Key Post "Have I enough to retire at 60?"

This question comes up a lot and while each case is different, I thought it would be useful to try to set out some general principles for people to consider before looking at the specifics.

In a very few cases, the answer is clear

• If you are 60, single with no dependents and you own your forever home with no mortgage and you have a pension fund of €3m, you can afford to retire.
• If you are 60, with a €200k pension fund and you are renting and kids still in college and your partner has no income of their own, then you can't afford to retire

But most cases fall between these two extremes and there is just no clear answer

There are too many uncertainties

• How long you will live.
• How long your partner will live.
• What return you will get on your investments.
• What your expenditure in retirement will be.
• Whether the Contributory Pension will continue to be paid forever or whether it will become means-tested.

The younger you are, the more uncertainties there are

If you are 60 now, you are looking at the next 30 years or so and that is very uncertain.
But if you are 30 now, you are looking at the next 60 years or so and anything can happen.

Try to get a handle on what your living expenses will be in retirement

Some people ask "How much will I need in my pension fund to get a pension of 2/3rds my final salary?"

This is the wrong question. You may spend more or less than 2/3rds of your salary in retirement.

On the one hand, you won't have

• mortgage payments
• the costs of raising and educating children
• pension contributions

On the other hand,

• a lot of time off can be expensive e.g. if you plan to travel a lot.

So keep a record of what you are spending now. That will be a very good base to work out how much you will need in retirement.

Some common mistakes to avoid



2) Ignoring the value of the family home

A lot of the Excel spreadsheets I have seen show that there is a risk that the person's pension fund will be gone if they live to 90. But they ignore the fact that the person is living in a home worth €500k.

Having a valuable asset at age 90 can be used to get an income. So factor in the value of the family home into any calculation.

You do not need to move home to get an income from your home. You can get a life loan where the interest is rolled up and mortgage is repaid when you die.

3) "My investment property is my pension."

The best way to invest for your retirement is to maximise your contributions to a formal pension fund. You get tax relief on your contributions. The fund grows tax-free. And you can usually take out 25% of the value tax-free on retirement. Borrowing money to buy an investment property outside a pension fund is no substitute for a proper pension.

4) Assuming the same tax and pension legislation will still apply in 30 years.

If you are a public servant, it's very likely that there will be changes to the pension scheme by the time you retire. So don't go worrying about which scheme you are in and what the retirement options are until you are closer to retirement.

How to approach the problem when you are years away from retirement

It's important to factor in all your assets when you are planning for the long-term

• Your pension fund
• Your family home
• Any assets you own outside your pension fund

In your 20s and 30s, your priority should be to get on the housing ladder and get your mortgage down to a sustainable level. If you are mortgage-free in your 40s, you can stuff your pension fund with the mortgage repayments you no longer have to make.


While it's no harm planning your retirement when you are in your 30s, don't overdo it

Here is an example of a 30 year old couple planning to retire at 60


It's too early to be worrying about it. Just save for the future and see what happens.

Don't go without in your 30s because you are worried about running out of money in retirement

I have seen some people living a very frugal life because they want to be mortgage-free by 40 and have absolutely no risk of poverty in retirement.

They are very likely to leave a mortgage-free house and a lot of assets behind them when they die.

You should strike the right balance between saving for the future and unnecessarily scrimping and saving.

You need to strike a balance between medium term financial needs and long-term needs

Stuffing a pension fund puts the money out of reach until you retire.
Overpaying your mortgage in your 30s, puts it out of reach temporarily, but it reduces your ongoing payments.
Keeping the money in cash or shares gives you maximum availability.

But long-term saving is important, the vehicle - pension or clear mortgage is less important.

At the end of the day, you have to find the balance which suits your circumstances.

Planning for retirement isn't a set and forget exercise and has to be adjusted continually as life, legislation and markets get in the way. Get the fundamentals in place and adjust as needs be.

If you are planning to retire at 60, ask yourself if you are in the right job

If you are in your 40s and desperately looking forward to retirement, then you probably have a more fundamental question to ask.

It's not worth working in a job you hate, just so you can be well-off in retirement.

Is it possible to change employers or change careers, even if it means taking a salary cut?

Retirement planning should be also about life planning

Working practices have changed. You may work full-time until you retire and then stop working full-time. Or you may reduce your working hours. You may work part-time. Or you may do contract work, taking months off at a time.

If you are planning to retire at 60, ask yourself if you can continue to work after 60 but work less.

Brendan Burgess said:

While it's no harm planning your retirement when you are in your 30s, don't overdo it

Here is an example of a 30 year old couple planning to retire at 60

It's too early to be worrying about it. Just save for the future and see what happens.

