One aspect of retirement planning remains constant: the need for everyone to save – and for most people to save far more than they are already. Here we look at saving and financial planning priorities for five different age groups.
In your 20s – Starting Out
As you take your first steps into the world of work, retirement is possibly the last thing on your mind. It is quite common that other priorities take precedence, whether you are finding a deposit for a first home, paying down debts from student days – or simply enjoying life. By in large, the last thing that people embarking on the first stages of their career are thinking about is saving for their retirement!
Priority 1 – Enhance those earnings
Arguably the biggest influence on a person’s ability to plan for a comfortable retirement is their capacity to generate greater earnings, so you may consider setting aside savings for future study which might aid your career and ultimately enhance your income potential.
Priority 2 – Little Acorns make Big Oak Trees
It pays to start a regular savings plan, even if you can only spare small amounts.
This is the age to get the saving habit under way. You’re in a wonderful position because relatively small amounts should build into much larger sums over time, due to the magic of compounded returns.
If your employer will pay in to a company pension plan on your behalf, make sure you join it. You might pay 5pc and the company 5pc. This is free money, and if you don’t join you are almost certain to regret it!
In your 30s – Getting Established
Here come the financial pressures – so it is just as well that your earnings should start to increase.
Priority 1 – Responsibility Shock
You may be getting married, starting a family or buying a first home. Many mothers – and increasingly fathers – will take time out of employment to look after young children, putting more pressure on the family income.
Priority 2 – Create a Buffer
Before thinking about retirement funds, create a cash “buffer” for emergencies such as redundancy, we suggest a contingency pot worth six months’ expenditure.
Priority 3 – Cover Yourself Up
New parents might also consider life assurance, which will protect family finances if the main breadwinner dies. Repaying mortgage debt will also take a large chunk of income. Make sure you are well covered should interest rates rise.
Look into how your company pension is invested and consider increasing contributions if possible.
In your 40s – Family Demands
If you haven’t started a savings plan yet, it’s not too late – it will just be more effort.
Priority 1 – Get Saving
Saving €200 a month for 20 years – from age 45 to 65, for example – effectively means putting aside the same amount as saving €100 for 40 years, having started at age 25. But owing to the effect of compound interest, the pot will be worth just over €92,000 compared with €199,000 for the person who started at age 25 (assuming 6pc net annual growth)*.
Priority 2 – Beware of the School Drains
As always, be wary of other drains on your finances, such as school fees and plan for them in advance.
Priority 3 – That’s a relief! (A tax one anyway)
Don’t ignore the tax relief on pensions though as these apply at your highest marginal tax rate. It costs a higher-rate taxpayer just €60 to put €100 into a pension with the current tax reliefs available.
Consolidate pensions sitting idle with former employers.
Consider putting bonuses or money from pay rises towards retirement rather than boosting your expenditure each time.
With up to 28 years before you collect a state pension and potentially another 20 or more afterwards, don’t be fooled into thinking your investment time-horizon is short; you could still be invested for 40 or 50 years. Riskier funds with higher growth potential are appropriate.
In your 50s – Older and Wiser?
Now saving for retirement gets serious. In certain circumstances you can take early retirement from your pension from age 50. In theory you could retire then.
Priority 1– Get an idea of how much you might need in retirement
In reality, most people should continue working and plan carefully, saving as much as possible for the future as other expenses dwindle. Make the basis of your planning a single number: that is, how much income you’ll need when you eventually stop work. There will still be demands on your income – for example, children at university – but you should be approaching your maximum earnings now. Pensions can again work as tax-planning tools. Making a contribution to a pension can reduce your taxable income and may bring you below the family income limits for eligibility for a maintenance grant.
Priority 2 – Make sure your Life Cap fits
Be aware of the €2m lifetime cap on saving, which can creep swiftly on to the horizon.
Someone aged 50 with €1m in a pension almost reach the lifetime allowance by age 65 if the fund grew at 5pc a year without additional contributions*.
In your 60s – Approaching and Enjoying Retirement
Congratulations, You’re there – what do you do now?
Most people will continue working, in some capacity, into their sixties.
You may decide to withdraw the entirety to pay off the mortgage. But equally, you might also want to have a portion of income “guaranteed”. A financial planner is well worth the cost here.
An annuity will guarantee a stream of income payments for life, but the cost of purchase is high. For example, current rates can pay just €4,000 a year for each €100,000 of savings**.
The main alternative is to keep your pension invested and take an income as you need it.
You will need to ensure you are exposed to just the right amount of risk. The capital should be protected, so that when you make withdrawals the fund isn’t depleted just as stock markets tank; but you may want to give some of your portfolio the chance to grow, with potentially decades ahead of you.
Whatever stage in life you’re at, remember it’s never too late to start saving for your retirement and to secure your future. This checklist is relevant at every stage of your life.
Checklist for retirement planning:
- Start saving as early as you can (never underestimate the miracle of compounding!!!)
- Put money away for retirement on a regular basis
- Make retirement plans a priority when you consider a job
- Take an active role in your retirement planning
- Don’t be scared of risk – it’s a long term investment
- Ensure you have a your maximum State Contributory Pension is secured
- Find an advisor you trust
- Review it regularly !
*Source Harvest Financial Services Ltd
**Annuity rate for joint life, age 65 with 3% escalation.
Emer Kirk is Associate Director and Head of Business Development and Marketing in Harvest Financial Services Ltd, one of Ireland’s leading financial services companies. Emer can be contacted at firstname.lastname@example.org or 01 2375500.
The material is not intended to provide advice and is provided for general information purposes only.
Warning: The information contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at October 2015 and may change in the future. No undertaking can be given that the tax legislation may not be revised with consequent effect upon any return offered.