How do you see your retirement? Maybe you would like to spend a couple of months of the year in the sun, eat out a few times a week and have enough spare cash not to worry about the costly problems life throws up from time to time.
But have you considered just how much you will need to save to achieve this? Traditionally, pension savers have been told to aim for income of around 50 per cent of their pre-retirement salary, but recently the Pensions Council, with KPMG, published a survey trying to put more realistic figures on this.
The Pensions Council said the old rule of thumb could be too simplistic, failing to account for individual lifestyles and specific needs in later life. Instead, it gave figures indicating just how much annual income single people and couples will need for a modest, moderate or comfortable retirement.
But given that most of us are now saving in defined contribution (DC) schemes that will provide us with a lump sum in retirement, how big a fund are we going to need to enjoy such income levels?
It is a truth universally acknowledged, perhaps, that most people who reach retirement age wish they had started looking at it earlier.
“One of the core strategies we speak to people about is to start saving early,” says Laura Farrell, chief executive of the Retirement Planning Council of Ireland. “It’s a really simple concept – the earlier you start, the easier it is to save – but there is a little bit of avoidance about it.”
Getting ready for that third stage of life is something many of us put off, even though by starting off early “you can actually do something meaningful about it”, Farrell says.
Part of the approach to effective pension planning is to focus continuously on increasing your earnings. “This is particularly true for women,” Farrell says, noting that “the pay gap pays forward into the pension gap”.
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And for those whose retirement plan is to keep working, a word of warning. “We are definitely seeing an increased appetite to work on,” Farrell says. “This is motivated in some cases by the fact that, at 65, you’re still a young person”. But age can be a “silent career killer” and employers can have an age bias.
“The appetite is there: the question is, is there the opportunity?” she asks.
This can mean that retirement goals can be more difficult to achieve.
When publishing the report, the Pensions Council did offer the following caveat: the terms “modest”, “moderate” and “comfortable” can be “highly subjective and mean different things to different people”.
What’s fancy for you might be a hardship for others. It is worth bearing in mind when considering the following options, but they still offer a useful guide as to just how much you need to save for retirement.
For simplicity purposes, we will use annuity rates as a guide to future retirement income. Remember, annuity rates can differ. If you have an illness, for example, or are a smoker, you might be able to get a better rate.
Many people will choose to remain invested in retirement through an approved retirement fund (ARF). This approach could make your retirement fund work harder and secure a better income in retirement, which would mean either you enjoy more benefits in retirement or will need a smaller fund saved by the time you leave work.
On the other hand, of course, an ARF is not a guaranteed income unlike an annuity. Your investment may also underperform, forcing you into a leaner lifestyle in your later years.
So back to the question of how much you will need to save.
Even with the caveats mentioned above, the figures offer some (frightening) food for thought. Remember, as it stands, the typical amount saved in a DC scheme at retirement is about €111,000, CSO figures show.
As we will see, this is just enough for a “modest” retirement, which is not what many people have in mind for their golden years.
Modest retirement
With an annual income of €19,200 for a single person and €28,800 for a couple, the modest retirement focuses on covering your basic needs with some money left over for the “non-essentials”, the Pensions Council says.
You will still be shopping in Lidl and Aldi then, but spending the winter months in the Canaries may not be realistic.
In terms of your budget, you can expect to spend about €100 a week for a single person on food, €12.50 on transport, €12.50 on leisure and €37.50 on health. With such an income you might own your own home, but you may be renting – most likely from a local authority.
But how much of a fund will you need for such an income?
Well, if you qualify for a full State pension, the sums become that little bit easier. Assuming a couple with two full pensions, you will not need any additional personal savings.
The maximum rate of the State contributory pension is around €15,043 a year at present. To secure that income from a private pension, by way of an annuity, you would need to have a fund of about €300,000, given a current annuity rate of about 5 per cent.
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But what if you are single, separated/divorced or widowed?
A single person will need to fund an income of €4,157 themselves to bridge the gap between their State pension and that €19,200 modest retirement income. Under the annuity path, this will mean building up a pension pot of €83,000.
To save this much, if you are a 30-year old hoping to retire at 66, then you would need to be putting away €294 (€176 after tax relief at the higher rate) a month into your pension.
If you do not qualify for any State pension, then the sums are that bit starker: you will need almost €400,000 saved as a single person to provide for a modest retirement and €576,000 for a couple.
Moderate retirement
If you are looking for a bit more flexibility and financial security in retirement, then you are targeting a “moderate” income.
The Pensions Council says this means an annual income of about €27,200 for a single person and €37,200 for a couple.
With that level of income, you can expect to spend about €112.50 on food a week for a single person, €25 on transport, €25 on clothing and save about €25 a week.
If you qualify for a full State pension, a single person will need to fund an income of €12,157 a year themselves or €7,114 for a couple with two State pensions.
Opting for an annuity will mean that a single person will need a pension fund of about €245,000 or about €140,000 for a couple.
Again, if you do not qualify for a State pension – or only for a reduced one – the sums needed are significantly higher: up to more than half a million for a single person and almost €750,000 for a couple.
Comfortable retirement
If having the ability to buy some luxury items is a goal in retirement then you are going to need to save more again. The Pensions Council says a single person will need an annual income of about €33,600 for a “comfortable” retirement and a couple will need an income of €43,200.
If they both qualify for a full State pension, this will reduce the amount of income they will need to self-fund to €18,557 for a single person and €13,114 for a couple.
But how much will they need to save to generate this income from an annuity?
Well, provided they are entitled to the State pension, a single person will need a pot of about €370,000 while a couple, with both entitled to a full State pension, will need €262,280.
It is a significant sum to save when you consider that the Pensions Council does not envisage someone on this income actually living it up. You will have a budget of €525 a month for food for a single person and €200 for leisure.
And if you do not have a State pension then you had better think about upping what you save now. Our figures show you will need to save more than €670,000 for such an income in retirement.
