Retirement scenario planning (10 years out)

[Setforlife]

In a great deal of the online ‘have you enough to retire on’ discussions the calculations are generally quite simplistic, I.e you have 1 million, can you take 4%
Increasing each year by inflation and will it last. Then the debate is about is it a constant 4%, adjustable, 6%, sequence of risk variable etc.

The issue I have trying to estimate required funds, is the special case of our tax free and low tax lump sums and the effect it has on calculations and approach.

For the sake of simplicity the scenario I’m planning for all going well, is to retire in the next 10-12 years before 60 with hopefully around 2 million in a DC fund. In my head it would make sense just to take an ARF and 4-6% out, which would be an excellent yearly sum. However the tax treatment of lump sums are too attractive to turn down.

Also the options are to take 500k lump sum and have a 1.5 million ARF paying 4% a year, which you don’t need probably for first 7-8 years, with 440k to live off.

I understand the accepted tax efficient approach assuming you don’t need the large lump sum to pay off a mortage etc would be something like the flowing approach.

You create say 3 PRSAs on retirement, 500k and 2x750k. I understand you could then vest the 500k one and take 200k lump sum and say 4-10% of 300k each year keeping you below tax threshold. So for say 5 years from 60-66 you can have ~70k a year tax free between income and lump sum. Then at 65 you vest a 750k prsa and take say 200k lump sum at 20% tax, and then 4-10% of 550k a year, varying with old age pension from 66 to stay below tax threshold. Again aiming to give you ~70k a year tax free. Assuming your original prsa has somehow run out.
Then at 70-75 you vest the last 750k prsa which has been growing for 10 more years hopefully and is now 1million plus, take the last lump sum and last 5% income stream.

You have the flexibility at any stage to take more income at the cost of more tax and all your investment growth in the vested or non vested prsas is tax free.

Is there any tools or calculators out there to model the above a bit more accurately? Mainly I’m interested in the levels to keep income as tax efficient as possibly but also to see does this approach make a significantly lower DC fund required to retire comfortably and earlier. Eg at 1.75million at 58.

Am I missing some obvious issue or better approach to utilising tax free lump sums the best way?

 

[conor_mc]

The EarlyRetirementNow safe withdrawal rate series of blog posts is excellent for the first part of your question, albeit it’s US-focused and quite a lengthy series at 60+ blog posts. Some of the Google Sheet tools are really helpful with modelling out scenarios based on your expected cash flow needs and how you would have fared if you’d retired each month since 1900 or so, all US CPI-adjusted. I don’t know of any tools to help with modelling Irish tax but you could probably have a decent go at it by amending some of the tools provided.

In terms of your plan, seems a solid one to me. Don’t forget that you can take a TFLS and simply reinvest it again, it doesn’t have to sit in your portfolio as cash. Actually drawing down from this in small amounts each year would allow you to use your annual CGT allowance in addition to your income tax allowances.

 

[Setforlife]

Thanks, that’s part of my point, loads about withdrawal strategy etc but little specific about how that interacts with TFLS. Eg in your second example are you suggesting you take 500k lump sum, invest it and take 4% of the 1.5million taxed? And take a % of the taxed 500k investing profits too? How would you model that? I assume in my example above you would put the smaller lump sums into high yield 3% accounts or possibly half of the sums so the other half is freely available to you. Your prsas are still invested anyway, so diversity of having your withdrawn income in cash is reasonable?

 

[conor_mc]

In the case of reinvesting your 500k TFLS to use as a capital drawdown (ie liable for CGT rather than income tax), it’s hard to model it out as a % for a couple of reasons. Firstly this only works with direct shares currently, although hopefully ETF’s in the future. ETF’s would greatly simplify it - buy a passive world equity ETF and you sell enough each year to utilise your annual €1270 CGT allowance. You could skip years where you would be selling at a loss, or sell at a loss if you rely on the income and offset against future gains. You can see how much trickier this would be with a basket of shares though - some stocks would be up, some would be down, particularly in the early years.

 

[Fortune]

Actually drawing down from this in small amounts each year would allow you to use your annual CGT allowance in addition to your income tax allowances.

Where would a CGT liability arise?

