Key Post Milestones to hit the Lifetime Pension Fund limit at age 60?

[RMGC11]

What milestones should one hit (at ages 30/35/40/45) if you'd intend to hit the SFT limit at age 50?

This is purely a thought exercise to do with early retirement planning.
I know previously milestones like 500k at age 40 were mentioned if retiring at the regular pensionable age.

 

[interested21]

For most people, all you can do as an individual is max out your contributions and hope that investment growth and company matches get you there ASAP.

I've modelled it out for myself and come up with the following:

70k @ 30 (this is where I am now)
475k @ 40
1.2M @ 50
2M @ 56

Assumptions - 115k salary @ 30 / 3% salary growth / 4% company match / 5% investment growth / no changes to current limits

The model is very sensitive to any changes in the assumptions. If I could get relief above 115k, if I was getting a better match, or if growth is higher I'd get there significantly quicker.

Sequence of returns is also a very important factor that is impossible to predict.

 

[RMGC11]

That's very useful interested21 - it's exactly what I was looking for, thank you!

Out of curiosity - once you've maxed out the pension relief - what's your personal decision around what to do with the excess?
Do you go for finishing the mortgage first or for stock market investments?

I know the recommendation from Brendan and others on the forum is the clear debt first - however, curious to know from others as well.
In my case I've fixed for a long enough period of time that I feel it would be silly to overpay money into a vehicle that's going to significantly trail inflation (fixed-rate mortgage debt), when that debt is going to be a lot easier to service at a much lower cost (inflation-adjusted) in a decade's time.

 

[Brendan Burgess]

I have moved Interested's spreadsheet to a new thread as it has wider application.

Key Post - Excel spreadsheet to show growth in size of pension fund

Do you have an Excel spreadsheet for this into which people could input their own figures? Sure - it's a bit rough and ready but it can be accessed here. Just make a copy and edit with your own figures. Assumptions and viz are in the first tab and the raw numbers are in the second tab Edit...

www.askaboutmoney.com

 

[Gordon Gekko]

I doubt it’s possible for employees…just company owners or someone with a sweetheart deal on employer contributions.

 

[ArthurMcB]

Thanks @interested21 for this.

If you have a pot if 1m at age 50.

Am i right in saying you can take 200 tax free?

And put 800k into a fund that pays approx 32k (4%) per annum for rest of life?

 

[T McGibney]

Sorry if I've missed something, but what's the precise point in achieving the SFT limit so far ahead of retirement?

It seems to me to be a poor use of resources to aggressively build up a fund only to be forced to then leave it idle and not earning a cent for 10-15 years.

 

[ClubMan]

For those, like me, who hadn't a clue what the title meant until I looked up the jargon... SFT = Standard Financial Threshold.

Lifetime limit on pension fund

Individuals have a maximum lifetime limit on the amount of their retirement benefits from all sources (except State pensions)...

www.pensionsauthority.ie

 

[Blackrock1]

Sorry if I've missed something, but what's the precise point in achieving the SFT limit so far ahead of retirement?

It seems to me to be a poor use of resources to aggressively build up a fund only to be forced to then leave it idle and not earning a cent for 10-15 years.

it can earn you just have to pay tax on the amount in excess.

Practical steps for anyone impacted by the Standard Fund Threshold for pensions | Davy

This article explains some of the technical challenges of the pension threshold and the most effective strategies to address them.

www.davy.ie

 

[interested21]

Sorry if I've missed something, but what's the precise point in achieving the SFT limit so far ahead of retirement?

It seems to me to be a poor use of resources to aggressively build up a fund only to be forced to then leave it idle and not earning a cent for 10-15 years.

Early retirement? If I hit the SFT early I'd want to really love my job to keep working for another 10-15 years.

Alternatively, by contributing aggressively early you can stop or significantly reduce payments early and let compounding bring you up to the SFT. With 6% growth, you can stop contributing when you hit 1M at 45 and let compounding alone bring you up to 2M by 58.

 

[interested21]

Of course this is all very hypothetical. The elephant in the room is how the various limits will change over time.

In the UK, their SFT is 1M.

The Political Party Who Shall Not Be Named have flown kites around reducing the amount you can get tax relief on from 115k to 60k.

So I think it is prudent to make the most of the relatively generous rules while they still exist.

 

[Itchy]

Hi interested

That is great.

So, it starts with a pension fund of €70k at age 30

The default growth seems high. 4% would be a better estimate.

But even with that, it shows that someone contributing the maximum is likely to blow their SFT .

But at 55, they could reduce their contribution to 7% and it would still exceed the SFT.

Brendan

Sorry if I've missed something, but what's the precise point in achieving the SFT limit so far ahead of retirement?

It seems to me to be a poor use of resources to aggressively build up a fund only to be forced to then leave it idle and not earning a cent for 10-15 years.

