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Asians' love of cash is jeopardizing their retirement savings

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(Bloomberg Business) — Asians are facing the prospect of running out of retirement savings because they hold too much cash.

The average investor in Asia may see an investment return shortfall of 3.3 percent a year, according to a new report from Manulife Asset Management. That may seem small as a percentage, but it adds up to a very large sum when compounded over 10 or 20 years, it warns.

Costs of the top financial goals across Asia, including healthcare and a home, have risen an average 6 percent a year over the past five years while investment portfolios delivered average returns of just 2.7 percent a year in the same period. Indonesia, China and Singapore are set to see the biggest deficits, the report said.

“If returns fall short of 6 percent in any given year, savers and investors in the region will be taking half a step back for every step forward.” said Michael Dommermuth, executive vice president, head of wealth & asset management for Asia at Manulife Asset Management. “Their preference for holding cash deposits is compromising their returns potential and increasing longevity risk, or the risk that they may outlive their savings.”

The survey covered mainland China, Hong Kong, Japan, Indonesia, Malaysia, the Philippines, Singapore and Taiwan. The main financial concerns were retirement, paying for children’s higher education, meeting current living expenses, purchasing a primary home and saving for a rainy day. The last includes unexpected healthcare costs.

Japan is the exception, with a surplus of 2.7 percent, but this is “almost certainly an aberration brought on by a combination of a long-standing period of almost zero inflation and a recent run of spectacular stock market returns driven by Abenomics,” the report said.

What’s common across Asia is that investors held high levels of cash: an average of 37 percent of assets is held in local currency, as much as 42 percent if foreign currency is included. That compares with less than a fifth in North America, Dommermuth said. Insurance was a distant second, followed by stocks. 

Why so much cash? “Historically, you had the familial financial support model in Asia, when fertility rates were high and the elderly relied on their children to support them, and there was no reason to deploy their cash wealth,” said Dommermuth. “Now, you have nuclear families and higher life expectancy. But the tendency to hold cash has persisted even in a near-zero interest rate environment. It’s very unique to Asia.”

What’s adding to the pain is the rising costs of education and healthcare in relation to inflation and gross domestic product growth. Healthcare costs are rising as people live longer and demanding better care, especially in developing countries. 

As for education, it has always been regarded as an important investment in Asia, where parents generally pay for kids’ college. Competition for jobs is spurring demand for higher quality private schools and universities in developing nations.

While populations across much of Asia are still quite young, the proportion of people over the age of 60 will more than double to 24 percent by 2050 from 11 percent in 2012, according to the United Nations. The average married couple should be prepared for their joint retirement to last between 21 and 33 years after leaving the active labor force, according to Manulife. So they do need to make those retirement savings last longer.