How big a pension fund do I need to retire on?

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Maybrick

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Hi all,

I am just starting to investigate the pensions issue and must admit I feel quite intimidated by how complicated it is. I was wondering if anybody could answer a very basic question just to get me started. How big a pension fund would I need at retirement age to guarantee an annual income of 30,000?

Any help gratefully received - thanks.
 
About €1.2m given where annuity rates are.

If you go the ARF route, about €1m; €250k paid out to you as your 25% lump sum (net €240k) and then €750k where you take out 4% a year to give €30k. But you need the fund to be invested wisely.
 
Thanks Gordon, much appreciated. I should have clarified, I will be entitled to the state pension of around 12K so would be happy with 18K on top of that. Does that mean I only need 450K after taking my lump sum? Also, what if I forego the lump sum? I'm hopeful that I won't need it, just the annual income.
 
Given that the lump sum is tax-free but the ongoing income is taxable, in most cases it's advisable to take the lump sum. Even if you just put it in the bank and make a monthly withdrawal to top up your pension income.

And yes, if you're looking to privately fund an annual income of €18,000 per year then €450,000 would be the correct target figure assuming you draw down at 4% per year. As Gordon mentions, the investment of the fund post-retirement is an important aspect of this. If you invest and get a return of 4% after charges per year, while taking a 4% income, then your original pension fund will be perpetual and will still be €450,000 when you die. If you get an investment return of, say, 2% per year after charges and are taking an income of €18,000 per year, then the value of the fund will be eroding slowly over time.
 
It entirely depends on the rate of return you expect. I think 4% to be over optimistic and would go with 2.5% to 3%, so between say €600k and €750k or so.
 
Maybrick said:
I should have clarified, I will be entitled to the state pension of around 12K so would be happy with 18K on top of that. Does that mean I only need 450K after taking my lump sum?
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Yes, that's about right.

At current rates, €450k would buy a 66 year old male an annuity of around €18 per annum.

An annuity buys you a guaranteed income for life. In essence, the life assurance company that sells you the annuity takes all the investment risk and guarantees to pay you an income for life, regardless of how long you live. The downside is that the annuity dies with you.

The alternative is to transfer the pot to an ARF/AMRF and then gradually draw-down an income from the pot over time. If you die before exhausting the pot, the balance will form part of your estate. The downside with this option is that you take all the investment and longevity risk (the risk that you outlive your savings).

In either case, you are nearly always better off taking the maximum tax-free lump sum before buying an annuity/starting an ARF/AMRF.
 
Gordon Gekko said:
For what it’s worth, my personal preference is the 25% lump sum/ARF/AMRF route; I like the idea of having something to pass on to the next generation.
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Mine too. I also like the ability to vary income according to your needs, take occasional ad-hoc withdrawals etc.
 
Of course you could partly annuitise your pension pot to guarantee a "base" level of income and then invest the balance in an ARMF/ARF.

Or you could wait to annuitise until you are further into retirement (at which time you would get buy a lot more income for a much smaller outlay).

There are a lot of individual variables at play - different life expectancies, different desires to leave a legacy, different pension pot sizes, other income streams, etc.

The best advice is probably to try and amass the biggest pension pot possible, while maintaining a reasonable lifestyle during your working life.
 
IMHO annuities are terrible value just at the moment. QE has led to quite unbelievably low interest rates even negative at the shorter end. If guaranteed pension is what suits your psyche wait for rates to improve. Ok you are foregoing the insurance against living long but by definition this risk does not suddenly hit you overnight, so it can safely be postponed.

I agree with other posters on the order of money’s needed to answer OP though I note inflation is being ignored.
 
Sarenco said:
The best advice is probably to try and amass the biggest pension pot possible, while maintaining a reasonable lifestyle during your working life.
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So true.

Sadly, I know a lot of people who are neglecting their retirement planning whilst simultaneously blowing money on extraneous rubbish.

And the same people will be moaning about penury when they can no longer work.
 
Anyone like to hazzard a guess as to how much money a person would have the contribute to there pension to have a fund worth a million after 30 years ??
 
Relying on the state pension being 12K, is a dangerous assumption to make. I am planning for it to be much lower, or non existent, or only offered after age 70. If you pessimistic, you never be disappointed.
 
Cervelo said:
Anyone like to hazzard a guess as to how much money a person would have the contribute to there pension to have a fund worth a million after 30 years ??
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Probably around 500K - 600K depending on the expected rate of return you forecast.
 
