18 Oct 2017
Posted in: Financial Review
What’s the first thing that pops into your head when you hear the word ‘pension’?
Maybe it’s ‘financial hassle’ or ‘senior citizenship.’ It’s unlikely that the word ‘scary’ will come to mind. However, certain retirement trends in the Irish market will make the hair stand on your forearms.
Did you know that less than 30 percent of Irish professionals currently have a pension plan? That mightn’t sound too alarming, but the current State pension represents a big step down for many in full-time employment. Definitely something that might instil the ‘fear of god’ into you!
Having a bit of a scare can be a good thing if it acts as a motivator to kickstart retirement planning.
While the State stipend is liveable, a proper pension plan will allow 20- and 30-somethings of today access to the lives they’re used to, after they retire.
Congratulations if you’re in the 30 percent with a plan, but for the remaining 70 percent of working professionals, we’ve outlined seven scary facts that just might get the ball rolling.
Yep – the state pension for PAYE workers is just €12,000 (or €250 per week). This means that if you’re on the average Irish wage of €45,075 per year – or just used to holliers and the odd restaurant trip – it might be a dramatic adjustment.
Plus, there’s another hiccup for those thinking of relying on the state pension. By 2046, our 65+ population will outnumber the younger generation (0-14 years) – that’d mean a population with just over two people of working age for every pensioner.
Given those stats (and potential government cuts), income tax will not be a sustainable source for many state pensions. Mercer, a financial firm, described the situation as a ‘ticking time bomb.’ Pre-empting a fiscal dilemma, Australia went so far as to introduce compulsory pension contributions for all workers.
Procrastination – we all do it. Who hasn’t put off their Christmas shopping until the 23rd of December, at least once? But when it comes to pension procrastination, there’s a lot more to be lost.
Starting your pension at 25 will remove huge pressure from your financial expenditure down the line (like, big time). The difference between starting a pension plan at 25 and starting at 35 could be an extra €194* per month.
If you’re starting in your 30s, you could essentially be doubling your pension contributions at a time in your life when you may also have more financial responsibility.
Starting early is also a smart move, as it will give your money time to bring higher returns. This is based on the concept of ‘compound interest.’ So the longer your money is building up in your pension fund, the bigger the potential return. Nice!
In case you need a little background on how your pension is making you money, here’s a quick recap: your pension sum is invested in a pension fund (which can be low, medium, or high risk, depending on your plan). Each type of fund comes with an investment return rate. An example of a low risk fund is an ‘annuity’, which can offer returns of approx. 5-7 percent.
Let’s take an example. If you saved €3,000 per year from age 21, your money and interest will build up in your account. In the first year, your lump sum will accumulate €210 investment returns. In the second year, your investment returns will have doubled to approx. €434 (seven percent of your new, compounded balance). You can see an upward trend appearing.
What does this mean for your savings? If you start when you’re 20, your savings could be worth more than someone who starts at 30 (even if they save for 40 years!).
Given that the average age to start a pension in Ireland is 37, most Irish people won’t have dodged this pension plan curveball. However, the maths really highlights the importance in getting on the pension train as early as you can. Sort your pension plan out now, and future-you will be very thankful.
A general rule of thumb for pension planning is to save enough to live on 50 percent of your income.
To meet this target, the average Irish person on a wage of €45,075 will need to save roughly €281,718 by retirement.
That’s a serious chunk of change.
“I won’t need that much when I retire,” you might think. “My kids will be up-and-gone. I’ll have finished paying my mortgage, and won’t be out on the tiles!”
The truth is that people’s spending habits don’t tend to change drastically with age – and they will have lots more free time to fill. Fast forward 50 years, and Ireland will be a society tailored for an older population, with more amenities for senior citizens (and opportunities to spend money).
Again: the earlier you start your pension planning, the more future-you will benefit.
A common presumption among workers is that their income will grow with age. However, your ‘money arc’ is shorter than you think.
According to recent research, on average, income tends to peak in your 40s, with people saving the least amount of money during their pre-retirement decade.
Of course, there are exceptions to this rule depending on industry and other factors – but this won’t be a happy realisation for those who are hoping that a larger salary down the line will cover any shortfalls of pension procrastination.
A study found that women who take career breaks to look after their children tend to overlook the financial implications on their retirement plans. For the average mother, career breaks could potentially reduce her pension fund by up to €194,316.**
Another overlooked trend is that women tend to live longer than their male partners – and therefore need more money in retirement years.
You may think that if you’re a savvy saver, you’ll be ahead of the game when it comes to your pension. However, the low costs and high return of saving into a pension plan compared to a normal savings plan are huge. A big benefit is that your pension contributions are tax free (although age and income limits apply).
If you’re on higher tax band of 40 percent, you will only pay €100 for every €250 contribution to your pension. If you are on the lower 20 percent tax rate, you will pay just €50 for every €250 contribution.
Why not book your free retirement review with EBS now, and we’ll help you plan for a comfy retirement?
The content of this blog is expressed in broad terms and is limited to general information purposes only. Readers should always seek professional advice to address issues arising in specific contexts and not seek to rely on the information in this blog which does not constitute any form of advice or recommendation by EBS d.a.c.
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*Figures based on 6 percent growth year on year.
**Staying at home for five years from age 35 to 40, and retiring at 68.