# How much do you need when you retire?



## MrEarl (23 Feb 2020)

Hi,

Is there a detailed questionnaire or formula, for calculating how much someone needs when they retire?

Are people really thinking about the breakdown of what they will actually need, they need food, shelter, heat etc. Some may need a car, others may not. Some may feel they need health insurance, others may not. Then you move onto what they think they need - holidays etc. Some people will get a full state pension, while others will not - and will the state pension keep up with real inflation, or even sell exist in its current form, in 10-20-30 years time, given it doesn't look like they state can afford to keep paying it? 

I've seen a number of people talk about their pension pot and what it might equate to if they take out "X" per year for 30-years, 40-years etc, but I've rarely seen people consider such factors as future inflation (will your €30k pension buy you much, in 20 - 30 years time?) , the possibility that they will need to spend more on Healthcare as they get older, how average life expectancy is getting longer so they may need to provide for more years in retirement etc.

I think we really need to get everyone thinking seriously about what they are going to need when they retire, as a first step towards people trying to plan for their retirement.

The easy answers are that either (A) you can never have enough or (B) you'll make do with whatever you end up with, but neither answer is likely to be correct.

So, is there a detailed and reliable resource already available to us all, to allow us to do this, or do we need to try and build something here on AAM?


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## DeeKie (23 Feb 2020)

That’s a great idea. I follow the responses on these types of threads with interest. It’s hard to extrapolate themes to form a plan


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## kevhenry (23 Feb 2020)

It's not an exact science as there are so many variables but this is useful.

Everything starts with the monthly income you think you will need. This needs some thought as its subjective on the part of each person, but it will obviously need to factor in things like medical care, lifestyle considerations and inflation.

Starting with this means you can calculate an approximate fund equivalent taking account of income tax, state pension entitlements and any other income assets like a rental property. You can then use an assumed annuity rate to work it all out and then gross up the whole thing for inflation.

The best way is to work an example so let's look at a 40 year old married couple looking for a net monthly income of €3,500 p/m at 68.

Desired net monthly income - €3,500 p/m
Gross monthly equivalent     - €3,833 p/m

Less state pension (joint)     - €1,998 p/m
Less rental income              - €500 p/m

Net monthly income gap     - €1,335

You could then apply a 4% annuity rate to this €1,335 and adjust for inflation to give you a fund total.

The annual income that they need from a pension fund is now €1,335 x 12 = €16,020

In today's money that would be fund of €400,500 i.e. (€16,020 / 4% annuity rate)

If we assume inflation running at a fixed 2.5% over 28 years, then we can apply a factor of 1.996 to find out the required fund at age 68.

Multiplying these together would imply needing a fund of €400,500 x 1.996 = €799,596

In other words, to sustain a fixed net monthly income of €3,500 p/m, factoring in tax, rental income and state pension entitlements they would be looking at needing a fund at 68 of around €799,856.

Like I said, it's not an exact science, as there are a lot of variables and assumptions underneath, but it's a good guide to work out what you need.

OP is right in that most people don't factor inflation which is a big omission. 

Kevin
www.thepensionstore.ie


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## kevhenry (23 Feb 2020)

And that is just an income calculation since I haven't factored in lump sums or anything like that.

If you were also looking to fund for a lump sum you could be adding another 33% on top of that figure.

Kevin
www.thepensionstore.ie


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## kevhenry (23 Feb 2020)

Working out what you need for retirement.

Settle on a monthly income figure that you would ideally like to have.
Work out its pre-tax equivalent. (You can earn €3,000 per month tax-free at 65 with a dependant spouse with the excess being taxed at 40%)
Subtract any monthly income figures that you can factor in i.e. state pensions and/or other income producing assets you may have.
This will leave you with a monthly 'gap' figure, so multiply it by 12 to work out its annual equivalent.
Take this annual figure and multiply it by 25 to calculate the fund required to provide it in today's money, or by 33 to factor in a lump sum)
Adjust for an assumed inflation rate of 2.5% by multiplying this number by an 'inflation factor'. You can use the table below to work out the one most suitable for your situation, *if retiring at 68*;
If you're 63 then multiply it by *1.131* 
If you're 58 then multiply it by *1.280*
If you're 53 then multiply it by *1.448*
If you're 48 then multiply it by *1.638*
If you're 43 then multiply it by *1.853*
If you're 38 then multiply it by *2.097*
If you're 33 then multiply it by *2.373*
If you're 28 then multiply it by *2.685*
If you're 23 then multiply it by *2.685*

Hope that's clear.

