Making Cents: What to do when retirement is just 10-15 years away? (Part 1)

THIS week’s article is going to be part 1 of 2. I tried reducing the word count so it would fit into one piece, but I have too many important things to tell you and I didn’t want to leave anything out which is why I’m spacing it out for you over the next two weeks.

And the subject matter was inspired by a gentleman who reached out to me recently because he’s 11 years away from retirement and he wanted to get a fact-check as to what he thinks he’ll be in receipt of from his pension funds when he turns 65.

And he was reasonably happy with the news I gave him because based on his current contributions and what he had accumulated to date, I confirmed that they were going to cover what he thought his monthly expenses in retirement would be, but only just.

This future outcome for him certainly wasn’t planned, it was more by luck than design. Because looking at his pension statements wasn’t something he paid much attention to. He always thought that what he and his employer were contributing was going to be enough, but he had no cold hard numbers to back up this hunch of his.

Anyway long story short he was lucky, but he might have felt much differently if I told him his pension funds were going to pay him a whole lot less than he needed.

Which got me thinking, what advice do people like him need when they are perhaps 10 or 15 years away from retirement?

And when your planned retirement date is a decade or more away it can seem like such a distant event that it’s much too soon to be looking at it.

But I think that after decades of hard work and saving, you don’t want to arrive at a point close to retirement and be hit with the news that your pension is going to pay you a lot less than you had expected and needed.

Those 10 or 15 years will fly by and leaving it to the year before you retire or even five years before only to discover what your pension/s will pay you is too short a time period especially if corrections or improvements need to be made to the fund you’re invested in or the amount you’re saving each month.

You see the problem with under saving or being in the wrong fund is that if you delay looking at both you may not have enough time to make any changes required, which is why I believe people need to be forewarned than forearmed and you can only become this way if you’re actively reviewing your pension and knowing well in advance what it will translate into based on current balances and current monthly contributions.

What you want to avoid are future shocks and surprises and you don’t want to end up saying, had I known then what I know now I would have done things differently, so taking action and ownership of your pension a minimum 10 years from your planned retirement date is the route I’d choose rather than just winging it and hoping it will be alright on the night.

Okay. with all of that in mind I’m going to outline what I think the key areas you need to be looking at and reviewing at least 10 years away from your chosen retirement age and they are.

Create a retirement budget

One of the most basic questions you have to ask yourself when planning for retirement is, how much money will I need when I stop working?

And you can’t answer this question unless you know how much your monthly living expenses will be.

I mean how can you know if what you’ve saved or the amount, you’re saving is enough, if you don’t know how much you’ll spend in retirement?

Which is why I’d say the first thing you need to do is sit down and create a mock retirement budget and you can do this by using your existing monthly outgoings as your reference.

What expenses will no longer be paid in retirement i.e. mortgage, kids off the payroll, costs associated with work, transport, food, clothes, travel etc. and what expenses will become a factor in retirement i.e. health insurance if currently paid by your employer and perhaps travel will be a cost that goes up in retirement rather than down.

I think setting out what all those estimated costs will be is your starting point because you need to know what you’re up against. And when you start this process, you don’t have to be exact right away and maybe it will take you a few months of reviewing your spending to really zone in on what your likely to spend in the future. And I know this exercise sounds like a pain in the ass and it sort of is, but it’s really important so I’d say spend time at it and be as accurate as you can be.

And when do this you may also be surprised at how much you might be able to cut back on right now and use those savings to either pay off debt quicker or increase your retirement savings, and more to come on both of these areas next week.

Estimate your retirement income

Next you need to look at what you are on track to receive from your current pensions be they a defined contribution or a defined benefit pension or a combination of both and you also need to look at others you’ve contributed to in the past, and what they will pay you.

And what you’re looking from each is (a) what they will pay you each month after tax and (b) what tax free lump sum entitlements you can get from each of them.

And perhaps now might also be a good time to consider consolidating all of them into one pension fund, that being your active one, if you can that is. It might just simplify things for you along with giving you a clearer picture of what your total funds are and will amount to.

You should also start looking at what you are on track to receive from the state contributory pension.

And under the yearly average method of working out what you’ll be entitled to, your average number of PRSI contributions is calculated using your total reckonable contributions and credited contributions and dividing this number by the number of years between when you entered into insurable employment in Ireland and your chosen pension drawdown date.

For example let’s say you’ll have 1,200 PRSI contributions at retirement and you have 35 years of employment from when you first started working to when you reach 65, then your average yearly rate is 34 i.e. 1,200/35.

That means you can expect to be in receipt of €249.30 per week.

The amount you are going to be in receipt of will depend on what that average number is.

The maximum rate of payment is currently €277.30 and that’s available to those with an average rate of 48. And the minimum rate of payment is paid to those with an average of at least 10 and that weekly figure is €110.80. There are four other bands that fall in between these two figures.

So important to figure out what that future payment will look like because it will be added to what you’ve built up yourself.

And now that you know what income you’ll be in receipt of based on your current plan and how much you’re likely to spend in retirement, if a gap exists between the two you or your financial adviser will be able to figure out how much more you need to save each year to make up the deficit.

Or you’ll know what you’re doing is fine and you’re on track or if you can’t save anymore and there is a shortfall at least you’ll be able to plan for a future which might be an income that is lower than you’d have liked or perhaps you may have to continue working albeit at a reduced pace to make up the shortfall but regardless of where you land, at least you’ll know what the outcome is likely to be.

Next week, I’ll follow up and tell you about three other areas you need to be aware of if you want to set yourself up for success when it comes to your future retirement.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie