You are here
Asia's wealthy should look towards lifestyle preservation
WHILE Asia remains the global engine for wealth creation, many of the region's wealthy are insufficiently prepared for a retirement that is likely to last significantly longer than that of their parents. Respondents to a survey conducted by UBS Investor Watch, a quarterly publication that focuses on investor sentiment and behaviour, reveals that large numbers continue to make inadequate provision for lifestyle preservation in retirement.
The survey, which took place in April, polled 226 affluent, high net worth and ultra-high net worth investors with at least US$250,000 in investible assets, including 95 with at least US$1 million, as well as 93 millennials (18-35) and 67 of the so-called Generation-X (36-55) in the US, the UK, Germany, Singapore and Hong Kong.
Responses showed that many investors neglect to plan ahead for retirement and for leaving a family legacy and inheritance. All too often, investors lump retirement savings into a single pot, and the common strategy of allocating more than half of retirement savings to stocks has the potential to leave investors unprepared should their needs change.
However, first and second-generation entrepreneurs, which represent a large proportion of Asia's wealthy families and individuals, have a different mindset.
In Singapore in particular, age is not seen as a barrier to starting a business, with some respondents setting up new businesses upon retirement. Interestingly, women tend to start businesses for financial stability, while men are more likely to be focused on legacy. Women see starting a business as having a direct relationship with their retirement savings. Indeed, 48 per cent of them start a business with the aim of increasing their annual returns and are confident that the proceeds will support them in retirement.
Contrary to popular belief, high net worth individuals often have not drawn up a plan, let alone come up with a number that they think necessary to fund their retirement.
However, it is important to go beyond projections, assumptions on inflation, projected returns, and likely income needs when planning for retirement. For example, it is important to understand not only that our retirement today is likely to last longer than that of our parents, but also that retirement funding is unlikely to be the sole financial goal. And in establishing a multiple-savings goal, we advise clients to assign buckets with different portfolio and risk levels, to each goal rather than rely on a single pot.
At the same time, we can help mitigate the vagaries of market performance through informed asset allocation decisions, and by balancing risk tolerance and risk capacity. But diversification will be the key in seeking to maximise returns.
There is no denying that a "low for longer" interest-rate environment has skewed asset valuations, causing unpredictable swings in the markets.
Portfolios are most vulnerable to market shocks in the five years before and after retirement. This is the period when the most assets have been accumulated, leaving investors with the most to lose. Notably, during the Global Financial Crisis, portfolios declined by between 40 per cent and 50 per cent on average.
Among the hardest hit were funds heavily exposed to stock options. But the risk to a concentrated portfolio is not confined to a synchronised market meltdown as in 2008, it may be industry or sector specific, like the rout in oil and gas, and commodities earlier this year. While it is impossible to completely safeguard investments from adverse market events, reducing concentration risk can mitigate significantly while back-up plans may include instruments that are not marked-to-market.
It is important to understand that retirement is not a consumption goal but rather is akin to climbing a mountain. Once the euphoria of reaching the summit is over, one still needs to make the descent. Similarly, assets accumulated for retirement are not consumed all at once, so care should be taken not to draw down too rapidly and so outlive the money.
As well as countering "longevity risk" during the accumulation phase, building multiple sources of passive income from multiple asset classes have the potential to provide protection during extended periods of poor market returns. However, it is wise to make an early decision as to which assets will be utilised during retirement and the order in which they will be withdrawn.
High net worth individuals are, de facto, adept at wealth accumulation but tend to neglect legacy and inheritance. Asked what they would do with their money should they only have one year to live, the response is invariably silence.
Wills and CPF nominations are just the first step.
In cases of mental incapacity, such as stroke/dementia, a Lasting Power of Attorney (LPA) allows appointed person(s) to determine welfare and financial matters.
For entrepreneurs, estate planning addresses business succession and continuity but it will also be necessary to identify, and groom the next leaders.
Establishing a trust allows wealth to be ring-fenced from creditors and be directed to family members, or towards philanthropic causes.
Of course, setting up a legacy has implications for the accumulation and withdrawal phases of retirement planning, so careful consideration is needed as any decision can affect the delicate retirement income equation.
Developing an effective plan to cater to retirement needs requires time, commitment and discipline.
The Investor Watch survey shows that, at present, investors tend to turn to their spouse (47 per cent of respondents) or friends (33 per cent) for retirement advice. However, seeking objective advice from a professional adviser has the potential to not only improve returns but also provide that invaluable quality - peace of mind.
Interestingly, an informal UBS wealth management poll of entrepreneurs, professionals and business owners in Hong Kong and Singapore in January this year reinforces the Investor Watch findings.
Regardless of location, only one in three of those polled had a precise idea as to the sum needed to achieve their desired retirement lifestyle and almost 50 per cent had not started a plan.
In Singapore, clients cited the cost of healthcare, outliving the retirement fund, and poor returns as their primary concerns. In Hong Kong, healthcare costs, inflation and "longevity risk" were top of the list. However, respondents in both locations agreed that proceeds from their respective state-run provident funds are inadequate to cater to their retirement needs.
- The writer is head of UBS Wealth Management South-east Asia