Click to expand...

This is an important point. A singular focus or goal of 'retire at 60' is probably not healthy. A broader, more achievable goal is to build long term wealth and financial stability (through all stages of life) that may result in the option of retiring earlier. But there are so many life events between then and now that need to be navigated financially. Even the desire to retire at 60 could change between now and then depending on the job satisfaction, social interaction, sense of purpose that one can get from employment.

A typical 30 year old is likely to get married, buy a PPR and have children between 30-40. From 40-50, they are likely to move/upgrade/extend a PPR to meet the demands of an expanding family. In their late 40's to 50's, they are likely to face 3rd level education costs. All of these are significant financial milestones.

Understanding and planning for all of the major costs (and not just a pension) is critical to your financial wellbeing. A good example of this is how many people worry about the cost of 3rd level education for a newborn child while completing ignoring the fact that the immediate cost of childcare is generally more expensive than 3rd level. And this is normally coupled with a high mortgage (LTI).

Funding childcare and reducing the mortgage principal are more important at this time than stuffing a pension. As childcare reduces (starting school), there is an opportunity to increase pension funding and increase mortgage payments.

As 3rd level approaches, the option to reduce pension funding and fall back to the minimum mortgage payment can create a lot of additional cash flow to fund 3rd level. And finally, as 3rd level costs falls away, pension funding and mortgage overpayments can be resumed.

Being consistent throughout each stage of life with a general attitude for saving for short and long term goals is important without being so frugal that you are making major sacrifices (that will impact your quality of life) now for the idea of retiring early in the future....Everything in moderation

OkGo raises a point which I had meant to cover: flexibility.

Stuffing a pension fund puts the money out of reach until you retire.
Overpaying your mortgage in your 30s, puts it out of reach temporarily, but it reduces your ongoing payments.
Keeping the money in cash or shares gives you maximum availability.

But long-term saving is important, the vehicle - pension or clear mortgage is less important.

At the end of the day, you have to find the balance which suits your circumstances.

Brendan

Brendan Burgess said:

Some common mistakes to avoid

1) Asking: "How much will I need in my pension fund to get a pension of 2/3rds my final salary?"

You need to look at how much will you need in retirement. Most people will get the OAP. Their mortgage will be paid off. Their kids will have flown the nest. They will not need anything like 2/3rds of their final salary.

2) Ignoring the value of the family home

A lot of the Excel spreadsheets I have seen show that there is a risk that the person's pension fund will be gone if they live to 90. But they ignore the fact that the person is living in a home worth €500k.

Having a valuable asset at age 90 can be used to get an income. So factor in the value of the family home into any calculation.

4) Assuming the same tax and pension legislation will still apply in 30 years.

If you are a public servant, it's very likely that there will be changes to the pension scheme by the time you retire. So don't go worrying about which scheme you are in and what the retirement options are until you are closer to retirement.

Click to expand...

I don't agree with these points:

1. My anecdotal evidence shows that those living life to the full in retirement are actually spending more in retirement than they did when working. Only having a certain amount of days annual leave is a great spending suppressor. In retirement, you have no such constraints and go out more and hence, spend more. What is true is that you spend more in early retirement than in later life, so it is important to remember that.
2. Again, most people do not move home later in life unless they live in a big house that become unmanageable. And the certainly only move much later in life when they are going to a nursing home.
3. We do not know what tax or pension legislation is going to be next year, never mind 20 years time. We can only act on what we know now and it adjust it each year.

Planning for retirement isn't a set and forget exercise and has to be adjusted continually as life, legislation and markets get in the way. Get the fundamentals in place and adjust as needs be.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

A thoughtful thread. A couple of other things I would add in from my own experience and from reading these threads.

1. Working life is changing for many people and within that context I would be looking a life planning rather that specifically retirement planning. For example, when my wife went back to work after each baby, I went to 3 days per week for a year, and really enjoyed the time at home. When I get to 60, I may carry on working one or two days per week, who knows how long for. The alternative traditional model is to work full time until you retire entirely. One of the advantages to my way of doing this is that you lose out less if you die at age 60!

2. Remember that as well as not paying your mortgage in retirement (hopefully), you're also not saving for your retirement, which is presumably taking a chunk of your salary in your 50s, so take that into account when working out how much money you need in retirement..

