Same Returns, Different Retirement: The HK$310,000 Cost of Sequence Risk

Track 3 Wealth Autonomy Academy | 2026-09-25 | Lead Financial Strategist, mpf.hk

US equities are hovering beside record highs, bond yields are at their highest since 2007, and the Hang Seng is struggling below 25,000. If you are 60, hold HK$2 million in MPF, and sit fully in equity funds, what is your biggest risk?

Most people answer “a crash.” They are wrong. The real killer is not the crash itself. It is when the crash arrives.

Reframing: the average return is a lie

Open any fund fact sheet and the first number you see is the annualised return. That number has a fatal blind spot: it assumes you never touch a dollar. But MPF members start withdrawing at 65 — money flows out, and the mathematics changes completely.

The same lifetime total return, arriving in a different order, can produce a wildly different retirement. Finance has a name for it: sequence-of-returns risk. It punishes one specific person: the near-retiree, heavily in equities, about to start drawing down.

Look at today’s markets and you will see why this cannot wait: the S&P 500 closed at a record 7,798.99 on 13 August and finished 23 September at 7,706, barely 1.2% below the peak and still up roughly 11-13% year to date; yet the 10-year US Treasury yield has climbed to 5.11-5.12%, its highest since July 2007. Taiwan’s Taiex hit a record high on 23 September while the Hang Seng spent two straight sessions below 25,000. Elevated valuations plus thin buffers plus oil near US$100 a barrel — this is sequence risk’s favourite hunting ground.

History tells you a 30% shock is not hypothetical; it is periodic. The Hang Seng fell 48.27% in calendar 2008 and declined three years in a row from 2021 to 2023 (-14.08%, -15.46%, -13.82%). The S&P 500 lost 37% in 2008 and 18.11% in 2022. The question was never “will it fall” but “how old will you be when it does.”

The sandbox: Mr Chan, 60, HK$2 million

The following is an illustrative simulation. Both paths use the identical set of annual returns — only the order differs.

Mr Chan is 60 with HK$2 million in MPF. He plans to retire at 65 and withdraw HK$150,000 a year for living expenses.

Path A: the crash lands at 61 (before retirement)
A 30% fall at 61, then four years of 10% annual recovery. At 65, his account holds HK$2.0497 million. During retirement he earns 6% a year and withdraws HK$150,000 annually. At 70, the balance is HK$1.8467 million.

Path B: the crash lands at 66 (the first year of retirement)
Steady 6% a year from 60 to 65, so he retires with HK$2.6765 million — looking HK$620,000 richer than Path A. Then a 30% crash in his first retirement year, followed by 6% annual growth, with the same HK$150,000 yearly withdrawal. At 70, the balance is HK$1.5371 million.

The gap: HK$309,570 — roughly HK$310,000.

Both paths used the exact same annual returns. The only difference is the order. What is HK$310,000 in human terms? At HK$8,000 a month of phased withdrawals, it is 3.2 years of living expenses. Path B’s Mr Chan runs dry more than three years earlier.

The mechanism has three layers, and every one is mathematics, not luck:

1. Asymmetric recovery: after a 30% fall, you need a 42.9% gain just to get back to where you started. The fall takes 30%; the climb back demands more than 40%.
2. Reverse dollar-cost averaging: withdrawing during a downturn means selling units at depressed prices. Dollar-cost averaging helps you buy cheaper in a falling market during accumulation; in drawdown it works in reverse — the units you sell never participate in the recovery.
3. The withdrawal-rate spike: Path B’s HK$150,000 was 5.6% of HK$2.6765 million at retirement; after the crash it becomes 8.5% of HK$1.7685 million. The same withdrawal is a far heavier burden on a shrunken balance, shortening the runway for recovery.

This is precisely why the MPFA built automatic de-risking into the Default Investment Strategy (DIS). The MPFA’s own booklet states it plainly: automatic de-risking “can help reduce the impact of large market fluctuations on a scheme member’s MPF investments as the scheme member approaches retirement age.”

The leverage: defence must be structural

Lever one: the DIS glide path. From age 50, the trustee automatically reduces the Core Accumulation Fund weighting by about 6.7 percentage points each year on the member’s birthday, shifting into the Age 65 Plus Fund. The Core Accumulation Fund holds roughly 60% in higher-risk assets (mainly global equities); the Age 65 Plus Fund holds only about 20%. Do the maths: a 60-year-old DIS member has roughly 33.2% equity exposure. The same 30% equity shock costs the portfolio about 10%, not 30%. Most of that HK$310,000 gap is structurally erased.

Honesty requires a caveat: de-risking is a shock absorber, not a vault. In 2022’s stock-and-bond double rout, even bond funds fell (one Hong Kong bond fund lost 9.46% for the year, its worst since inception). De-risking dampens the blow; it does not grant immunity.

Lever two: forward pricing makes tactics useless. MPF fund switching uses T+1/T+2 forward pricing — you never know the dealing price when you place the order. “I’ll switch from equities to the Conservative Fund when things look bad” means you are always one day behind the market. Sequence-risk defence cannot rely on timing; it must be structural. The glide path has to be in place before the storm. Staying 100% in equities near retirement is opting out of that structural insurance.

Lever three: phased withdrawal. The law sets no deadline for withdrawing MPF at 65, and taking everything in one lump sum maximises sequence risk. Phased withdrawal (the industry benchmark is up to four free instalments a year) lets you withdraw less in down years and wait for recovery — Path B’s tragedy, at least, would not be locked in during year one.

One sharp question for anyone who has opted out of DIS to “manage it myself” while staying heavily in equities: what is your manual de-risking discipline? DIS executes automatically every birthday. Your version executes on what trigger? If the answer is “I’ll figure it out when the time comes,” you are running Path B’s script.

This week’s action list

1. Check yourself against the glide path: find your portfolio’s current equity weighting and compare it with the DIS default for your age (roughly 60% at 50, gliding to 20% at 65). A deviation of more than 20 percentage points means you are betting against sequence risk.
2. Verify your DIS status: log in to the eMPF Platform and confirm your contributions are still under the Default Investment Strategy. If you ever opted out, write down why — and whether that reason still holds.
3. Anchor your review to your birthday: DIS de-risks automatically each birthday. Tie your own annual portfolio review to the fortnight around your birthday — use the system to fight inertia, and never let the market make the decision for you.

Sources: MPFA Default Investment Strategy booklet (automatic de-risking mechanism; Core Accumulation Fund ~60% higher-risk assets; Age 65 Plus Fund ~20%); Census and Statistics Department Monthly Digest March 2026 (2025 provisional life expectancy: 83.3 for men, 88.7 for women); S&P 500 and Treasury data as of 23 September 2026 close; Hang Seng 2008 (-48.27%) and 2021-2023 calendar returns from index history. The sandbox is an illustrative simulation; actual returns vary. This article is not investment advice.