Everything UAE residents need to know about planning for retirement

And yet few people place any serious thought into retirement plans until it’s too late.

Here our experts explain exactly what is required in order to enjoy a happy retirement.

Is there an ideal amount to save for retirement?

According to fund manager Fidelity, you should aim to save 15 percent of your income to fund your retirement.

However, that is assuming you start at the age of 25, when retirement is at the very far flung corners of your mind; and retire aged 67 – which seems a long time to be working.

Chris Ball, managing partner, Hoxton Capital, said generally people want two thirds of their final income as a salary in retirement, although he conceded this will be different for different people.

“A very simplistic way to do this is to multiply your desired annual income in retirement by 20. This will give you a total pot value of assets that if you were to invest with targeted annual returns of five percent, should provide you your desired income in retirement,” he said.

The amount is very much dictated by the lifestyle we choose to lead in the country we plan to retire to, taking into account its cost of living, taxes and the level of subsidy or state benefit we’re likely to be eligible for, if any.

Sandeep Ghosh, senior associate, Holborn Assets, said: “Without knowing how long we’ll live after retirement (statistically it will be longer than our parents’ generation), it is important to prepare for the worst. Overcompensating with our savings with an assumption that we’ll live to a grand old age, should ensure that we’ve made suitable preparations for the related costs.”

Are people taking retirement savings seriously?

“I can’t stress enough that the single most important thing people should do when planning their retirement is to start saving early,” so says Adnan Lateef, interim general manager MEA, at Friends Provident International (FPI).

Although he concedes this is definitely easier said than done as retirement is placed on the back burner in favour of other priorities, such as setting up a home and starting a family.

It appears, among experts, that the optimum age, when the retirement penny finally drops, is in the mid-to-late 30s.

Ghosh said: “There’s a worrying trend across most age groups of burying our heads in the sand, although our level of perseverance is often driven by age. When we’re younger, at least up to our mid-30s, thoughts of retirement are far off since we still feel young and have little awareness of our own mortality.”

It goes without saying that the more time your money has to grow, the bigger your retirement nest egg will be and the less it will cost overall.

Is there a retirement crisis?

Experts agree that there is a retirement crisis.

And Vijay Valecha, chief investment officer, Century Financial, said this is a particular for expats plying their trade in this country, where there is no provision for pensions at present.

He said: “In the UAE, the situation is compounded by the fact that cost of living is high, and on par with most developed countries. Add to this the fact that the working population is mostly comprised of expatriates, and that there is no social security net for this segment of the population, and you have a perfect mix of a high need for retirement planning on one hand, and no incentive for planning on the other.”

The issue goes back to having a false sense of security, assuming that somehow things will be taken care of and paid for in retirement, which in turn leads to procrastination and a laissez-faire approach to financial planning.

Ghosh said: “Lack of basic personal finance education is also fast becoming a hazard. If we can’t accurately calculate the costs we’ll face in the future, with inflation adjustment, tax planning and health and lifestyle assessments, how can we know what sort of a lump sum we’ll need? If we’re unaware of the functionalities of the types of products needed to get to those goals, how can we identify their appropriateness to build the right sized pot?”

According to a survey by FPI, one fifth of respondents expect to receive less than 10 percent of their current income in retirement, and over half of respondents expect to receive 25 percent or less.

Lateef said: “This is unlikely to be enough to maintain a decent standard of living when the salary cheques stop.”

The survey also showed that 29 percent of respondents think their end of service gratuity (EOSG) will be sufficient to sustain them in retirement. “People may not be aware that EOSG is capped at a maximum of two years’ pay, and is unlikely to be anywhere near enough to fund a comfortable retirement,” added Lateef.

Is there an optimum age of retirement?

There is a school of thought that says people would like to retire as soon as possible.

However, as life expectancy continues to rise and people look to stay mentally and physically active, it would appear that this is not always the case.

According to the FPI study, one third of respondents (34 percent) expect to retire at or before 55 and overall 75 percent by the time they are 65; a further five percent said they had no plans to retire.

“We think the definition of retirement has now changed. Whereas before it was a day that arrived in your life where you finished work for the last time and that was it, now we think of it as a time that arrives where you have the flexibility to work as little or as much as you want,” said Ball.

“More and more we meet people who tell us they will never stop working,” he added.

Ghosh believed the optimum age to “stop working and enjoy life” comes back to the issue of saving early and saving hard.

“Discussions about a retirement fund only come about when the amount saved so far is short of the amount required to provide a pension, and a solution is needed to plug the gap,” he said.

While Valecha warned it was a balancing act to ensure you save enough for a long and happy retirement.

He added: “Too often, people plan for 15-20 years of post-retirement life, withdrawing huge sums from their retirement corpus in the first few years of retired life, to soon find that they are in reasonably good health, and very much alive two decades after they stopped working. Unfortunately, they do seem to run out of money.”

What you need to save in order to achieve that goal?

Reaching that retirement target depends on your personal situation, the age you plan to retire and the income you are targeting in retirement.

Lateef said: “There is an industry term we use often: ‘The cost of delay’, meaning that the longer you delay saving, the more it will cost you to achieve your savings goals.”

According to Lateef, using a $1 million retirement fund target, and assuming a retirement age of 60 and seven percent annual growth, the following monthly savings would be required: 30-year-old – $814.94; 40-year-old – $1,908.52; 50-year-old – $5,744.01.

Ball said: “If you don’t know where to start, seek advice. On average, people who have received advice achieve 2 percent better returns on their portfolio per year than those who haven’t. Aim to be saving 20 percent of your monthly salary towards a pension.

“Diversification is always key so make sure you aren’t over-exposed to one specific asset class. And if you know where you want to be living in your retirement years, seek tax advice early regarding that jurisdiction.”