Retirement planning by age: how much should you save in your 20s, 30s, 40s and 50s?

April 13, 2021

Saving goals for retirement usually depend on which country you plan to settle down in during your golden years, but it is also important to start planning as early as possible, financial experts say.

A survey by global consulting company Mercer in February last year found that almost half of all UAE residents often delayed preparing for their retirement until they had reached their late 40s and 50s.

It also found that about 45 per cent have no plans to ensure an adequate standard of living after they retire or plan to work beyond their retirement age to ensure a steady income.

Worryingly, 61 per cent have no long-term savings at all and 43 per cent expect their end-of-service benefits to meet their long-term financial needs, the survey showed.

With life expectancy rates rising rapidly thanks to advances in healthcare and better living standards, the concept of traditional retirement is fast disappearing. Exacerbated by the absence of savings, people will be forced to work longer to sustain themselves, especially if they are not eligible for state pensions.

According to Andrew J. Scott, a professor of economics at the London Business School and co-author of The 100-Year Life – Living and Working in an Age of Longevity, today’s state pensions and retirement funds are not enough for individuals to fund lengthier retirements.

However, it’s never too early to get started because of the power of compound interest – and it is never too late to make progress, experts say. Achieving key financial targets in each decade can help prepare you for a successful retirement.

In your 20s

Although retirement is a long way off when you are in your 20s, financial experts say this is the perfect time to harness the power of compound interest to maximise savings.

American billionaire Warren Buffett, for instance, owes much of his wealth to the power of compound interest. The 90-year-old chief executive of Berkshire Hathaway began investing when he was 10 years old and is now worth nearly $100 billion.

When you start investing early, your wealth can grow exponentially thanks to compound interest and time in the market

Stuart Ritchie, director of wealth advice, AES

“Compound interest can be thought of as ‘interest on interest’ and will make a sum grow at a faster rate than simple interest,” Stuart Ritchie, director of wealth advice at AES, says.

“When you start investing early, your wealth can grow exponentially thanks to compound interest and time in the market.”

Mr Ritchie advises people in their 20s to invest whatever they can, no matter how small an amount. The power of compounding will turn that small sum into something significant over time, he says.

“Today is the second-best time to start investing. The best time was yesterday,” he adds.

It’s best to allocate disposable income according to needs, wants and savings using the 50:30:20 rule: half should go towards your needs, 30 per cent to wants and 20 per cent to savings and investments, Mr Ritchie says.

He recommends investing in a globally diversified portfolio of low-cost funds over the long term.

“This way, your money is spread across asset classes and geographies, ensuring you’re properly set up, regardless of what happens in the world and in the markets.”

Mr Ritchie says investing should be boring despite the younger generation’s propensity to chase new fads like cryptocurrencies to get rich quick.

“While low-cost funds may not bring bragging rights, they will bring greater returns over time. By simply investing in them and leaving them alone, you have more time to enjoy life and focus on your career,” he says.

In your 30s

If you did not save for your retirement in your 20s, push yourself to save as much as possible in your 30s, financial experts say.

“Start saving with whatever you can, no matter how small. Do not touch the money you have saved unless it is an absolute emergency,” Georgina Howard, a chartered financial planner at The Fry Group, tells The National.

Ask yourself if you were five years from retirement, how important this would be to you. Just because you are 30 years away, it should still be as important

Georgina Howard, chartered financial planner, The Fry Group

“Ask yourself if you were five years from retirement, how important this would be to you. Just because you are 30 years away, it should still be as important.”

It is important to adopt a flexible approach to saving during your 30s in case of any unforeseen life changes or if you receive unexpected money such as a bonus. Review your savings plan every year to ensure you are on track, Ms Howard adds.

She recommends investing in a well-diversified portfolio of funds in different asset classes.

“The most important aspect is to agree the risk you wish to take and your capacity for loss,” she says.

People should take into account all their assets that will give them an income in retirement as well as pensions in their home country when working out how much to save to achieve their retirement goals, Ms Howard says.

“For instance, if you are from the UK, make National Insurance Contributions to boost your State Pension. You can find out how much you have accumulated.”

In your 40s

The general rule of thumb is that people in their 40s should invest at least two months of their earnings into a retirement fund, or save 15 to 20 per cent of their annual income in percentage terms, says Vijay Valecha, chief investment officer at Century Financial.

“A Dubai resident willing to take moderate risk can dream of becoming a dollar millionaire by the age of 67, investing Dh36,725 annually,” he says.

The objectives by the end of this decade should be to eliminate debt, avoid credit card balance and increase savings as much as possible.

The 40s are when a person hits the peak in their earnings, and this is the best time to correct previous errors

Vijay Valecha, chief investment officer, Century Financial

Mr Valecha suggests that a person in their 40s should allocate nearly 60 per cent of their investment towards equities since they tend to offer higher returns over the long term.

People in their 40s could consider also making regular payments into a mutual fund, retirement account, systematic investment plan or passive index funds.

“Asset allocation would be one key factor to watch out for. Diversification is essential and funds should be split between two to three reputed financial firms. Avoid falling for ‘get rich quick’ schemes,” Mr Valecha says.

Although it is futile to regret not having saved for your retirement earlier, “the 40s are when a person hits the peak in their earnings, and this is the best time to correct previous errors”.

Another challenge is a lack of financial awareness. People in their should be aware of the various financial products and opportunities in the market, Mr Valecha says.

“In the current world, parking funds in a bank deposit and believing that money is saved for retirement would be a grave financial error. Saving schemes in banks hardly beat inflation. Investors need to understand the power of compounding and should use the volatility in equities to their advantage,” he suggests.

In your 50s

Most people who start saving in their 50s have already left it too late, so they need to put away a very sizeable chunk of their salary per month for retirement, says James Spence, the Abu Dhabi-based vice president of financial adviser Globaleye.

They have the last few years of their working life and have to live on a tight budget, he adds.

“The biggest pitfalls I see with people in their 50s is that throughout their life they have been either too scared or enjoying life and did not take action. It’s very hard to change that mindset, but also a difficult pill to swallow to be told that they will probably have to work until 70,” Mr Spence tells The National.

Another pitfall to watch out for in your 50s is health, with most people not expecting to suddenly fall sick and being unable to work for six to 12 months, although this happens, he adds.

He recommends people in their 50s work out a target amount of what they need to save to provide an income that will give them the quality of life they want in retirement. “Understanding the goals, lifestyle and location of retirement is key to know how much it will cost,” Mr Spence adds.

Understanding the goals, lifestyle and location of retirement is key to know how much it will cost

James Spence, vice president, Globaleye

People need to ask themselves a range of questions when planning for retirement. These include where they want to retire, how much they will need to cover basic costs such as food, utilities, medical bills, taxes, travel and clothing, as well as other expenses they may have, such as gifts, entertainment and sport activities.

They should then study the inflation rate of where they want to retire and work out what that cost will be at the point they want to retire, says Mr Spence.

A financial adviser can help work out your target retirement pot at future value, considering inflation, any potential taxes and other factors. The adviser can also break it down into monthly amounts you need to save to achieve your retirement goal.

Mr Spence suggests people approaching retirement reduce their risk and switch out of volatile equity holdings into fixed-income assets or bonds. He also recommends people in their 50s do not lock away all of their retirement money in a property or similar asset class because if they need cash when the markets are falling, they will be forced to sell at a low point with no profit at all or even at a loss.

“Start yesterday. Don’t procrastinate, seek professional advice from a qualified adviser, get an action plan and take action. You don’t have time to wait,” Mr Spence says.

Published: April 13, 2021 09:00 AM