The National - How to save for financial goals other than retirement

Vijay Valecha, Special to The National January 18, 2022

When it comes to savings goals, many people traditionally focus on funding a comfortable life after retirement.

However, the economic effects of the Covid-19 pandemic have forced people to reassess their financial priorities, resulting in saving for goals besides retirement.

While retirement and financial freedom continue to be at the centre of people’s saving plans, they are now provisioning for unforeseen expenses, strategic investments, medical emergencies and more lifestyle-related costs such as travelling, Ashok Sardana, founder and managing director of financial services provider Continental Group, says.

“Everyone’s goals of saving money vary based on different reasons. An individual’s career aspirations, age and family responsibilities are crucial in defining their goals,” says Vijay Valecha, chief investment officer of Century Financial.

“However, generically, besides retirement, UAE residents save money for vacations, buying a home and building wealth. Apart from goals, people also save money for emergency funds.”

The most common goals range from funding their children’s education, maintaining living standards, bequests and saving for a specific goal such as buying a house or to cover unforeseen expenses, Rohit Nanani, founder and director of financial advisory Arrow Capital, says.

About 20 per cent of American adults picked buying a house as their top financial goal, according to a survey of 1,000 people last year by financial comparison website LendEDU. Nineteen per cent chose retirement, 14 per cent identified paying off credit card debt, 10 per cent picked building an emergency fund and 7 per cent wanted to pay off student debt, the poll found.

Individuals must determine their risk tolerance before deciding which asset class to invest in to achieve a specific saving goal. Your time horizon, or when you plan to withdraw the money you have invested, can greatly influence your approach to risk, says Mr Nanani.

While most tend to want the highest amount of return with the lowest amount of risk, it is important to set realistic expectations on what a particular risk profile means and how it translates in real market situations, Mr Sardana advises.

People generally look to invest in four key asset classes in search of growth potential – cash, fixed interest/debt securities, property and equity securities, says Rupert Connor, partner at Abacus Financial Consultants.

A general rule of thumb is that cash is the least risky, but gives the lowest return, whereas shares are the riskiest, but can potentially provide a higher return over time.

“Investors who are less willing and able to tolerate loss of capital will have less of an exposure to shares, which means that there is less potential for your investment to grow. Those investors looking for higher potential growth in their investment will see a higher exposure to shares, meaning a higher likelihood of loss of capital,” Mr Connor explains.

“For example, if one is saving to purchase a property in two years, it would be safe to keep in cash or fixed interest rather than equities as the capital is required in the short term, so a lower valuation cannot be risked.”

People can select which asset class to invest in depending on how far away and how crucial the goal is, experts say.

“If the plan must be met soon and is vital, securities with higher returns must be considered to meet the financial goal in a short period. In contrast, if the goal is dated far away and isn’t as important, low-return securities may be ideal,” Mr Valecha says.

Savings for emergency funds need to be the most liquid but at the same time earn some income while being the least volatile, says Francois Farjallah, head of Middle East and Turkey at global private banking group EFG International. They typically go into money market funds and diversified exchange-traded fund portfolios, he says.

If you keep money in a deposit or a saving account, it is instantly accessible, you may get some interest and there’s a very low risk of losing your capital, according to Mr Connor. “But generally, returns are low and in a period of high inflation, cash held in savings can lose value alarmingly rapidly.”

Bonds are a good option if you harbour a long-term outlook to investments and have no qualms over lock-ins for a predefined period. They are viable for those who are less risk-averse, Mr Sardana says.

For equities, the potential for high rewards from stock market growth is matched by possible risks, Mr Connor advises.

“Property funds invest mainly in commercial property, which tends to rise in value during a boom and lose its value in a depressed market. But the relatively long time it takes to buy and sell property can make it a safe haven when stock markets are volatile. It can take up to six months to cash in shares in property funds,” he adds.

The UAE’s real estate investment trust market has paid great dividends in recent years and continues to be lucrative for those who seek exposure to real estate but do not want to be tethered to physical property, Mr Sardana recommends.

Mutual funds or ETFs are good options for people seeking flexibility, Mr Sardana says. It’s also advisable to invest in insurance to cover risks for both the individual and their family and be prudent when exploring alternative asset classes such as digital currencies, he adds.

When saving to fund an overseas holiday, investors need to keep their money out of sight yet accessible at short notice. The goal is very short-term (six to 12 months), so the returns do not matter much, Mr Valecha says.

“A short-term debt fund with no exit load would be ideal. Such investments are also subject to low volatility, making them suitable for short-term needs,” he adds.

People saving to buy a house can opt for a blend of an initial lump sum investment in bonds and a systematic investment plan in equity investment, Mr Valecha suggests.

The recurring income from yields and capital returns of equities can be optimised to initially cover the down payment and the substantial mortgage payments, he adds.

Meanwhile, if a person is seeking to build wealth, they can be exposed to moderate to high risk over the medium term, such as a six to 10-year time frame.

“An investment fund comprising at least 75 per cent stocks while having a portfolio with 25 per cent in bonds. The fixed income aspect helps to mitigate the risk a bit while still aiming for higher returns,” Mr Valecha says.

Once you have chosen the asset class to invest in, it is important to prioritise saving goals and budget accordingly. The goals must be realistic and based on an analysis of your existing financial health, liabilities, assets and liquidity, Mr Sardana says.

Subsequently, prioritising savings goals will require you to create a budget, which could be unique to each individual, he adds.

“Typically, people tend to make a 70:20:10 or a 50:30:20 plan, wherein they spend 70 per cent of their monthly income, save 20 per cent and invest 10 per cent or spend 50 per cent, invest 30 per cent and save 20 per cent," Mr Sardana says.

However, Mr Valecha reckons that the priority should be saving for an emergency fund of three to six months’ worth of expenses. The second step is paying off high-interest debts to reduce compounding liabilities over time.

Once the emergency fund and debts are taken care of, ranking goals is the next step to prioritising goals. Needs must be segregated from wants and essential goals must be prioritised over discretionary ones, he adds.

As the time horizon nears its end for a savings goal, a portfolio should naturally become more defensive, so this usually means adjusting the asset allocation and decreasing the equity content within that portfolio to decrease potential volatility for when the capital is needed, says Mr Connor.

“While moving to a more conservative allocation is generally a good practice when nearing the goal objective, it also depends on the goal, subsequent objective and market condition. Is it money being saved for a child’s education plan, is it for retirement? Is the money going to be reinvested?” Mr Sardana says.