3. Take a holistic view of all pension entitlements you may have. The missus and I have 6 small-ish pensions between us: 2 x Irish state pension; 2 x UK state pension (NB - have you ever worked in UK and paid NICs - voluntary NICs are the best value return in the pension world assuming rules don't change); 2 x UK defined benefit pensions. But combined they will give us a joint income of €1200 per week. I'm now building a private pension rapidly but starting late from a zero base. But if it never reaches €800k, I don't have to panic. And I don't need to worry about de-risking that private pension by moving into bonds / cash as we have a good enough base.

Steven Barrett said:

My anecdotal evidence shows that those living life to the full in retirement are actually spending more in retirement than they did when working. Only having a certain amount of days annual leave is a great spending suppressor. In retirement, you have no such constraints and go out more and hence, spend more. What is true is that you spend more in early retirement than in later life, so it is important to remember that.

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Hi Steven

My main point was the 2/3rds question. But I have updated that point accordingly.

Brendan Burgess said:

1) Asking: "How much will I need in my pension fund to get a pension of 2/3rds my final salary?"

You need to look at how much will you need in retirement.

Most people will get the OAP. Their mortgage will be paid off. Their kids will have flown the nest. They will not need anything like 2/3rds of their final salary.

But in other cases, they will spend more in retirement as they will have more free time.

Click to expand...

Steven Barrett said:

Again, most people do not move home later in life unless they live in a big house that become unmanageable. And the certainly only move much later in life when they are going to a nursing home.

Click to expand...

Again, I have clarified my point:

You do not need to move home to get an income from your home. You can get a life loan where the interest is rolled up and mortgage is repaid when you die.

But in retirement most people have no mortgage, no child costs, no cost of retirement provision itself, little if any need to save, and no costs of working.

I struggle to see how someone could spend more.

Steven Barrett said:

Planning for retirement isn't a set and forget exercise and has to be adjusted continually as life, legislation and markets get in the way. Get the fundamentals in place and adjust as needs be.

Click to expand...

I have incorporated this into this post:

time to plan said:

1. Working life is changing for many people and within that context I would be looking a life planning rather that specifically retirement planning. For example, when my wife went back to work after each baby, I went to 3 days per week for a year, and really enjoyed the time at home. When I get to 60, I may carry on working one or two days per week, who knows how long for. The alternative traditional model is to work full time until you retire entirely. One of the advantages to my way of doing this is that you lose out less if you die at age 60!

Click to expand...

Thanks ttp

I have incorporated that now:

Retirement planning should be also about life planning

Working practices have changed. You may work full-time until you retire and then stop working full-time. Or you may reduce your working hours. You may work part-time. Or you may do contract work, taking months off at a time.

If you are planning to retire at 60, ask yourself if you can continue to work after 60 but work less.

Personally, and I say this every time that a discussion starts about retirement or early retirement, the most important thing to know in deciding do you have enough to retire is to know exactly how much it costs you to live!!
And not just how much it costs but to know the who, what, why, when and where of every euro you spend and the sooner you start this process the better able you are to understand the true meaning and longevity of your wealth and what for you is to be considered essential spending and non essential spending.
It's not the be all of early retirement but it is one if not the top element in the decision making process, with out it you really are flying blind.

Hi Cervelo

Good point, I have made it the second post in the thread.

When it comes to planning for retirement, a spreadsheet is your friend.

Break out your monthly expenditure in granular detail, look at what will fall away in retirement, and inflate the rest at 2% pa.

That’s the basis of my own plan.

The 2/3 of final salary stuff is far too arbitrary. And in many cases, it probably leads to massive overprovision and the additional stress of trying to get there.

User meadow explains in this post how to estimate your day to day expenditure:

Brendan Burgess said:

If you are planning to retire at 60, ask yourself if you are in the right job

If you are in your 40s and desperately looking forward to retirement, then you probably have a more fundamental question to ask.

It's not worth working in a job you hate, just so you can be well-off in retirement.

Is it possible to change employers or change careers, even if it means taking a salary cut?

Retirement planning should be also about life planning

Working practices have changed. You may work full-time until you retire and then stop working full-time. Or you may reduce your working hours. You may work part-time. Or you may do contract work, taking months off at a time.

If you are planning to retire at 60, ask yourself if you can continue to work after 60 but work less.

Click to expand...

I'm not sure that retiring at 60 is incompatible with enjoying your job. I broadly enjoy my job, with the same ups and downs as most people, but I'm certainly looking forward enthusiastically, if not quite desperately, to retirement. I'm getting close to 60, and I've been working since I left school. I've had my fill of forty-plus years of dragging out of bed at seven-ish five days a week. I'm living for the weekend and the holidays for that extra hour or two of sleep in the morning, I'm fairly fit, exercising most days, but generally feeling my age over the past five years, and enthusiastic for the next phase and moving on from the 9-5 slog.