Retirement planning: Save early, save hard
Who doesn’t dream of retiring rich? In fact, come to think of it, it is not that difficult to achieve this dream – provided you know what has to be done and when.
So, what is the secret formula? Start planning early? Yes. It really is that simple. Although retirement is one of the most distant financial goals, it is in our own interests not to ignore it.
It is the law of nature that you will not be able to work forever. One has to be really cautious to avoid the problematic issue of retreating into an unfunded and unplanned retirement in your twilight years.
Long non-earning period
With increasing life expectancy, the non-earning period in an individual’s life is expanding exponentially. For instance, after working for nearly 30 years, if someone retires at the age of 60, he/she may still live for 30 additional years. This, effectively, means that in the 30 years of service period, one needs to make adequate arrangements for the 30 years of not earning. This is known as the 30-30 rule in retirement planning.
Investment is vital
Earlier, the key to retirement planning was saving. However, today investment is vital to a smooth post-retirement life.
Though seemingly complex and even possibly daunting, investment and retirement planning chiefly revolves around a systematic and sequential series of small investments, which should help you achieve your target rather comfortably.
However, one needs to factor in inflation here. While inflation typically only slightly increases the cost of goods and services from year to year, it represents a serious risk and challenge for retirement income planning, as its impact is magnified over an extended period of time.
The impact of inflation is usually a decline in purchasing power, as one dollar would not buy as much in ten years as it does today. A retirement income plan that does not take into account inflation and the potential decline of purchasing power could meet the retirement needs of the client early in retirement, but fail to meet his or her needs ten to 15 years into retirement.
The best way to plan is to decide how much money you will need each year. Usually, around 70 to 80 per cent of your current annual income should allow you to lead your post-retirement life in the same comfort that you’re enjoying today.
The retirement age varies for different countries, but it is generally between the ages of 55 and 70. Most people choose to retire when they are ready, but some are forced to retire early due to various reasons, mostly due to illness or disability.
Research by multinational financial services corporation, Fidelity Investments recommends savings of at least eight times your salary at the end of your career – giving you an annual return of 70 to 80 per cent of your annual income – is needed to ensure that you have enough to live on in retirement.
Fixed deposits are a safe and reliable investment vehicle, but the interest rates for these deposits after tax, can be very low. It is important that you consider your available options, such as mutual funds, pension schemes, stocks and investment in other hybrid products in order to realize what fits your bill the best. Investing correctly today is a much better option than depending on someone else for life after retirement.
Safeguard against rising medical costs
Keeping guard against rising medical costs is equally important in retirement. Medical expenses are a major expense and you need to have a comprehensive medical policy that covers you and your spouse in the case of eventualities. An ineffective policy or lack of a medical insurance policy can throw all of your plans out of kilter, since the need for medical intervention and scope of medical expenses are very difficult to predict.
It is, therefore, critical that you’ve factored in the medical insurance costs through your retirement years. Usually a retirement income of 70 to 80 percent of your current income will be able to cover this bit as well.
Predicament of UAE expats
In 2016, according to the National Bonds, 38 per cent of salaried workers globally did not have a proper retirement plan. On the plus side, expats in the UAE can use their tax-free earnings to build a cushion for their later years.
So, exactly how much do you need to save to fund a decent lifestyle in a retirement that you can enjoy?
According to Dubai-based independent financial advisory firm deVere group, the average UAE expat hopes to retire with a pot of approximately $850,000. However, the vast majority severely underestimates how much capital they require to enjoy their retirement as per their aspirations.
While $850,000 might seem like a lot of money, given today’s low interest rates, it won’t stretch as far as you might hope. If you retire at 55, a pension pot of $850,000 would generate income of approximately $42,000 a year. The chances are you would like to generate a lot more income than that. Doubling that pension target to $1.7 million would still only buy you an income of approximately $80,000 a year, ruling early retirement out of reach for most people.
At 65, a pot of $850,000 would stretch much further, because your life expectancy is 10 years lower. Typically, it would buy you income worth about $51,500 a year. That still isn’t riches, especially if you pay tax on it.
It goes without saying that you shouldn’t dip into your retirement fund, unless it is absolutely unavoidable. A smart retirement plan will go a long way in ensuring a happy and stress-free retirement for you and your family, so get started right away.
The message is clear: save early, save hard.