Why You Should Think About Your Pension Plan
Except for actual pensioners and maybe the odd accountant, there aren’t many people in the world who get too excited when thinking about their pension. For a lot of people, a pension is mainly associated with two things: getting old, and money being taken away from your paycheck. When most of us first enter the workforce, our pension is something that is at least half a century away, and the idea of losing wages just isn’t appealing, and so we kick the can down the road. But as we will see below, a proper pension plan is something you don’t want to postpone.
The state of the State Pension
As it stands right now, the contributory state pension (which is paid out to people who have made enough social insurance contributions) is €248.30 a week for an individual, and €470.80 for a married couple in retirement. If you have multiple sources of income during your retirement, such as investment dividends or rent from leased properties, then your contributory pension may be taxed, but not if it is your only source of income.
For those who have not made enough PRSI contributions, there is also the means-tested non-contributory pension, which is just slightly below the contributory pension at €237 per week. This is also taxable if you have other income, which is why this is a means-tested payment.
While the exact figures of the pension payouts will fluctuate over the coming years, most changes should be more or less in line with inflation, so the current payouts should give you some idea of the spending power you would have on a state pension. Of course, pensioners are also eligible for a wide range of government assistance, such as rent relief, free travel, and fuel allowances. These should bring down your cost of living, but again, there are no guarantees about what support will be there when you retire.
Work/Life Expectancy
You may have heard recently that the population of the Republic of Ireland has reached its highest levels since before the famine, despite increasing emigration, with about 4.9 million people calling this nation home. You may have also noticed that over the past few decades, the stereotype of the Irish family with gaggles of children in tow has fallen by the wayside, with Irish families now having a shockingly low average of 1.3 kids. Ignoring migration patterns, which can change dramatically over time, the required average to replace the population is about 2.1.
This is a commonly observed phenomenon in countries that begin to do well economically, which is why we see this trend beginning around the late 80s/early 90s in Ireland. When both the government and the people have more disposable income, GDP and quality of life rise, while infant mortality falls, and the birth rate soon follows. At the same time, life expectancy rises, with the average Irish life expectancy moving from 76 in 1990, to 82 in 2016.
Over time, all of these factors combined lead to what is known as a top-heavy population pyramid. Population pyramids are used to illustrate the number of people in any particular age bracket, with the vertical line showing age groups (e.g. 0-10, 11-20), and horizontal bars on the left and right representing the number of men and women. Countries with a low birthrate and high life expectancy can eventually end up with more citizens outside the labour force than within it.
Having a top-heavy population pyramid ultimately puts more pressure on those in the labour force, as they have to work harder and pay more into the system in order to meet the obligations of the public pensions. If such issues are not addressed, it is only a matter of time before the system implodes.
The Maths
With increased life expectancy comes an increase in the age of retirement, which has now moved from 65 to 66, with plans to settle at 68 by 2028, and which will likely keep moving over the coming decades. But while that may reduce some pressure, it won’t solve the issue, as people are more likely to live longer in retirement regardless.
How much you have to put away will of course depend on how soon you start, which is why you can make life so much easier on yourself by starting early. The guideline for calculating how much to put away is to half your age, and make it a percentage. So by starting at 18, putting away 9% of your pay throughout your working life should give you a decent private pension. If you start saving at 40, you’ll need to put away 20% to get a pot of roughly the same size.
Another helpful trick can be used to figure out how long it will take an investment to double in size, which is to divide 72 by your expected rate of return, the keyword being “expected”. So if you decide to go for a riskier rate of return such as 12% in the hopes of winning big, you can double your investment in as little as 6 years. A safer investment with an expected rate of return of around 5% would take over 14 years to double. The most crucial point to remember here is that there is a huge difference in the amount of risk associated with a return of 12% compared to the likes of 5%, and your decision should only be made after serious consideration and professional advice.
When it comes to pension planning, there is no substitute for starting early. This not only gives you the greatest amount of time, choice, and control over the decisions you make, but also makes it easier to go through your working life without ever really feeling pressured. If you’ve only ever lived off 90% of your paycheque, you should never really miss the other 10%. But while it may be too late to start saving on day one, it’s never too late to start saving. The bottom line is that it doesn’t matter what age you are, or where you are in your career. The best time to start saving for retirement will always be now.