Successful retirement planning starts by answering 3 high level questions;
-1 How much will it cost to live the life I want in retirement?
-2 What will my state pension be?
-3 How do I fund the gap between my cost of living and what the state provides?
In some ways, questions 1 and 3 feed of one another. Typically, people will cut their cloth to suit their measure. It is useful however to start your retirement planning by forecasting the cost of living in retirement whilst maintaining your current living standard.
So, let’s now imagine we are retired. What are the costs that we have today that we will not have then? Well, we’re likely to have paid off our mortgage and our children are likely to have flown the nest. Once past retirement age, you are no longer liable to pay PRSI on income earned. Over the age of 70, USC falls to a very low rate. Everyone’s numbers will be different and that’s why a financial advisor is a useful resource in getting to grips with these costs.
But let’s say we have a 2-income family on €100,000 before tax and we have 2 children and a mortgage of €1000 per month. You are paying on average €1000 per month per child between groceries, childcare, books, Dental, clothing, entertainment etc. Combining these costs comes to €36,000 per year. Your combined take home pay after PAYE, PRSI and USC is deducted is likely to be around €77,000, leaving you with €41,000 per year after deducting children and mortgage expenses.
So, without making your lifestyle any better or worse than it is currently, you would need an after-tax income of €41,000 between the two of you for retirement. For a married couple who are past retirement age, €43,000 in gross income will produce an after-tax income of €41,000.
This is a complicated question to answer because it will depend on whether you are a public or private sector worker. And if you’re public, it will matter whether your start date is pre/post April 1995. If will also matter whether your self-employed or a PAYE worker and how many years you have made full PRSI contributions. Again, a good financial advisor should be able to give you some guidance on this.
Let’s continue the example above with our married couple. Let’s assume that by retirement they both qualify for the full state contributory pension which will pay them €248.30 each per week when they retire. Which is close to €26,000 per year.
Still following on our example of the married couple on €100K per year, we have identified the required pre tax income of €43,000 and the state pension entitlement of €26,000. The gap between the 2 figures is therefore €17,000 (43,000-26,000). So we now know that we need to create a savings pot large enough that it can pay out €17,000 (in todays money) per year for life. 17K in todays money will likely be around €32K in 25 years time.
Bear in mind, this €32K income should be treated as a baseline. You may perhaps have ambitions for a more comfortable retirement, which may involve travel etc. Maybe the costs of these enhanced living standards are an extra €10K per year. So now we might be looking at a funding gap of €42,000 per year.
We could look at the retirement funding in the following way; we have identified a need for a funded income of €32K per year but we have a want for a funded income of €42K per year.
To fund this over the course 25 years and allowing for tax breaks and some positive investment performance, the couple will need to be sacrificing €1,000 per month in nett take home pay.
They might get away with less if they are willing to take on investment risk in retirement.
Investment performance is a key factor in all of this, and returns are not guaranteed.
There are so many moving parts to this, that is why having a financial advisor monitoring and reviewing your retirement provisions, managing the risks and maximising the returns is so important.
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