Saving for retirement probably is not your favourite subject to ponder, especially if you are young and have a few decades to go before you throw in the towel. It involves, after all, setting aside cash you could otherwise spend now. And it means thinking about a time when you will be older and less active. Depressing stuff. Here is a scenario that could depress you even more, though: Waiting just five years to start saving could cost you millions of dirhams when retirement time comes, knocking down your standard of living a few notches.
Take this example. Start saving at 30, putting away 15 per cent of your Dh15,000 (US$4,000) a month salary, and you will end up with Dh7.9 million, assuming four per cent yearly raises and portfolio returns of eight per cent. Start five years later, when you are 35, and you end up with just Dh4.9m, or 38 per cent less. The size of the nest egg you have in retirement largely depends on what you do early in your career. A dirham of savings in your 20s can go a very long way - much further than a dirham in your 50s. If you hold off for too long, you will likely need to take drastic measures to catch up, cutting back significantly on spending to add to your portfolio.
The early birds win because of the power of compounding - the principle of getting returns on top of your returns. While eight per cent a year might not seem like much - Dh100 becomes Dh108 in one year - compounding doubles your money in just nine years. Imagine it as a rollercoaster at the crest of a an endless hill: it creaks into motion, slowly builds up speed, and then takes off like a rocket. If you start off late, you reach retirement while your rollercoaster is still wrenching into motion.
This is not to say that you are a lost cause if you start saving after 30 - you are not - but if you do happen to be young and are debating whether to start now or hold off for a few years, it is a no-brainer. Start as soon as possible. "The younger you start, the better," says Jonathan Brookes, a financial adviser at Acuma Wealth Management in Dubai. "If you're in the UAE and aren't paying tax, consider what you would have been paying in tax in your home country as a starting place for savings, and then after that any amount you could save would be a bonus. Another way to figure what you should save is the formula of half a per cent of your salary per year of age, so if you're 20, save 10 per cent, and if you're 30, save 15 per cent."
If putting away 15 per cent seems like a daunting prospect, not to worry. Starting your saving does not mean curtailing spending habits significantly, or living off milk and dates in a cave on the eastern coast. Begin modestly by transferring, say, six per cent of your salary into an investment account per month. Every year, ratchet up your savings by one or two per cent. If you get a raise, save some of that extra money.
One of the best ways to execute a savings plan is to arrange to do it automatically using a monthly standing order in your bank account. All banks in the UAE will execute standing orders, although some charge a small fee. Barclays, Standard Chartered and Mashreq, for example, charge non-premier customers Dh50 to set up or amend a standing order. Emirates Bank charges Dh20 per transaction. Whatever your bank charges, it is a small price to pay for savings that are automatic.
"That is hugely important," Mr Brookes says. "If it's not automatic, people will forget to save, or they'll spend the money, or go on holiday." Once you have decided how much to save, you have to figure out where to put the money. In the UAE, that can be a tricky proposition, especially for expatriates. Americans especially have very few options because the large banks and brokerages will not let them invest in stocks, bonds or mutual funds, as they are afraid of the tax authorities in the US.
The US taxes its citizens worldwide, but no established method exists for international banks and brokerages to report taxable income to the US. That means financial institutions with a global footprint could be held liable if a US citizen uses them to invest but does not report investment income or pay taxes. If you are American, talk to your bank or go to a financial adviser, either in the UAE or the US, to discuss your options. Your best ones will likely be sending money back home to invest - this can be set up with most banks to happen automatically - or putting it into a special offshore account that can legally deal with US citizens. If you go that route, you will sign a waiver saying you will report all foreign income.
Thankfully, citizens of the rest of the world have it easier. For them, there are plenty of options. Charles Schwab, Vanguard, Fidelity and numerous other major mutual fund and brokerage firms have offshore operations and are happy to take investments from UAE accounts. Many of these funds are easy to invest in without any help from a broker, if you are so inclined, and many allow you to contribute just $1,000 at a time, after making an initial investment of $10,000 or so. Some have even lower barriers to entry if you do not have that kind of cash.
If you would rather have the help of a broker, the process is even easier, although it may cost you a bit more. So, which specific funds and stocks and bonds should you invest in? If you are just starting out, play it safe by sticking to index funds that track stocks in the developed world. The more money you amass, the more important asset allocation, rebalancing and comprehensive planning become.
For now, though, you are just getting started. So save away. Once you build up an impressive kitty, life beyond work will not sound so depressing. @Email:email@example.com