Calculating retirement income requirement

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Gordon Gekko

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What is people's view on how to calculate one's retirement income requirement?

e.g. Take what you earn, subtract mortgage payments, other debt servicing costs, savings, and pension contributions, and then tweak the tax to reflect lower income? And perhaps build in medical / nursing home contingencies? And adjust everything for inflation?
 
Surely it has to be a bottoms up approach - establish in today's terms what you need to fund the essentials of living; food, accommodation including repairs and refurb, health, communication, travel, leisure/family and entertainment. Recognise that some of these costs reduce with old age. Then factor in inflation and tax to find the gross needed. If you have no money then the state will pay for basic nursing home so should be no need to factor that in. No one should be planning to enter retirement with debt - there should be a plan to eliminate that before retirement. What you earn today is not relevant, even though the pensions industry tries to entice you to plan based on that. It may set out your standard of living but a realistic bottom up analysis should suffice.

Elephant in the room of course is the state pension. It could throw the best laid plans out.
 
Hi Joe,

I think our approaches are similar in fact.

I proposed starting with income and removing debt servicing costs, pension funding, and savings (which handles any surplus). I agree with your "bottom up" approach, but I think that we end up in the same place.

I agree that the industry approach is wrong, primarily because it ignores surplus income; i.e. if someone's net income is €10k a month and his/her mortgage and savings account for €6k of that, then the income requirement isn't as great as the industry would tell you.
 
Problem is the known knowns, providing for the unknown knowns not to mention unknown unknowns.

Taken in turn, while I agree with the subtraction of debt, commute costs to work, pension contributions and savings, people tend to plan a lot of travel given their excess free time and therefore initial costs and that type of lifestyle can be expensive. Then you have further down the retirement road the provision for medical care and / nursing home. Thereafter, it would be the unknown situations that arise, funding a son/daughters mortgage or marriage breakdown (I known one of relatives has this situation).

My own view for what its worth would be to actively fund for the "active retirement years" Age 55 to 75, then divert funding to increased medical care in the age 75 to 85, thereafter once your home covers nursing home costs you have provided accordingly for yourself. This would cover most situations bar unknown unknowns.

In Ireland we always seem to provide inheritance, however my plan will not. My view on this is to avail of the annual gift exemption and ensure family is assisted when they need cash most rather than "save for the rainy day" . The other part of my plan is to find a country that is not so WCE (wet, cold and expensive)
 
An eminently sensible approach. My own plan kind of assumes that medical/nursing and lifestyle are an either/or. In other words, the amounts for living it up or dribbling in a nursing home will be broadly similar.

I view my spouse's pension income, my State Pension, my ARF distributions, and rental income as sufficient to cover the above, with the aim thereafter to protect the real value of my ARF and pass it together with our home and investment properties on to the kids. The tax-free lump sums and savings can be used to help the kids to get on the property ladder and as a rainy-day fund for us in our dotage.

We will probably split our time between Ireland and sunnier climes also.
 
I'm not sure a couple's expenditure pattern when they are in their 30s or 40s is a reasonable proxy for their likely expenditure pattern when they are in their 60s or 70s.

I think Brendan's estimates for a comfortable retirement on this thread are a pretty good guide -
http://www.askaboutmoney.com/threads/how-much-savings-do-you-need-to-feel-safe.196907/

However, I wouldn't be overly confident that the State pension, "Fair Deal Scheme" or our health care system will fair well in a rapidly ageing society so I think it's wise to err on the side of caution in budgeting for retirement.
 
Thanks Sarenco, Yes the State Pension is another unknown unknown which I am entitled to but not my spouse. My spouse does not believe it will be there and she and her two siblings work in SW! Given my age the State Pension age would be 68 given the proposed timeline increases.
Must look through that thread you raised again. Essential thing is to clear all debt before retirement.
 
In terms of planning for retirement. I saw a recent presentation from our pension consultants in work. They estimate in 30 years the ratio of tax payers currently 5:1 - this will move to 2:1. I also recall and I could be wrong - the current longer term liability to fund public sector pensions is currently 40 billion which is not being funded - well outside of day to day expenditure. So my questions are as follows:
  1. How long can the government fund the existing old age pension - and is it reasonable to allow award the OAP to recipients of generous PS sectors pension or semi-state pensions.
  2. If someone aged 35-40 is unable to fund active pension provision and arrives at a retirement age with no PRSA will they then get a pension allocation.
  3. If someone currently aged 35-40 funds a small PRSA something which realises eventually an annual pension of the current OAP will they be penalised out of an OAP award as they have a self funded model of some form.
It seems a bit like private health care where people who decide to opt out now - they can still receive a health service albeit through waiting lists etc. But deciding they cannot afford it at the expense of lifestyle sacrifices. It seems pension provision is the same. There is a large cohort of the current old age pension recipients in receipt of an OAP award who have not contributed towards in general taxation.
 
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