When working life gets stressful, it’s nice to think about the future and retirement. But if you haven’t started planning your financial future, that retirement may be in jeopardy. Here’s a five-step guide to ensure you retire on time.
Planning for the future is vital if you want to retire comfortably and on time. There is no doubt the earlier you start, the more likely you will retire at the time you want to and with the financial cushion that you would like. And there is no time like the present to get started. Here is a five-step guide to help your retirement dreams come true:
Step one – Decide where you want to retire
Evaluate the type of home you would like to be living in when you retire and, more importantly, where. Both these factors will help you decide how much you need for retirement. Retiring to the countryside in the United States or the United Kingdom will need a lot more financing than a beach hut in Goa. So be clear about where you would like to end up. You also need to factor in the type of lifestyle you would like to lead. A person who wants two golfing holidays a year, gym membership and a sports car will need more than someone who wants to focus on gardening, walking to the shops and community activities.
Step two – Calculate how much you need
If you like the income you have now, then you need to put away a healthy stash of cash to ensure you can retain that income after you stop working. Calculating how much you should put away should be decided by step one and the lifestyle you plan to lead.
There are lots of online retirement calculators that allow you to input your ideal lifestyle scenario and find out how much you need to save to achieve it. They will generally calculate a figure based on an annuity of around AED35,000 on every AED600,000 saved. But remember, there is no way of knowing what the rate of return will be.
A general rule of thumb is to save at least 8x your annual salary to increase the chances you won’t outlive your savings. You can achieve this gradually: by 35 you should have saved 1x your current annual salary. This goes up to 3x by 45 and 5x by 55 and so on.
To ensure you reach that target, those in their 20s should focus on clearing debts and putting away 10 to 15% of their income for the future. Those in their 30s can afford to take on more high-risk investments as they have time to recoup any losses and should aim to save up to 25% of their income for their future. In your 40s you need to put the maximum you can into retirement savings and your 50s will follow a similar pattern. But by this stage you should focus on low-risk investments that will guarantee a return.
Step three – Decide which investment vehicles you want to use
Putting your money in a standard bank account isn’t going to cut it when it comes to retirement funds. You need to be very savvy about how you invest ensuring you spread the risk across multiple asset classes. A healthy retirement portfolio should include property investments, stocks and shares, bonds, offshore pension plans, commodities and cash.
When saving into a particular investment or portfolio, expats should take advantage of dollar-cost averaging – where a fixed amount is deposited in an investment vehicle every month. That way they buy more shares when prices are low and less shares when prices are high. This allows investors to benefit from market highs and lows in the long-term.
For those unsure about their final retirement destination, they should consider some local investment options such as fixed-deposit savings accounts, prize-linked savings accounts, which generally reap healthy returns on lump sum deposits.
Step four – Save, save and save again
Just because you’ve hit a recommended target, it doesn’t mean you have saved enough. The world learnt a harsh lesson in the financial crisis of 2008-2009 and that was that investments fail just as much as they can succeed. So if you find yourself earning a much higher salary than anticipated, ramp up your savings to keep them in line with your new earning capacity. The more you save the more options you have later on and the more likely it is you will make your dreams come true. This is also important when you consider how unpredictable life can be and you never know what might happen that could damage your ability to earn.
Step five – It’s never too late
If you’ve hit your 40s and haven’t saved a dirham, don’t panic. It’s never too late to start and retirement plans can be adjusted. To bring down your retirement needs, you can retire later, take on a part-time job during the golden years and downsize your planned retirement lifestyle.
And don’t forget all employees working in the UAE are granted a gratuity or end-of-service benefit when they leave their job. To work out what you will receive, look at your basic salary. Those who have worked less than five years receive 21 days basic salary for every year of service. Over five years it becomes 30 days of service.
Putting that lump sum payment to good use by investing it in your future is key. It is there as a type of pension, so rather than splash out on a great holiday or new car, stash it away the moment you receive it.
And keep debts to a minimum. The last thing you want is your gratuity to be swallowed up by loans and credit cards. If you want to retire well, you need to live a healthy financial lifestyle now.
Souqalmal.com is the first and leading comparison website in the Middle East allowing users to compare over 1,500 banking products across the UAE and Saudi Arabia. The site enables users to search and compare fees, rates and benefits and make an informed decision on their financial decisions. For more information, visit http://www.souqalmal.com/financial-education/ae-en