover daily expenses but also to consider various variables that arise after retirement, such as unexpected medical expenses. Pramoth Rajendran, Country Head of Wealth and Personal Banking, HSBC Vietnam said a comprehensive retirement plan should encompass investment strategies both before and after retirement.
Risks in retirement that cannot be ignored
Longevity risk: While living to a ripe old age of 100 is a blessing, it also brings financial risks for retirees. Data has proven that Vietnamese have high life expectancy. According to statistics from the Vietnam's General Statistics Office in 2023, the average life expectancy at birth for males is 71.1 years, and for females, it is 76.5 years. The country's average life expectancy at birth is 73.7. This represents an increase of approximately 5 years compared to 25 years ago. With advancements in medical technology, reaching the age of 100 is no longer impossible. However, if retirement funds are insufficient to cover daily living expenses, longevity becomes a significant retirement risk.
Inflation risk: About twenty years ago, a bowl of phở was only around 7-10,000 VND. Today, the price has risen to 50-60,000 VND. This demonstrates the impact of rising prices and inflation. Over the past nearly 30 years, Vietnam has experienced an average inflation rate of about 5% per year, reaching an all time high of 28.32% in August 2008, and global inflation is also expected to remain at a relatively higher level for some time. If investment returns do not keep pace with or exceed inflation, the rising cost of living will gradually erode retirees' savings.
Investment risk: Facing inflation risk, retirees may consider investing to achieve capital appreciation. However, investing involves risks. Higher risk assets such as stocks have higher expected price volatility but also higher expected returns. Lower risk assets such as bonds have lower expected price volatility but also lower expected returns, which may not effectively counteract inflation risk. Therefore, retirees need to find a balance in their investment portfolios and pay attention to diversifying investment risks.
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Post-retirement planning
Although each retiree's financial situation, expected quality of life and lifespan may vary, we face many common challenges after retirement, including capital appreciation, regular cash flow, longevity, inflation, investment and medical expenses, etc.
In terms of investment, a suitable portfolio for retirees needs to generate regular cash flow to meet daily living needs while also addressing inflation risk through capital appreciation. The investment portfolio can consider incorporating various types of bonds to reduce portfolio volatility and increase cash flow. At the same time, an appropriate amount of risk assets such as stocks can be added to enhance the portfolio's capital appreciation potential against inflation. There are also mixed assets funds available in the market that are designed to provide regular dividends. These funds invest in different asset classes according to their predefined risk levels to enhance capital appreciation and diversify risks. They also offer different dividend levels to cater to the cash flow needs of different investors.
“When planning for retirement, retirees may also consider using a suitable deferred annuity product to hedge longevity risks. To prepare for rainy days, they may also make additional medical insurance arrangements to cope with potential medical expense increase as they age. As retirement lifestyles vary, retirees can consider leveraging different investment portfolios to address various challenges that may arise during their post-retirement years”, said Pramoth Rajendran.