Confused about how to prepare for retirement

[Future101]

Personal details
Age: 54
Spouse’s/Partner's age: 57

Number and age of children: 1 (15)

Income and expenditure
Annual gross income from employment or profession: 200,000k
Annual gross income of spouse: 0 (stay at home)

Monthly take-home pay 6,500 euro (due to AVCs)

Type of employment: e.g. Civil Servant, self-employed. Private company employee

In general are you:
(a) spending more than you earn, or
(b) saving? Breaking even


Summary of Assets and Liabilities
Family home worth €350k with a €0k mortgage
Cash of €30k
Defined Contribution pension fund: €250k (estatimated value on retirement)
Company shares : €200k after tax
2nd Property worth €250k with mortgage of €0k (currently family member using same with 0 rent – due to change in 5 years)

Family home mortgage information
N/A

Other borrowings – car loans/personal loans etc
None

Buy to let properties - None

Other information which might be relevant

Life insurance: 4 times from work
Health insurance for family: from work
Work pension contribution: 7% plus company 7%
2 new cars – no car loans (tend to keep these for 7/10 years)


What specific question do you have or what issues are of concern to you?
I would like to go part-time in 4 years time but am constantly worried about how we will survive when we retire. We will sell our family home before I am 60 (dependent on market conditions) and move to our 2nd property. We still need to fund college and my greatest worry is healthcare and nursing home funding in later life.

I would love to talk to a professional who could help, but wonder if they are all so focused on selling me something that the advice will be poor?

We are breaking even right now because we go on regular holidays and tend to have a great lifestyle – but I feel the time has come to start budgeting for the much longer term.

 

[Sarenco]

Something looks off with your figures - by my calculations your monthly disposable income (with a 7% pension contribution) should be around €8,800, after-tax.

I think the first thing you need to do is to figure out what you are spending to support your current lifestyle. With no mortgage and no childcare costs, I find it difficult to believe that you are just breaking even on a gross income of €200k.

As a rough guide, you will need to have put by around 25 times your annual spend for retirement.

On the figures presented, it looks like you will have to materially increase the amount that you are saving for retirement. Forget about early retirement - that’s not realistic without a significant drop in lifestyle.

A couple of things strike me immediately -

1. You have far too much of your net worth tied up in a single stock - you need to diversify that holding; and

2. Your pension balance is far too low - you should be maximising your tax-relieved pension contributions for your age.

 

[Future101]

Something looks off with your figures - by my calculations your monthly disposable income (with a 7% pension contribution) should be around €8,800, after-tax.

I think the first thing you need to do is to figure out what you are spending to support your current lifestyle. With no mortgage and no childcare costs, I find it difficult to believe that you are just breaking even on a gross income of €200k.

As a rough guide, you will need to have put by around 25 times your annual spend for retirement.

On the figures presented, it looks like you will have to materially increase the amount that you are saving for retirement. Forget about early retirement - that’s not realistic without a significant drop in lifestyle.

A couple of things strike me immediately -

1. You have far too much of your net worth tied up in a single stock - you need to diversify that holding; and

2. Your pension balance is far too low - you should be maximising your tax-relieved pension contributions for your age.

You are correct on take home pay, but last month I starting AVCs of 2k so that is the difference between 8k and 6k.

Sounds like I am right to be concerned from what you say. Perhaps my first port of call is to look at spending. I know there was a 12k spend in December and there was no obvious material purchase.

 

[moneymakeover]

Age 55 you can contribute up to 35%

From what you're saying you were contributing 7% and employer 7%

This year you added 2k which is about 12%

So you're contributing 19%

But plenty of scope to increase further

 

[Future101]

Age 55 you can contribute up to 35%

From what you're saying you were contributioning 7% and employer 7%

This year you added 2k which is about 12%

So you're contributing 19%

But plenty of scope to increase further

Thank you - my spouse is “anti pensions” (you can’t trust anyone with your money). She also believes I should just give up work and it will be fine. But looking at the replies here - we cannot trust ourselves to budget appropriately so pension fund cannot do any worse. Time for a good sit down and review it would seem. I appreciate the wisdom.

 

[moneymakeover]

If existing pot 250k

And say for 5 years you maxed out your contributions 70k +14k employer

that's 250 + 420 = 670

Adding investment returns you could exceed 800k giving the 200k tax free lump sum


Correction
Above I should say 35% up to a limit of 115k salary
Over 5 years 5x(40k +14k)= 270k
Plus 250k
Equals 520k

Sorry a bit less than my original number
I guess add an extra year to get to 800k

 

[ClubMan]

Age 55 you can contribute up to 35%

Just to note, the higher age related limit kicks in for the full year that you turn that age. So, even if you turn 55 on December 31st you can contribute 35% and get full tax relief for that full year.

 

[ClubMan]

Thank you - my spouse is “anti pensions” (you can’t trust anyone with your money). She also believes I should just give up work and it will be fine.

This thinking really doesn't make sense assuming that you're not prone to engaging with fraudsters - and it certainly doesn't sound like it from your posts.

 

[Sarenco]

You are correct on take home pay, but last month I starting AVCs of 2k so that is the difference between 8k and 6k.

Ah, thanks, that makes sense.

I think you know yourself that your core problem is that you are spending too much and saving too little.

But I wouldn’t be too disheartened - you are still young enough to turn things around.

If you could get your annual spend down to, say, €40k a year, you still have ample income to save enough over the next 10 years to maintain that lifestyle post-retirement, given your current net worth.

Perhaps it would be a good idea for yourself and your spouse to sit down with a good financial planner - a number of them post here.

