Dubai: Saving for retirement can seem difficult at first, especially if the idea of reaching a major financial milestone right before retirement seems too daunting or daunting. yeah. However, there are ways to ease these worries.
Over the years, investment experts have devised several useful hacks to help you grow your savings in a shorter amount of time. Certainly, there’s no one-size-fits-all approach to saving for retirement, but these strategies are a great starting point.
Retirement Rule #1: “7-5-3-1”
“When it comes to saving for retirement, the widely recommended 7-5-3-1 rule is a simple yet highly effective rule that not only allows you to enjoy superior long-term returns, but also It will also help you become a successful SIP mutual fund investor,” he said. Brody Dunn is an investment advisor based in the United Arab Emirates.
What is Stock SIP?
A SIP (Systematic Investment Plan) allocates a small, predetermined amount of money to invest in the stock market on a regular (usually monthly) basis.
“The 7-5-3-1 rule is a strategy for investing in stocks through a systematic investment plan (SIP). It suggests that you need to allocate it. [how long you plan to stay invested] Each will be sent to the stock via SIP. ”
How does the 7-5-3-1 rule work?
This rule is based on the fact that the stock market has been very strong for seven years. According to historical statistics, in the past few decades, 8 out of 10 times in 7 years his savings increased by more than 10%.
“The idea behind the 7-5-3-1 rule is to invest a smaller portion of your investment in stocks for the short term and a larger portion for the long term,” says Zubair, an investment advisor in Dubai.・Mr. Shakir said. An asset management company based in .
“It is based on the principle of investing in stocks for the long term in order to benefit from higher return potential and weather short-term market fluctuations. This approach takes into account your investment objectives and risk tolerance. while aiming to balance investor expectations.”
So, if you want to stay invested for 10 years, divide your savings into 4 parts and put the maximum part towards equity SIP investment for 7 years. However, Shakir also pointed out that the 7-5-3-1 rule is only a general guideline, as stock market returns fluctuate from year to year.
Retirement Rule #2: “8-4-3”
“Using the 8-4-3 rule, you can turn your initial savings goal of eight years into just four and three years of the same amount in subsequent periods,” Dunn added. “The faster you reach your first year milestones, the faster you can reach your second and third year milestones.”
An example is shown below. If you invest 1,000 dirhams every month in the stock market with an annual return of 10%, you can achieve your first 100,000 dirhams within 8 years. Adding another four years will halve the time required for the second 100,000 dirhams, and the third 100,000 dirhams can be achieved in just three years.
However, the above condition is that you continue to invest 1,000 dirhams every month until you retire. This is the ‘power of compound interest’ and by year 20, you’ll be adding nearly AED 100,000 to your retirement savings each year.
How does the “power of compound interest” affect your savings?
The “power of compound interest” is essentially the act of “adding interest to interest.” Depending on the amount invested, income is generated from both the initial investment and the earnings accumulated from the previous period. means that increases.
Retirement Rule #3: “90-10”
In 2013, world-famous investor Warren Buffett asked the trustees of his estate to put 90% of his cash into very low-cost “stock index funds” and the remaining 10% into short-term bonds. He revealed that he had ordered the assignment.
What is a stock index fund?
An “index fund” is an investment vehicle based on a preset basket of stocks or a “benchmark” that measures the performance of stocks. Therefore, fund managers aim to replicate the index and generate returns equal to the index they are tracking, excluding fees.
Warren Buffett’s advice wasn’t ignored by investors. Between 2013 and 2016, Buffett’s moves led investors to move $1.7 trillion (6.24 trillion dirhams) into index funds, generating an investment return of 263.73 percent (13.09 percent annually). .
“Putting 90 percent of your retirement savings in low-cost equity index funds will significantly minimize investment costs because the expense ratio (the annual fee charged to shareholders) is much lower than that of actively managed funds. ” Shakir added.
“This means more money is left in your account to grow, thus increasing your chances of meeting your savings goals. However, as you approach retirement age, you can adjust your portfolio to meet your changing needs. Talk to your financial professional about how to adjust your allocation.”
Stock index funds typically have a low annual expense ratio of 0.05%, which is a small percentage of your investment or retirement savings, and investors who track stock or index benchmarks can save as much as they show. has increased by more than 10%. On top of that.
What is the conclusion?
Apart from the retirement savings rules listed above, there are more general and simple rules of thumb for how much of your income should go specifically toward retirement. According to many advisors, you should contribute at least 10% of your salary to your retirement fund.
Why is 10 percent a rule of thumb? One possible explanation is the ease of calculation: just take out the zeros. If his gross monthly salary is AED 5,000, he knows that he needs to contribute AED 500 to his retirement account.
“The caveat about the general 10 percent retirement rule is that you should start as early as possible and continue to do so as long as you’re working. Young savers will benefit most from interest-based interest.” Mr Dunn added. “The earlier you donate, the more time your fund will have to grow.
“Regardless of which rules you use, they can all help you advance your retirement strategy. Every financial situation is different, so think of these rules as guidelines, not commandments. Make the most of what is available and what suits your needs.”
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