As we all live longer, our retirement savings have to stretch that much further.
Rock bottom global interest rates have made building sufficient pension savings even harder, as we now generate far less income from our pots.
Nobody can expect to take early retirement at, say, 55, without a substantial portfolio of work and personal pensions, investments and other assets, such as property.
Even retiring at 60 or 65 can be a financial challenge unless you start early.
UAE expats may also have little state pension provision to fall back on. On the plus side, they can use their tax-free earnings to build a cushion for their later years. That’s if sky-high rents and the Dubai lifestyle do not drain their resources and willpower first.
So exactly how much do you need to save to fund a decent lifestyle in a retirement that you are still young enough to enjoy?
Reece Fallaize, a senior technical adviser at the independent financial advisory firm deVere Group in Dubai, says the average UAE expat he meets hopes to retire with a retirement pot of about US$850,000.
“Unfortunately, they have average savings of just $125,000, leaving them well short. The vast majority severely underestimate how much capital they require to enjoy the retirement to which they aspire,” he says.
So, taking that as a target, what kind of retirement can $850,000 buy?
The answer partly depends on what age you would like to retire.
Retiring at age 55
It’s a dream for many people, to earn enough to quit the rat race and retire while you’re still young enough to enjoy yourself. Many expats have come to the UAE to do exactly that.
To make this work, you really do have to build a large pot of money. Most healthy, educated people can look forward to living to 80 or beyond, so if you retire at 55, your savings will have to stretch at least another 25 years.
While $850,000 might seem like a lot of money, given today’s low interest rates, it won’t stretch as far as you might hope, Mr Fallaize says. “If you retired at 55, a pension pot of $850,000 would generate income of around $42,000 a year.”
Would you (and possibly your spouse) be happy living on that for the rest of your life? When doing your sums, remember that in many countries, this income will also be taxable.
The chances are you would like to generate a lot more income than that. Doubling that pension target to $1.7 million would still only buy you an income of about $80,000 a year. Early retirement will be out of reach for most people.
If you still want to go for it, the amount you need to save depends on personal factors such as how much retirement savings you already have, and how old you are, Mr Fallaize says.
A 30-year-old aiming for a pension pot of $850,000 by age 55 would need to save nearly $1,500 per month, assuming an investment return of 5 per cent a year after charges.
If that sounds a tall order, it gets exponentially harder as you get older. If you don’t start saving until age 40, you would have to save nearly $3,300 a month to hit your target. That’s nearly $40,000 a year.
If you leave it later than that, you can probably forget it (unless you have a business to sell or are due a nice inheritance).
Your early pension contributions are the most important because they have much longer to grow in value, says Cyriel Varwijk, a partner at UAE-based personal financial advisers the VSM Consultancy. “If you don’t start saving for a pension until age 40, you will have to save almost twice as much each month as somebody who starts at 30.”
Few of us will be able to retire at 55. But even if you’re happy to retire later, you need to get your act together today.
Retiring at age 65
At 65, a pot of $850,000 would stretch much further, because your life expectancy is 10 years lower. Typically, it would buy you income worth about $51,500 a year.
That still isn’t riches, especially if you pay tax on it.
At age 30, you would need to save $785 a month to accumulate $850,000 by age 65, assuming 5 per cent annual growth. At age 45, that rises to nearly $2,150 a month.
When you’re in your 30s, retirement seems a long way off, says Quentin Marshall, the head of advisory at Coutts in Dubai. “You have other priorities, such as repaying debts or buying a house. But the impact of a delay in building up your retirement fund can be significant.”
He says the key to successful long-term saving is to spread your money around between different assets, such as stocks and shares, bonds, cash and property.
You should review this regularly, to make sure it matches current market conditions.
Because of today’s low interest rates, he says his company is focused on global equities, “particularly companies paying attractive dividends that are capable of long-term growth.”
Deciding where to invest isn’t the only decision you face, Mr Marshall adds.
“For UAE residents intending to retire outside the region, understanding how your pension fund will be treated by the tax authorities in your retirement country of choice will be critical. You may need to take specialist tax advice to navigate these complexities.”
Retiring at age 75
Unless you absolutely love your job, you probably don’t fancy the prospect of working into your 70s. If you don’t start saving today, you may not have much choice.
At age 75, your $850,000 pension pot could generate income of about $69,000 a year. Although at this stage, rather than commit to any annuity-style project, you may prefer to live off the interest, dipping into your capital when you need it.
Most people only consider working to 75 if they have left their pension savings to late. Somebody starting from scratch at age 50, for example, would need to save nearly $1,500 a month to hit that $850,000 target by age 75.
Again, the message is clear: save early, save hard.
Get started today
The amount you need to save to build a decent pension income comes as a shock to many. The task has been made far more daunting by today’s low interest rates, which means you won’t generate as much income from your savings.
If interest rates have climbed higher by the time you retire, you should be able to generate more income from the same pot of money.
Pensions are complex, especially for internationally mobile expats, so you may need to take specialist advice on your options specific to your home country.
You could back this with a portfolio of investment funds that matches your attitude to risk and investment goals, says James Thomas, regional director at Acuma Wealth Management in Dubai. “Fund managers such as GAM, Goldman Sachs, JP Morgan and Skandia Investment Group all offer managed investment portfolios tailored to the investor’s personal needs.”
The GAM Star Balanced fund, for example, invests in a blend of 30 funds, spread across the world with a wide range of asset classes, Thomas says.
Such a fund gives a “boost to your chances of getting a steady, risk-managed return, while keeping volatility under control”, he says.
Aside from pensions, you have plenty of other tough retirement decisions to make, Mr Thomas says. “Often the biggest unknown is where to retire. The longer you are offshore, and the more places you live, the less likely it is that you will return to your home country. You also have to watch out for tax surprises in the country that you do eventually retire in.”
Another challenge facing UAE expats is combining the twin savings goals of building a pension with buying somewhere to live in your country of retirement. “I regularly see people who have spent so much on a property that they don’t have enough wealth to generate a decent income when they do retire,” Mr Thomas says.
Building a large pension pot is vital, but it is only one element of successful retirement planning.
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