Starting your pension

We all want enough pension income to cover our expenses in retirement. While what is considered “enough” will differ from person to person, a good rule of thumb is to have a retirement income of 50-60% (including any entitlement to a State Pension) of your pre-retirement income.

However, depending on your needs in retirement, this percentage could be higher or lower. When figuring out how much to aim for, you might consider the following:

• What will your needs be when you retire?
• How many years do you have ahead to save before retirement?
• How long your retirement will last? No one can predict this, but it may last 20 to 30 years or more
• What can you afford to save on a regular basis into your pension? It is essential to budget to ensure you can afford the regular payments you plan to contribute to your pension

The Pension Authority calculator allows you to estimate the amount you should contribute to provide your target pension income when you retire.

How do you imagine your life after retirement? Would you like to go on getaways or prefer a quieter lifestyle? How much money will you need for hobbies or other activities?

While figuring it out doesn’t seem an easy task, some tips may help you have a rough idea of how much income you will need in retirement, considering your lifestyle plans and the expected expenses. In particular, you should consider the following:

The cost of your home

If you own your home, your mortgage is usually one of your biggest expenses. Your expenses may significantly drop if you can pay the mortgage off before you retire. Otherwise, paying it off using your tax-free lump sum from your pension could be an option.

If you rent your home, you will still have to pay rent when you retire. Consider that if you rent in private accommodation, you will have little or no control over this expense, as the rent can increase at any point.

Will I have any dependents?

If you are supporting your partner or expect to continue supporting your dependents, you will have to consider their expenses, for example, if your children will still be in college.

Changes to my expenses

Some expenses may be lower or disappear when you stop working, for example, travelling expenses, lunches, etc. Other costs, such as healthcare expenses, may increase, especially if you don’t have health insurance coverage.

Your gas and electric bills may increase if you spend more time at home. When it comes to managing utility-related expenses, support may be available to you. For more information, see Citizensinformation.ie or contact your local MABS centre.

Do I expect to have outstanding loans?

Try to repay any outstanding loans before you retire. If you are worried about debt repayments in retirement, you should contact your local MABS centre for information.

There are two golden rules when it comes to starting your pension:

• The sooner, the better
• Don’t worry if you have not started yet: It is never too late!

Unleash the power of consistent savings

One of the best ways to ensure you have enough money in retirement is to save regularly into your pension throughout your working life. The earlier that you start contributing, the longer you have for your investment to grow and benefit from compound interest.

But remember it is never too late to start!

If you start saving into your pension later in life, you will be in a better position to estimate your needs when you retire. At this stage, you may have a mortgage, a family, etc. However, the later you start, the less time you will have to save into your pension and for your pension fund to grow, so you will likely need to contribute a higher amount of your salary to ensure you reach your target pension income. To do this, you may need to change or prioritise your budget.

Tax relief on pension contributions

Making contributions to your pension allows you not only to build up a fund for retirement but also allows you to save money now through tax relief.

Pensions can be complex and sometimes difficult to understand, so getting financial advice can help you get the right pension product to suit your needs, wants, and circumstances.

Another reason why you should consider getting financial advice is that pensions are long-term investments. In general, you cannot access the money in your pension funds until at least the age of 50/55 (depending on the rules of the pension) and you may not need it until you retire which could be much later.

As they are long term investments, the way in which you invest your money will be different to that for short-term saving goals, such as saving for a holiday. You need to understand the types of funds available in the market.

There are some important things you must be clear about before choosing what fund/s to invest in:

• Level of risk
  What level of risk can or are you willing to take? When it comes to investments, risk can be seen as “uncertainty”: in exchange for expecting higher returns, you must accept that things can go as expected, better than expected, or worse.
  Examples of funds you can invest in for your pension include cash deposits, bonds, company shares, property, etc. With some professional help, you will be able to find funds that match your appetite for risk.
• Length of time
  The longer, the better, as it will give your investment time to grow and give it time to recover if the investments fall in value. In the beginning with many pension schemes, your money will be invested in riskier funds such as company shares or property (with higher potential returns).
  But as you get closer to retirement, your money will be invested in less risky funds, for example, cash deposits. Most defined contribution pension plans will provide you with a range of investment funds that are used to invest your money in different ways over the lifetime of your pension. The fund’s investment manager handles the investment fund changes throughout the life of your pension.
• Inflation
  You need your money to grow at a faster rate than inflation. If this is not the case, your money today will buy a lot less in future years. Some products are better than others if you want to beat inflation. For example, the interest rates of some cash deposits may not be enough to keep up with or exceed increases in prices.
• Spreading your money between different types of investments
  It is called “diversification” or “don’t put your eggs in one basket”. To some extent, you can control the risk you are taking by putting your money into products with different levels of risk (it is not likely that all of them will lose value at the same time).
• Fees and charges
  They can have an important impact on your expected returns.

And last but not least, remember that you need to keep reviewing your pension. Not only because your circumstances will change over time, but because there will be new products and investment options that you would like to consider.