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Dubai: Retirement from an active full-time job is a big life decision that requires careful planning to ensure financial security and stability post-retirement. There are many factors to consider if someone is planning to retire in a country like the UAE that does not offer permanent residency unless certain criteria are met.

Retired residents aged 55 years and above can apply for a long-term UAE visa for five years, which can be renewed, after fulfilling the below criteria:

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Set a goal and follow through

Knowing the retirement goal is the first step towards planning for it. “Based on your goal, start saving as early as you can towards building a retirement fund,” recommended Hannah Greenwood, managing director of Dubai-based financial services group Finsbury Associates. She also pointed towards some key questions to effectively planning for retirement:

  1. What is your ideal retirement age?
  2. How much income would you need in retirement (based on where you want to retire)?
  3. What assets do you have?
  4. Finally, what is the funding gap that needs planning?

For example, Dubai-based Indian national Sharmistha Chatterjee, in her early 50s, has lived and worked in the UAE for almost two decades and recently retired from her full-time job. She started planning for retirement only a few years before she quit her job.

“I had started planning towards retirement almost five years ago, before retiring from my full-time job in July 2020. By then there were COVID-19-related travel restrictions, and my daughter had just completed her higher education in Europe and had returned to Dubai, which is why I decided to stay on in the UAE. But I had to re-evaluate my financial planning since cash flow would be affected due to my decision to stay on in the UAE. So I had to ensure that the returns on my investments generated the kind of monthly cash we would need,” Chatterjee said.

Picture used for illustrative purposes.

Ensure financial security

Financial security is key when planning for retirement. Over the past five years, Chatterjee diligently kept aside anywhere between 10 per cent and 20 per cent of her monthly salary to create a fixed fund to manage finances after retirement. “Whilst I do not think it is about creating a retirement fund as such, finances must be structured and managed well for the indefinite time that a person will probably not earn regularly. Managing and investing these funds appropriately is also crucial.”

Now the big question: What is the best way to plan for retirement?

Earlier financial advisors used to suggest a certain amount of income that people should save towards retirement planning. “But now the meaning of ‘retirement’ and ‘retirement age’ have changed significantly,” pointed out UAE-based wealth manager Roy Walker.

“Some people choose to retire in their mid-50’s, while others work until at least 70. And people’s income can vary substantially, both up and down, over their working career. The global economy has changed and so has the nature of jobs. So, nowadays it is advisable to work out objectives in actual numbers based on your lifestyle expenses post-retirement, estimated by inflating today’s cost over the number of years to retirement.”

Walker shared a step-by-step calculation.

Step 1: Evaluate your lifestyle in retirement. Assume your children are independent and your home is paid for.

• Step 2: Now imagine you had to retire today. If you were to live your chosen lifestyle, how much annual income would you need? Let’s say, in today’s money terms, the answer is $40,000 (Dh 146,919).

Step 3: Account for inflation. For example, 20 years at 3 per cent inflation gives a multiple of (1.03)^20 = 1.8. This means a lifestyle that costs $40,000 (Dh146,919) today will cost $72,000 (Dh264,454) in 20 years, if average inflation is 3 per cent.

Step 4: Decide your theoretical withdrawal rate from your retirement pot. Advisors typically use a number between 4 per cent and 5 per cent for planning. For example, if it is 5 per cent you need a retirement fund of $72,000/5 per cent = $1.44 million (Dh5.3 million), to provide an inflation-proof retirement income, equivalent to $40,000 in today’s purchasing power, with a good chance that you will not run out of money over 30 years.

Now here’s the thing, while creating a financial plan for retirement, it important to calculate the cost of living in the place where one chooses to retire. There are freely available online resources, such as Numbeo, to do this. Importantly, inflation must be factored in the financial plan. While the International Monetary Fund publishes data on inflation, other online resources such as MyMoneySouq (UAE), SmartAsset (US) and Scripbox (India), among others also help in calculating inflation.

Tip #1: As a rule of thumb, it is advisable to follow the ‘pay yourself first’ model, which means instead of saving from what is left in the account at the end of the month, make retirement savings as the very first deduction. It is also important to start saving a realistic amount early and consistently, taking a long-term view to avoid dipping into retirement savings, except in case of dire emergency. Another crucial aspect of financial planning is to have a diversified range of investments.

A well-balanced portfolio is one that is wisely diversified Image Credit: Gulf News

Create a diversified investment portfolio

While creating a diversified investment portfolio, Walker suggested avoiding a home country bias. Gold, government bonds and even real estate are great investments options, according to him.

“Don’t invest in one asset class,” Greenwood agreed. “The benefit of a diversified portfolio lies in the fact that not all asset classes will go down at the same time. Some will outperform others and rebalancing will certainly bring returns. Start by investing in traditional asset classes such as bonds and equities and rebalance it. For example, a moderate risk investor could start by investing 40 per cent in bonds and 60 per cent in equities. As this portfolio grows, they can diversify by investing in commodities and properties.”

It is important to constantly review the portfolio to understand how a particular investment aligns with the expected return. “A good practice is to evaluate at the end of each month how much and where you have spent and what you could have saved. Similarly, how much did you save and where did you put that savings,” Greenwood shared.

Tip #2: Along with a diversified investment portfolio, consider buying a comprehensive health insurance as early as possible to plan for any sudden health issues. Walker also suggested getting a critical illness cover (CIC), which is different from health insurance. CIC pays out a lump sum amount of money in case a person gets diagnosed with a critical illness. Having a CIC can, thus, help a person to focus on recovery instead of being stressed about money. According to Policy Bazaar, premium for CIC plans in the UAE ranges between Dh200 and Dh2,500 depending on the provider and the cover that varies from Dh200,000 to Dh500,000.

Retirement is a lifestyle choice

As a retirement coach, Chatterjee is of the opinion that retirement planning is not only about the finances. “It is a lifestyle choice that needs to be thought through well in advance. It might involve rewiring priorities. For instance, post retirement I mindfully made a couple of adjustments from my earlier lifestyle. I restricted my constant socialising that I used to enjoy earlier, especially when my daughter was away.

“But with the new circumstances, I did not feel the need for it so much and restricted my socialising with only a few close friends. I have also cut down on my retail therapy and since I am mostly at home, my maintenance costs, including salon visits have gone down drastically although I pamper myself occasionally. As an outcome, I have saved a lot of money.”

Tip #3: Retirement does not mean that a person should stop working or earning. It is more about having the financial independence to pursue a chosen path to remain intellectually sharp and live a meaningful life. For instance, Chatterjee now undertakes small consulting and coaching projects to bring in some money. While creating a financial plan is the foundation, it is equally important to stay healthy and active mentally to be able to enjoy the post retirement phase.