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

[Gordon Gekko]

People also need to look at the tax position;

The 20% rate band for a two income household is circa €70,000.

PRSI falls away at age 66.

There are lower rates of USC for over 70s with income below €60,000.

There are those income exemptions for over 65s (€18,000 for a single person, €36,000 for a married couple).

It surprising how one’s needs (even for a pretty comfortable lifestyle) are far less than one might expect when mortgage costs, education costs, childcare costs, pension funding costs, and getting to work/working costs are stripped away.

 

[Maybrick]

Hi Garbanzo,

Not a stupid question at all, I should have given more detail. Yes, there is a Mrs Maybrick. We are 51 and 42 and neither of us has a pension. On the positive side, we expect to be mortgage free in a couple of years with savings of roughly 200K. We also expect to inherit money at some point, perhaps another 200K. We should be able to survive post-retirement on roughly 26K per annum between us plus the state pension. We have no children so are not particularly concerned about what we leave behind, if anything.

To be honest, at our age I am not sure whether it is worth the hassle of starting a pension or whether we would be better off just maximising our savings. Am I being delusional?

As always, any help gratefully received - thanks.

 

[Marc]

.

 

[Slim]

Hi,
In fact, there’s a reasonable argument to be made for each of you making a contribution of €100k right away from your savings.

Curious Marc. How could either make a contribution of €100k to a pension fund, based on a 30% limit? This may be of great relevance to me!

 

[Marc]

.

 

[Slim]

.... plus you still pick up all the income tax relief against future earned income which has the effect of increasing your take home pay.

Much obliged. I get it now. One more thing, could you clarify the comment above? I am interested in the 'future earned income' piece.

My wife has a PRSA. She will retire this year and has been contributing the max. 30%(incl. occupational pension contribs). Is there a way she can load her PRSA before retirement and claim the tax relief against her occupational pension in future years? She will take her occupational pension this year but could leave her PRSA for 5 years(she will be 55 this year). Thanks, Slim.

 

[bappelbe]

An added complication for the OP is inflation.
If an income of 30k is in terms of 30-40 years time then inflation should be taken into account
if inflation is 2% (what the ECB wants) then the non state part of the pension would need to be significantly higher to compensate for that.

 

[mtk]

The percentage of net relevant earnings only relates to the amount of tax relief allowed in any one year. Any excess over that is carried forward and allowed indefinitely against future income.

The key advantage being that the whole capital sum is sheltered from personal taxes immediately ( no Dirt, income tax or capital gains tax) on future investment profits.

Assuming a 5%pa return that adds about 2%pa to your investment returns on all your capital compared to say an insurance company investment plus you still pick up all the income tax relief against future earned income which has the effect of increasing your take home pay.

With tax breaks so limited it never ceases to amaze me why more people don’t consider this.

I see three risks
Your future earnings do not materialise or are lower than expected and are taxed at standard rate
Tax relief rules change in future
You need access and cannot get it (if "young" )

 

[fistophobia]

I agree with the sums quoted by the original poster.
Believe it or not, there are people on this site who have modest incomes.
450K is a huge amount to try and squirrel away, for most Irish people.
I know people your age - they have no pension or savings.
Its all down to the property / mortgage question. If you have found a way to clear it earlier, then you can smash it with the retirement fund.

If you are up around this figure already, I would be asking myself the opposite question - whats the minimum I need to retire on?

Work is over-rated anyway.

 

[Gordon Gekko]

Believe it or not, there are people on this site who have modest incomes.
450K is a huge amount to try and squirrel away, for most Irish people

With respect, it’s not a huge amount to try to squirrel away by any stretch of the imagination.

€370 invested in a pension each month starting at age 35 and retiring at age 65 with a growth rate of 4.5% per year would create a fund of €450,000.

I challenge anyone to argue that €85 a week from age 35 is a big ask in the context of funding one’s retirement.

 

[elacsaplau]

I challenge anyone to argue that €85 a week from age 35 is a big ask in the context of funding one’s retirement.

Frightfully middle class perspective, Gordon.

Also, very misleading - we are talking about €450,000 in today's money terms - pretty massive difference in the sums!

 

[MrEarl]

With respect, it’s not a huge amount to try to squirrel away by any stretch of the imagination.

€370 invested in a pension each month starting at age 35 and retiring at age 65 with a growth rate of 4.5% per year would create a fund of €450,000.

I challenge anyone to argue that €85 a week from age 35 is a big ask in the context of funding one’s retirement.

Hello Mr. Gekko,

Just out of curiosity, I did a quick search online. It looks like the average wage for a full time worker in Ireland was running at circa €46k gross, about 18 months ago (that's not to be confused with the average industrial wage, which would be lower). While I imagine it has increased a little since then, the point remains the same - when you allow for payment of tax, accommodation and other basic living costs (particularly if it's a one income household and there may be children to support), then I can see how some people might struggle to pay €85pw gross into a pension. Obviously, that does not mean they could not afford to make some form of smaller regular contribution however.