Exactly this, what would be far more interesting/efficient (and very uncertain), is how much I could avoid putting into a pension in the early days and still hit the SFT by retirement, based on projected salary growth, investment return etc.

 

[NoRegretsCoyote]

Early retirement? If I hit the SFT early I'd want to really love my job to keep working for another 10-15 years.

You're using the SFT as a benchmark for Amount Needed to Comfortably Fund a Retirement at Fifty.

That may or may not be the case for you. I wouldn't let the threshold wholly guide your thinking and decisons on this.

 

[T McGibney]

Alternatively, by contributing aggressively early you can stop or significantly reduce payments early and let compounding bring you up to the SFT. With 6% growth, you can stop contributing when you hit 1M at 45 and let compounding alone bring you up to 2M by 58.

That's not what's being discussed here though.

it can earn you just have to pay tax on the amount in excess.

Yes, which makes it a poor use of resources.

 

[Sarenco]

As @interested21 correctly pointed out, these projections are very sensitive to the assumptions used.

Most folks will (for good reason) gradually start to de-risk their portfolio as they approach retirement. So, to assume a consistent rate of risk/return throughout the accumulation phase seems unrealistic.

The assumptions around investment return mandated by the Pension Authority are as follows:-

"Investment return is assumed to be 3.5% per year after expenses until 10 years before your retirement date. The investment return is then assumed to reduce annually to the post-retirement interest rate over the 10 year period prior to retirement. This is intended to reflect a common investment strategy of defined contribution pension scheme members and allows for a reduction in risk during the 10 year period leading up to retirement. The investment return earned on your fund is estimated to be 1.9% per year after expenses from now until your retirement date."

Using these assumptions, a pension pot of €1m at 50 won't come anywhere near to the SFT by retirement at 60, even if maximum tax-relieved contributions are maintained by an employee over that final 10-year period.

It's also worth bearing in mind that there is a credit for any tax paid on a lump sum. This means, in effect, that there is additional capacity for growth of up to €150,000 above the SFT before there is any excess tax charge.

 

[interested21]

You're using the SFT as a benchmark for Amount Needed to Comfortably Fund a Retirement at Fifty.

Sorry, I was being a bit facetious! Of course a full pension pot is only part of the equation for early retirement.

That's not what's being discussed here though.

Is it not? You claim its a poor use of resources to aggressively build up a fund when young. My point is that the bigger and earlier you build it, the more you can benefit from the compounding gains. Anything I put in at 30 has 25-30 years to grow until retirement. Anything I put in at 50 has 5-10 years to grow. My euro at 30 goes significantly further towards my retirement than my euro at 50

 

[T McGibney]

Is it not? You claim its a poor use of resources to aggressively build up a fund when young. My point is that the bigger and earlier you build it, the more you can benefit from the compounding gains. Anything I put in at 30 has 25-30 years to grow until retirement. Anything I put in at 50 has 5-10 years to grow. My euro at 30 goes significantly further towards my retirement than my euro at 50

No, the OP's question, the logic of which I queried, was something else entirely, viz.

What milestones should one hit (at ages 30/35/40/45) if you'd intend to hit the SFT limit at age 50?

You claim its a poor use of resources to aggressively build up a fund when young.

I made no such claim.

 

[interested21]

Sorry if I've missed something, but what's the precise point in achieving the SFT limit so far ahead of retirement?

It seems to me to be a poor use of resources to aggressively build up a fund only to be forced to then leave it idle and not earning a cent for 10-15 years.

I made no such claim.

I don't know how else to interpret this statement.

No, the OP's question, the logic of which I queried, was something else entirely, viz.

What do you suggest the OP should do so if they're worried about hitting the SFT early?

 

[T McGibney]

I don't know how else to interpret this statement.

"What's the precise point in achieving the SFT limit so far ahead of retirement?" (ie at age 50) is hardly cryptic, even if you misquoted it to claim that I said something else.

What do you suggest the OP should do so if they're worried about hitting the SFT early?

They've made no indication that they're worried about that. I'm sure they can find alternative uses for their money.

 

[interested21]

@T McGibney I'm not going to go any further down this rabbit hole because it is adding no value to the discussion.

If I may, let me reframe to the group because I am just a lay-person and am interested in the opinion of the pros here:

• The OP has asked about the path to hitting ~€2M in their pension pot at 50.
• My view has been that this is a good (if admittedly very difficult to achieve) goal - by working towards this when young you get maximum compounding effect of your money (which means that your lifetime contributions are minimised), and it opens the door to early retirement depending on other factors
• Some here have suggested that this isn't a good goal as it is "inefficient" and "a poor use of resources"
• Of course any money above ~€2M is taxed punitively, but this can be managed by ramping down contributions and increasing cash holdings, and, as Sarenco pointed out, is unlikely to actually happen in the first place.
• If OP hits ~€2M early then they are also missing out on income tax relief, but surely not having to contribute is better than contributing and getting tax relief?

Is there something here I'm not getting?