Retirement planning — facing up to reality

There is an old Irish proverb which states that “Ní hé lá na gaoithe lá na scolb” – loosely translated as the windy day is not the day to be thatching a roof.  Speaking to this age cohort of people my view is that you still have more than adequate time on your side – but now is the time to act.  Delaying eliminates time.

People often shy away from providing for their financial futures for a number of reasons with chief among them being a lack of understanding of the terminology used in the industry and the consistent focus on which fund or investment product is better than the next.  This article will steer clear of such focus and rather, hopefully, make you aware of why you must address your financial future now.

As you turn into your 50’s you are certainly entering, if not well into, the final significant period of your working life.  Making adequate provision, as best possible, for your non-working life is now paramount.  Why? Two reasons.  We are as a nation living longer and it is likely that you, reading this will live well past your 80^th birthday – proof of this is that I am writing this article in the home of my hail and hearty 84 year-old mother.  The second reason is that the historic expectation that the State would be able to look after you is certainly unlikely.  There is a significant amount of people (currently working) who are retiring in the next 20 - 30 years and the State’s resources will not be able to stretch to adequately provide and care for all of those.  Even assuming that the current State pension rate of circa €13,000 remains in place the buying power it will have in 20+ years’ time is likely to be significantly eroded.

What actions do you need to take?

The first requirement is to take responsibility for your future finances and spend time mapping out where you want to be (financially) when you retire so that you have enough to live the life that you want to lead when you do retire from employment.  This should be done with an advisor who can offer unbiased advice and who can help remove emotions from the equation. Too often we let our emotions overrule logic when it comes to making financial decisions.

Key aspects to be covered off are as follows:

Pension(s):        

What level of pension fund will you have when you retire?   Is it sufficient for what you want to be able to do in retirement?  If not can you make additional contributions over the coming years to increase the level of your fund to be at a sufficient level?  The earlier the contributions are made the longer they have to grow and increase the overall level of your fund.

Pension funding is a tax efficient method of providing for your retirement.  Where you make personal pension contributions (either to your employer pension scheme or to a personal scheme) you will obtain tax relief on the payments.  If you are paying tax at the marginal rate this gives you a 40% tax relief on the payment.  It does cause you to have reduced cash now but if it helps grow your retirement fund is that short-term “pain” worth it in the long-run?

You may have pension funds accumulated from previous employments as well.  It is imperative that you consider them and ensure that they are appropriately structured and invested so that they are in line with your overall objectives as well as your current pension fund.

Deposits & Investments

While pension funding should be a significant part of the financial answer for retirement, personal assets should also be considered.  As a rule of thumb our view is that people should have immediate access to six months’ net salary as a “rainy day” fund.  With the current deposit rates being close to, if not below, 0% this should be constantly monitored by individuals as leaving significant funds sitting in bank accounts earning no interest is not financially savvy.

For non-deposit style investments do you have a plan for how long you will remain invested? Will these investments produce a return on an annual basis that will be part of your retirement income plan? Is the capital amount invested at risk or guaranteed?  If you encash a policy what will you do with the proceeds?  Many questions arise but to revert to the start, if you have a defined plan the answers to these questions may well be contained in the plan.  Arising from the on-going Covid 19 restrictions, the overall savings rate in Ireland has grown considerably and therefore you need to consider whether it is appropriate to maintain the level of cash you have on deposit or whether investing now in a longer term investment is more appropriate to your personal circumstances.

Loans & Expense

Typically, you are now in your peak loan repayment and expense years and provision for future retirement may be farthest from your thoughts.  University costs and mortgages may dominate the cash-flow of monthly out-goings.  This is normal and to be expected.  However, will you have an opportunity to accumulate personal funds, while still in employment, once these current expenses are eliminated?  Where loan terms have been extended and may now run into your retirement years it is important that you know when all significant liabilities are settled so that the remaining period can be spent accumulating and providing for retirement.

Cash flow planning

Retirement is a concept and while people may retire at different times the one constant across all of us is that we need money in retirement to live – irrespective of when we actually retire.  Outlining your future cash flow requirements will make it clear to you the actions you need to take on the various matters above and indeed any other areas that directly impact the cash you will need.  Ensuring the structure of these cash-flows is correct is what advisors should be advising you on.

Summary

We all spend much of our time focusing on today and the issues that need to be addressed immediately in our work or personal lives.  Planning for our personal future, though important, never gets to the top of the priority list.  If you have read to here do yourself a favour and take the time to begin or review your personal financial plan so that you give yourself the best chance to have the retirement you dream of!

Vist our private client services hub