You may have dozens of things you would rather do than think about your long-term savings plans. The choice between the dentist and a meeting with your IFA about just that - I can tell you're booking that appointment with the dentist right now. To spare you as much pain as possible, I've attempted to answer all your questions about planning for the future in just one easy to read Q&A. Dull? Maybe. Essential? Definitely. Wendy Jackson reports.
But first a short story.........
Nigel is a 65-year-old Sales Manager who has consistently good money for many years. His colleagues, friends and family define him as a prosperous yet "spontaneous" man. From as far back as he can remember, Nigel has always hated planning and believes that his "spontaneity" and ability to think creatively while implementing new ideas has made him successful.
For the past 30 years or so, Nigel believes that his non-planning methodology has worked well for him. Now tired of the working rat race, Nigel suddenly decides that it is time to retire and have some fun. He doesn't know what he'll do exactly when he retires in six months other than have a good time. However, he knows that he won't plan his days and will do whatever pleases him.
Let's take Olaf, a 60-year-old solicitor who is also financially secure. He is the complete opposite of Nigel and has planned everything in his life to the last minute detail. And not unlike Nigel who believes his "spontaneity" has made him successful, Olaf believes his love of planning and his impeccable organisational skills have enabled him to accomplish all of his goals. Some might say that Olaf is a bit boring but he disagrees and believes that his planning methodology has served him very well the past 35 years or so. Like Nigel, Olaf is ready to retire. He's had enough of the hustle and bustle of being a senior partner in a big law firm and is ready to retire so that he can pursue one of his lifelong dreams of becoming a volunteer for several organisations.
However, unlike Nigel, Olaf had already started planning out his goals, activities and has designed a financial plan that will enable him to retire in less than six months to pursue his dreams.
Fast-forward six months and as planned Nigel is now retired and is having a great time doing things on the spur of the moment, going on weekend fishing trips, playing golf and hanging out at the health club. The trouble is Nigel didn't have a financial plan on place to pay for this lifestyle and already running out of money. He is even considering going back to work or perhaps taking on some work projects to give him some extra income.
On the other hand, Olaf is having the time of his life. In the first few months of his retirement, he relaxed and enjoyed himself immensely. And now he has transitioned to his non-paid volunteer activities and has become a valuable resource to two prominent non-profit organisations. Olaf is truly enjoying his retirement and looks forward to a busy, scheduled day of providing volunteered activities. With the added bonus of no money worries, he can afford to work for free and still afford to do all the other things he loves to do.
So, what has this taught us? It has taught us that planning for your retirement is more than simply deciding that you have had enough and wish to retire on a certain date to take part in pastimes and activities and to pursue your dreams. It is also about making sure you will have enough money to accomplish all your retirement goals. In fact, according to one Dubai based IFA, "Many professionals don't actually plan for their retirement. Although they evaluate how they'll actually spend their time day in and day out they don't actually plan their finances and are sure that they can support their lifestyles and then find out too late that they can't. This "lack of planning" often leads to intense boredom and dissatisfaction with their newfound freedom. As a result, many of these professionals go back to work part or full time, to obtain some extra money. This could have been avoided by simply planning out their future goals and working hard to save for the future."
With this in mind, I've talked to a number of different IFA's and financial institutions on the subject of 'Planning for your future' and collated the following information. I hope it gets you thinking.
The openers
Q. What is retirement?
A. Views on retirement are changing. And people are living longer. No longer are people dreaming of doing nothing during their formative years and in a world where 70 is the new 40 (a slight exaggeration, but you know what I mean), the image of retirement need to change. People need to look at today's retirement reality and be informed on how to prepare for it.
And the reality is that governments, employers and individuals cannot afford to shy away from the enormous challenges and opportunities presented by the world's rapidly ageing population. The key is we can no longer rely on anyone else to look after us in our old age. We need to plan for our retirement ourselves."
Q. How will we pay for retirement?
A. People are finally recognising that governments will not be their sole source of support in old age. How do we pay? Private savings.
Q. When should we retire?
A. When to retire is no longer the key issue. Most people reject the enforced withdrawal from the workplace at a fixed age. Some people want to work longer and some people want to retire early. The real issues are down to retirement planning with most people looking forward to a retirement where they can devote more time to pastimes they enjoy without knowing what needs to be done to allow them to do so. Therefore......
