How can millennials secure their future financially in the absence of a suitable pension system for them.
With the UAE’s pension system that isn’t open for the non-Emirati population within the UAE, and with the Emirati millennials (and all millennials for that matter) following a lifestyle that can’t fit the pension system, what are the youth in the UAE doing today to secure their tomorrow?
The Emiratis who were born in the 50s and 60s, who worked their whole career in one company, are often caught talking about receiving their pensions or processing the last paperwork to start receiving it into their accounts. The ones born in the 70s often spent their whole career in two or maximum three workplaces, so they’ve struggled a little bit in sorting their pension paperwork when moving between jobs. However, with the millennial (those born post-1980), the case is a little different.
The millennials across different behavioral research are known to have much shorter tenures than their predecessors. In a research done by PayScale -an online salary, benefits and compensation information company in the US- it was found that people born in the 50s and 60s had a tenure average of over 15 years, people born in the 70s had an average tenure of over 5 years, and the millennials had an average tenure of 1.5 to 2 years[i].
Why does the tenure average matter? Because the current UAE pension fund is built so that if you have worked all your career in one company, then the pension fund will easily manage your pension pocket as one easy transaction. Changing jobs between governmental companies is also still relatively easy, as the government is still the main contributor to your pension pocket. But if you start to move into the private sector, the equation changes, as the contribution to your pension pocket is now split between the government, your employer, and yourself, and not all private sector employers contribute, which complicates your pension pocket management in endless ways. Behold, the process even gets more complicated the shorter your tenure is, with additional costs that are often paid by you. What does this result in? The majority of millennials are opting out of the pension to avoid the complicated process and the additional costs that come with it.
But with the UAE’s pension fund being only for Emirati nationals, who were less than 12% of 8.2 million people in 2010[ii], and of which millennials constitute 40% (as is the case with most countries’ population[iii]), this leaves us with more than 90% of the UAE population who are not part of the pension fund. So the question is: in the absence of a suitable pension fund tailored for them, what are those 7.5 million people (the 90%) doing now to secure their future?
As a result of my endeavor to research this topic further, and between some life learnings, here are some of my suggestions of what can millennials do now to secure their future during their retirement age.
- Stop spending, start saving!
I think I learned a lot during my late teens and early twenties by watching the Oprah Winfrey Show. And one of the things that really stuck with me was a lesson she learned from her father, to always try to save 30% of her salary. You do that by not spending on lavish items and not spending your time on mindless shopping sprees. Try to buy things that you have thought over and know you need, as opposed to wanting to buy because of potential peer pressure.
- High-risk appetite? The stock market, here I come!
I was asking my brother what kind of investments people can go for (he’s our financial guru at home), and he said it has to do with your risk appetite. The younger you are and with fewer responsibilities, the more risks you can afford in your investment, in which case, investing in stocks is an option. But, if you do get into stocks, you need to do your homework, stay updated with the companies you’ve invested in, in what projects they have lined up, the performance of the markets they’re in and so on. That helps you better understand when you should invest more and when you should pull your money out from that company.
- Low-risk appetite? Bonds should be your best friend.
Bonds are like a saving account with an interest rate, only you decide ahead of time how long you will not touch that account: 1, 3, 5, 10 years and so on. Being the safest method with guaranteed interest rate, though its main issue is the low-interest rate associated at rarely over 5%.
- Real estate for the win.
The older generation has always believed in the value of real estate and believed the value of real estate could never drop. Obviously, the 2007-2009 real estate crisis changed many things, but more than anything, it recalibrated the huge inflation we had in the market pricing. How do you go about a real estate? Your plan should be to mortgage a real estate and rent it out till it pays the mortgage off, then whatever rent you make in the years after paying off that mortgage will be ongoing income for you. Try to go with trusted property developers who meet their plans (in the case of buying something still not ready on the market), and are good in their maintenance contracts. It’s also better to find a trusted real estate management agency in the middle to handle your tenants’ relations and always ensure a high rent rate for your real estate.
- Find your investment app.
Being a millennial, obviously, this means there are so many mobile apps to do whatever it is that you need, including investments. There are many applications that allow you to manage a different investment portfolio between stocks and bonds, according to your own monthly budget and risk appetite. I found in InvestorJunkie a list of many investment millennial-friendly apps, and each is thoroughly explained, so you can pick and choose according to your preferences.
Of course, there are many other ways to invest in your future. So whatever you choose, choose it wisely. Don’t waste your youth only to find yourself later with no savings to use for your daily expenses. Plan now to secure your future.
Also published on Medium.
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