Question

Hugo is now 50 and plans to retire by the age 60. He is single, owns an apartment with current market value around HKD 4.5 million, with a mortgage to be paid down in 10 years.

Currently, he has an income of $30,000 per month but does not have much savings (after all expenses including mortgage) but expects to have HKD 1 million in his MFP account when he retires. He figures that he needs $12,000 per month ($144,000 per year) in today’s term to live a comfortable live then.

1. Assuming that the MPF account can generate a real rate of return of 2.4% per year (after adjusting for inflation), how much he can receive per month the first year he retires if he draws money out from his MPF account such that the account balance is 0 by the time he turns 82.   

(Hint: First determine the monthly income required at aged 60.)

2. What is the shortfall per month during his first year of retirement?
3. What alternatives Hugo has in order to generate enough to cover the shortfall, if possible. Try to work out the math briefly for your suggestions. If not, what advices will you give Steve?
4. State the assumptions you use and implied in the case. Criticize the assumptions used.
5. Suggest how the government can help in this case.

Please list the full steps, thanks.

Answer 1

Note : Answer the first 4 sub parts, as per policy

The question is based on the concept present value and future value of money with annuity payment method.

Answer a) he can receive per month the first year he retires,

Retirement age = 60

Need money till = 82 years

Number of payment= 82-60=22 years i.e. 22*12= 254 months

Present value = HKD 1,000,000

Interest rate = 2.4% (annual) = 2.4%/12 (monthly)

Monthly withdrawal by use of spreadsheet function of pmt().

PMT(0.024/12,264,0,-1000000) = HKD 2879.17

Answer b) Shortfall of Income :

Required income = $ 12,000

actual income from MFP = 12,000-2879.17 = HKD 9,120.83

Answer c) Available alternatives for him

HUgo can diversify his investment in multiple asset class , like he can use Mutual fund to gain more return in his retirement fund.

Answer d) Hugo should create an additional investment at least $ 5000 per month from now for 10 years . The additional fund should be invested in equity linked scheme or any well diversified Mutual fund to meet the shortfall.