Key Post Some wealthy people are worrying unnecessarily about their finances.

Brendan Burgess

Brendan Burgess

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There have been some posts recently where people who have income and wealth well above the average are worried about their future.

This family has an income of €130k and €125k in savings and is worried about paying for private school fees and college fees.

Some people in this thread say that a pension pot of €2m on retirement is inadequate, although to be fair, most people disagree.

The pensions industry will reinforce the view that anyone who has not got a pension pot equal to 10 times their income on retirement is headed for the poor house.

These posts cause two big problems

  • The posters themselves are worrying unnecessarily about their future and are in danger of making bad financial decisions as a result – e.g. working in a job which they hate because it’s well paid or cutting back on necessities because they are worried about the future.
  • Readers who had considered themselves well off and on a path to a happy retirement are now worried about their own future, for example this guy.
Many people are living in genuine poverty and have no prospect of ever owning their own home. It must be galling for them to see people who are living mortgage-free worrying about their future. But this particular thread is about people who do own their own homes.

Most people are doing the right thing – balancing their financial and life plans

  • They aim to buy a home
  • They aim to get the mortgage cleared by the time they retire.
  • They contribute to a private pension as it’s the best form of long-term saving for retirement
  • They accept that some periods of their life e.g. kids in school or college will be financially challenging – they either save for this or borrow for it but they don’t panic.
  • They live, more or less, within their means – they don’t consider themselves a failure if they don’t buy a new car every two years or if they can’t go on 4 overseas holidays a year.
  • They don’t rely on receiving an expected inheritance, but they don’t ignore it either.
But most of all, they realise that they need a financial/work/life balance. They will prioritise family over work and finances when they need to. And if they are in financial difficulty, they will prioritise sorting out their finances.

If you own your home mortgage-free on retirement and your only income is the state pension, then you can have a perfectly adequate and fulfilling life.

You might not be able to go on 4 holidays a year and buy expensive presents for Christmas and for everyone’s birthday, but you will be well able to afford the necessities.


Some people are making big mistakes in the finances

Working in a high-pressure, long-hours job which they don’t enjoy just because it is well paid and they need the money to fund their lifestyle or retirement plans.

If you are aiming to retire at 50, it probably means that you are in the wrong job or the wrong career. Example

Sending kids to private schools when there are perfectly good state schools in the area. I am not against private schools for people who can comfortably afford them.

Borrowing to buy a new car. If you can’t buy a new car with cash, then buy a second-hand car.

But living unnecessarily frugally is also a mistake.

Making unnecessary financial sacrifices during the best years only to get a big inheritance later in life which leaves you very well off in retirement.

Living frugally to “pay off the mortgage in 10 years.” This makes no sense at all. It’s nice to live mortgage-free, but there is no hurry. When the mortgage is under control, contributing to a pension is usually a better use of your spare cash.

Trading down from a house they love because they are worried about their finances.

Taking in a lodger because they are worried about their finances.

Pensioners living frugally and avoiding spending because they want to leave their house to their children or because they are worried that they might spend ten years in a nursing home and won’t be able to afford it.

General points to remember

After buying a house, contributing to a pension is the most efficient means of long-term saving.

Don’t look at your pension in isolation. Look at your total wealth. If you have a mortgage-free home on retirement, you need a far smaller pension.

Distinguish between essential and non-essential spending

Don’t ignore inheritances but don’t rely on them either.

If you run out of cash in retirement, you can borrow against your home.

So how much do you need to have a comfortable retirement?

If you own your home mortgage-free on retirement and your only income is the state pension, then you can have a perfectly adequate and fulfilling life.

But of course, it’s much better to have a good private pension or other wealth in retirement.

But base your calculations on your projected expenditure and not on your final salary. Guidelines that you need 70% of your final salary in retirement are nonsense. If you retire on €200k, you don’t need €140k a year in retirement.
 
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This is a very interesting thread about how much you will actually need in retirement. It would be great if someone could summarise it with up to date figures in the format that Standard Life uses.

Key Post - How much will you spend in retirement?

