How to have over $1,000,000 in MPF by age 40

If you have worked as a professional in Hong Kong since the first MPF scheme was launched in December 2000, and contributed the minimum each month into a low-cost Hong Kong stock index fund, you should have over $1,000,000 in MPF by now.

MPF stands for Mandatory Provident Fund, and is Hong Kong’s equivalent to a US 401(k) or Australian superannuation fund as an employer-sponsored, defined contribution retirement savings plan that is often invested in mutual funds. Hong Kong law requires employers and employees in Hong Kong to each put 5% of the first $30,000/month of an employee’s salary (raised from $20,000 from 2000-2012 and $25,000 from 2012-2014) into the employee’s MPF fund.  The below chart shows how these minimum contributions of $2,000-$3,000 per month, every month, since December 2000 (red line below) should have grown to over $1,000,000 by now if invested in a simple, low-cost, Hong Kong stock index fund (I used EWH as an example due to the high-quality, long-term total return data on the iShares website).  These monthly contributions would have totalled less than $500,000, so this monthly savings strategy would have roughly doubled the amount invested over an average of 9 years, compared with the how a lump-sum investment of $250,000 would have returned 4x over the same period (yellow line) with more ups and downs.

According to page 8 of this MPF report, the average MPF account balance was not yet over $1,000,000, but was rather only around $150,000 as of 2016.  The obvious reasons why Hong Kong MPF participants have less than a million dollars include:

1. Many have not worked continuously in Hong Kong for the past 18 years,
2. Some had ORSO plans instead of MPF for some of those 18 years,
3. Some workers earned less than $20,000-30,000 for many months over those 18 years,
4. Most MPF plans are invested way too conservatively, and did not capture the higher returns from investing in stocks, and
5. Fees charged by most MPF funds are far higher than the 0.49% charged by EWH, which in turn is many times higher than the 0.09% charged by the simple Tracker Fund (02800.HK)

While reasons #1-3 are of course significant, I suspect the bigger ongoing problem for workers who do have the full $3,000/month going into their MPF are reasons 4 and 5: investing too conservatively, and paying way too much in fees.  An extra 1% per year in fees (common in many MPF funds) is over $10,000/year taken out of a $1,000,000 MPF account, and can easily cost a saver half or more of what they should have accumulated over a working career.

Hope this has inspired you to take a closer look at how your MPF is invested.  As always, I look forward to your comments and questions,

Tariq