Vijay Valecha , Special to The National April 13, 2021
Saving goals for retirement usually depend on which country you plan to settle down in during your golden years, but it is also important to start planning as early as possible, financial experts say.
A survey by global consulting company Mercer in February last year found that almost half of all UAE residents often delayed preparing for their retirement until they had reached their late 40s and 50s.
It also found that about 45 per cent have no plans to ensure an adequate standard of living after they retire or plan to work beyond their retirement age to ensure a steady income.
Worryingly, 61 per cent have no long-term savings at all and 43 per cent expect their end-of-service benefits to meet their long-term financial needs, the survey showed.
With life expectancy rates rising rapidly thanks to advances in healthcare and better living standards, the concept of traditional retirement is fast disappearing. Exacerbated by the absence of savings, people will be forced to work longer to sustain themselves, especially if they are not eligible for state pensions.
According to Andrew J. Scott, a professor of economics at the London Business School and co-author of The 100-Year Life – Living and Working in an Age of Longevity, today’s state pensions and retirement funds are not enough for individuals to fund lengthier retirements.
However, it’s never too early to get started because of the power of compound interest – and it is never too late to make progress, experts say. Achieving key financial targets in each decade can help prepare you for a successful retirement.
In your 20s
Although retirement is a long way off when you are in your 20s, financial experts say this is the perfect time to harness the power of compound interest to maximise savings.
American billionaire Warren Buffett, for instance, owes much of his wealth to the power of compound interest. The 90-year-old chief executive of Berkshire Hathaway began investing when he was 10 years old and is now worth nearly $100 billion.
“Compound interest can be thought of as ‘interest on interest’ and will make a sum grow at a faster rate than simple interest,” Stuart Ritchie, director of wealth advice at AES, says.
“When you start investing early, your wealth can grow exponentially thanks to compound interest and time in the market.”
Mr Ritchie advises people in their 20s to invest whatever they can, no matter how small an amount. The power of compounding will turn that small sum into something significant over time, he says.
“Today is the second-best time to start investing. The best time was yesterday,” he adds.
It’s best to allocate disposable income according to needs, wants and savings using the 50:30:20 rule: half should go towards your needs, 30 per cent to wants and 20 per cent to savings and investments, Mr Ritchie says.
He recommends investing in a globally diversified portfolio of low-cost funds over the long term.
“This way, your money is spread across asset classes and geographies, ensuring you’re properly set up, regardless of what happens in the world and in the markets.”
Mr Ritchie says investing should be boring despite the younger generation’s propensity to chase new fads like cryptocurrencies to get rich quick.
“While low-cost funds may not bring bragging rights, they will bring greater returns over time. By simply investing in them and leaving them alone, you have more time to enjoy life and focus on your career,” he says.
In your 30s
If you did not save for your retirement in your 20s, push yourself to save as much as possible in your 30s, financial experts say.
“Start saving with whatever you can, no matter how small. Do not touch the money you have saved unless it is an absolute emergency,” Georgina Howard, a chartered financial planner at The Fry Group, tells The National.
“Ask yourself if you were five years from retirement, how important this would be to you. Just because you are 30 years away, it should still be as important.”
It is important to adopt a flexible approach to saving during your 30s in case of any unforeseen life changes or if you receive unexpected money such as a bonus. Review your savings plan every year to ensure you are on track, Ms Howard adds.
She recommends investing in a well-diversified portfolio of funds in different asset classes.
“The most important aspect is to agree the risk you wish to take and your capacity for loss,” she says.
People should take into account all their assets that will give them an income in retirement as well as pensions in their home country when working out how much to save to achieve their retirement goals, Ms Howard says.
“For instance, if you are from the UK, make National Insurance Contributions to boost your State Pension. You can find out how much you have accumulated.”
In your 40s
The objectives by the end of this decade should be to eliminate debt, avoid credit card balance and increase savings as much as possible.
In your 50s
Most people who start saving in their 50s have already left it too late, so they need to put away a very sizeable chunk of their salary per month for retirement, says James Spence, the Abu Dhabi-based vice president of financial adviser Globaleye.
They have the last few years of their working life and have to live on a tight budget, he adds.
“The biggest pitfalls I see with people in their 50s is that throughout their life they have been either too scared or enjoying life and did not take action. It’s very hard to change that mindset, but also a difficult pill to swallow to be told that they will probably have to work until 70,” Mr Spence tells The National.
Another pitfall to watch out for in your 50s is health, with most people not expecting to suddenly fall sick and being unable to work for six to 12 months, although this happens, he adds.
He recommends people in their 50s work out a target amount of what they need to save to provide an income that will give them the quality of life they want in retirement. “Understanding the goals, lifestyle and location of retirement is key to know how much it will cost,” Mr Spence adds.
People need to ask themselves a range of questions when planning for retirement. These include where they want to retire, how much they will need to cover basic costs such as food, utilities, medical bills, taxes, travel and clothing, as well as other expenses they may have, such as gifts, entertainment and sport activities.
They should then study the inflation rate of where they want to retire and work out what that cost will be at the point they want to retire, says Mr Spence.
A financial adviser can help work out your target retirement pot at future value, considering inflation, any potential taxes and other factors. The adviser can also break it down into monthly amounts you need to save to achieve your retirement goal.
Mr Spence suggests people approaching retirement reduce their risk and switch out of volatile equity holdings into fixed-income assets or bonds. He also recommends people in their 50s do not lock away all of their retirement money in a property or similar asset class because if they need cash when the markets are falling, they will be forced to sell at a low point with no profit at all or even at a loss.
“Start yesterday. Don’t procrastinate, seek professional advice from a qualified adviser, get an action plan and take action. You don’t have time to wait,” Mr Spence says.