Kevin
www.thepensionstore.ie


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## Sarenco (23 Feb 2020)

I think it’s reasonable to assume that the net return on a balanced portfolio of securities will simply match inflation.

So, for an anticipated 25 year retirement, you need to have put by 25 years’ worth of anticipated expenses.


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## Gordon Gekko (23 Feb 2020)

I have a spreadsheet with my monthly outgoings. I think that to devise a retirement plan, it’d be easy enough to identify the expenditure that will endure versus the expenditure that will fall away (e.g. mortgage, kids, etc).


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## NoRegretsCoyote (23 Feb 2020)

kevhenry said:


> Adjust for an assumed inflation rate of 2.5% by multiplying this number by an 'inflation factor'.



Why are you assuming 2.5%? Inflation hasn't been over that level in Ireland since 2008.

The ECB has struggled to keep inflation close to its 2% target for nearly a decade now, despite huge monetary stimulus.


This really matters btw, the difference between 1.5% and 2.5% over 25 years is 27%.


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## kevhenry (23 Feb 2020)

Yes you’re right, it matters a lot and I agree with what you’ve said.

However, because I work in the industry, I am mindful of compliance since the SORP guidelines (Statements Of Reasonable Projection) issued by the society of actuaries in Ireland state that the assumed figure to be used for inflation and/or CPI on any projections should be between 2% - 3% so I’ve taken 2.5% as the median. 

These guidelines primarily apply to the statements sent to consumers and members of schemes so, it’s not that I’m ignoring the reality of the current inflation rate in Ireland, or indeed over the last 12 years as you say, I’m just sticking to the guidelines is all.

Kevin
www.thepensionstore.ie


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## MrEarl (23 Feb 2020)

Folks,

Let's not forget, there's official inflation and then there's real inflation... No point in measuring inflation across a basket of goods and services, if your going to need different goods and services.

Health Insurance / Medical Costs, aren't running at 1.5% - 2.5% pa.


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## Gordon Gekko (24 Feb 2020)

MrEarl said:


> Folks,
> 
> Let's not forget, there's official inflation and then there's real inflation... No point in measuring inflation across a basket of goods and services, if your going to need different goods and services.
> 
> Health Insurance / Medical Costs, aren't running at 1.5% - 2.5% pa.



I agree 100% Mr Earl. Inflation in respect of the things that I buy seems a lot more than the headline figures!


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## NoRegretsCoyote (24 Feb 2020)

MrEarl said:


> Let's not forget, there's official inflation and then there's real inflation



When they looked at it in the 90s in the US they found that official measures _over_estimate true inflation.



kevhenry said:


> Yes you’re right, it matters a lot and I agree with what you’ve said.
> 
> However, because I work in the industry, I am mindful of compliance since the SORP guidelines (Statements Of Reasonable Projection) issued by the society of actuaries in Ireland state that the assumed figure to be used for inflation and/or CPI on any projections should be between 2% - 3% so I’ve taken 2.5% as the median.
> 
> These guidelines primarily apply to the statements sent to consumers and members of schemes so, it’s not that I’m ignoring the reality of the current inflation rate in Ireland, or indeed over the last 12 years as you say, I’m just sticking to the guidelines is all.



Thanks, I wasn't aware of these.

A guideline that says anything between 2% and 3% isn't very useful IMHO. That's a difference of 27% in purchasing power over a 25-year retirement.


Nominal returns and inflation aren't unrelated - when inflation is low returns tend to be lower too. I think a better way of thinking about this is in terms of a likely range of real returns. Conceptually this is harder to explain to people though.


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