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Are you approaching retirement? Less than 10 years to go?

Author
Phil Farrelly QFA RPA SIA CFP
Certified Financial Planner | Mason Wealth Management

What does retirement mean?

Retirement really means being financially independent. It does not mean being able to stop working on a given day and then doing nothing. It is the date when you can stop working because you can afford to. You only work because you want to. Retirement is now a bit more flexible than it was in the past. It could mean reducing your hours to a 3 day week. Perhaps even remaining on in a part-time capacity. This could work for you especially if your pension funds are insufficient for a complete exit.

Time to take Action

Up until now, you have had lots to think about – building your career, educating your children, paying down debt. These were important, however, it’s probably fair to say not as important as building an income for the rest of your life. If you are within 10 years of retirement, it’s time to take action. If you don’t take advantage of the last 10 years of your working life, you will miss a valuable opportunity.

You need to know the following before you can make any decisions:

  • How much will you need to live on?
  • How much can you save before retirement?
  • Will you be working part-time after you retire?
  • Will you retire gradually?
  • When will you qualify for the state pension?
  • Do not forget inflation. If inflation is running at 3% per annum, the purchasing power of your funds will be reduced by over 30% after 10 years. Make sure your retirement fund is sufficient.
  • What is the current value of all your pension funds?

Do you own a business?

If you own a business and you would like to sell it to help fund your retirement, you need to be aware of the generous tax advantages given by Revenue, i.e. “Retirement Relief” and “Entrepreneur’s relief”.

In order to qualify for these reliefs, certain conditions must be met, so now is the time to check out the criteria. It may mean that you simply cannot retire at the chosen date as you have not satisfied the conditions laid down. See www.revenue.ie

Selling a business is not always straightforward. It needs to be planned many years in advance.

The following issues should be considered:

  • Will someone buy the business if you have exited the business?
  • Is the business worth as much or indeed anything if you are just about to retire from it?
  • Is there a recurring income built up in the business?
  • How much do you need to sell the business for in order to make your retirement possible?

What is your current expenditure?

Calculate how much you are spending now on a monthly basis. This can be a little tedious, however, stick with it as it is important. Have a rough idea of how much you will need in retirement (net – after-tax). Remember your mortgage should be paid off so please ignore this. Obviously, you can ignore pension contributions and savings as these will also have stopped.

Bring clarity to your affairs

Make things as simple as possible so you do not get overwhelmed by the detail. Gather together all your pensions, investments, and saving policies. Consider amalgamating the policies under one roof, but only if it makes sense. Having individual policies all over the place can make things more difficult.

Warning – Before you do this, check the following:

  1. Do any of the policies give you a guaranteed pension?
  2. Do any of them provide guaranteed fund performance?
  3. Do they provide a guaranteed lump sum?
  4. Will you forfeit a final bonus if you leave early?
  5. Will you suffer any exit penalties?
  6. What charges and costs are you paying?

Make sure you talk to a fee-based Certified Financial Planner who will guide you through the maze that is Irish pension legislation.

Save as much as you can

It is never too late to start saving – every penny counts!  Maximise the tax effectiveness of saving by investing in pensions, in order to get the highest return. Get “free money” from your employer by convincing him to make an employer contribution. Remember a 55-year-old can contribute 35% of their salary into a pension and get full tax relief (subject to the salary cap of €115k).

How much risk should you be taking in the last 10 years?

Traditionally, people were advised to de-risk in the years approaching retirement.  Move from growth assets to defensive assets. If you talk to a certified financial planner he will draw up a detailed financial plan for you. This will give you many things including a “rate of return” needed. This information will help calculate the level of risk that should be taken in the last few years.

For those in their final years, the following “must dos” are necessary:

  • Invest in a last minute Additional Voluntary Contribution (AVC). You can also backdate your pension contribution for 1 year which means that you can maximise your pension contributions for the last 2 years.
  • Write to the Department of Social Protection to find out what state pension, if any, you are entitled to – see http://www.welfare.ie
  • If you are in a defined benefit pension make sure the insurance company has all your up-to-date salary details etc. This could give you a higher tax free cash lump sum.  You may not be limited to 25% tax-free cash.
  • Employ a Certified Financial Planner who will run through all your retirement options with you. Retirement planning is complicated so this could be the best fee you have ever spent.