 

[Dave Vanian]

I understand you could then vest the 500k one and take 200k lump sum

If you vest 500K your lump sum will be 25% of this, or 125K.

The 200k limit is a different thing - it's a tax-free threshold for pension lump sums you withdraw in your lifetime.

 

[conor_mc]

Where would a CGT liability arise?

This is only if you took your 500k TFLS and reinvested it in shares outside of your pension wrapper. Most folks take the cash and either buy big things (e.g. brand new car to last 15 years) whereas if you want/need annual income, reinvesting it and utilising your annual CGT allowance might be more tax-efficient.

 

[Setforlife]

If you vest 500K your lump sum will be 25% of this, or 125K.

The 200k limit is a different thing - it's a tax-free threshold for pension lump sums you withdraw in your lifetime.

Check, thanks, I guess this is the kind of thing you would like to model, how to split the prsas to maximise yearly income and mimimise yearly tax but retire as early as possible. In this example should you take a bigger initial prsa so (800k) for the bigger tax free lump sums, or take the smaller lump sum and a bigger yearly % off 375k left.

 

[T McGibney]

buy a passive world equity ETF and you sell enough each year to utilise your annual €1270 CGT allowance.

Tailoring a 2 million pension in order to utilise a tax exemption worth €419 a year is wild.

 

[conor_mc]

Tailoring a 2 million pension in order to utilise a tax exemption worth €419 a year is wild.

That’s not a fair representation - the OP’s question relates to having enough to retire on, ie not running out of money in retirement. One way of ensuring that is by reinvesting the TFLS back into equities for the long-term (retirement can last 40 years!) rather than buying the E-class or letting the cash sit on deposit. Having done that, it makes sense to maximise all annual allowances, including CGT.

Also, any gain on withdrawals from this pot above the allowance are taxed at CGT rate of 33% rather than a potentially higher tax rate of 40%. And not liable to prsi/usc if under 70. And a couple can utilise 2x allowances by simply transferring shares between them.

 

[Dr Strangelove]

retirement can last 40 years!)

OP is perhaps 48 and planning to retire at 59.

I’ll let you look up the probability of a 48 year old living to 99 but I assure you they are extremely low.

Having had a few family members make it past 90, I can also assure you they don’t spend much at that age either.

 

[conor_mc]

OP is perhaps 48 and planning to retire at 59.

I’ll let you look up the probability of a 48 year old living to 99 but I assure you they are extremely low.

Having had a few family members make it past 90, I can also assure you they don’t spend much at that age either.

Fair, but go ahead and stick 500k on deposit at 3% for 20 years if maximising your retirement income isn’t your thing. OP asked a question, I gave an option.

 

[Setforlife]

Actually the key thing was not to take 500k at say 59/60 and then be stuck taking 4% from your already large 1.5million arf. You are basically creating wealth for the taxman that way. At both 33% and 40% rates. Nothing against paying your fair share of tax but certainly against being taxed on 4% of 1.5million whether you take/need the money or not. Possibly I shouldn’t have given the ‘bad’ option above.

 

[SquirrelChaser]

The taxman will get their share in the end regardless- my understanding is that when you die your remaining pension pot will be subject to the applicable rate of income tax etc. So presumably 40% income tax and 8% USC on most of it. And afterwards comes CAT i believe.

If you take the minimum (or just below the 40% cutoff, whichever is higher) each year the effective tax rate will be lower on your drawdowns. If you then put that in an ETF the gains are currently taxable at 41%, which is obviously significantly less than the tax applicable to your last euro of income.

But really, the best way to minimise your tax liability is to minimise your wealth and income. I don't think this is a great strategy, which is why i don't agree with prioritising tax avoidance- tax efficiency should be a consideration, but not the biggest one.

While it's nice to leave your heirs with a decent pot, i also wouldn't prioritise this unduly- everyone needs to stand on their own feet eventually after all.

And as you get older it'll probably get harder and harder to spend your pension. So there's also a strong argument for blowing a significant chunk in the 10 years or so after you retire. You can't take it with you after all.

 

[ClubMan]

I can't see it mentioned already (maybe I've missed it) but if the lump sum taken (at once or in tranches) is €500K then only €200K will be tax free and the additional €300K is taxed at 20%. Anything over €500K is taxed at 40%.