Obviously this will vary enormously but I recently came across this calculator from Standard Life that I thought was quite interesting - https://www.standardlife.ie/tools/having-enough-money-when-you-retire#pensions-dialog1
askaboutmoney.com

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Brendan Burgess said:
But base your calculations on your projected expenditure and not on your final salary. Guidelines that you need 70% of your final salary in retirement are nonsense. If you retire on €200k, you don’t need €140k a year in retirement.
Click to expand...

I think for me and the question of how much you need in retirement is answered by the above statement, it is the first metric you need to know and is key to unlocking that answer and others that are going to arise.

I’m always amazed when I meet and talk to people about this subject at their lack of knowledge of where their monthly salary goes but on the other hand if I was to ask them about the Six Nations or who’s going to win the Masters, why they bought an iPhone 15 pro max or why they bought a Tesla over a Nissan Leaf I’d be bamboozled with their facts, figures and predictions

The only way you’re going to know how much you need is to know how much you spend but it’s not as simple as saying I earn €5K a month and I’m usually left €1k so I need €4k a month.

For over thirty years now I’ve been tracking my spending in one shape or form, first on paper but from 2005 I’ve been using excel and since 2012 I’ve added more info (the 5W’s) about each purchase so as I don’t forget what that purchase was on such a date back in 2014.

What this has done for me is to show me the who, what, when, where and why of my spending and also it has highlighted what is essential spending and what is non-essential spending but most importantly it has given me a figure that I feel is a very accurate way of estimating my projected spending during retirement which in turn has eliminated any anxiety that I had about the longevity of my retirement fund

I’ve done several postings here about my early retirement journey and how much it has cost me sofar and what I project I’ll need in the future and how comfortable I am with my decisions and finances and it all stems from knowing my yearly expenditure.

Knowing your yearly expenditure is only the first part and I’ll be honest and say the easy bit, it’s making changes or adjustments that sometimes can be easy like not having a takeaway coffee every morning on the way to work or buying your lunch from the local deli counter to much harder ones like changing the car, where to send the kids to school and what type of house or area you’d like to live in which is why you also have to be realistic in what you can actually achieve and become comfortable with that and not be comparing yourself and your situation to your friend, neighbour or work colleague, remember the grass isn’t always greener on the other side.

Back to the question at hand “How much”, well we’ve arrived at a yearly figure of €40k so when we get to retirement age of 66 we’ll need a pension fund that will cover the shortfall between the state pensions and our projected expenditure which is €11K, so using the 4% rule we need a minimum pension fund of €300K to achieve this which is way lower then the headline figures quoted above.
 
Brendan,

Worrying unnecessarily only holds true if the income is guaranteed until retirement. In my case my household income is in the top 10% but in the current economy we could be made redundant at anytime.

I would say many large earners are in similar boats and those who recently bought houses and have young kids are probably at their peak outgoings.
 
Brendan Burgess said:
Borrowing to buy a new car. If you can’t buy a new car with cash, then buy a second-hand car.
Click to expand...

Not too sure if I would agree with this point. I'm not a car person and they are viewed as purely getting me from A to B.

In the past I was like many of the view that driving a new car onto the road and having it drop in value immediately was a dreadful waste of money. Between the inconvenience of the dreaded NCT mess over the past few years we have switched to buying new mainly for reliability. The price of the second-hand cars has increased so much too that it is another point to be borne in mind.
 
Brendan Burgess said:
If you own your home mortgage-free on retirement and your only income is the state pension, then you can have a perfectly adequate and fulfilling life.
Click to expand...
I agree with most of it except this bit, it's a pretty basic life on just state pension, I'm not sure a person could run a car for example and pay all the normal household bills and live any sort of a fulfilling life after that.

My father had nothing but state pension and I dealt with his finances, his house was tiny but it still had bills and not until he was unable to drive any longer did the pension amount come close to covering the day to day expenses, at that stage he wasn't really leaving the house much so any bit of discretionary spend like garden centres or the odd lunch out had stopped, not exactly what I'd consider a fulfilling life at that stage. He died in 2019 so just before heat/fuel bills went really high not to mention health insurance and I know the increases in pension since would not have covered those increases. Yes he had a medical card but I still wouldn't have wanted him depending on public system.

