Pension time-bomb: Where are you going to find €360,000 to retire on?
Not having a pension could be very dangerous down the road
There's a great documentary playing this month at Dublin's Lighthouse Cinema and a smattering of other well-curated arthouse cinemas around the country, called Advanced Style.
It profiles seven women aged between 62 and 95 who are growing old fabulously, living large into their eighties and beyond clad in monochrome, cashmere and Prada sunnies, showing the world that one doesn't have to be young or beautiful to have style.
But it's easy to romanticise old age. Imagine yourself in your eighties – what do you see? The details will undoubtedly be hazy – most of us struggle to come up with a five-year plan, never mind a fifty-year plan – but undoubtedly you will already hold some basic assumptions.
You'll be retired, of course. Comfortable. With grandchildren, perhaps, and a spouse who is ageing similarly well, and the ability to travel. Living in a warm and roomy home, somewhere not too urban and not too rural, furnished with furniture that didn't come through the door in a flat pack. Reaping the benefits of a life of hard work and smart choices.
Now imagine something different. Imagine making a life for yourself, in your old age, on two grand a year. Because that's how much the average woman has saved for retirement – a sum total of about €45,000.
Financial services firm Mercer calls it a "ticking time bomb" – the scary truth that we're living longer than ever before, but saving less than ever. Women are at a particular disadvantage because of the small issue of children – becoming a mammy means many temporarily leave the workforce and stop contributing to their pension pot for long periods of time. Studies show they lose out on up to €200,000 by taking just five years off.
It's not just the ladies that are affected, but it seems women are just less likely to plan for their future than men.
However, if you want to be able to enjoy your golden years, you have to wise up. We've answered the most common questions that come up about pensions in a straightforward, legalese-free manner.
Remind me – just how do pensions work?
You're not an eejit, lots of people don't understand them. In a nutshell, a pension is a fund that you save into throughout your working life.
The money is invested into a variety of assets, depending on how it is managed – everything from Microsoft shares to diamonds. When these assets rise in value, so too does your pension fund. The longer it is invested, the more likely it is to gain value. With a bit of luck, you should have a nice pot of gold at the end to fund your old age.
Won't the state pension cover me?
The state pension, which most people will be entitled to, comes to a grand total of about €12,000 a year. If you decide to rely on that alone, you better have a taste for beans on toast – that's about all you will be able to afford. €1,000 a month barely covers rent for a studio apartment in Dublin, the kind of thing where you cook in the same room that you sleep in.
The state has also proved itself to be notoriously unreliable when it comes to pension entitlements, eroding away tax incentives and extending the age of eligibility for benefits in recent years.
So there's no real guarantee that they won't have cut this amount below €12,000 by the time most of us retire. It's mostly on you to fund yourself, either through an occupational scheme run by your employer, or a private scheme.
When can I actually retire?
Retiring at 65 is no longer the norm. The goalposts have changed; the Fianna Fail government extended the age of eligibility for the state pension. It moved from 65 to 66 this year and will increase to 67 in 2021 and to 68 in 2028.
The same rules apply for civil servants joining the service now when they retire. Most private and occupational pension schemes also carry a minimum retirement age of between 60 and 70. There are some provisions that allow early retirement at 50 – but you'd need to have an awful lot saved up early on to make this a reality.
So put it to me straight – how much will I need?
One common misconception is that retirees need much less to survive on than the average working Joe or Joanne, with kids having long fled the nest, the mortgage paid for and the cost of the daily grind – work clothes, commuting – a thing of the past. In practice, this just isn't the case. If you're a spender now, you'll be spender when you're 70 – and will have more free time to fill too. As a rule, most people will need about 70 percent of their income to live comfortably in retirement. This means that someone on an annual salary of €42,000 will need about €30,000 a year when they retire, give or take. So you'll need to top-up the state pension by another €18,000 a year, at least. To achieve this requires a cash pile of €360,000 by the time you retire.
Saving €360,000 seems like a huge task, but it's not as difficult as it sounds. The key is to start saving early, because this gives your money more time to earn a decent return. Studies have shown that saving €3,000 a year between 20 and 30 alone can generate the same amount as saving for 40 years starting at 30, because the money has longer to sit there gaining value. Yes, the vast majority missed that boat long ago, but it just highlights the importance of starting now.
Starting early also gives you more time to space out your savings, meaning the monthly amount is far less punishing.
Those starting at 25 would have to save €259 a month to save €360,000 by 65; those starting at 40 will need to pay out a whopping €634 a month.
Yikes! That's a weekend in Paris
It's not really. Putting your wages into a pension is far less costly than taking it into your bank account, because income diverted into a pension escapes income tax.
For people on the top tax rate of 41 percent, this means that every €100 put into your pension only actually costs you €59. You will eventually be taxed when you withdraw it, but in the meantime it should have built up a healthy return, tax-free. You're also allowed to withdraw a big lump sum – tax free – when you retire, up to €200,000.
Those in occupational pensions run by their employer get even more perks. Many companies will add something on to or even match your contributions. It is silly not to take advantage of this, it's free money. But studies show that most of us do not.
My employer doesn't offer any pension plan! Why bother?
That's not an excuse. Thousands of people who are self-employed – from barristers to plumbers – don't have access to company plans and are responsible for their own pensions. Changing work norms like the increasing use of temporary contracts also means more and more of us are on our own.
There are a vast array of private pension schemes available to private savers – an overwhelming amount, in fact. The best course of action is to shell out €200 or so and get advice from a financial adviser.
The first question to ask before you make an appointment is how they get paid, ie. do they earn commission from any of the pension providers for selling their products – if the answer is yes, they're likely to be biased towards one company.
Smart enough to read to the end of this piece? Your reward is free advice – if you're a woman that is. Standard Life and Connect Women In Pensions are working together in 2014 to raise awareness among women about the importance of having their own pension and saving enough for a comfortable retirement.
Twenty top female advisers have offered free advice nationwide to the first 100 women who email them at email@example.com. You're welcome!
First published in INSIDER Magazine, exclusive to Thursday's Irish Independent