Taxation of retirement lump-sums

This page outlines the taxation of an excess lump-sum

www.revenue.ie

The 20% on up to €300K can be offset against chargeable excess tax on pension pots in excess of the SFT if applicable.

Chargeable excess tax

This page describes chargeable excess tax

www.revenue.ie

Minister Chambers announces changes to Standard Fund Threshold

www.gov.ie

These may be issues to be factored into any decision making process in the context of this thread.

 

[Dr Strangelove]

I think a good use of a lump sum is a new car or home renovation, or even a trade up. You earn an implicit return from living in a nicer house or driving a better car. That return is tax free.

 

[Freelance]

Is there any tools or calculators out there to model the above a bit more accurately?

I'll leave advice on pension structure and investment to others, you'll get plenty of that on here. I'll try to address the above question which I think is every bit as important.

I'm 15-20 years ahead of you and faced the same question when I was at your stage. I searched extensively for the perfect tool and never found it. In general they were either too simplistic to be of much use or so complex (and required so much data) that they were overwhelming, sacrificing the clear outcome I was looking for on the alter of spurious accuracy.

What I needed was something to allow me model my post retirement cash flow on an annual basis. I looked at many of the available options, spreadsheets such as @conor_mc and also tools built for pension advisers. I was prepared to pay for such a tool if it gave me what I wanted, regarding it as an investment in my future. In the end I built my own spreadsheet model. Well in truth I built about four spreadsheet models, discarding each of the first three when they became too unwieldy or weren't producing the information I needed and a fresh start could incorporate my learning experiences.

Building your own is not a solution I am usually in favour of, but in this case it was invaluable. Having to contend with the model structure and decide on the data values forced me to do a lot of thinking and learning, questioning my assumptions, deciding what was important to me, what expenditure I could discard at retirement and what expenditure was important to my ongoing contentment and happiness. So while the focus was on the numbers, it forced a lot of valuable thinking about the context and the whole question of my retirement.

I refined the model, the assumptions and the values quite a bit over the 10 or so years leading up to retirement. That was valuable in itself, and I'm happy to say that the model stood the test of time post retirement (seven years and counting), allowing for various changes of circumstances. What was more valuable was the learning exercise as I determined what was important to me. Big questions such as: what kind of car will I drive and how often will I change it, what is my expectation in relation to travel and holidays, will I change my expectation in relation to weekend breaks, memberships, social activities, charitable donations, right down to putting in a daily €15 figure for "the pint, the paper and the coffee and scone" etc.

You can keep the model as simple or as complex as you wish. Show each income stream (pension bucket) separately or merge them? build in different growth/inflation assumption for each bucket/element or have just one per year? You can bring in elements such as the state pension as and when they com on stream. You can also escalate significant expenses such as health care at a rate that is different to other expenses as you see fit.

In addition to the benefits I mentioned above, doing all this had a few other benefits. The focus on retirement spurred me to embrace a number of lifestyle changes, to make a list of "things I want to do but have never got around to" as a basis of how I would use my time post retirement, and indirectly conditioned me towards retirement and prepared me for the change.

I built a separate model of my expenditure (both as it was back then and into the future) which was also invaluable with short and long term benefits. Some areas of expense were easy to discard, some involved harder decisions, and some required planning (e.g. can I address future energy costs by investing in making the house energy efficient now, as well as making it more comfortable for the days when I will be spending a lot more time there). It both helped me with my expenditure and savings at the time, and also proved a sound basis that I could have confidence in for the expenditure side of the main post retirement model.

This may sound like a lot of work, and I'd readily admit that it isn't for everybody. But I actually enjoyed it, learned a lot (mainly about myself) from it, and I think have greatly benefited from it long term. In summary, it was a great investment and use of my time.

 

[jim]

You earn an implicit return from living in a nicer house or driving a better car. That return is tax free

Whilst I dont disagree with this, I do question its relevance given that this statement could surely be applied to almost all consumption whether that be enjoyment of a new house, new car, new phone, new coat, new hat etc.

 

[SquirrelChaser]

I'll leave advice on pension structure and investment to others, you'll get plenty of that on here. I'll try to address the above question which I think is every bit as important.