I don't know where people who don't have kids that will help out or some small amount of savings or other income find the money to manage on just a state pension unless they live a very very simple life with no car.
 
Our family finances do not keep me awake at night however the future (finance wise) does cause me some concerns.

My father retired at 62 (off the back of a health scare) and was best thing he ever did. They travelled, had a great social life and for 10 years or so they lead a great life (not cheap though). Now in their mid/late 70's health issues have caught up with them and they hardly do anything anymore.

The retirement 'window' to do all the things you might like to isn't long so early retirement helps. However this cost more and you have less time to save.

I worry if my kids will be able to afford to buy a house in 20/25 years time. I was very fortunate that my parents could afford to give me decent deposit to buy my first home. I would like to be in the position to do that for my kids when the time comes. Again this cost money.

Would I like a smaller mortgage and bigger pension pot, of course however I know we are doing OK so not stressed just have some concerns.
 
Some interesting perspectives. I'm not convinced that a state pension makes for a comfortable retirement even with mortgage paid off. But let's say you want to double it. What size pension fund would you need? I reckon 385k would give you a 96k lump sum and then a 290k fund which you could draw down at 5% per year from age 66. It's not the huge pension pot that is often touted, assuming you start reasonably early in life.

Now, retiring before state retirement age is a whole other matter.
 
As other have mentioned, I think you will struggle to live a fulfilling life on the state pension (c.€1,200 p/m) even if you own your home.

You will only be able to afford the bare essentials.

You can forget owning a car or taking a holiday abroad.

You will never be able to buy anyone anything.

You will be severely limited in what social activities you can participate in.

Just one unexpected €1,000+ expense and you will be wiped out for a year.

You will be constantly anxious about money and bills.

You will be able to survive, but that's about it.
 
I think it is good to draw people's attention to pensions and living expenses.
There are a large % of people who are financially illiterate.

One issue I have a problem with ... on this website;
an obsession with getting full PRSI stamps, to have a full state pension.
I have never thought or worried about this issue.
I am not counting on getting the full state pension, therefore I have provided for myself with a private pension.
It would be more helpful to educate people, - the state pension is not enough.
 
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TRS30 said:
This is one of my financial goals and I can only see this getting older (harder to retire early) before I get there!
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I have a small (£125 per week) NHS pension that kicks in at 60, so I see it like this in my personal case (starting at the end)

Age 67: NHS pension and Irish state pension and UK state pension - imagine this is my goal for minimum retirement income of approx. €660 per week
Age 66: NHS pension and Irish state pension - I need to make up (from a private pension and/or part-time work) the shortfall of €240 per week against my goal for 1 year
Age 60: NHS pension - I need to make up (from a private pension and/or part-time work) the shortfall of €510 per week against my goal for 1 year

Any retirement before 60 means I have to make up the full €660 per week AND in my case I have to have the mortgage paid off (doable) and fund about kids in 3rd level education as the younger should finish when I am 60 (tricky).

But one learning I get from this is that if I am happy with €660 per week, in the event that I retire early, my private pension fund only has to last until I am 66.
 
fistophobia said:
One issue I have a problem with ... on this website;
an obsession with getting full PRSI stamps, to have a full state pension.
I have never thought or worried about this issue.
I am not counting on getting the full state pension, therefore I have provided for myself with a private pension.
Click to expand...

But that's a bit of a mé féin attitude. Perhaps they have an obsession with qualifying for the full state pension because they are not financially in a position to provide for a private pension.
 
fistophobia said:
I think it is good to draw people's attention to pensions and living expenses.
There are a large % of people who are financially illiterate.

One issue I have a problem with ... on this website;
an obsession with getting full PRSI stamps, to have a full state pension.
I have never thought or worried about this issue.
I am not counting on getting the full state pension, therefore I have provided for myself with a private pension.
It would be more helpful to educate people, - the state pension is not enough.
Click to expand...
That in itself doesn't seem financially literate (if you don't mind me saying - not trying to start a fight).

Just because the state pension is not enough doesn't not mean that it isn't an important goal for retirement, as part of your retirement provision.
 
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