Ensuring your nest egg is adequate to meet your needs

Starting pension contributions early is a major advantage but is really only the first step towards a comfortable retirement. Even though it may seem like a distant dream, how can people ensure they have built an adequate nest egg to meet their financial needs when the time comes?

Shane O’Farrell, director of workplace markets for Irish Life Employer Solutions, says it’s about having enough to pay for “the life you want when you finish working”.

“That means it’s about the quality of the pension you have, not simply just having one.” The reality, O’Farrell says, is that many people will find a gap between what they have and what they’ll need. “So, you need to be honest and ask yourself, do the numbers add up?”

Evelyn Ryder, director, corporate pensions with New Ireland, says a good starting point is to review all the pension assets that an individual may have, including the State pension, any private pension they may have, and/or a previous employer pension.

“Then, having gathered details on accumulated pension assets, consider what sort of retirement income you want,” she says. While “a good rule of thumb” is two-thirds of your current income, most pension providers have pension calculators to help you determine if your pension will ultimately meet your needs.

“The Pensions Council has retirement living standards that can provide a useful reference point for considering different lifestyles in retirement,” notes Ryder. This resource clearly maps out the cost of living “modestly”, “moderately”, and “comfortably”. “For someone who wants a more personalised assessment, discussing their circumstances and objectives with a financial adviser can help turn those projections into a more tailored retirement plan and help address any funding gap.”

According to Kristen Foran, national sales director with Zurich Life Assurance, the adequacy of people’s pensions will depend on a number of factors such as how old they are now, when they want to retire, what they expect to get in retirement and how much they are currently paying into their pension.

This means that when it comes to determining what a reasonable contribution to a pension plan is, “there is no one size fits all”, she says.

“Generally, a good aim is to pay as much as you can afford and get full tax relief on it,” Foran explains. The Government provides generous tax breaks at different levels of contributions that are age dependent, she adds; people under the age of 30 can claim tax relief on up to 15 per cent of their net relevant earnings up to a maximum of €115,000 in earnings. This percentage goes up to 20 per cent up to the age of 39, 25 per cent up to the age of 49, 30 per cent up to 54, 35 per cent up to 59 and 40 per cent at the age of 60 and over.

“There isn’t one contribution rate that is right for everybody,” Ryder agrees. Generally speaking, however, to achieve over 50 per cent of salary at retirement someone will need about 15 per cent contributions from their working life.

“What someone can afford to contribute will change throughout their working life as earnings, family commitments, housing costs and other financial priorities change,” Ryder acknowledges. “But in reality, and in line with Revenue contribution tax limits, most people increase their contributions with age.”

“Inflation erodes the real value of money, so pensions are a great way to combat this,” Foran says. Pension plans invest the money saved with the ambition of providing returns that beat inflation. “The compounded returns over the years until retirement will contribute substantially to the final pension pot.”

If an employer is offering a generous pension contribution, all experts agree the employee should consider what the benefit of matching it is. “Generally, if it’s affordable, employees should seek to avail of any matching contributions,” Ryder says. This is a very effective long-term saving mechanism, she adds; for an employee in their late 30s, optimising their contributions could be equivalent to the price of a coffee and snack per week. “This could be an opportunity to build an additional pot of over €100,000 – the same investment outside a pension arrangement would only be about €25,000.”

“These contributions can be very generous, so to not take it would be leaving money on the table,” Foran adds. She also notes that employees often have the option of making additional voluntary contributions, or AVCs, which can boost their pension pot even more.

“Where an employer offers matching contributions, employees should strongly consider contributing enough to receive the full employer match, as this effectively doubles their savings,” agrees O’Farrell. “While not everyone might be able to afford it, it’s important to understand why not maximising your employer contributions means missing out on a significant boost to your savings, which only compound and grow over the long term.”

Irish Life’s new Life100+ research found that 74 per cent of people in Ireland believe that getting advice on funding a longer life is key. “I’d encourage everyone to get a financial adviser’s help to understand how you’re tracking, make a manageable plan to meet your goals and help you feel in control,” O’Farrell says. “Reviewing your pension regularly with an adviser, particularly after major life events or changes in income, can help ensure you’re kept on track and gives you time to make adjustments if needed. This should be done on a combined basis if you are a couple: a wider lens is important here.”

The take-home message, Ryder says, is that pension saving doesn’t necessarily have to move in a straight line throughout somebody’s career. “The important thing is to keep reviewing whether your current level of saving remains appropriate for the retirement you’re trying to achieve.”