The average person in China has the highest saving rate in the world. But as things get pricier and inflation goes up, it's harder to prepare for retirement. For many in China, a retirement savings plan is nothing more than setting aside money. But financial analysts say you can make your money work for you. China Drive business correspondent Jennifer Pak has this report.
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Yinan is 32 and has just finished a graduate degree overseas. Financial analysts say he's at the ripe age to start thinking about retirement. But Yinan says it's the last thing on his mind. "Right now I don't think about it and I have no plan."
He has little savings to his name but says he knows he will need some for the day he stops working. "The basic goal is to make as much money as possible to have the security in the old age." Like most people in China, Yinan has no idea where to begin saving for his retirement.
Alfred Chan is the chief consultant for Arcadia Financial Management in Beijing. He says first you have to decide how much you need to save up. "Let's have a spending money of 1,500RMB and let's say if you retire at the age of 60 and then you live until 80, so you have got about 20 years to live on. So if you do all your calculations of the figures, the retirement amount that you need is actually half a million RMB. So it's not a small sum of money."
The financial planning industry is still in its infancy. Companies often have retirement savings set up for employees but those may not give you enough to keep up your current lifestyle. And if you think having a regular savings account is enough - think again. The money you put in usually collects at low interest rates and it likely won't cover the cost of inflation.
A retirement savings plan gradually makes your money grow. It's a combination of low risk investments like government bonds, mutual funds, and money market funds. More importantly, it's tax-free.
Chan says it's like locking yourself into a long term savings plan. "All these kind of retirement saving plan has a penalty for withdrawal. It doesnt allow withdrawal within 10 years. So it's actually a kind of forced savings. Usually the earliest age they allow you to take it out is 55."
Next you have to decide on how much money to invest in various portfolios that can get you between a five to 10 per cent return. That is not easy in China because the government bonds actually give a 3 per cent. The stock market is too risky so you have to balance out in a portfolio to make sure that you have about 5 to 10 per cent return every year.
Chan says in order to save for retirement you have to think in the long term. "A lot of young people would probably like to spend whatever they earn and so this is basically anti-habit for them to save money for the future."
But if you do the math, Chan says the earlier you start, the better off you'll be. "Let's say at the age of 30, if you start saving 1,000RMB a month, in terms of 20 years the amount actually comes up to about 400,000RMB in 20 years. The annual return we use is five per cent, so it's quite a conservative return figure. Thirty years of saving 1,000RMB actually will amount to 800-something thousand. If you can actually have the stamina to save consistently for 40 years, the amount actually goes up to 1.5 million RMB."
As good as those numbers sound, very few people can achieve it. More and more young people like Yinan are starting their careers later as education becomes a top priority. The 32-year-old says he knows he should start his retirement savings but says it keeps getting shoved aside for other things in life. "I'm going to have a baby probably in two years so this is a big pressure actually."
Chan says on average people don't start planning for their retirement until their 40s. "And then if you are actually thinking about retirement at 45, your earning power in your career only has about 10 to 15 years. So you can actually only have money to save for about 10 to 15 years. So in that particular age group you have to save more than 1,000RMB then. The monthly saving amount goes up the later you catch on to retirement."
Chan advises that retirement savings plan isn't just a luxury, but a necessity. "Once people have excess money they use to dabble in the stock market and dabble in some other risky venture. But I think the first thing from a financial planning angle you are to first tackle all your basic needs and I think retirement is your basic need in the future."
So the next time you gripe about rising prices, just think how much harder will be when you stop working.
China Drive is one of CRI's radio programs aired from Monday to Friday. We pick the most interesting life reports from China Drive. Stay tuned.
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Director: Liu Chi