After 40 years of hard work most people expect to retire with a tidy sum to enjoy their golden years.
But if you want to enjoy the fruits of your labour, you must start saving long before it’s time to leave your office life behind. As with many things in life, investment strategies depend on age – in general, the younger you are, the more aggressive you can be.
Although Emiratis receive a government-sponsored pension and some international companies offer contributions, it is vital that expats without pension options in the UAE save and invest for later in life.
And for those with children, you should save for your child’s education from the day they are born. This can be through trust funds, baby bonds or via a savings account.
In Sorting Out Your Finances for Dummies, author Melanie Bien says: “The younger you get the savings habit the better. It establishes good principles that last a lifetime.”
Derek Hong, Senior Fund Manager for the Asset Management Group at the National Bank of Abu Dhabi (NBAD) agrees: “People’s ability to make money early in their career has more flexibility. Someone who is just starting out can have a riskier profile than someone older.”
Whether it is equity, bonds or mutual funds, all investments have their place, the key to success is knowing when to take advantage of them whatever your age.
Parents from different backgrounds have different priorities and as such save for various reasons. While Indian expats might save for a child’s wedding, this is not such a priority for Western expats, who marry later in life, says Farhan Waheed, the head of retail distribution and investments at Barclays UAE.
There can be issues for expat children having bank accounts as a result of the visa situation, therefore it is advisable that parents open a separate bank account in their own name to be used solely for their children’s savings. Numerous banks offer high interest accounts and variable rates as well as offshore accounts that might be more suitable for expat savers, who do not plan to be in the UAE for more than a few years.
There are also education plans to think about. Baby bonds exist, but some financial advisors do not recommend them. “Unless people have a large sum, there is no point. “I tell parents to open another bank or building society account and leave the money to grow,” says Craig Holding from Acuma Wealth Management in Dubai.
Graduates often leave university with a bright future in front of them and a pile of debt behind them. For the first time they are making real money in a real job. Retirement seems a million light years away, but now, say experts is the time to start saving. “Set goals and determine what you need to achieve them,” says Hong.
The longer a person saves for the more money they are able to accumulate. As soon as a person starts their first job, it is advisable to put money aside each month to formulate good habits. Consider putting away 10 per cent of a salary each month, but if that is too much, as little as Dh1,500 is enough to start a good savings plan.
In terms of investing, some advisors believe it is acceptable to put the majority of money, if not all, into equity while a person is in their 20s. Yes, it can be risky, but if the right equity is chosen, it can also be very fruitful. “For someone in their 20s and 30s they can select an adventurous portfolio of 100 per cent equity in companies with long-term capital growth. They can be volatile, but at 20 people don’t have to worry about what will happen next year. It shows good discipline and can also be helpful when buying a future property,” advises Holding.
At this age, retirement becomes more of a pressing issue, especially because some people choose to stop work altogether from the age of 50 and for this reason, attitudes towards risk should change.
“Investors should buy bonds, deposit-based assets and other secure investments at the later stages of their investing lives,” says Ishrat Kiyani, Regional Head of Wealth Management at HSBC bank Middle East.
A recent survey by Barclays showed that 58 per cent of people in Dubai were willing to take financial risks. Waheed believes this is down to the transient nature of the country. “People have taken a risk by moving here in the first place, which shows they are ambitious and as such their exposure to risk is higher,” he says.
Alternative investments such as art is another option, but it can take years to make money, therefore something such as commodities is worth trying. Another option is life-cycle funds. Kiyani explains: “The objective is to adjust the proportion of an asset during the course of the investor’s life, therefore taking a lower risk position as the investor approaches retirement.”
By the time a person reaches 60, investments that give a more reliable source of income become much more appealing.
Barclay’s Waheed says: “As people get older they want a stream of money. This is why fixed-income plans are ideal.”
Reducing risk is key as a person ages and Holding recommends having no more than 30 per cent of money in risk investments. “People need to be realistic and if they want to draw Dh183,500 a year, they need to have 20 times that so they never touch the capital,” he says.
At this stage, regular meetings with a financial advisor help to get the most out of investments. Retirement is a key time to reassess the situation having being used to a certain income level over the years. “Reviews will ensure that proper updates and new elements are discussed at each stage, and more importantly, provisions to ensure that the desirable results are on track to being achieved,” says Kiyani from HSBC.
If you have a small savings fund it is worth looking into releasing equity from your home. “If the mortgage is paid off you can increase income by buying a smaller property and bolster the cash in your pocket,” says financial author Melanie Bien.