But I still think the first thing you need to do is to get a really clear idea of your current spending pattern and you can plan from there.

 

[Future101]

If existing pot 250k

And say for 5 years you maxed out your contributions 70k +14k employer

that's 250 + 420 = 670

Adding investment returns you could exceed 800k giving the 200k tax free lump sum

Sorry for all the questions, so if I totalled 800k, minus 200k tax free - the remainder is tax at lower tax, so the real saving is receiving this money at lower tax rate then rather than higher tax rate now? Is that correct??? As you can sense, my job requires zero financial skill! (And of course the benefit that the money was saved rather than spent!).

 

[ClubMan]

Company shares : €200k after tax

If these are shares in your employer then you should consider diversifying a bit more. Otherwise you're putting two eggs in one basket - your salary/remuneration package and a significant chunk of your non pension savings/investments. An adverse event for your employer could impact both.

 

[ClubMan]

Sorry for all the questions, so if I totalled 800k, minus 200k tax free - the remainder is tax at lower tax, so the real saving is receiving this money at lower tax rate then rather than higher tax rate now? Is that correct??? As you can sense, my job requires zero financial skill! (And of course the benefit that the money was saved rather than spent!).

It depends on what you do with the remaining pension money - e.g. an annuity or an ARF - and how much annual pension income that generates. And what the taxation rules will be in the future. You shouldn't really let that distract you from accumulating as big a pension pot as you can given that you have the spare income to do so.

 

[KOW]

Thank you - my spouse is “anti pensions” (you can’t trust anyone with your money). She also believes I should just give up work and it will be fine. But looking at the replies here - we cannot trust ourselves to budget appropriately so pension fund cannot do any worse. Time for a good sit down and review it would seem. I appreciate the wisdom.

Dont listen to the wife. Send her out to work.

 

[Future101]

If these are shares in your employer then you should consider diversifying a bit more. Otherwise you're putting two eggs in one basket - your salary/remuneration package and a significant chunk of your non pension savings/investments. An adverse event for your employer could impact both.

They are from a previous employer and I tend to sell a few each year if the market is good.

Dont listen to the wife. Send her out to work.

And then I could go part time in 4 years!

 

[Future101]

It depends on what you do with the remaining pension money - e.g. an annuity or an ARF - and how much annual pension income that generates. And what the taxation rules will be in the future. You shouldn't really let that distract you from accumulating as big a pension pot as you can given that you have the spare income to do so.

So now I am out of my comfort zone with those terms and perhaps was getting distracted by the terms and taxation whereas you make the key point - just build up the pot. As others said early, maximise pension contributions, sort our my spending and the rest will be a good problem to have. This is really helpful.

 

[Sarenco]

And say for 5 years you maxed out your contributions 70k +14k employer

There’s a cap of €115k on the earning aside so the maximum tax-relieved contribution the year the OP turns 55 would be 35% of €115k.

But, with a fair wind, it’s realistic for the OP to project a final pension pot of around €800k if he maximises his tax-relieved contributions over the next 10 years.

 

[ClubMan]

So now I am out of my comfort zone with those terms and perhaps was getting distracted by the terms and taxation whereas you make the key point - just build up the pot. As others said early, maximise pension contributions, sort our my spending and the rest will be a good problem to have. This is really helpful.

There are lots of existing threads that will help you to get more comfortable with the terminology and issues.

Also, some useful info here.

Welcome to the Pensions Authority - pensionsauthority

The Pensions Authority regulates occupational pension schemes, trust retirement annuity contracts (RACs) and personal retirement savings accounts (PRSAs). Our website provides you with access to a comprehensive range of information and guidance material to help you understand pensions. The...

www.pensionsauthority.ie

 

[NoRegretsCoyote]

I won't repeat @Sarenco 's excellent advice but just to zoom in on a few points.

Company shares : €200k after tax

You are way too exposed to the performance of one company. 100% of your income and a fifth of your wealth. Maximise tax relieved pension contributions of course, but also divest yourself of company shares over the next few years. If you want exposure to equities do it via ETFs.

2nd Property worth €250k with mortgage of €0k (currently family member using same with 0 rent – due to change in 5 years)

Sorry but is an extravagance too. A full quarter of your household wealth earning zero income! The family member involved should be paying something even if it's below market rent. Everyone has an income.

Annual gross income of spouse: 0 (stay at home)

Your spouse is not paying PRSI at any class so not on track for a full contributory state pension at 66. As your child is over 12 her years as stay-at-home-parent can't be used as a disregard anymore. A very simple solution here is for her to receive €5k a year in rent from a family member on which she pays €500 a year in Class S PRSI. She gets 52 PRSI credits a year and builds up entitlement to a full pension which is not far off.


There's a general point here that often comes up on money makeover threads: it's not always a good idea to prioritise mortgage payments over pension. This is a classic case of someone who would have been much better off building up a pension pot instead of having two mortgage-free properties.

 

[messyleo]

I am still shocked at the 12k spending in December with no material purchase - definitely look into this side of things as if you do go part-time / retire you will need to have a good understanding of how much you need to meet your lifestyle long term

 

[moneymakeover]

Sorry for all the questions, so if I totalled 800k, minus 200k tax free - the remainder is tax at lower tax, so the real saving is receiving this money at lower tax rate then rather than higher tax rate now? Is that correct??? As you can sense, my job requires zero financial skill! (And of course the benefit that the money was saved rather than spent!).

The real benefit is

• the compounded growth on the tax free contributions
• no capital gains tax
• The tax free lump sum, up to 200k or 25%

On withdrawal you pay tax at the normal rate which tends to be lower simply because your income tends to be lower in retirement.

Best regards