The reality
Q. Are we saving enough for our retirement and our future livelihood? Are our pension plans on track?
A. Most people look forward to a retirement where they can devote more time to the pastimes they enjoy. However, when it comes to retirement planning and pensions, a veil of confusion tends to cloud their perspective.
The essential fact about retirement planning is that it is simply making provisions out of your current income and investing for the time when you come to retire. Although most states provide some retirement income, at the end of the day it is up to the individual to make provision. In this way, providing for retirement is no different than setting aside money for any other future purpose such as a new car, a house deposit or a holiday.
The significant difference between retirement planning and other investment objectives is one of magnitude. In retirement, we expect a continuation of, at the very least, our current standard of living. Given that we spend an increasing proportion of our lives in retirement and that state benefits are reducing, the need for early, effective retirement planning has never been greater.
However, modern society is told by TV adverts, children's demands,
And the like that immediate gratification is the only way. So how do you marry up these two key ideals?
Basically, the answer is DON'T DELAY! The cost of delaying the savings process can have a dramatic effect on both the amount you need to invest and the impact this will make on your lifestyle.
As such, the questions we all need to ask are:
"Is this going to be sufficient to maintain our lifestyle in retirement?"
"Is this enough to do all the extra things in retirement, like travelling,
that we might want to do?"
"What about inflation, what about annuity rates falling further?"
All these points mean that two things are vital, one that saving for retirement starts as soon as possible and secondly that plans are reviewed regularly.
What you can afford to contribute to ensure your future depends on many factors; including current, ongoing financial commitments.
But the true cost of delay is not being able to achieve your goals and dreams, not the cost of saving money now.
Q. As someone who doesn't have any plan for saving money for the long term. How would I start?
A. Getting people to sit down and talk about their future is a challenge. By getting people to recognise the need to set financial goals is half the battle. It's been documented that households with a financial plan accumulate twice as much wealth as those that don't.
The first thing you need to do is figure out what you're saving for. Most finance experts say to break down your goals into short-term, intermediate and long-term goals. A common breakdown of those time periods is less than three years for short term, three to 10 years for intermediate, and more than 10 years for long-term.
Examine your circumstances, for example you might decide that compressing those time frames might make more sense for your particular situation.
Then, make some decisions about what you want to save money for. A common short-term goal is to build an emergency fund, which would contain three to six months of living expenses. Such a fund would prevent you from going deep into debt if you experience a sudden loss of income.
Common intermediate goals include saving for a home down payment, a car or a dream vacation. Long-term goals often include saving for retirement or a child's college education.
The thing to remember is financial goals must be specific to be workable. For example, instead of 'save for a car,' state your goal with an amount and a time period, i.e. 'Save AED100,000 in the next five years for a new car.' Then, do the calculations. To save AED100,000 00 in 60 months (five years), you would need to save AED1,667 a month. That doesn't include any interest the money would earn, but you can use this simple formula to get you started. Each year, revisit your goals to see how you're doing.
And another important trick is to save for short-term, intermediate and long-term goals all at the same time. While it may be tempting to put off long-term goals for later, you could lose by doing so. Saving even a small amount regularly and letting it earn compound interest pays off in the long run.
For example, let's say you save AED100 a month in a college fund beginning when your child is born. You would invest AED21,600 over 18 years, but at five per cent interest, that account would grow to nearly AED35,500. If you waited until your child was 10 and tried to catch up by saving AED250 a month, your money would build only to barely over AED30,000 by the time your child was 18 -- even though you invested more money a total of AED24,000 in that time.
Your probably feel a little overwhelmed and decide financial goals aren't for you? Don't let yourself take that path. If your initial financial goals don't fit your current fiscal reality, simply re-adjust. Start small and take the long view. At the end of the day today's savings no matter how small will get you that much closer to tomorrow's financial security.
Q. What are the consequences of not considering retirement now?
A. The cost of delaying the savings process can have a dramatic effect on both the amount you need to invest and the impact this will make on your lifestyle no and when you retire. The point is that however you decide to enjoy your retirement you retirement planning strategy will play a major role. The quality of life you want in the future will depend on what you contribute in the present.
The conclusion
Q. Who can anybody interested in sitting down and planning for the future get in touch with?
A. There are a number of IFA's and banks. But the key thing is to get the proper advice through someone who can take you through what needs to be covered and advice according to your situation. Whether you're just starting out in the world or looking forward to retirement, life continually races ahead and things can change in a matter of months. It's therefore important to make sure your long term financial arrangements keep up that your constantly review your situation with a qualified financial expert.