Cervelo said:
Anyone like to hazzard a guess as to how much money a person would have the contribute to there pension to have a fund worth a million after 30 years ??
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About €16,500 a year (which is €495,000 in total).

That’s based on an average return of 4.5% a year (which is what I use when doing my own planning).
 
Maybrick said:
....I will be entitled to the state pension of around 12K.....
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fistophobia said:
Relying on the state pension being 12K, is a dangerous assumption to make..
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Hello,

I could not agree more with fistophobia on the point about the state pension.

  • The population is aging, so there will be more people drawing on the state pension in the future
  • Average life expectancy is getting longer, so those who draw on the state pension will draw on it for longer periods
  • Successive governments continue to make no meaningful arrangements to provide for future obligations under state pensions

Notwithstanding the moral obligation that the state may have to pay pensions in the future to those who have contributed into the system for many years, financially I don't see the state being able to afford to do so. As such, sooner or later, the government of the day is going to have to break the bad news to the population and make some radical changes. Obviously, governments don't want to grasp this nettle given the fear of them then being penalised in subsequent elections, but tinkering with the state pension (by pushing our the age before payments commence for example) can only continue for so long.


Duke of Marmalade said:
IMHO annuities are terrible value just at the moment. QE has led to quite unbelievably low interest rates even negative at the shorter end. If guaranteed pension is what suits your psyche wait for rates to improve. Ok you are foregoing the insurance against living long but by definition this risk does not suddenly hit you overnight, so it can safely be postponed.

I agree with other posters on the order of money’s needed to answer OP though I note inflation is being ignored.
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Hello Duke,

While I appreciate that it's all relative, wouldn't it be correct to say that annuities have been poor for several years now (rather than "just at the moment") ?

Also, with QE likely to continue for another few years (at least in terms of a low interest rate environment, if not with ongoing Bond purchasing by the EU), isn't it most likely that annuity rates will continue to be terrible for at least another 3-5 years, if not longer ? Obviously, I appreciate that none of us can predict the future, but I'm working on what we know to be true at this time.

Your point about inflation is very well made btw. Notwithstanding the fact that official inflation rates have been very low in recent years, true inflation in terms of the cost of living and buying every day goods and services is on the up, at a higher rate than a weighted basket of goods might suggest to those releasing official inflation figures. :)
 
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MrEarl said:
Hello,

I could not agree more with fistophobia on the point about the state pension.

  • The population is aging, so there will be more people drawing on the state pension in the future
  • Average life expectancy is getting longer, so those who draw on the state pension will draw on it for longer periods
  • Successive governments continue to make no meaningful arrangements to provide for future obligations under state pensions

Notwithstanding the moral obligation that the state may have to pay pensions in the future to those who have contributed into the system for many years, financially I don't see the state being able to afford to do so. As such, sooner or later, the government of the day is going to have to break the bad news to the population and make some radical changes. Obviously, governments don't want to grasp this nettle given the fear of them then being penalised in subsequent elections, but tinkering with the state pension (by pushing our the age before payments commence for example) can only continue for so long.
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Hello MrEarl,

I agree wholeheartedly about the State Pension. I think many in Government are terrified of mobilising the "grey vote" again, as happened some years ago. In the most recent document this Government published about future plans for all Irish pension systems, it was stated that the plan is to index-link the State pension. I think this is a missed opportunity. It would be relatively painless to effectively reduce the State Pension over time by simply NOT index-linking it.
 
Maybrick said:
Hi all,

I am just starting to investigate the pensions issue and must admit I feel quite intimidated by how complicated it is. I was wondering if anybody could answer a very basic question just to get me started. How big a pension fund would I need at retirement age to guarantee an annual income of 30,000?

Any help gratefully received - thanks.
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Hey Maybrick

Can i ask a stupid question? Are you single or is there a Mr or Mrs Maybrick who you will be supporting in this retirement scenario. I ask as it isn’t clear and a significant other will probably double the amount you will need to have to support in retirement.

Cheers

garbanzo
 
garbanzo said:
I ask as it isn’t clear and a significant other will probably double the amount you will need to have to support in retirement.
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Not really - one TV licence, one ESB bill, one gas bill, one LPT bill, etc.

I would estimate that a retired couple would require around 1.5 times the income of a single retiree.
 
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