# Optimal pension contributions for those on the average salary



## moore82 (20 Jan 2018)

I began contributing to my pension fund for the first time last year and I'm now looking at possibly increasing those contributions. Currently I put in 5% (salary is 35k by the way) and of this 5%, 2.5% is AVC for what it's worth. Company puts in 10%. I currently rent and not looking to purchase in the foreseeable future. I also put 1k into a separate savings account each month.

So as it stands, this is what it looks like for the three different percentages:







My question I guess is what is the optimal contribution for someone with a salary of 35k? When does it stop making sense to be contributing x amount more? I recall some saying that at that salary point that there's no real gain to contributing more than the 5%, but can't remember the logic behind that statement.


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## Gordon Gekko (20 Jan 2018)

Hi,

The logic or otherwise can really depend on the amount of tax you pay at the 40% rate.

However, there’s nuance to that; is your salary likely to grow significantly? And how old are you?

Gordon


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## Jim2007 (20 Jan 2018)

I would suggest you work from the opposite side - at what age will you likely want retire and how much would you need to have saved at that point to live comfortably.  It is guess work of course but the objective it to ensure that you have enough to live the life you want to live and not have the final outcome decided by the current tax rules.

Usually we expect people will need about 65% of their income in retirement, so for example in your case => ((530 * .65) - 240) * 53 = €5,500 approx.  So a capital some of around €200K might be needed at todays figures.  No doubt you'd also like to have some play money to take that cruse, hobby activities etc. in early retirement so may be a figure of about €250 might be more realistic.

Now start playing around with contributions, tax savings and growth rates to see how you can achieve your objective.  Do this exercise every other year or so because the figures will change.

A couple of observations I will make:
- Don't assume that you can live on a dramatically reduced income in retirement, most people can't.  In fact most find at about 65% is just doable
- The more you invest early the better the change that you will achieve your objective.
- The are very few jobs people want to continue doing after about 60.


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## moore82 (20 Jan 2018)

Thanks guys.

Salary to grow significantly? Doubt it in the next five years anyway. Age is 35, by the way.

As for the age I'd like to retire at, I've never given it a whole lot of thought but 60 would be preferable of course. But like you say, so much of it is guess work. And sorry but that 240 you're deducting, where's that coming from?


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## RETIRED2017 (20 Jan 2018)

moore82 said:


> I began contributing to my pension fund for the first time last year and I'm now looking at possibly increasing those contributions. Currently I put in 5% (salary is 35k by the way) and of this 5%, 2.5% is AVC for what it's worth. Company puts in 10%. I currently rent and not looking to purchase in the foreseeable future. I also put 1k into a separate savings account each month.
> 
> So as it stands, this is what it looks like for the three different percentages:
> 
> ...


Great new post hope it gets some traction on hear


For what it is worth  max out the 20% tax break in other words if you can afford to put 6650 into your pension,This break may be gone in the future,lock it in while you still can


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## RETIRED2017 (20 Jan 2018)

RETIRED2017 said:


> Great new post hope it gets some traction on hear
> 
> 
> For what it is worth  max out the 20% tax break in other words if you can afford to put 6650 into your pension,This break may be gone in the future,lock it in while you still can


Some thing to bear in mind  by putting away 6650 you are already learned to live on 81% of your wages
there are other advantages which I may go into later when I  get time,


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## Jim2007 (20 Jan 2018)

moore82 said:


> As for the age I'd like to retire at, I've never given it a whole lot of thought but 60 would be preferable of course. But like you say, so much of it is guess work. And sorry but that 240 you're deducting, where's that coming from?



240 was a guess at a state pension.  If you are aiming for 60, then assume 55 because there may we’ll be periods where you are unable to contribute anything as well.


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## Gordon Gekko (20 Jan 2018)

The reverse engineering approach suggested by Jim2007 is really sensible.

It’s amazing when you take away mortgage costs, pension funding costs, creche/school fees, loan servicing, and “on the beer” costs just how little you need to live pretty well.


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## RETIRED2017 (21 Jan 2018)

Gordon Gekko said:


> The reverse engineering approach suggested by Jim2007 is really sensible.
> 
> It’s amazing when you take away mortgage costs, pension funding costs, creche/school fees, loan servicing, and “on the beer” costs just how little you need to live pretty well.


I would not call it reverse engineering more like making up for all of the years lost because the listening to people who should have known better advising them  only to pay into a pension if they were on the high tax rate,


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## Gordon Gekko (21 Jan 2018)

RETIRED2017 said:


> I would not call it reverse engineering more like making up for all of the years lost because the listening to people who should have known better advising them  only to pay into a pension if they were on the high tax rate,



That is crazy advice, I agree.

Most people will pay tax largely at the 20% rate in retirement.

And I’d challenge anyone to try and beat a pension fund by investing net/after-tax monies.

So many people leave a quick win on the table by avoiding pensions.


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## Steven Barrett (22 Jan 2018)

Jim2007 said:


> I would suggest you work from the opposite side - at what age will you likely want retire and how much would you need to have saved at that point to live comfortably.  It is guess work of course but the objective it to ensure that you have enough to live the life you want to live and not have the final outcome decided by the current tax rules.
> 
> Usually we expect people will need about 65% of their income in retirement, so for example in your case => ((530 * .65) - 240) * 53 = €5,500 approx.  So a capital some of around €200K might be needed at todays figures.  No doubt you'd also like to have some play money to take that cruse, hobby activities etc. in early retirement so may be a figure of about €250 might be more realistic.
> 
> ...



Some good advice but the difficulty is how will a 35 year old know what the 60/65 version of himself want to live on. What will the life of a 65 year me look like. 

Most people under estimate their financial needs for when they retire. They discount their mortgage and cost of kids etc and reckon they don't need a lot. The problem is, most adults go without through the child rearing years (decades). They are spending money on mortgages and kid braces etc. If there were no kids, they'd be doing a huge lot more and that more usually costs money. 

Put away what you can, when you can because things will change over time. There will be periods when you have no spare cash and can't afford extra contributions and there will be times when you can. Just keep things up to date and monitor how you are getting on over time and whether it continues to fit with your goals. 


Steven 
www.bluewaterfp.ie


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## Gordon Gekko (22 Jan 2018)

Sage advice.

How much should one put away?

As much as one can, and in as tax-efficient a manner as possible.


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## RETIRED2017 (22 Jan 2018)

Gordon Gekko said:


> Sage advice.
> 
> How much should one put away?
> 
> As much as one can, and in as tax-efficient a manner as possible.


I would say to someone on 35000 look at the likes of Germany/Austria see what someone on the same level of wages as yourself will finish up getting in pension  at 65 then have a look at there take home pay ,
Including the Irish tax break put in enough to bring your wages down to the same level at the very least,if you are  starting at 35 you will need to put in a lot more to forward fund the lost years,


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## moore82 (2 Feb 2018)

Thanks all, appreciate the feedback. Could I also ask about AVC vs employee contribution. At the moment I'm set up with EC 2.5% and AVC 2.5%. If I was to bump up my contributions does it make any difference which one I choose to increase?


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## moore82 (5 Feb 2018)

I had another look around on AVC vs EC. Saw this post but goes back to 2005 and doesn't really clear things up for me.

https://www.askaboutmoney.com/threa...frm-the-main-employer-sponsored-scheme.14394/


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## Conan (5 Feb 2018)

If you are in a DC scheme, it makes little difference whether you personally contribute Employee Contributions or AVCs. 
The only possible reason why you might classify them as EC would be if there was some Employer matching in such circumstances. Otherwise no real difference.


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