Q. Are there any other considerations?
A. You must consider writing a Will, estate planning and should have any insurances (life, critical illness etc..) that are needed in place. Your financial advisor can help and advise on what you need.
Q. Are there any other possibilities?
A. OK, so we won't get help from our governments and it is clear that the quality of our retirement is well and truly up to us. Or is it? Or more specifically does it have to be all on us? What about employers? It is about time we 'involved our company? Isn't this what happened in the good old days?
It's true to say that it's on the corporate side where things are really starting to develop in the UAE. Therefore......
Are corporate plans the way forward?
Many residents in the GCC hail from a society where companies offer a long-term savings plan, in some form. Saving via a corporate scheme is an easy, attractive way for employees to plan for the future and for employers to greatly enhance staff retention and aiding with provision for gratuity commitments.
According to most corporate pension advocates, in a competitive and changing environment, one of the key challenges facing employers is attracting and retaining the best quality staff to help them grow and prosper. It is expected that regional benefit programs will eventually follow international trends to become one of the key reasons quality people select their employers.
Unfortunately, whilst international companies here in the Gulf have had to become increasingly imaginative and flexible in employment package structuring it rarely includes a retirement provision.
It appears that companies are still reluctant to and it will take employees to encourage their employers to offer schemes to them. Much of the problem with saving is the willpower and discipline, something that many of us don't have in droves. Ask anyone. Long-term savings plans are all well and good but there is nothing safer or more disciplined than saving for retirement via a scheme.
The employer who doesn't play ball
Yet should it be your employer that shoulders the responsibility of your saving for your future plans? I caught up with the HR director of a company here in the Gulf, employing a number of people outside of the region but who chooses not to offer a corporate pension. As there are two sides to every story I decided to look at the company side for a change.
Q. Why don't you have or why haven't you considered a corporate pension scheme for the employees of your company. What are the reasons for not doing it?
A. There are several reasons why as a company we do not offer a corporate pension scheme. The first is that we are uncomfortable with the product regulation in this market. I have no doubt that it is improving but it is still a concern for us when there is so much money at stake. On a similar note there have been pension mis-selling scandals reported in the media over the past few years. This can reflect badly on a company in that if an employee loses everything as a consequence of a product mis-sold to the company.
Lastly, expatriates are often here for the short-term, many are young and not interested in long-term savings plan at least for the time being. The region as a whole is a transient place and corporate schemes are often associated with a 'job for life' type scenario. The demand from employees in this part of the world is simply not there.
Q. Is a pension scheme/gratuity funding product something you would consider to be useful? What gratuity provisions if any do you have in place?
A. I see these as two completely separate issues. And to be honest I don't know enough about such a product to know whether it would be something that would be considered. As far as gratuity provision goes it is accounted for on the company's balance sheet. The company then has a choice on how to invest that money. Keeping it on deposit or investing it back into the company.
Q. What is your argument about attracting and retaining quality staff do you buy this argument given by most corporate pension providers?
A. They do have valid point. Of course a pension scheme is attractive and it's free. But for an employer it is an expensive perk. The money used on a corporate pension scheme could be re-routed to offering perks such as accommodation allowances and free flights home, all of which are just as attractive, or maybe even more so to employees who are living away from their home country. These perks are much less expensive for employers.
In my experience there have been occasions when a company has offered this perk and at the end of the day couldn't really afford it and have gone bust. Offering perks that you are not contracted to pay out on frequently can equally attract and retain staff as well as keeping the balance sheet looking healthy.
Happy retirement
So there you are. There is no right or wrong answer here. The providers put forward their argument both solid and obvious. But there are some valid reasons for a company not committing to a corporate pension scheme, which could be linked to size and capitalisation.
In an ideal world governments, employers and lottery tickets, would take care of us in our old age. Giving us enough money to have a fabulous retirement without the worry of saving for it now.
But we don't live in an ideal world so whilst governments should perhaps be offering a helping hand and companies should be encouraged to offer pension perks the message that keeps cropping up is that we need to take control of the situation yourself. No one else is going to do it for us. We can all make a difference to our future and our life after work. The trick, if you can call it that, is 'Don't rely on anyone else, take control and RELY ON YOURSELF'.
Here's to a happy retirement...
This article appears in the July 2007 issue of MONEYworks magazine
© UAE MONEYworks 2007