I'm 15-20 years ahead of you and faced the same question when I was at your stage. I searched extensively for the perfect tool and never found it. In general they were either too simplistic to be of much use or so complex (and required so much data) that they were overwhelming, sacrificing the clear outcome I was looking for on the alter of spurious accuracy.

What I needed was something to allow me model my post retirement cash flow on an annual basis. I looked at many of the available options, spreadsheets such as @conor_mc and also tools built for pension advisers. I was prepared to pay for such a tool if it gave me what I wanted, regarding it as an investment in my future. In the end I built my own spreadsheet model. Well in truth I built about four spreadsheet models, discarding each of the first three when they became too unwieldy or weren't producing the information I needed and a fresh start could incorporate my learning experiences.

Building your own is not a solution I am usually in favour of, but in this case it was invaluable. Having to contend with the model structure and decide on the data values forced me to do a lot of thinking and learning, questioning my assumptions, deciding what was important to me, what expenditure I could discard at retirement and what expenditure was important to my ongoing contentment and happiness. So while the focus was on the numbers, it forced a lot of valuable thinking about the context and the whole question of my retirement.

I refined the model, the assumptions and the values quite a bit over the 10 or so years leading up to retirement. That was valuable in itself, and I'm happy to say that the model stood the test of time post retirement (seven years and counting), allowing for various changes of circumstances. What was more valuable was the learning exercise as I determined what was important to me. Big questions such as: what kind of car will I drive and how often will I change it, what is my expectation in relation to travel and holidays, will I change my expectation in relation to weekend breaks, memberships, social activities, charitable donations, right down to putting in a daily €15 figure for "the pint, the paper and the coffee and scone" etc.

You can keep the model as simple or as complex as you wish. Show each income stream (pension bucket) separately or merge them? build in different growth/inflation assumption for each bucket/element or have just one per year? You can bring in elements such as the state pension as and when they com on stream. You can also escalate significant expenses such as health care at a rate that is different to other expenses as you see fit.

In addition to the benefits I mentioned above, doing all this had a few other benefits. The focus on retirement spurred me to embrace a number of lifestyle changes, to make a list of "things I want to do but have never got around to" as a basis of how I would use my time post retirement, and indirectly conditioned me towards retirement and prepared me for the change.

I built a separate model of my expenditure (both as it was back then and into the future) which was also invaluable with short and long term benefits. Some areas of expense were easy to discard, some involved harder decisions, and some required planning (e.g. can I address future energy costs by investing in making the house energy efficient now, as well as making it more comfortable for the days when I will be spending a lot more time there). It both helped me with my expenditure and savings at the time, and also proved a sound basis that I could have confidence in for the expenditure side of the main post retirement model.

This may sound like a lot of work, and I'd readily admit that it isn't for everybody. But I actually enjoyed it, learned a lot (mainly about myself) from it, and I think have greatly benefited from it long term. In summary, it was a great investment and use of my time.

This, all day long.

The model you need is almost certainly not online, because the generic ones are generic. And really you probably need several (an expenses spreadsheet, a gross to net income calculator, and one to model your pension fund from inception to death).

So learn excel reasonably thoroughly then make a project of making the model of your specific retirement plans.

 

[Setforlife]

I can't see it mentioned already (maybe I've missed it) but if the lump sum taken (at once or in tranches) is €500K then only €200K will be tax free and the additional €300K is taxed at 20%. Anything over €500K is taxed at 40%.

Taxation of retirement lump-sums

This page outlines the taxation of an excess lump-sum

www.revenue.ie

The 20% on up to €300K can be offset against chargeable excess tax on pension pots in excess of the SFT if applicable.

Chargeable excess tax

This page describes chargeable excess tax

www.revenue.ie

Minister Chambers announces changes to Standard Fund Threshold

www.gov.ie

These may be issues to be factored into any decision making process in the context of this thread.

Thanks, I did note in the prsa scenarios in the original post that later lumps sums would be 20% taxed, and thanks to everyone for the notes on building your own model. I guess that is the best option, my concern is not around the work in that really, it was around what to model and what the best options are.

I.e is there a better approach to the tax and prsa rules that multiple prsas vesting over different periods. This is relatively easy to calculate, but is there a better approach to begin with that isn’t obvious or clear to anyone who doesn’t work in the area of retirement planning?