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SAVING for a pension as an expat abroad is not always simple, but if you want to ensure you are getting the most out of your retirement, you need to start planning early.
With retirement for many people so far away, and more immediate drains on our income ever present such as mortgage payments and school fees, it is the one thing that often gets forgotten or delayed. But the longer you leave it before you start saving, the harder it is going to be.
In many countries, including the UK, retirement planning within a family is often undertaken primarily by the man in the household. While this is the same in many countries across Asia, the notable exception is Taiwan, according to research from HSBC. Here, women are more likely than men to deal with retirement plans. Interestingly, there is also generally a greater level of equality between men and women in retirement planning across Asian countries, such as China and Korea.
David Wells, head of investments, pensions and savings at HSBC, said that while people in the West are less optimistic about their retirement prospects, those in the East are seeing “rising incomes and living standards are merging with a culture of saving and self-reliance to create a generation of well-prepared retirement optimists” in emerging economies.
The difference between men and women when it comes to retirement planning is important, as statistically women are more likely to live longer than men, so they will need more money to survive for a greater number of years after retirement. Women are also more likely to take time off work to raise a family, and this can harm their ability to save effectively for retirement.
In Japan, for example, women born in 2009 are expected to live until they are 86, while men born in the same year have a life expectancy of 80. In Thailand the differential is even greater, with men born in 2009 expected to live until 66, while women are expected to survive until they reach 74 on average, according to statistics from the World Health Organisation.
Depending on when you expect to retire – it will usually be any age from 50 onwards – you are potentially looking at living for at least another 20 to 30 years on the money you have accumulated in your retirement fund. That is going to be costly, and making the money stretch for that length of time takes meticulous planning.
Generating a retirement fund can be done in a number of ways. If you are an expat in a region where you are not paying tax on your income, then saving into your retirement fund will give you the equivalent of tax relief. The type of fund or funds you choose will largely be determined by your personal attitude to risk, and how close you are to retirement. For example, if you are prepared to take a greater risk with your money, you would be looking at equity funds and perhaps emerging markets as an option. You are likely to generate higher returns from your portfolio than those who are risk averse.
But everything has to be considered in the context of how close you are to retirement, as the nearer it is, the less risk you can afford to take with your money as you will have less time to repair any damage done by sharp falls in the markets. Traditionally, women are more risk averse than men when it comes to investing, but the HSBC report found the opposite to be the case for China, where women were happy to take greater risks than men when it came to their retirement portfolios.
The report stated: “Men and women display very different attitudes when it comes to embracing long-term investment risks. Whereas only one-in-four men (25%) count themselves as conservative investors, this rose to two-fifths (39%) of women.
“China is the only country in the survey where women have a greater risk appetite than men: in all other countries women appear to be more risk averse.”
Of course, the way you create your retirement fund has a bearing on how you will be able to generate your income. Building a property portfolio to generate rental income is a popular method of funding retirement. This has the advantage of having tangible assets in the bricks and mortar and you are not reliant on annuity rates to try and generate enough income to live on. Also, because you can borrow money to invest in property, you are able to leverage your investment, something you would not generally be able to do elsewhere.
The downside is the relative illiquidity of the assets – if you needed to, you would not be able to get rid of them quickly. If you build a portfolio with stocks, shares and funds, then you will need to turn that money into income. You can do this by keeping your portfolio invested and generating an income from it, using bond funds and good tax planning.
But the vagaries of this method mean you could leave yourself with too little income to live on if the bond markets turned against you. In reality, the best way to create a retirement fund is to have a mix of assets, such as property, bonds, equities and cash, so your portfolio can weather financial storms more effectively when they hit because you are not relying on one asset class to consistently perform well. If you want to know exactly what your income will be, then you can buy an annuity, where you invest part – or all – of your retirement fund with an insurance company, and it pays you an agreed amount of income until you die.
If you buy a level annuity, then you will be paid the same each year with no uplift in line with inflation. This does mean you will get more income at the start of your retirement than you would with an inflationlinked annuity, but as time goes on, your spending power will reduce in real terms. Inflation is a silent thief, and is a real threat for pensioners who have a fixed income.
With the current global economic crisis, there is a significant risk that we will see inflation start to rise more sharply in the short-term. An inflation-linked annuity will help you to keep pace with rising prices, so you should be able to maintain a similar standard of living over time. But without this inflation-linked uplift, you will soon find your buying power eroded, and it will become increasingly difficult to make ends meet.
It is vital that you take advice when you start your retirement planning process, as building a good foundation is a sure way to get the results you desire. But even if you have started your retirement planning without advice, then make sure you get some guidance as time goes on, because it is a complicated area, and it easy to make mistakes.
The problem is, without the right advice, you may not realise this until it is too late.