It’s easy to breeze through our twenties without much thought about our finances for retirement. We are generally more concerned with enjoying life, perhaps getting married and having a family, or buying a house. Even as we progress through our thirties retirement is still one of the last thing on our minds. By the time we get to our mid-forties we may have started to think about it, and by fifty most people are thinking they should really start some sort of personal financial plan for when they are no longer working.
This all comes about because of the historical way pensions have been thought of. You could be lucky enough to be employed in a job that has a pension attached to it. However, for many years, if you were not it was just accepted you would live off the state pension, and claim further help from the state if you needed it. This was the way it was for generations, but pension planning has changed.
Initially there was a big push to get self-employed people to take out a personal pension plan. The tax incentives made it worthwhile for them, and when they retired they reaped the benefits. It was not long before it was realised all people in jobs without an occupational pension should be investing in a personal financial plan of their own for when they finish work.
It was also obvious that starting retirement planning sooner rather than later had big advantages.
The Difference With Starting When You Are Older
However much you invest in your pension it will be making you money. If you start a monthly payment at 20, after a year your fund will be made up of your contributions plus whatever money it has made. That new total will be making money in year two, so by the time you reach the start of year three you will have two years contributions making money, plus the profit it has already made making money as well.
Think how much extra your pension fund will have by the time you reach 30, and as most Irish people do not start their personal financial plan for retirement until they are 37, just think what a head start you would have. As time goes on the difference gets larger and the only way for older people to make up what they have not gained by starting their personal financial plan earlier is to pay much larger sums of money into their pension fund.
You may think that’s fine. By the time you reach forty you expect to be earning more and have fewer responsibilities, so will have more free cash to invest. Sounds like a good plan, but in reality it’s not what happens. Yes you may have a bigger salary, but prices will have gone up for just about everything you can think of, and you will need the increased income to keep living at the same level.
It is estimated that for each ten years you delay starting your pension, you need to double the amount of contributions to end up with a similar amount in your fund at retirement you would have had if you had commenced it at 20.
You also have to remember there are legal limits to the amounts you can invest each year. It is determined as a percentage of your income, depending on your age. This can stop you investing as much in later life as is needed to bring your pension fund up to the amount you want it to be.
The State Pension Will Not Be Enough
The Irish state pension is more generous than a lot of countries, with a current rate of just over 240 euros a week. You may think that sounds a reasonable amount to live on if your children have left home and your mortgage is paid off. The current average annual wage in Ireland is just over 45,000 euros, or about 865 euros a week. Your income dropping from 865 euros a week to 240 a week will be a big shock to your way of life, and is totally unnecessary with the right financial planning.
The government is desperate for people to take out their own pension plans, as the state pension is not sustainable forever. This is not just a problem Ireland has; it is a global problem. As people live longer and birth rates drop the planet has an aging population. Different governments are trying various things to ease the burden, such as Australia, where it is compulsory to have a personal pension plan if you are working.
You could save a lump sum yourself in a bank or building society, but it will not make you as much money as the same amount would in the right pension scheme. Then as you start to use it for living expenses or leisure time activities, so it will dwindle and soon there will be nothing left.
Call On The Experts
When you are considering a personal financial plan for your retirement, you should always take advice from experts. They will understand all the complications of personal pension plans, as they all differ and pay out under varying circumstances. Some pension plans are high risk and return a higher amount if they are successful. Some are lower risk and make a lower amount of money. An expert in financial planning and personal pensions will explain all the ins and outs of this to you, so that you can make an informed choice about which is the right sort of plan for you.
Making your way through the minefield of information yourself could just mean you end up with a personal financial plan that doesn’t work. At Masons Wealth Management we have over 20 years experience assisting clients to achieve their financial goals. Our experts are highly qualified in the financial planning industry and are here to help you with your personal financial plan for the future.
Whether you are in your twenties or already retired, get in touch with us and see how we can help to maximise your financial planning.