Medical advances, healthier lifestyles, better cars and roads ... All of these things and more mean that most people in their 20s or 30s now will now live at least 10 years longer than their grandparents. And the news is even better for children born in this century as they’re expected to live well into the next one (as long, that is, that they were fortunate enough to be born in the developed world).
Ask anyone in their 20s or 30s how they see themselves spending their retirement and there is a very good chance you will hear stories of round-the-world trips and mini-breaks to European hotspots as well as all manner of other pleasant things that people tend to put off earlier in life because of work and family commitments and the financial stresses associated with raising a family.
While it is lovely to think of Ireland’s actively retired jetting around the world in the years ahead, they’ll need to be able to afford it first. And, to be honest, that could be a problem.
All things being equal, more than 40 per cent of retirees in 2050 will be relying on the State pension to see them through their golden years. Some hope. At today’s levels, it is just over €230 a week which will barely cover the cost of a trip to Tesco never mind Tasmania.
“As a society we are used to relying on the State and on our employers to fund our retirement years but we are moving away from that model now and if people want a decent income when they retire they will have to look after it themselves,” warns Bernard Walsh, the head of pensions at Bank of Ireland Life.
“It can hard to explain to someone in their 20s why it matters,” says “Walsh. “But if people think of it in terms of allocating some of their money for spending money to day and some for spending in the future it can help. The money is not gone, it is just put aside for a period. I sometimes use the analogy of Christmas. If you want to have €1,200 to spend over Christmas you can save €100 each month from January or €600 in October and November.”
A 30-year-old who wants to fund a private pension that will return just €8,000 a year when they retire at 68, needs to make gross monthly contributions of about €120 – a figure that comes down thanks to tax relief. If you wait until 45 that monthly figure jumps to €285 a month. While €8,000 is not very much at all it can be used to top up the State pension which would give you €20,000 a year (in future values).
“A lot of people don’t realise how much they need to save so they leave it very late,” says Aileen Power of Standard Life. “But someone who leaves it until their 40s is putting a lot of pressure on themselves. If they start in their 20s they are so far ahead of the game.”
So is €20,000 enough? It depends on what you read and who your believe as there is not one set answer and few people seem to have a handle on just how much they need for a good retirement. Right now the State pension pays €230.30 a week for a single person. That is just under €12,000 a year - or €6,000 less than someone gets working 40 hours a week on the minimum wage.
It is not a lot by any measure. But then it is important to have realistic expectations of what you need. Older people live more cheaply as they are typically mortgage-free, have fewer family expenses and childcare costs. Having a paid-for house as an asset can cover costs if you ever needed a nursing home or the like and while we are living longer, those under age 50 will be retiring later.
So how much is enough? The National Pension Policy Initiative in 1998 suggested that adequate gross retirement income would be 50 per cent of gross pre-retirement income, a figure which includes the State pension. So if you earn €80,000 you need a pension income of €40,000. If €12,000 comes from the State you only need to find €28,000.
To reach that magic number you will need a fund of between €700,000 and €930,000. A 35-year-old would need to put aside €1,000 every month for the rest of their working life to get that. There are not many people managing that. Don’t be put off though and remember that if you can’t afford to save as much as you’d like or need, save as much as you can. Your fortunes may well improve into the future and we have to hope that today’s austerity cannot last forever.
When it comes to planning for life after work, things have been made all the harder because of a combination of reduced salaries – thanks to pay cuts and tax hikes – and dramatic changes to the pension systems. Pension contributions are no longer deductible for PRSI purposes nor are they deductible for the universal social charge (USC), which has replaced the health and income levies. But, despite all the bad news, pensions still matter. In fact, they matter more than ever.
It is alarming how many people do not join their company schemes and even more alarming how many Irish companies give their employees little encouragement to do so. A good employer will pay between 5 and 10 per cent of an employee’s annual salary into a company pension scheme. If your company has a decent occupational pension scheme and you earn €40,000 per year, the company will be putting between €2,000 and €4,000 into your pension pot every year.
This is a serious benefit in austere times. Typically, you will have to match this contribution. Remember that tax relief of 41 per cent applies to those paying the higher rate while there is 20 per cent relief if you are a standard rate taxpayer.
But ultimately it comes back to the start. The starting point matters because of compound interest – the sooner you start the sooner compound interest starts accruing. Power says more could be done to explain compound interest’s power. “If you save €200 a month over a 30 year period it amounts to €27,000 but that becomes €284,000 in an average managed fund,” she says. and as Benjamin Franklin said: “The people who understand compound interest are destined to earn it and the ones who don’t are destined to pay it.”
