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For some, it will be a decade of two halves – the first spent working, the latter in retirement. For others, the transition to retirement may not come until the following decade, while for others still, retirement is a gradual process, with some downsizing to a three-day week as they ease into their “third age”.
But if how and when people retire is changing, there are still many constants; and one of these is the importance of some good financial planning.
As Eamon Porter, a financial planner with Aspire Wealth Management, says, it's about, "How do you realise the wealth you've accumulated and how quickly do you spend it?"
1. Expecting you’ll catch up
Yes the amount of tax relief you can claim on your pension does get even more generous in your 60s. You can claim relief on pension contributions amounting to 40 per cent of your gross salary. But if you haven’t been paying close attention to your pension, and maximising contributions in previous decades, don’t expect this benefit to dramatically enhance how much you’ll have to live on in retirement. For many, trying to play catch-up in your 60s is simply too late.
"It's only for those who are very well paid," says Alan Morton, managing director of Moneywise, adding that, at this point, many people will be shocked at how their prospects stack up for retirement.
“And it’s usually a bad surprise; others will have done their research and reading over the years and know exactly what’s coming,” he says.
2. Not closing the bank of mum and dad
With property prices soaring, Central Bank limits hindering affordability and the “gig economy” squeezing earnings, many parents may feel obliged to help out their children. But Morton is certain that, unless you’re particularly wealthy, it’s generally a bad idea.
“I do my very best to steer clients away from that,” he says. “I see clients writing cheques for their kids when they shouldn’t. They’re putting their own financial futures at risk.”
Porter vehemently agrees.
“It never ceases to amaze me the number of people who retire, get their package, and give dig-outs. When I was buying a house 30 years ago, we scrimped and saved. We didn’t have the lifestyle people have today. But today parents are feeling guilty about their children not having enough,” he says.
He warns sixtysomethings not to dilute their pension funds now by gifting to their children in the expectation that they’ll look after you in your old age.
“You actually have to look after number one,” he says.
3. Working too much/too little
If you’re still working too hard in your 60s, you might be putting your health at risk; but if you stop altogether, your mental health could suffer. Then again, you mightn’t be able to afford to stop working.
As Porter notes, in the Celtic Tiger days he spoke to clients who wanted to retire by 60; now these same people are finding they have to work to their late 60s.
“But those who have sufficient funds sometimes don’t want to stop working. They want to keep mentally engaged and so they stay working for two or three days [a week],” he adds.
Morton agrees, noting that those who can, do tend to ease up.
“Increasingly, we’re finding people are taking the foot off the work pedal. A lot of senior professionals, by the time they get to 50, are knackered, burned-out. They want to move to a three- or four-day week,” he says.
Make sure you don't have all your pension pots in one place or it must all be retired at the one time
When you will get the State pension is another factor which can impact on when you take retirement. If you’re going to turn 66 before 2021, you’ll be able to get your state pension of €243.30 a week. But if you were born after January 1st, 1955, you’ll have to wait until you’re 67. And not only that, but discussions are taking place about a move to a total contributions approach, which could require a working life of at least 40 years to qualify for the full payment.
“People have to be aware that they’re not necessarily going to walk into a State pension,” says Porter.
4. Paying too much tax
Yes, you’ll be entitled to a tax-free lump sum of 25 per cent of your pension on retirement, but if you don’t plan carefully, you could end up paying tax at a rate of 52 per cent on your hard-earned pension fund.
One way to prepare for this, and potentially avoid onerous taxation, is to build up your pension pot in separate funds. This is particularly useful at mitigating tax bills should you opt to ease into retirement by cutting down your working week.
“Make sure you don’t have all your pension pots in one place or it must all be retired at the one time,” advises Morton.
If you’re self-employed for example, you can avail of different pension structures, such as retirement annuity contracts (RACs) etc,
If you’re employed, but have worked in various places and thus have built up several occupational schemes, Morton suggests you can leave these alone in retirement bonds.
You can then leave most of these in “pre-retirement mode”. If on a three-day week for example, Morton suggests you could retire one of them, and use the 25 per cent tax free sum from this to supplement your income shortfall, put the remaining proceeds into an approved retirement fund (ARF), and leave the outstanding pensions alone.
5. Making the wrong decision on investing your pension
With interest rates still at historic lows, annuity rates remain “on the floor”, says Morton. This means that only those who are the most risk-averse – or who are obliged to – are even considering them.
