Close your eyes and imagine your retirement. It is nice to think of it as a time you will spend jetting off to exotic locations whenever the mood takes you and eating nice food in fancy restaurants on Mondays and seeing life-improving plays on Wednesdays without having to worry about infernal alarm clocks ordering you to go out to endless meetings where you will be set endlessly tiresome deadlines.
As the official age for retirement stretches out and people live healthier lives for longer, more people are looking at longer periods of retirement – and they can be made even longer if retirement comes early, something repeated studies have shown, more and more people want .
That is not to say people never want to work again, simply that they would like to be able to chose what they do and when they do it from an earlier age. But can it be done? Can retirement turn into an extended holiday when you are still full of youthful vigour?
Yes it can come sooner than you think but it still has to be paid for and early retirement – any retirement really – does not come cheap.
The starting point is the most important point when it comes to getting access to you pension pot early. And the earlier you get things started the better it will be.
“A 20 year old hoping to retire at 68 on a pension of €30,000 would need to save €690 before tax, per month to achieve their goal. If that individual didn’t start saving for retirement until they were 30, they would need to save €945 per month to achieve the same standard of income,” says Mairéad O’Mahony, Partner, DC & Financial Wellness Leader at pension experts Mercer.
“The later you start your pension, the less time you have to make contributions and to earn investment returns, and so the more you will have to save now in order to achieve the standard of living you want in retirement.”
She points out that contributions attract tax relief at the marginal rate of income tax which makes it “an extremely efficient way of saving for the long term. People are often very averse to the potential impact of negative market movements on the value of their pension; but it would take a lot of market wobbles to offset the benefit of the 40 per cent tax relief enjoyed by a higher rate taxpayer on their contributions.”
For people whose employer offers a pension schemes, it’s important to ensure you are joining at the earliest possible opportunity and availing to the fullest extent of any matching contributions offered by the employer,” she suggests. “For example, your employer scheme might have a default contribution structure of 4 per cent employer and 4 per cent employee, but might match employee contributions up to 7 per cent; so if you’re not actively choosing to pay that additional 3 per cent yourself, then you’re leaving money on the table in that your employer also contributes only 4 per cent, not 7 per cent.
Alistair Byrne is the Head of Investment Strategy at the European Defined Contribution, State Street Global Advisors. “The key thing is to start saving as early as possible. The introduction of automatic enrolment will be positive as many people are able and willing to save but don’t get around to it. Auto-enrolment provides a helpful nudge,” he says.
“Saving more to retire early might suit some people. Others may actually plan to work longer. Perhaps not full time and in their original profession, but many people will be keen to do some work. Earning some income beyond traditional retirement age has a marked effect on helping make retirement savings last longer and can also provide a valuable sense of purpose and fulfilment.”
When it comes to retiring richer, earlier, Additional Voluntary Contributions are the secret, says Sinead McEvoy, the pensions technical spokeswoman for Standard Life. “These are known as rocket fuel for pension savings in the industry and are a too well- kept secret. You want to be one of the super savvy 27 per cent of people who understand how valuable they are and save into them accordingly.”
AVCs are “a brilliant way to pump up your savings and are simply another clever way to save money in addition to your main pension scheme contributions. They are contributions you make to build up a bigger pot separate to any pension contributions your employer is making or any matching contributions you the employee make to a company scheme.”
People in company pension schemes should ask their HR how to “get started on these little gems. They can make the difference between a good and a bad retirement income.”
The bottom line for enhancing the bottom line is interest – not the growth of your money pot but the interest you take in your finances. As a spokesman for the Pensions Authority says, it is “keen to point out that members of a pension scheme or PRSA contributors should take an active interest in their pension arrangements. Where you don’t understand any of the pension information provided to you, ask your scheme trustee or PRSA provider to explain things to you.”
