How to Save More for Retirement

Retirement is like politics—some are invested in it, some dread it, but nobody truly ignores it. Ignoring retirement isn’t an option, as it is an inescapable eventuality. In the past, planning for retirement was relatively straightforward. However, today’s uncertain economic cycles, protracted inflation, and increasing living costs have made retirement planning essential for individuals of all ages. Moreover, life expectancies have increased considerably, requiring serious thought about how to support oneself financially after retiring.

While there is a strong consensus among workers about the need for retirement planning, many face a pressing question: How to save? Though this question seems simple, it lacks straightforward answers. Retirement is a subjective goal—what works for one person may not work for another. Today, many people aim for early retirement compared to the traditional age of 65. However, an individual retiring at 50 will typically need to accumulate more retirement savings than someone retiring at 65. Additionally, how one plans to spend their retirement can significantly influence these goals. Therefore, setting realistic and comprehensive goals is the logical first step.

Setting Comprehensive and Realistic Goals

Before diving into retirement planning, it is essential to acknowledge that circumstances can change, and future costs are often unpredictable. Retirement will likely involve new hobbies, travel, and other expenses that need to be financially accounted for. Consider projected everyday expenses, periodic payments for insurance and mortgages, and unforeseen costs related to health emergencies. These expenses can be offset against potential earnings from assets, such as rental properties or land intended for sale, along with savings until retirement. The difference between expected income and anticipated expenses serves as the foundation of your retirement goal.

Most advisors recommend saving at least 15% of your income. As your career progresses, aim to incrementally save more. The key is to start saving early and make it a habitual part of your financial routine. The power of compounding means that the sooner you start saving, the more you’ll have when you retire. For instance, if you set aside AED 1,000 every month in a savings account yielding 2% interest per annum from the age of 25, you’ll accumulate about AED 727,000 by age 65. However, if you start saving at 35—ten years later—you’ll have only about AED 490,000 by 65. Therefore, the sooner you start, the better.

Growing—not Just Saving—Money

Simply relying on a savings account may not suffice if your retirement entails more expenses than your pre-retirement income. It’s advisable to create income avenues that can generate about 70% of your pre-retirement income. If you lack income-generating assets, such as real estate or a family business, focus on building an investment portfolio. Unlike savings accounts, investments in equities and bonds have the potential for significant growth over time. However, since these investments carry market risks, it’s crucial to assess your risk appetite beforehand.

Typically, risk tolerance is inversely proportional to how close you are to retirement. Younger investors can afford to take on riskier but potentially more profitable investments, while those nearing retirement should adopt a more conservative approach. This strategy allows more time to recover from potential losses incurred due to poor investment choices. Younger investors may maintain equity-heavy portfolios, gradually shifting towards fixed-income instruments as retirement approaches. Regardless of age, portfolios should be diversified to offset losses from one investment with gains from another.

That said, even the most diligent planners can face unforeseen setbacks, such as tax implications and inflationary pressures, leading to financial challenges in retirement. For example, in 2022, the Middle East ranked as the region with the second-highest inflation rate globally at 13.2%, defying earlier estimates. Such possibilities highlight the importance of timely portfolio rebalancing and strategic adjustments—skills best handled by seasoned financial advisors. To learn more about how to plan for retirement while factoring in unforeseen circumstances and staying adaptable, drop a mail to info@cfsgroup.com.