Dubai: The number of retirement millionaires have reached record levels globally, recent statistics show.
Most experts still recommend contributing at least 10 per cent to 15 per cent of your income to your retirement fund to retire rich. So as per the latest salary estimates, what does that equal to?
Globally, workers aged 35 to 44 have a median annual salary of $35,000 (Dh128,554). (At ages ranging from mid-30s to mid-40s, data shows that most people are well into their careers at that point.)
According to the above salary estimates, 15 per cent of your income equals to about $400 (Dh1,470). But what if you're not able to save or invest as much?
Let’s say you’re able to set aside half that amount, i.e. Dh740 per month, to invest. Is it still possible to become a millionaire by the time you retire?
If you want to become a millionaire by saving Dh740 per month, there are two things experts note you need to do:
• Earn an average 8 per cent annual return on the amount you invest
• Invest that amount consistently every month for 30 years or more
This should leave you with just over Dh1 million at the end of your 30-year period. And, for many, taking both of these steps are reasonable. Or is it? Let’s find out!
Stock markets give you a profit of 10 per cent annually
You’ll need to earn an 8 per cent average annual return to be on target. With stock markets worldwide producing average annual returns of around 10 per cent, that should be easily doable – even if you just invest in index funds that track the performance of the market.
You do, however, need to be sure you’re exposing yourself to an appropriate level of risk and building a diversified portfolio – whether that includes stocks, bonds, cryptocurrencies, ETFs, or a mix of all different investment types.
Will Dh1 million be enough to retire anywhere? Also, what if I don’t have 30 years left to retire?
Now, Dh1 million may not necessarily be enough for retiring, but Dubai-based financial planners reiterate it is definitely a good start – and it’s much more than most people end up with.
So if you’re 37 years old or younger, start investing your Dh740 per month today to get on track to a seven-figure nest egg. And if you’re older, figure out a number that works for you and get your money to start working so you can have the financial security becoming a millionaire provides.
If you start earlier, you could reduce the amount you must save to hit your Dh1 million target. Someone who starts saving at 25 and who wants to retire at 67 would need to invest just Dh273 per month.
But, even if you’re well beyond your 20s, saving just Dh740 per month still makes it possible to achieve your Dh1 million goal. If you’re older than 37, of course, you’ll need to bump up the amount you’re investing.
Let’s use any interest rate calculators that are freely available online to calculate how Dh740 grows during the 30-year period at a modest 8 per cent return.
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How much do I start investing now to retire a millionaire in the UAE?
Starting at age 20:
Assuming a 6 per cent profit or return to your investments, compounded monthly, you should aim to invest Dh364 a month toward retirement to reach Dh1 million in savings by age 65.
Starting at age 30:
Assuming a 6 per cent profit or return to your investments, compounded monthly, you should aim to invest Dh704 a month toward retirement to reach Dh1 million in savings by age 65.
Starting at age 40:
Assuming a 6 per cent profit or return to your investments, compounded monthly, you should aim to invest Dh1,444 a month toward retirement to reach Dh1 million in savings by age 65.
Starting at age 50:
Assuming a 6 per cent profit or return to your investments, compounded monthly, you should aim to invest Dh3,439 a month toward retirement to reach Dh1 million in savings by age 65.
Investing in the right places
To give yourself the best chance at reaching millionaire status, it's first important to choose the right investments.
High-risk, high-reward investments (like penny stocks or meme stocks, for example) can be tempting because it's possible to earn a lot of money in a relatively short period of time. However, they can also be incredibly dangerous, and there's a good chance you'll lose more than you gain over the long run.
A better option, then, is to buy stocks from strong companies and hold them for as long as possible. These investments may not earn explosive returns, but you're less likely to lose money over time.
Most key exchange-traded funds, for example, may only earn average returns of around 10 per cent per year. But most key stock index benchmarks has a decades-long track record of surviving market crashes and economic downturns, so it's a safer bet than stocks from trendy new companies.
Consider your timeline
Next, think about how many years you have to save. Time is a resource when it comes to building wealth with the stock market, so the sooner you begin investing, the easier it will be to accumulate Dh1 million or more.
Let’s say you want to retire early and you want to accumulate Dh1 million by age 50, and your investments are earning an average rate of return of 10 per cent per year. Here's how much you'd need to save each month to achieve that goal depending on your age.
The longer you wait to start investing, the more difficult it becomes to save a significant amount of money. So regardless of how much you can afford to invest, it's wise to start sooner rather than later.
What if you can't afford to invest this much?
Saving hundreds or thousands of dirhams per month can be difficult or even impossible for many investors. But you can also boost your savings by making sure you're investing aggressively enough.
While you don't want to invest in extremely risky stocks, it's also important to avoid being too conservative.
If you're investing heavily in bonds, for example, you'll earn much lower returns than if you'd invested in stocks. Over time, those lower returns are going to make it much harder for your money to grow.
Saving any amount can put you significantly ahead in reaching your retirement goals, thanks to compound interest.
Compound interest means that the money you initially invest will grow over time, on top of the interest that you incur moving forward. That's why starting early is so important.
Compounding can lead to significant wealth building, experts reiterate. Even if it's just a few hundred dirhams each month, this adds up.
Finally, keep in mind that even if you can't save enough to become a millionaire by age 50, that doesn't mean you can't still accumulate a significant amount of money by the age of 60.
Investing anything at all is always better than doing nothing. No matter how much you can afford to save, getting started investing now will pay off down the road.