Managing Retirement Accounts
It's not as bad as it sounds
Ready for some retirement talk on a Monday? Alright! We’re going to try to keep things as broad as possible, given we have people from so many different places reading this. Comment if you have specific questions though, we’ll do our best to help answer!
We’ve touched on retirement accounts briefly, but will reiterate: these are a no-brainer because your savings grow TAX-FREE. If you’re going to be based in the same place for a while and won’t be moving countries anytime soon, there’s really no reason not to enroll. It doesn’t matter if you work at a company or are self-employed, there are options for everyone!
Here’s a quick snapshot of retirement plans globally:
United Kingdom: Individual Savings Accounts (ISAs). You can pick between a cash ISA or a stocks-and-shares ISA, or combine both.
Hong Kong: Mandatory Provident Fund (MPF).
United States: 401(k) plans are the most typical, but Individual Retirement Accounts (IRAs) are also popular as they give you more control. Again, you can pick one or have both.
India: lots of options! These include the Employee Provident Fund (EPF), Public Provident Fund (PPF) and National Pension Scheme (NPS).
Singapore: Central Provident Fund (CPF).
This is going to be more straightforward for those of us in HK and SG. However, if you’re in a country that lets you choose between different kinds of accounts, the differences are usually seen in:
Returns, so a plan that invests in stocks and bonds will likely offer a higher long-term return than one that only offers tax-free interest.
Ease of access, with some accounts only accessible upon retirement while others allow withdrawals within a shorter time frame.
Eligibility, for example if you’re self-employed in India you can open a PPF and NPS account but not an EPF.
Phew! We’re going to focus on how to manage these accounts, but will leave picking which one works best for you to google (or we can talk about it another time in more detail, let us know).
Where to Start
First off, no matter what kind of account you pick and no matter where you’re based, your monthly/yearly contributions are capped at a certain level… the government wants you to save but can’t let it all be tax-free! Maxing out your contribution is therefore a good place to start, especially if you live in a high-tax country, because you get to invest your income without paying taxes on it.
Now let’s talk about what’s actually IN these accounts. Because they’re designed to encourage maximum participation from everyone in society, the default investment strategy is usually quite conservative. In most places, this means if you never log in and never check what’s going on, the account will usually be invested in a “target-date” fund that grows more conservative (i.e. more bonds and cash vs. stocks) over time.
So the first step is simply logging in and checking what the default strategy even looks like. If you already have some money in there, what’s the rate of return you’ve achieved so far? After you know that, you can decide whether to have your entire monthly contribution keep going towards the default or have a portion of it allocated to other strategies offered by the fund manager.
Let’s Get to Managing!
Here’s an example from my Hong Kong MPF account, which is run by Fidelity:
Each fund comes with a risk score, fee breakdown and a more detailed description for you to browse.
What your portal looks like will obviously vary across different countries and providers, but the choice of funds should be similar no matter where you are. You’re usually allowed to pick between bond funds, equity funds and some mixed or “target date” funds that have varying allocations.
If you’re satisfied with the current performance, you could leave 100% in the default option. Or you might choose to mix and match. Some people use their retirement accounts as a way to access bonds and other conservative investments they don’t get around to buying otherwise. Alternatively, if you want to take on more risk, these accounts are a great way to invest in stock tracker funds and other equity products because of the tax-sheltering benefits.
The key is to make sure you know where your money is going, and to avoid investing in high-fee funds just because it’s the default.
Anything else you do to manage the investment strategy or how often you re-balance it is entirely up to you! Play around with the allocations and check back in every few months to see how it’s doing… but if it ain’t broke, don’t fix it.
Note, these posts are intended as an educational resource and to encourage participation in the stock market. None of our opinions should be taken as investment advice, please speak to a professional for that :)