“The only people who are going into annuities at the moment are forced to because they’re in DB schemes and have no choice. They have to do it,” says Morton.
Irish Life gives a rate of just 3.2 per cent for a 60-year-old male. With a lump-sum of €500,000, this turns into an annual guaranteed income of €16,135 – so you'll need to live until you're 90 for it to be worthwhile. A 68 year-old on the other hand can get a rate of 4.2 per cent, for an income of €21,130 a year.
As Porter notes, annuity rates are priced based on prevailing interest rates and mortality expectations; and as interest rates have plummeted, the other has soared, leading to low incomes on offer.
If you don't want your fund to dissipate, you probably have to get at least 3 per cent investment return [a year] if not 5 per cent
However, the clear advantage of an annuity is the fact that it’s guaranteed, which takes away the investment risk from the saver.
Opting for an ARF now doesn’t limit your options. “The advantage of an ARF is that rates will improve,” says Morton, adding that if you “hang around a while”, you could decide to switch into an annuity in a few years’ time when rates are higher.
The risk of staying in a ARF is that, depending on how your investments perform, you stand the risk of eating away at your capital; and people who would otherwise have opted for the security of an annuity are now finding themselves having to invest wisely with an ARF, when they may not be best-educated to do so.
“If you don’t want your fund to dissipate, you probably have to get at least 3 per cent investment return [a year] if not 5 per cent,” says Porter. This means people have to be willing to take on risk.
“People think ‘I’m old, I don’t want to take risk’. But actually you’re forced to take risks; if you want it to keep going beyond 80 you need investment return,” Porter advises.
Of course, too much risk can be a problem. As Morton notes, we could be coming to the tail-end of an equity bull run, one of the longest and biggest in market history.
“There’s a danger that lots of people, who are unwittingly investing heavily into equity-led funds in the summer and autumn of 2018, risk their capital in the first few years,” he says. “That’s the biggest risk of people going into an ARF now.”
He gives the example of someone with a ARF of €100,000. If, over the next three years, markets fall by 25 per cent, which, he says, is “distinctly possible”, this retiree will lose 25 per cent of their capital. Not only that, but they will have drawn down 4 per cent under ARF rules – or about 5.5 per cent once costs are added.
“So they could be potentially down 40 per cent in three years,” he says, adding, “I don’t think people are quite aware of this”.
In the “accumulation” phase, when people are saving for their pension, they benefit from dollar-cost averaging, which eases out the price at which they buy into an asset. But in “decumulation”, it’s the exact opposite, as people are no longer contributing, they’re just withdrawing. And if they’re doing so at a bad price, it can have a “serious impact” on capital values, says Morton.
Allied to this is the danger that people will sell out altogether if they see a big hit on their capital. “But then they sell out at just the wrong time,” says Morton.
Property may be popular with many Irish people, for the regular income it offers, but Porter suggests you tread carefully, noting that he has seen clients sell out of property when they get to retirement.
“In old age, I’d advise against property for two reasons,” he says. People should maintain liquidity as much as possible, he says, and being a landlord can be time-consuming and stressful.
“The last thing an elderly person wants is a phone call saying ‘my fridge is broken or I have a burst pipe’. You don’t want that stress.”
6. Not starting to think about care in your old age
You may still be in rude good health, but with your 70s and 80s looming, some consideration should be given to paying for care in old age.
“Most people can’t afford to pay for the long-term healthcare of a relation,” says Porter, pointing out that it costs in the region of €70,000 a year. “People need to be thinking about that.”
Figures show that the average life expectancy in a nursing home is three years; but Porter suggests planning for six years when you do your sums.
While the State’s Fair Deal scheme offers financial support to meet the costs of nursing home care, depending on your income and assets, you might find that you won’t qualify.
And Porter warns against the temptation of underdeclaring your assets. When you die, this will likely be discovered, and the State, through the Fair Deal, will come and claim it back.
Your 60s in numbers
- Age at which you get the State pension: 66 (though if you’re born after January 1st, 1955, it’s 67);
- Percentage of allowable tax relief on pension savings: 40 per cent;
- Percentage of tax-free lump sum when you retire: 25 per cent;
- Loading if you take out health insurance for the first time: 52-70 per cent
