One of the advantages of being an expat in the UAE, is the tax-free income that could allow you to put money away more frequently. However, a new survey from Zurich International Life found that around 44 percent of expats in the UAE are not confident about meeting their long-term financial goals, while 26 percent do not set any financial goals during their time in the country.
So, let’s say you are a 35-year old expat currently living and working in Dubai and earning AED 25,000 per month with the goal of retiring at the age of 60. What would you have to do now to ensure you have enough money when you retire? We examine Retirement Savings Plans as an option.
Retirement Savings Plans: Save and invest a portion of your income
In simple terms, a Retirement Savings Plan is a program allowing you to set money aside and invest it for when you retire. This way, your savings generate a return over the years. In order to save enough for the future, you will need to consider a few key factors:
- Inflation can considerably reduce the value of your money. For example, if inflation increased by 1% next year, your income will have to grow by 1% for you to be able to have the same purchasing power. The same concept applies to your investment but over a much longer time horizon.
- Secondly, putting your money into a Retirement Savings Plan that generates an annual return, can help grow your retirement pot. If you simply deposited your savings into a bank account, you would be limiting the income that could have been generated by your money.
Next, estimate how much you need upon retirement. Let’s assume that AED7,000 a month would cover your rent, utility bills, groceries and other essentials.
Let’s consider a conservative Retirement Savings Plan that returns 6.5% yearly and assume an inflation rate of 4%. The table below outlines how much your savings pot should be and how much you’ll need to save starting now.
Based on the calculations, you would need to put AED4,601 into your Retirement Savings Plan each month for the next 25 years to attain a retirement pot of AED3.45 million.
|Monthly spend after retirement (AED)||7,000|
|Estimated inflation (%)||4%|
|Expected annual return on investment (%)||6.5%|
|Expected yearly expenses at time of retirement (%)||223,930|
|Savings pot at retirement||3,445,081|
|Monthly investment today (AED)||4,601|
|Total in Retirement Savings Plan (AED)||3,445,081|
* Your expected yearly expenses at retirement are calculated based on how much you need per month (AED7,000) adjusted for inflation
* The savings pot at retirement is how much you would need in order to cover your AED223,930 expenses, factoring in a yearly investment return of 6.5%
*Annual return and inflation figures are assumptions and may vary
*The estimated retirement amount is for one person only and does not account for additional family members and other costs
*This example is based on a current age of 35, a salary of AED25,000/month and zero savings
If you are considering a savings plan for retirement, an independent financial advisor (IFA) could help explain them to you. There are several plans available in the UAE, varying by risk-profile and how much you can invest monthly. For example, Abu Dhabi Islamic Bank offers a savings plan that can be used for retirement. The plan requires a minimum investment amount of AED1,000 and offers four fund choices: ultra conservative, conservative, balanced and aggressive.
Are there any disadvantages to Retirement Savings Plans?
Before making a decision to participate in a Retirement Savings Plan, it would be worth considering some of their pros and cons:
|Low contribution amount: RSP’s can start as little as AED350 a month, giving you flexibility on how much you want to contribute||You have a limited range of asset classes to allocate your money into as RSP’s are managed by funds and investments depend on the fund’s strategy|
|Several risk investment profiles to choose from including conservative, medium and aggressive||If you withdraw your contribution from an RSP early, a penalty sometimes applies and this varies by product, service provider and length of investment|