Informed Decisions are one of Ireland’s only remaining independent financial advice firms. We specialise in retirement & investment planning for successful individuals, so that our clients only have to retire once.
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October 14, 2024
If you're like most people we work with, as you approach retirement , you've probably found yourself asking the question: 'How much do I need to retire comfortably?'.
It’s one of the most common questions we get here at Informed Decisions, and it’s a crucial one to address, especially with the financial landscape constantly shifting!
In this piece, we’ll break it down step by step, using an example to give you a practical sense of what your retirement might look like financially, based on prudent and best-available assumptions.
In 2018 we explored 'Can We Retire with €1m Pension Pot'. The resounding conclusion was that it surely is enough to provide a reasonably comfortable lifestyle for the majority of people. In that piece we started with the pension pot value and worked from there.
In this piece we take another look at the exploring how much do I need to retire comfortably in Ireland, tackling it the other way round!
It is UK research, but it's quality research; The Pensions and Lifetime Savings Association in the UK suggest that the following levels of retirement income are required to provide the various levels of retirement lifestyle comfort:
Based on this research (and my view is that it is closely reflective of the Irish costs), in order to be 'comfortable' as a couple in retirement, we need €70k per year net (£59,000).
'Comfortable' is defined as; a lifestyle that allows you to be more spontaneous with your money. You could have a subscription to a streaming service, regular beauty treatments, a foreign holiday and several UK minibreaks a year.
This might sound like a big number—and it is. But it’s important to note that this figure is based on a comprehensive study and aims to reflect a lifestyle where retirees can live comfortably without financial stress.
Interestingly, the same research suggests the 'minimum' required for a couple is £22k or c€24k - which is pretty closely aligned to what the State Pension. Full rate Contributory Pension is now €15k per year, per person, thanks very much! It's the equivalent(ish) if having a pension pot of €400k per person. It's an exceptional foundational income, which we should be thankful for (it's not the same in all countries and that's for sure).
To give you a clearer picture of what to consider, let's use the example of an imaginary couple, John and Mary (remember them from Father Ted!?). They are well and truly tired of trying to keep the newsagent open, and of working along-side each other without literally killing the other! They are hoping to retire asap, and are asking that question 'how much do we need to retire comfortably?'. Lets see if they are on track or not!
John is 63, and Mary is 60. After years of knocking lumps out of each other while selling spuds for quadruple the main-land price, they’ve built up a retirement pot of €900,000! Mary never told John about the pension in-case he'd kill her for it - so it's in Mary's name only! They each saved money secretly, and have €100k each in what they each call their 'run-away money account'. As you do :).
They’re mortgage-free and debt-free, and their home (the shop is located in a lean-to at the side) is worth €450,000. We're excluding the house from their financial plan as they plan to stay there indefinitely - until they finally kill each other off.
Their big question is: Will this €900,000 plus their savings and state pensions be enough for a 'moderate/comfortable' retirement? They have eyes on spending the middle point of that reasearch, at €62k per year.
They like their holidays, and John is a divil for the sunbeds and spa-days. Plus, it's not cheap going on holidays from the island. The Craggy Island ferry to the mainland reportedly takes 18 hours, and is odiously expensive, never mind getting to Knock Airport etc! So, €62k is their target per year from next year, once they pull the door on the shop for the last time.
At Informed Decisions Financial Planning, we use cashflow planning to map our clients' financial futures and stress-test various scenarios and strategies.
For John and Mary, we’ll use our cashflow forecasting software. We take care to input their information, assets, incomes, expenditures, tax rates and strategy. This is how we help all clients to model their future incomes, lifestyle spending and assets for their futures, to help inform major decisions.
We'll use conservative assumptions for John & Mary. For example, average net returns of 6% on their pensions and 2% net returns on deposits (AIB and BOI now offering decent-ish rates people!). We assume life expectancy of 90 for both, which is c5 years beyond real expectancy here. We're also assuming they will spend €62k every single year between now and 90 years of age. They acknowledge that they'll probably not need that level of income beyond 75, but they'd like to know if they could. Plus, we're stress-testing here, we're hoping to over-shoot as opposed to under-shoot the plan. We’ll take a look at whether their resources will support their desires!
