Tracey Warren, 50, knows she needs to invest all she can now to fund the retirement she wants.
“Although I have a decent pension, it isn’t enough to be comfortable. I need to make up for lost time and money,” she says.
Tracey worked as a teacher in the UK before moving to Al Reem, Abu Dhabi, five years ago, and has built up 24 years of pension.
After taking advice from the UAE-based financial advisers AES International, she set up a five-year savings plan invested in a mixture of medium and low-risk investments.
As retirement edges closer, she doesn’t want to take too many chances with her pension savings. “I need the money to grow but don’t want to invest in anything too risky at this stage. And the closer I move to retirement, the fewer risks I want to take.”
The final 10 years or so before retirement are critical for everybody, as this will determine the success of all those years of hard planning.
There is always the danger that a last-minute hitch could blow a lifetime of saving and investing.
If you are heavily invested in stocks and shares, for example, and the market crashes just before you retire, half your wealth could be wiped out in days, along with your retirement dreams.
Another worry is that financial services fraudsters can sniff out large pension pots like sharks scent blood.
You need to avoid predators in the run-up to retirement and work only with people you trust, or risk blowing a lifetime of hard work.
Samer Abdel Kader, head of SEI Investments Middle East, points out that saving enough for retirement is a daunting task, especially given sky-high living expenses in the UAE.
“Many employers help by offering end-of-service benefit schemes or employee savings schemes with matching employer contributions,” he says. “But don’t depend solely on the final payout to fund your retirement, you should treat it as just one component of an overall retirement portfolio.”
As retirement approaches you must carefully review your pension and investment portfolio to make sure it will be enough to fund a decent lifestyle.
If it isn’t, then you have to invest every spare dollar to make up the shortfall, because time is running out, Mr Kader says. “The alternatives are to consider retiring at a later date, or reducing your planned living expenses in retirement, neither of which are appealing.”
Marcus Gent, managing director of Friends Provident Middle East, says that while the early years of saving are all about building up your pension, in the later years your focus should switch towards protecting what you have. “As you approach retirement, it is a good idea to move your savings from riskier equity funds to more defensive funds in an attempt to ring-fence the gains you have made.”
Many investment bonds and pension plans come with a pre-set “lifestyling” option, which will steadily shift your money into more defensive investments in an attempt to lock in your gains, Mr Gent says. “Lifestyling gradually reduces your exposure to stock market volatility and shields you from more dramatic shifts in the value of your savings.”
If your investment plan doesn’t include a lifestyling option, you can make the switch yourself, by shifting out of stocks and shares into lower-risk investments such as bonds and cash.
But David Hughes, Middle East divisional manager at independent financial advisers deVere Group, says you shouldn’t completely dump all your riskier investments as you approach retirement.
Today’s “abnormal” investment conditions, with ultra-low interest rates and quantitative easing, demand a different response. “Moving your money out of the stock market and into lower-risk fixed income assets such as bonds and cash could backfire, given the low yields you will get right now.”
Mr Hughes says investors should now consider keeping relatively more of their money in the stock market, despite the added risk. “Preferably invested in high-income funds which focus on mature companies with large dividend payouts.”
These funds are typically found in the global equity income sector. Popular funds include JPMorgan’s US Equity Income, which has returned 101 per cent over five years, according to Trustnet.com, Threadneedle UK Equity Income, which returned 55 per cent, and Newton Global Higher Income, which grew 65 per cent.
While you are still in work you can reinvest the income back into the fund for future growth. Then after you retire, take it as income to top up your pension.
You also need to plan carefully to reduce your tax liability in retirement, to make your pension go further, Mr Hughes says: “You should also consider well-established, expat-exclusive financial solutions such as Qualifying Recognised Overseas Pension Scheme [Qrops].”
You may need to take independent financial advice from a trusted specialist to help you understand the complexities of these schemes and review other options such as insurance bonds.
James Thomas, managing partner at Dubai-based independent financial advisers Acuma, says retired people face another challenge: growing life expectancy.
The fact that we are all living longer may be good news, but it also means our pensions have to stretch further.
Mr Thomas says this bolsters the arguments in favour of keeping more of your pension invested in stocks and shares. “You could easily live for another 20 or 25 years after you retire, and over such a lengthy period, stock markets typically offer the highest potential returns.”
He says that growing numbers of people are now spurning the traditional method of generating retirement income, using your combined pension pots to buy an annuity, an income for life.
Annuities have fallen out of favour because rates have crashed in the past five years.
Each $100,000 in your pension pot would now buy barely $5,000 a year in annuity income, even less if you wanted a joint life annuity that covered your partner and increased in line with prices.
Many people also rail against the restrictions on annuities, because once you have signed up, you are locked in for life.
Worse, if you die in the early years after taking an annuity, your pot disappears and there is nothing to hand on to your family.
Mr Thomas says a far more flexible alternative known as income drawdown is proving increasingly popular. “This involves leaving your money invested to continue growing, while taking a proportion of your pot as retirement income each year. This income can be varied year-on-year, and the fund is still available to pass on to your dependents.”
Income drawdown is riskier than buying an annuity, because the size of your pension pot could fall if stock markets correct, but it is potentially more rewarding. Seek financial advice before taking the plunge.
David Norton, AES International’s head of investments, says another key issue is deciding in which country you want to retire. That will partly dictate where you keep your pension portfolio and in which currency.
Then you need to work out how much cash flow you need to support the lifestyle you want in retirement. “Expats will have worked hard for a lifetime and deserve to retire in comfort, or start another business, or sail around the world… whatever it is. But this dream needs careful planning, otherwise your hard-earned savings could go up in smoke.”
Mr Norton says you also have to be on the alert for other dangers. “Do you have any overseas tax liabilities, say, from a property in your country of origin or in the UAE? Do you have a spare pot of cash for emergencies in the run- up to retirement?”
You also have to choose any investment vehicles carefully, and only deal with individuals you trust.
“In less regulated environments like the UAE, you must be wary of investments which promise consistent outperformance, capital guarantees or market-beating returns for minimum risk,” Mr Norton says. “There are too many examples of unregulated funds that have been heavily sold in expatriate markets only to collapse after severe liquidity issues and even fraud. Investing in one of these could seriously damage your retirement plans.”
The decisions you make in the years before retirement will have a big impact on the rest of your life, Mr Norton says, so take your time. “Don’t be pressured into making a decision, a wrong move at the last minute could potentially ruin a lifetime’s worth of saving.”
Eddy Abramo, regional chief executive of Banque Internationale à Luxembourg Middle East, says expats need to plan carefully to make sure they own a property in their chosen retirement destination. “Real estate is a popular expat investment. Your home country is more familiar, so it is easier to buy a house or an apartment and to rent it out.”
Wherever you plan to retire, you have prepare your base as far in advance as possible, to give you enough time to pay off the mortgage.
The final challenge you face is timing your exit from the expat world, Mr Abramo says. “Many expats know that one day they will go back to their home country, but don’t know exactly when.
“This means they cannot fully control timing issues. Today everything is fine, you have a job and you can save money for your future. But if you lose your job, the whole situation changes and you might have to go back to your home country sooner than expected.”
And that is why careful preparation is so important. Things can go wrong at any point, but in the final years before retirement you have less opportunity to rectify them. Time is no longer on your side, so start planning now.
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