Sunday Times Article on Retirement, April 2021

Author: Jonathan Sheahan, Managing Director of Compass Private Wealth

Published: Sunday Times Business Section, 11th April 2021

I’ll start off this article on a factual and positive note. As a society, not only is our life expectancy continuing to increase every year, but those in their twilight years are also living more active and fulfilling retirements, save for the last 12 months with Covid restrictions.

This is great: from a lifestyle point of view, being in retirement is more enjoyable than at any time in the past and for those of us in our pre-retirement years, we can hopefully look forward to a healthier & longer retirement than our grandparents would have had.

When we in Compass Private Wealth ask our clients what their target retirement age is, the average, default answer is 65. My bet is that Financial Advisors got the same answer to the same question 25 or even 50 years ago. Essentially, the target retirement age is not keeping up with our forecasted mortality age, creating a bigger gap and financial hole to fill.

From a financial planning point of view, ceasing all earned income in your mid-60s and having adequate funds built up for a sustainable and enjoyable retirement was a lot more palatable when one’s life expectancy was in the 70s. The simple maths of it is that, if we compare 2021 to previous generations, Irish people are now looking at double their time in retirement. Somebody aiming to retire at 65 today needs to plan financially to have more than 20 / 25 years of hugely reduced income. Outgoings can actually be higher in retirement, as more time may equal more (expensive) hobbies and holidays at one end of the spectrum, and more costly healthcare or nursing home needs at the other end of the health spectrum.

I would suggest that anybody planning for retirement carries out the below exercise, which is best completed in a simple spreadsheet. Again, this only looks at retirement from a purely financial and mathematical point of view.

Step 1: Calculate your planned regular expenditure in retirement. Expenditure will include Essential Outgoings (running the house, food & groceries etc.) and Discretionary spending (enjoying your retirement!). Also include any one-off outgoings you may have in certain years, such as replacing a car, work on the house, paying for a big holiday, gifting some funds on to children / grandchildren etc. I would recommend indexing up your annual outgoings by 2% p.a.

Step 2: Map out your fixed & guaranteed net income (after tax) in retirement. This may include the State Pension and any other forms of fixed income such as rent on property, Defined Benefit pension schemes etc.

Step 3: Input and total the above numbers from your target retirement age until your target life expectancy (say 90). At this point, you will be able to calculate your total cashflow position (which is usually a deficit) over the full number of years in retirement. Let’s call this (A)

Step 4: Now, list out all of your existing Assets and Defined Contribution Pensions and ascribe a Euro value to each. From this figure, deduct an amount for an Emergency Fund and any amount that you have ringfenced for passing to the next generation. I would also suggest excluding the value of your home. Let’s call this (B)

Step 5: Now, you just need to figure out of the numbers add up. If (B) is greater than (A), then things are looking good and you might even consider increasing your retirement discretionary spending budget or bringing forward your retirement. However, if (A) is significantly bigger than (B), then you need to reel in your planned retirement spending and / or push out your target retirement age.

Now, the above exercise is as simplistic as you get and is only really useful as a basic start to a Financial Plan. Financial Advisors like us would need to use indexation and asset growth figures and a whole series of other calculations, assumption and what-if scenarios to be any way accurate in mapping out the future

Remember also that in previous generations, most pension schemes were Defined Benefit (DB), whereby the retiree would receive a fixed monthly income for the rest of their lives that would supplement the Fixed Income in Step 2 above. Nowadays, the vast majority of private pensions are Defined Contribution (DC), thereby putting the onus on the individual to manage the pensions assets and take the appropriate level of income.

In summary, for those within 10 years of retirement, before deciding a set retirement age, I would strongly encourage you to carry out a more detailed version of the above exercise to ensure that your retirement age and spending in retirement are commensurate with your financial position.