If you want a successful retirement, you cannot leave it to chance. You have to take charge of your retirement plans as early as you can.
The following six-step plan will put you in control of your pension investments, giving you far more say over where and when you retire, and how much money you have at your disposal.
1. Shun inflexible savings plans
Insurance-based long-term investment plans are notorious in expat hotspots such as Dubai. They are aggressively sold by commission-hungry advisers, typically to new arrivals who are looking to save their tax-free salaries and have yet to be warned of the dangers by more seasoned residents.
Many quickly find themselves locked into policies running for anything up to 25 years, with hefty upfront charges and extreme penalties if they try to run for the exit.
Simon Fielder, the managing director at Ryland Grey in Dubai, says even the supposedly short-term 10-year plans are expensive and inflexible. “They may allow you to suspend your contributions after the initial period, but the hidden cost of doing so is high.”
Mr Fielder says these policies are designed to benefit the adviser, with you footing the bill.
On a 10-year plan, you will typically have to pay the adviser commission equal to 13 months of premiums, which comes straight out of your pocket. “On a 15-year plan, you pay 18 months of premiums as commission, even more on a 25-year plan.”
Worse, your money is invested in over-priced, underperforming offshore plans, with any profit you do make eaten away by recurring annual charges, year after year.
The UAE regulatory authorities are working hard to clean up the investment sector but it will take time.
Do not let anyone talk you into locking into one of these plans when there are far more flexible, low-cost, high performance options out there.
2. Only deal with financial advisers you trust
If anybody approaches you with offers of independent financial advice; stay very wary. You must be absolutely certain they are working for your financial interests, rather than their own. Always check the adviser’s qualifications carefully: too many advisers claim to have approval from overseas regulators such as the Financial Conduct Authority in the UK, when they do not.
Seek personal recommendations from experienced expats you trust – unless they have been locked into an investment plan themselves. You do not want to repeat their mistakes.
When you finally sit down with an adviser, ask tough questions. You need them to set out every single charge you are likely to pay. You need this all clearly written down, otherwise walk away. Do not accept half answers, or you could throw away thousands of dollars a year.
Mr Fielder says: “In an unregulated regime such as the Middle East, trust is an expensive luxury. Make your adviser prove every claim, and explain every fee.”
Steve Cronin, the founder of Wise (wiseuae.com), a non-profit organisation designed to help UAE residents invest their wealth and avoid rip-offs, says a better option may be to shun advice altogether. “Instead, rely on the one person who will always have your best financial interests at heart – yourself.”
3. Build a low-cost portfolio
Investing for your future is now a lot easier than you think. The most straightforward way is to build a portfolio of low-cost exchange traded funds (ETFs).
These are passive funds that allow you to track almost any stock market index in the world, or sectors such as bonds, technology and property, or commodities such as oil, industrial metals and gold.
ETFs are traded like stocks and shares and UAE residents can deal online through platforms including AES International, Interactive Brokers, Saxo Bank, Swissquote and TD Direct Investing, or maybe the stockbroker they used in their home country.
In contrast to insurance-based saving plans, ETFs have no upfront charges and minimal annual fees ranging from 0.05 to 0.50 per cent a year. You can pay in lump sums or regular monthly amounts, and start, stop, increase or reduce your contributions whenever you wish.
There are thousands of ETFs to choose from, although Oliver Smith, a portfolio manager at online trading platform IG, says you can keep things simple by investing in a single global ETF that spreads your money across thousands of companies around the world.
His suggestions include Vanguard FTSE All-World, iShares Core MSCI World and HSBC MSCI World. Mr Smith says any one of these funds would make a good starting point.
“You could then build your portfolio with specialist ETFs investing in, say, the US, UK, Europe, emerging markets, government bonds, smaller companies, commodities and much more.”
4. Spread your money and hold on for the long-term
Sam Instone, the managing director at advisers AES International, says investing is a long-term game.
“This is especially true if you are saving for retirement, as you could be putting money away for decades.”
Over the long run, stocks and shares should deliver a far superior return to cash, especially in today’s near-zero interest rate world, so this is where you should focus your efforts.
Figures from fund manager Fidelity International show that if you had invested £15,000 (Dh70,940) into a stock market index such as the FTSE All Share over 10 years you would have £25,769, against a paltry £15,846 in the average savings account. The difference will only grow over time. However, you should always keep some money in an easy access savings account, that you can access in an emergency.
Mr Instone says as well as investing for the long-term also need to diversify, using ETFs to spread your money between assets such as shares, bonds, cash, property or gold, that perform differently at different points in the market cycle. “This reduces risk because if one asset underperforms, other holdings in your portfolio should compensate. Never put all your eggs in one basket.”
Resist the temptation to raid your long-term savings for short-term needs, Mr Instone adds. “Time is the investor’s best friend, and you need to give your portfolio plenty of time to grow.” You should also review your portfolio regularly, to make sure it remains properly balanced and is in line with your investment goals.
5. Keep your head when markets crash
Never invest in the stock market for periods for less than five years, and preferably much longer, to give you time to recover from any short-term correction. If you can do that, you can make stock market volatility work in your favour, rather than against you.
Steven Downey, a chartered financial analyst candidate at Holborn Assets in Dubai, says you should not panic when stock markets crash, as they inevitably will at some point. “Do not sell in a panic, as you will only crystallise your paper losses. Sit tight and wait for them to recover, as they always have done in the past, given time.”
You should also see this as a buying opportunity. Most people like to buy things at a discount, but investors are an odd exception to this rule.
“They run for cover when markets fall but this is exactly the time they should be buying, because share prices are cheaper.”
Mr Downey says they compound the error by waiting until stock markets are expensive again before investing. “You should be doing the opposite: buying at the bottom of the market rather than the top.”
Or as investing legend Warren Buffett famously put it: “Be fearful when others are greedy and greedy when others are fearful.”
6. Decide where you will retire and plan your currency exposure accordingly
One threat many internationally mobile investors overlook is currency risk, which is a particular problem as you approach retirement.
If your portfolio is denominated in US dollars but you plan to retire in, say, Europe or Australia, the value of your portfolio and the income you draw from it may vary dramatically with foreign exchange swings.
You should also beware of hidden currency risk, for example, if you invest in an ETF denominated in US dollars or British pounds, its value will vary according to the performance of that currency.
Mr Cronin says many expats have too much exposure to their home country, say, through savings accounts and property.
“They should consider diversifying their portfolio currency-wise, especially if they plan to retire elsewhere.”