The biggest question on everyone’s mind is whether they can truly afford to retire comfortably in the UAE, as living costs keep rising. The next thought is how much you need to sustain yourself during retirement.
However, most financial experts point out that there’s no one-size-fits-all number, it varies depending on lifestyle expectations.
A good rule of thumb is your desired annual income multiplied by 25. For example, if you want $40,000 (Dh146,900) a year in retirement, you will need a retirement pot of $1 million, recommends Josh Clancey, head of technical at Indigo Financial Analysis and Consultancy.
“Generally, my clients want Dh20,000 to Dh40,000 a month to retire on. This would include living in a property they own and includes insurance as well. The retirement income will generally come from rental income and/or having a retirement pot of money that they can draw from,” he says.
Breaking it down further, Jay Adrian Tolentino, a financial coach in the UAE, instructs people to multiply their monthly expenses by 12 to arrive at their annual cost, then factor in any income they will receive during retirement such as pensions, from business, or rental income. The remaining shortfall is what their investments will need to cover, he says.
“For example, if you expect to spend Dh180,000 a year and receive Dh36,000 annually from other income sources, you’ll need your portfolio to provide Dh144,000 per year,” Mr Tolentino explains. “Using a 4 per cent withdrawal rate, that means you’d target a retirement fund of around Dh3.6 million.”
This estimate is based on the “4 per cent rule” that a study by financial planner William Bengen laid out in the 1990s.
What is safe withdrawal rate?
Safe withdrawal rate (SWR) is the percentage of a retirement portfolio that a person can withdraw each year without running out of money. The global SWR is 4 per cent.
Most planners today use 3 per cent to 4 per cent as a safer range for annual withdrawals, given longer lifespans and inflation, Mr Tolentino says.
For example, if you have Dh5 million invested, a 3.5 per cent withdrawal rate gives you about Dh175,000 per year, or Dh14,500 per month.
Carol Glynn, founder of Conscious Finance Coaching, suggests establishing a target monthly “required income” during retirement and then working back to how much savings and investment are needed to generate that income when retired.
The UAE’s retirement visa offers five-year renewable residency for those who qualify. Eligibility is typically based on age and meeting certain financial criteria such as savings, property ownership or regular income.
For a person to be eligible, they must either have worked for not less than 15 years within or outside the UAE, or be aged 55 or older at the time of retirement; own a property/properties worth no less than Dh1 million; have savings of no less than Dh1 million; or have a monthly income of Dh20,000 (Dh15,000 a month for Dubai).
There is no state pension for expats in the Emirates. Income must be built from private savings, workplace schemes, investments and any foreign private and state pensions earned before moving.
Non-Emirati employees have their end-of-service entitlements covered by the UAE’s gratuity programme. Gratuities are lump-sum payments to which all employed residents are entitled after completing at least one year of service. The amount depends on an employee’s length of service and basic salary.
But end-of-service gratuity is not a pension and is usually not enough to fund even a year of expenses. It is, therefore, important for expats to save and invest their gratuity payments towards their long-term goals, experts say.
Budget for expenses vs income
Alex Salter, head of commercial development and senior financial planner at Metis, a DIFC-based wealth adviser, says that to build an accurate cash-flow forecast, you need a detailed summary of expenses, including private health care, which typically increases with age. Whether a client rents or owns their property makes a huge difference as well. Being mortgage-free means your fixed outgoings are lower, meaning the income needed to retire could be less, he explains.
“A detailed summary of all income and investments is also needed, including any state pensions you may have in other countries. Gathering all this detail and putting it on to proper projections using technology gives a very visual way of seeing wealth,” Mr Salter adds.
He also recommends those planning to retire in the UAE to consider which inflation rate to use when determining how much they need. This will help ensure they do not understate the effect of inflation and, therefore, the amount they need at the outset of retirement to sustain their lifestyle over the long term.
However, Ms Glynn warns that cost of living in the UAE is higher than many “lower-cost retirement countries”, so naturally your retirement pot needs to be larger compared to retiring in a lower-cost region.
Mr Tolentino explains that a well-diversified global portfolio earning around 5 per cent to 7 per cent per year can support a long-term withdrawal rate of 3 per cent to 4 per cent. The longer your retirement horizon, the more conservative you should be with your assumptions, he says.
Determining factors
To break it down, these include your housing choice (renting vs owning), lifestyle expectations (comfortable vs modest vs luxury), health care and insurance, cost of living, currency and exchange rate risks (if you have savings or income denominated elsewhere), length of retirement, return on investments and residency/visa and location decisions, Ms Glynn says.
The higher the expected cost of living (housing + insurance + maintenance), the higher your retirement amount target must be.
Bucket list items – such as a six-month cruise, flying first-class twice a year, paying for your child’s wedding, helping them on to the property ladder, buying the watch you’ve always wanted – will also impact the figure needed to sustain retirement, Mr Clancey warns.
“Keeping up with the Joneses is a genuine problem for expats. Monetary inflation is more of a concern – if inflation is running at 3 per cent to 4 per cent a year, your purchasing power is essentially halved every 18 to 24 years,” he says.
“Some people need to plan for a 40-year retirement – meaning your purchasing power will only be a quarter of what it is today [assuming inflation runs between 3 per cent and 4 per cent].
“People think keeping money in cash is the safest thing to do, when it’s potentially the most dangerous.”
Mistakes to avoid
The biggest mistake is underestimating the required investment pot on retirement. Many think “Dh2 million to Dh3 million will cover me” without modelling length of retirement, inflation and rising health costs, Ms Glynn says.
Other mistakes include relying on employer pension or state benefits, ignoring inflation and future cost increases, failing to save and invest early, overemphasising property as the only asset, ignoring lifestyle creep post-retirement and neglecting withdrawal strategy and longevity risk, she warns.
“A lot of people delay investing because they think they’ll start later or once they go back home. Others keep too much money in savings accounts instead of letting it grow. Some buy expensive insurance-linked plans that eat up returns through high fees,” Mr Tolentino highlights.
“Another common mistake is not understanding how much they actually need or not factoring in all income sources and inflation. Without a clear number or plan, it’s easy to end up underfunded when you stop working.”
Mr Salter says there is no point planning for retirement in one country if you end up retiring in another. Different countries have different rules and what may have been a tax-efficient investment may now not be.
Holding assets in the wrong currency for future spending is a common mistake. “We meet a lot of people who are planning to remain UAE residents, even after they finish employment, but their investments may be in GBP or EUR, which is opening yourself up to foreign exchange issues,” he warns.
Don't chase the hype and educate yourself from reliable sources, says Mr Clancey. He suggests speaking only to qualified professionals who are regulated or licensed by The Abu Dhabi Global Market, Dubai International Financial Centre, Insurance Authority or the Securities and Commodities Authority.
Mr Salter advises expats to ensure their estate planning is in order. Make sure to have a valid UAE will and any wills made in countries where they hold assets to ensure there is no drawn-out probate process for beneficiaries, he suggests.
Investment options
Mr Tolentino suggests people to start with simple, regulated options such as National Bonds or UAE-based robo-advisers such as Sarwa and StashAway.
For those comfortable investing on their own, international brokers like Interactive Brokers provide access to low-cost global exchange-traded funds (ETFs). Real estate can also be part of the plan, but only if the numbers make sense after accounting for maintenance, vacancy and management costs, he suggests.
In the UAE, some options to build a retirement fund include investing in dividend-yielding stocks and ETFs through global brokers, real estate investment trusts, owning a property (consider liquidity, maintenance costs and market risk), fixed deposits or business/entrepreneurial income, Ms Glynn says.
