You’re working very hard and you have one simple goal: Create a big fat nest egg by age 65, so that you can put up your feet and enjoy the fruits of your labor. While the goal is crystal clear, the uncertainty lies in deciding exactly how much to save for retirement. Where do you even begin? There are so many variables to consider: your current age, salary and possible increments, lifestyle, rate of inflation, life expectancy.

Moreover, who knows what the future holds – Are there any unseen expenditures coming your way? How do you decide what magic number will sail you through your retirement years. Unfortunately, there’s no one-size-fits-all universal approach.

Here is what you can do – Bring together a few theories, add in a couple of safe assumptions, do some educated forecasting and use a handy retirement calculator to get a close estimate. To start with, here are a few things you can try:

Step 1: Project future expenses

Begin by taking a look at your current spending trends. You could then roughly guess the future spending per year post retirement. This will lead you to the annual income required when you stop working – i.e the minimum desired “replacement rate”. What’s that? Read ahead.

Step 2: Calculate future income

Let’s take a look at your current income. And then let’s calculate the retirement benefits that you’re expected to receive. These include benefits from your employer (such as end of service benefits or EOSB in the UAE), the government (applicable for UAE Nationals) and from any investments you’ve made (such as pension based retirement plans).

What percentage of your current income is this expected income of the future? 60%? 70%? You just calculated your “replacement rate”. Most economists agree that to maintain your lifestyle your replacement rate should be between 60-80%.

[Related: Got a financial plan for your retirement?]

Step 3: Calculate the fund value

You already have a rough idea of how much money you need per year post retirement. Now it’s time for some back calculation. What should be the value of your retirement fund such that you can generate the required replacement rate in returns alone?

You can use the “4% rule” as a broad guideline. According to this rule, you can assume returns of 4% on the lump sum you collect at the end of your work tenure. For example, if you currently have an annual income of AED 120,000 and you’re looking at a replacement rate of 80% i.e., AED 96,000 – you would need a retirement fund of AED 2.4 million. Throw in an inflation rate of 1.5% and a life expectancy of 85 years and the required fund value jumps to AED 2.7 million. The figure will change the more variables you add in to the mix.

The 4% rule was created by financial planner William Bengen in the 1990’s. But given that the theory is quite dated and does not take into account all the many variables, economists suggest to use it as a loose guideline rather than a hard and fast rule.

Step 4: Use a retirement calculator

All of the above working out to be too much math? Don’t sweat. There are plenty of retirement calculators available to aid you. Here are a two that we liked: – Retirement Calculator

Bloomberg – Retirement Calculator

Step 5: Start early

As it is with any kind of financial planning, this step cannot be stressed enough. The sooner you start, the more you save, and the lesser is the pressure on your current lifestyle. Using the calculator linked above (from, we look at how the percentage you need to put away from your monthly income changes at varying ages:

Saving from age 25 35 45
Retirement age 65 65 65
No. of years of saving 40 30 20
EOSB (in AED)* 379,729 281,089 182,467
Saving required (in AED)** 2,745,755 2,365,927 2,038,642
Net Saving Required (in AED)** 2,366,026 2,084,838 1,856,175
Monthly Saving required (in AED) 2,037 3,042 5,101
% of salary 20% 30% 50%

In this table we’ve assumed:
1. An inflation rate of 1.5%
2. A constant salary of AED 10,000 per month
3. That the entire EOSB earned is going towards savings from the day you start saving
4. Life expectancy of 85 years and replacement rate of 80%
5. A 4% average rate of return on retirement savings & investments

* Remember, EOSB calculations are: 21 days of your basic salary for the first 5 years. Post that 30 days salary every year.
**The saving amount required reduces due to time value for money where inflation reduces your actual value for money.

[Related: Have you thought about retirement in the UAE?]