My top students will start planning their pensions now

PF University Pension planning conjures up distant scenes of infirmity and incapacity, which is why we prefer to call it long-term saving or retirement planning.

Pension planning, not the most riveting of topics, conjures up distant scenes of infirmity and incapacity, which is why we prefer to call it long-term saving or retirement planning. Nevertheless, since we are all living longer than before, and our life expectancy is rising every year, the period after paid employment ceases might actually be longer than your working years. This sounds great - providing you have built your "replacement income" wisely. And for expats, this is even more relevant because companies in the Middle East, for example, do not provide the same kind of pensions as they do back home. And state-run social security systems around the world are facing ruin, forcing governments to urge individuals to make their own retirement arrangements. So not much to rely on there either.

My strong message to you, therefore, is that by not planning and preparing for your retirement well in advance, it will likely result in financial hardship and subsequent misery. If you can neither rely on the state nor, as an expat, on your company, then you are on your own. So where do you start? The answer is simple - as soon as possible. Let me illustrate with some fascinating examples. If you commence your long-term saving plan at the age of 25, and put aside US$200 (Dh734) per month, you could end up with a savings pot of well over $500,000 by the time you retire at, say, 65.

However, if you were to commence saving at the same monthly rate, but at 35, you would end up with half this lump sum. That's the difference that 10 years make. Now observe what a difference five years can make to your retirement. If you can afford to put aside $1,500 per month at 25 for just five years, you will end up with a nest egg greater than $500,000 by the time you are 50. As a rule of thumb, work with the following: save one-fifth of your salary if there's 20 years until retirement, one-third for 15 years and two-thirds for 10 years.

It just gets tougher the longer you leave it, so you need to draw up a plan, and fast. The two key considerations are what annual income you will require during retirement, and what is your contribution matrix. Sadly, there is no precise answer. But your guideline is what is called the "rule of twenty". Plan to build a pot 20 times the annual income you think you will need on retirement. This is because you should conservatively estimate a 5 per cent draw down from your invested retirement pot. Now the really interesting (and most important) part - where and how to invest for retirement?

This is a very large subject which I shall be covering in much greater depth in future classes, commencing next week. In the meantime, however, I want to leave you with some basic, but important principles for investing to reflect on. Risk and reward: the longer your time horizon, the more aggressive your investment planning can be; the shorter, the more conservative. Diversification: invest across a broad class of assets.

? Supervise: keep an eye on what is going on with your investments. ? Administer: when the time comes, switch from aggressive to more conservative investments; try to be proactive with your plan. Remember the philosophy behind retirement planning - you are putting as much money aside (as is practical to your current needs) on a regular basis at the earliest age in order to build your nest egg for retirement, so that you can continue to live a comfortable and quality lifestyle during your sunset years.

Wishing you all a healthy and prosperous 2010. John McGaw is a financial adviser based in Dubai. Contact him at [e-mail]