Personally, I think the tax treatment for pension contributions needs to be changed radically, to give notably more benefit to people who can only afford to make lower levels of contributions. If the incentive is big enough, more people will contribute into a private fund (no matter how small their contributions) and ultimately, this country needs everyone to be making private arrangements for their retirement.

The sooner the better we get a government that has "a pair" and is willing to tackle the retirement problem for our population head on. I'm taking about dealing with everything here, from overly generous pensions for state employees, to how pension contributions are taxed and who benefits the most from incentives, to stopping new entrants from being entitled to avail of the state pension as we currently know it (with those people instead being assisted with funding their private pensions through tax breaks etc.). It's a massive task, but also a massive problem and the longer we let the current arrangements continue, the bigger the problem is going to be in the years to come !

 

[Sarenco]

Also, very misleading - we are talking about €450,000 in today's money terms - pretty massive difference in the sums!

True but the monthly contribution in Gordon's example (€370) is similarly unadjusted for inflation.

Also, 4.5% real return on equities over a 30-year period wouldn't be unusual by historical standards.

 

[Sarenco]

It looks like the average wage for a full time worker in Ireland was running at circa €46k gross, about 18 months ago (that's not to be confused with the average industrial wage, which would be lower).

Gordon's example of €370pm works out at less than 10% of €46k.

Surely an average earner should be putting away at least 15% of their gross income to save for their retirement. Bear in mind that contributions at that level would all be relieved of income tax at the higher rate.

What's the alternative? Rely on State hand-outs? Live on cat food?

 

[Gordon Gekko]

I genuinely don’t think that €85 a week is a lot to ask in terms of planning for one’s retirement. That’s from age 35, giving the individual quite of bit of time to get himself/herself established during which time no contributions are made. And it’s often forgotten that for lower earners, the State Pension is probably enough.

I would be surprised if €85 a week can’t be found for most people earning at a level of (say) €36k upwards. And if sacrifices have to be made, well so be it. I know people who spend that on lunch and coffees during the week; making sandwiches themselves and buying Nespresso pods could give them a €500,000 pension pot!

 

[elacsaplau]

4.5% real return on equities over a 30-year period wouldn't be unusual by historical standards.

Broadly the assumption used in return seeking assets of DB plans (i.e. not the entirety of the fund) - and note how employers are queuing up to fund such arrangements!!

The example I baulked at was crude - it can be "argued" but overall I believe it was misleading.

We were talking about €450,000 in current money terms. For someone to achieve this (I haven't checked the sums) - they would
- have had to contribute €85 a week for each week for the last 30 years
- received an average return on these investments of 4.5% after charges

€85 a week 30 years ago was a lot a lot of money - not an easy peasy, forego a few lattes sum.

Chances are also that individuals got completely milked by industry charges back in the day - even more so than now.

 

[bappelbe]

Gordon,
on your calculations, I put it into a calculator: calculatorsoup future-value-calculator.php - google it as I can't post links
and get 280K after 30 years - not 450K - inputting 0 starting value 30 periods(years), 4.5 growth, 370 Payment amount, 0 payment growth and 12 payments per period.

am I doing something wrong?

 

[Sarenco]

Gordon,
on your calculations, I put it into a calculator: calculatorsoup future-value-calculator.php - google it as I can't post links
and get 280K after 30 years - not 450K - inputting 0 starting value 30 periods(years), 4.5 growth, 370 Payment amount, 0 payment growth and 12 payments per period.

am I doing something wrong?

Your calculation looks right to me.

 

[bappelbe]

Gordon,
on your calculations, I put it into a calculator: calculatorsoup future-value-calculator.php - google it as I can't post links
and get 280K after 30 years - not 450K - inputting 0 starting value 30 periods(years), 4.5 growth, 370 Payment amount, 0 payment growth and 12 payments per period.

am I doing something wrong?

Playing with it a bit - if you put the payments increasing at 4%pa then you get 450K
(note in that calculator put 4440 per payment(1 annual payment), 1 payment per period and then 4 for growth per payment)

 

[MrEarl]

Gordon's example of €370pm works out at less than 10% of €46k.

Surely an average earner should be putting away at least 15% of their gross income to save for their retirement. Bear in mind that contributions at that level would all be relieved of income tax at the higher rate.

What's the alternative? Rely on State hand-outs? Live on cat food?

Please, don't get me wrong here...

I am 100% of the view that everyone needs to be making regular contributions into a private fund.

However, a family of say 2 adults and 2 kids living on something close to €46k gross pa won't be able / prepared to release €45 - €50pw (after tax) on an ongoing basis.

Your question about what they will do alternatively is more than just, but the fact that so many people are not correctly educated on financial matters (to include retirement planning), and the government is doing no where near enough to change that, means most people won't even think about the answer to your questions and instead, just stick their heads in the sand or plead ignorance.

If it were up to me, I'd have basic finance as a module for all secondary school pupils, teach them about how to manage their finances, retirement planning etc. It could easily be introduced into the curriculum for 4th year for example and would bring some important life lessons into the class room.