Retirement planning: How UAE expats can combat issues with not saving enough money Image Credit: Shutterstock

Dubai: Although the mechanics of retirement planning hasn’t changed all that much over the years, beyond the usual – earning, saving and then retiring – plan savers are facing some challenges now.

Over the past three-plus years, surveys from Mercer, HSBC and Guardian Wealth Management, among others, have repeatedly found that 50 per cent or more UAE expatriate employees have no plan to ensure an adequate standard of living after retirement.

Putting off plans to retire, save

Of the 500 employees polled in Mercer’s 2020 UAE Security and Savings survey, 45 per cent said their only plan is to work as long as they can, 37 per cent said they anticipate working past retirement age.

Prominent issues include a reliance on the UAE's end-of-service gratuity and the lack of access to pension or savings plans, the Mercer report had found.

An earlier survey from Guardian Wealth Management drew similar conclusions, while flagging that GCC has one of the highest number of residents in the world that don't have any form of retirement fund.

“Increasing numbers of expats, however, are remaining in the region for longer periods of time (seven plus years) hence coming closer to their retirement age,” Mercer revealed. “As a result, concerns and needs around appropriately planning and saving for retirement are becoming more pressing.”

How much can your gratuity help?

Financial planners and other matter experts are still of the opinion that majority of the residents mistakenly think the end-of-service will cover their needs in the long term.

End-of-service is equivalent to two years of salary after 25 years of service, while you really need more than 10 times your salary for retirement – which is the big gap that most are not aware of.

The UAE’s current gratuity system pays employees a lump sum based on the length of employment. Employees with at least 12 months of service are entitled to 21 calendar days of their base salary for each year of service in the first five years and 30 days’ base salary for each year worked beyond five years.

Here are five frequently asked questions (FAQs) that resident expats often ask when it comes to planning for your retirement in the UAE.

FAQ #1: How do I plan what sort of retirement I would want?

To maintain your current lifestyle once you retire, experts suggest you will need two-thirds of your current income. It is, or course, very difficult to know exactly how much money you will need post-retirement. To know further on how much, read this.

When you have an idea of the annual income you'll need for the retirement you want, the next big question is what savings and investments you'll need to provide this.

FAQ #2: What savings and investments are required to match your retirement plans?

You shouldn’t rely on one source of income as savings alone won't pay enough for a comfortable retirement, and even low-risk investments can be unpredictable. Your end-of-service benefits should never be deemed a substitute for a pension - even if you intend to use a chunk of it for this purpose.

FAQ #3: What types of investments should be included in your pension plan?

The next decision is where you should pay into your pension. The best retirement plans involve a range of investments, including: savings accounts, investment schemes and property.

As an expat, your choices over where to invest include: your home country, your country of residence or off shore.

In a time of continuing economic uncertainty, property is viewed as a good way of saving for retirement, with surveys indicating that majority of working expats thinking it delivers the best returns. T

his is compared to cash savings, buying a business, stock/shares, government/corporate bonds, and personal pension schemes. This is not yet fully reflected in retirement plans, with only a minority of working age people expecting property to help fund their retirement.

FAQ #4: What if you have a pension scheme in your home country and plan to retire there?

Your best option may be to keep it there rather than transfer it to a local scheme, which can prove costly. If a local scheme charges hefty commissions, an advisor could end up enjoying your retirement funds instead of you.

However, if you plan to retire outside your home country transferring your pension might be the best option. Depending on where you hail from, a pension in your home country may not be easily portable.

FAQ #5: What about an offshore pension scheme?

An offshore pension can offer greater flexibility, tax efficiency and superior returns - if you pick the right one for you. Offshore pensions that can be transferred from one country to another and invest in multiple currencies are a good option for serial expats.

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If you're not sure where you'll spend your twilight years, you will want to consider a scheme that pays out anywhere in the world. However, it is vital to get the correct advice before uprooting your pension. Be very wary of investing in schemes that you don't fully understand.

Monitoring your retirement investments Is key

Once you've made your investments, it is vitally important to monitor their progress. If you've budgeted on the assumption that your investments will perform in line with long-term trends, you might be caught short if returns aren't what you'd been promised.

Keep a watchful eye on your money; if your investments are not performing as you'd hoped, you may need to save a little more. Equally, they could be outperforming, giving you more financial flexibility for the present.

When should you retire?

On average, working age people expect to retire at age 58, compared to the global average of 61, and expect to live to age 73 (global average 81), resulting in a retirement of 15 years, compared to the global average of 20.

There is very little variation between generations’ expectations of when they will retire and how long they will live. Millennials expect to retire at age 56, Generation X at 59 and Baby Boomers at 62.

Millennials expect to live to age 72, while Generation X expect to live to 74 and Baby Boomers to 80, resulting in expected retirements of 16, 15 and 18 years respectively.

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Can the current low interest rate environment help?

With interest rates at historic lows as a result of the current pandemic-triggered health crisis, experts add that half of their clients who are working expats think they will need to move their money from savings into investments and many actively move their money around to get the best return/deal.

While there is not a particularly high appetite for risk, with lesser than majority salary-earners being more willing to make risky investments to ensure their financial stability, less than quarter of the survey respondents are willing to risk financial losses – especially given the current environment.

Practical steps or best practices for effective retirement planning

Here are some important insights and practical actions drawn from the research findings, which may help today’s retirement savers plan a better financial future for themselves.

Earlier you start planning, the better: The sooner an individual starts off with retirement plans, higher the gains as the invested money has a longer period available to compound.

If a person wants to accumulate a corpus of about Dh500,000 at the age of 60, he needs to invest Dh 222 per month from the age of 30 – assuming 10 per cent returns per year. And if he starts at 50, then he needs to invest Dh2,459 every month – at the same rate of return. This is a modest estimate.

To attain a sizable retirement corpus an individual needs to increase his pension contribution or invest in other retirement products to bridge the gap.

Ensure long-term commitment: Due to various options of withdrawals from long-term retirement products, advisors add that many make the mistake of making use of the option before their retirement, and this affects the retirement goals.

Investors should only exercise these options in emergency situations, advisors reiterate. This long-term commitment habit will help the corpus to grow.

In case of changing a job that provides employees the option of a pension account elsewhere, the employee should transfer the pension account to the new company instead of withdrawing the money as this instrument is risk free, tax-free and gives high interest.

Prepare for highest life expectancy, keep inflation in mind: Surveys also indicate a trend wherein individuals generally plan retirement up to 75 years of age only. With continuous increase in life expectancy, plan for up to 85 years of age. A proper health insurance plan that covers up to this advanced age is essential.

Also, it is essential to keep inflation in mind: Choose a mixed approach of equity and debt while investing for retirement. The corpus you assume is sufficient under present market conditions may not be enough if inflation is factored in.

Even 1 per cent increase in return can make a lot of difference in long term investment. The final corpus would be significantly very low if individuals invest long-term in safe debt assets only.

Having a contingency corpus handy: Instead of parking funds in bank savings account, invest in liquid mutual fund schemes or bank fixed deposits where the returns can be significantly better.

Thus, an individual should make financially sound decisions by going for smart investments that would yield a sufficient corpus to be used only for retirement.

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