We will all be retiring later, or so the government propose anyway. There is also the prospect (if you are an employee) of being auto-enrolled into a pension scheme, whether you like it or not.
Thinking about this and much more about pensions, it made me wonder about the amount someone might want/need in retirement and how you should plan for this.
At present the state pension is approximately €12,000. Say prior to retirement you are earning €44,000 and you want a 50% pension i.e. you want your pension to be 50% of your final salary. Then your number or your income requirement in retirement becomes €22,000. So you have an entitlement to the state pension of €12,000 (assuming this remains untouched by government into the future).
So your requirement for income is €10,000 per year until you die. So we now add in some other factors. Your age, lets say you are 48 and you will retire at 68 you have 20 years to provide for the €10,000 income requirement.
Now we have to work back. What amount of money in 20 years time will give you an income of €10,000 per year. This depends on many factors. Your investment choice, tax rates, your life expectancy. Say we take it that the fund will be put on on deposit and the interest rate net of tax (at 41%) will be 1.18%. Say in this example the individual is male and at 68 an average male has a life expectancy of 20 years (CSO) so hopefully we need to provide for (at least) 20 years of this income. Taking the 2014 inflation rate of 0.20% (CSO).
The required lump sum to be put aside to meet the above criteria is €185,321. So this is the amount you would need in 20 years time.
How do you accumulate this amount? Well in this example at age 48 you have 20 years to accumulate the fund. Assuming you do not have any existing pension. The amount you would need to save is €685. per month.
Taking a slightly higher return of say 3% net of charges (no taxation as say it grows tax free in the pension fund), then you need to put aside approximately €564 per month.
So hopefully this simple example will throw some light on how to quantify your income requirement. If you want to start planning for your retirement and need some help, please contact us today to make an appointment.