Your pension: How much is enough?

This is a question often asked, either just in our minds or sometimes asked directly to us at Allied Financial, as independent pension advisors.

It is a really important question, as there is little incentive to simply keep throwing money into a pension fund, without any real idea of what that fund will achieve for you down the road.

Like most things in life though, there is no single answer that works for us all, because different lifestyle ambitions in retirement come with different price tags! If you are happy to live a fairly frugal life in retirement, you will not need as much money. However, if you want to ensure your life is comfortable, travel, replace the car every few years and be generous to your family, your need for a more significant pension fund is obvious. It is also worth taking into account the cost of health in later life.

So where do you start?

The State Pension in Ireland on its own provides a pretty meagre existence for pensioners as it is only designed as a basic provision. The current contributory rate for a single person is €248 per week. Even if both you and your spouse qualify for this amount, there is not going to be a whole lot of room for luxuries (or necessities in some cases). We each need to take ownership and provide more ourselves, ensuring we can live comfortably later in life.

But how much is enough?

But again, how much should you save? We can look at this in a few different ways and offer you good financial advice. A good place to start is the new pension auto-enrolment environment on the horizon for introduction in Ireland in 2023, at the earliest. The goal of this new form of mandatory pension is to force employers to play a role in pension provision for all their employees, thereby reducing the State’s burden of poverty among people who are reliant solely on the State Pension. In order to encourage everyone to comply, the contribution levels have been pitched quite low, with a total contribution from the employer, employee and tax relief rising to 14% p.a. over a period of years. This is seen as a low bar and a minimum total contribution that you should consider.

An often quoted rule of thumb in the pensions industry is that for a meaningful pension fund and lifestyle in retirement, you should save “half your age” at the age you start saving. Someone starting to save at age 30, should save a minimum of 15% of their salary each year until they retire. Another person waiting until age 40 to start, should save a minimum of 20% of their salary each year. People are now living longer in retirement and needing funds to last longer, so these figures are a little on the conservative side. While these are of course quite significant amounts to save, they give a sense of the scale of saving needed for a comfortable lifestyle in retirement.

Factors impacting growth of your fund

There are many factors apart from contribution amounts that will impact the size of your pension fund. Probably the biggest factor is when you start. Pension Contributions made early to a pension fund have time to grow over many years, using the power of compound interest – effectively “growth on growth.” The impact of compound interest is so powerful that Albert Einstein once dubbed it “the eighth wonder of the world”!

The growth rate achieved by your pension fund is another significant factor and this will depend on the assets that you are invested in. You want these to reflect your personal appetite for taking risks – your pension adviser will help you make sense of this.

When setting your financial goals, remember to be realistic. Take time to make small, achievable financial solutions you can work towards. You can’t spend what you don’t have, but maximise what you do. At a minimum, you should ascertain your end goals.

This article first appeared in Irish building magazine.

To create a retirement plan contact Allied Financial 096 60044

Mark Winters and Henry Bourke trading as Allied Financial are regulated by the Central Bank of Ireland.