Thankfully, the state pensions accumulated through what felt like 100 years of working and PRSI contributions have given John and Mary a real boost in making their retirement savings last.
First, both John and Mary are entitled to the full Irish state pension, which currently stands at just over €15k each per year (as of next year, Budget 2025). That’s €30k Gross combined.
Again, we don't assume that their spending will reduce as they age. While research does show that many retirees spend less as they get older (as they slow down on holidays, sun-beds and leisure activities!), we're really stress-testing here.
Like many retirees, John and Mary are thinking ahead about potential healthcare needs. They're thinking there's no bloody way either of them will pay any money for the other to be 'molly-coddled' by some home help - 'He can suffer out the shed' were Mary's exact words!
Despite their protestations, its prudent to set aside even 2 years' worth of care costs for the end of their lives, which we estimate at €55,000 per year (based on median nursing home rates). This reduces their overall balance, but it’s an important safety net. That's €110k that'll be needed in future.
In terms of their investments, John and Mary currently hold €200,000 in cash savings, which is more than necessary for an emergency fund.
Based on the plan, Mary and John will use this account for the next 2 years for generating their €62k living costs per year (€124k).
At Mary's 63rd birthday Mary will take the Tax Free Lump sum of €200k to replenish savings, adding €50k of it to a diversified investment account.
She will then start drawing €36k Net from her Approved Retirement Fund (at only c15% tax thanks very much!). In conjunction with the State Pensions at 66, they will have sufficient income to sustain them and their desired lifestyle.
With these adjustments, things are looking positive for their long term plans.
If you are going to look at your own level of financial independence, here are a few considerations.
Many people believe that there is no point putting money into pensions, because you're taxed on the way back out, as you draw the money from the pension as income. You might, but that rate of tax will be an awful lot lower than most people think!
If you have a pension pot of €1,000,000 at draw-down, you can get an almost tax-free lump sum of €250k. A full 200k will be totally tax free, and the remaining €50k at 20% tax. So €10k tax on the €250k, meaning you pocket €240k.
Plus, with the remaining €750,000 (assuming you put it in an ARF and draw say 5%), will pump out €37,500 in year 1. Add 2 contributory pensions and you have total Gross (before tax) income of €67,500. The average rate of tax on all these incomes is in the region of 14.8%.
15% tax on a total house income of almost €70k. It can be even lower if both have ARF pots and income.
That's a far cry from the 40-50% average tax rate that many folks in this scenario would have been used to paying during their 'working lives'.
We didn't get into it in the above scenario, but it is prudent to run various scenarios, to test their impact on the plan. What if's.
In theory one could run hundreds of scenarios to test positive and negative events - but that wouldn't help anyone decide anything. Consider the main things that might impact you, and your priorities.
Try out the UK Gov Life Expectancy calculator here.
Here's my projection - which I'm committed to bettering!
10% chance I'll still be here at 98 they reckon. We'll see!
The easiest lever to pull to improve their retirement outlook? Working another year.
If John and Mary continue working for just one more year and save an additional say €50,000 to pensions or otherwise, it can improve their chances of success. Depending on the plan, and the existing margin for error, it may or may not move the dial that much. Plus, if you're in danger of getting stabbed in the head in your current employment - it may certainly not be worth the risk!
At the end of the day, how much you need to save for retirement will depend on your specific circumstances—your desired lifestyle, your spending habits, and how your investments/pension pots perform over time. Your rate of expenditure is one of the biggest variables in all this, and the one you have most control over. Fact.
As we’ve seen with John and Mary, having a detailed financial plan that considers all these factors can be the difference between a stressful retirement where you don't know where you stand, and one that allows you to enjoy your 'next chapter' with peace of mind and confidence.
If you think this is something you'd like to explore, get in touch with a professional financial planner, who'll charge you a fee for this valuable service. Probably not optimal to get it done for free!
I hope it helps.
Paddy Delaney QFA RPA APA
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Informed Decisions are one of Ireland’s only remaining independent financial advice firms. We specialise in retirement & investment planning for successful individuals, so that our clients only have to retire once.
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