The average pension fund in Ireland matures at around €107,000.
As a result, it’s fair to say that most people face a sizeable drop in their standard of living when they reach retirement.
If you want want a different outcome then you need to make the most of your opportunities so here are the 7 reasons why your pension isn’t as big as it should be and what you can do change that in 2020. (8 minute read)
Reason #1: You’re Not Making The Most of Your Time.
A tidsoptimist is someone who believes they have more time than they actually do. (I’m sure you know at least one person who’s consistently late for everything!)
Managing your time is important but it can be a difficult thing to do, especially since most of us are guilty of underestimating the amount of time we have to build a retirement fund.
And that’s the problem.
You see, if you don’t see time as a constraint on your financial planning then you need to change your perspective because, when it comes to money, the passing of time is either bringing you closer to your financial goals or further and further away from them.
If you believe that you have all the time in the world then you’ll have no sense of urgency.
This lack of urgency makes it very easy to postpone the hard financial decisions you need to make in the belief that you’ll get around to them later on.
The reality is that you do have time but what you probably don’t have enough time to build a fund large enough to last you 30+ years in retirement.
Time is the only thing money can’t buy so if you’re serious about retiring with the financial freedom you want then you need to make the most of it.
If you’re 40 now and you want to retire at 68 then you have 336 monthly contributions left to construct a fund which means each month represents 0.3% of your total available time.
Solution: Create the urgency you need to take action by working out what each month represents in your plan and act accordingly.
Reason #2: You’re Too Cautious With Your Investment Strategy.
You will be much happier reaching 68 with a big pension fund so it’s vital to get the investment returns you need to realise that ambition.
This might seem obvious but the reality is that most people are wholly underexposed to the returns they need in the belief that ‘safety first’ is always the right strategy.
The truth is that you need to realise a minimum investment return of around 3.75% each year, once you factor in charges and inflation, just to preserve the value of the money you invest.
As such, your growth expectations should factor this as a base level of return before you even start thinking about your own growth goals on top.
Unfortunately, the evidence would suggest that the majority of people don’t think this way when you see the way money is invested by the population at large.
Below is the distribution of money invested across a range of branded fund suites from some of the well known Irish insurers. Note the difference in weightings, and the corresponding rates of return, for each over the last 3 to 6 years.
New Ireland (PRIME – €1.65 Billion)
- (1%) PRIME Equities: + 9.8% each year since 2015 (high risk)
- (8%) PRIME 5: + 8.4% each year since 2015 (medium high risk)
- (33%) PRIME 4: + 7.9% each year since 2015 (medium risk)
- (58%) PRIME 3: + 4.0% each year since 2015 (low risk),
Irish Life (MAPS – €6.2 Billion)
- (1%) MAPS 6: + 6.9% each year since 2013 (high risk)
- (9%) MAPS 5: + 7.1% each year since 2013 (medium high risk)
- (41%) MAPS 4: + 5.7% each year since 2013 (medium risk)
- (38%) MAPS 3: + 4.1% each year since 2013 (medium low risk)
- (11%) MAPS 2: + 2.5% each year since 2013 (low risk)
Zurich (PRISMA – €3.3 Billion)
- (2%) PRISMA 6 : + 8.4% each year since 2013 (high risk)
- (18%) PRISMA 5 : + 9.2% each year since 2013 (medium high risk),
- (40%) PRISMA 4 : + 7.1% each year since 2013 (medium risk),
- (32%) PRISMA 3 : + 3.4% each year since 2013 (medium low risk),
- (8%) PRISMA 2 : + 1.3% each year since 2013 (low risk),
The takeaway is that between 82% and 90% of all money is being invested into the lowest performing funds across these portfolios.
It’s regrettable that people don’t get the returns they need but it’s usually because they’re not in a position to get them.
Remember, you don’t need to be fully invested in higher risk funds but you should have some exposure. (Yes, these examples are of a short time horizon but there are many examples of Irish funds producing average returns of over 8% p.a. since the 80’s)
Solution: Invest with purpose instead of being passive or relying on default options because these won’t get you what you want long term.
Reason #3: You’re Not Contributing Enough (…or Often Enough).
Financial planning, or anything to do with money for that matter, is a numbers game so you should look to swing as many variables in your favour as much as possible. One effective way to do this is by taking advantage of cost averaging.
Cost averaging means that by consistently investing on a regular basis, you take advantage of market movements more frequently. The more contributions you make the more you average out your unit costs when purchased by the month rather than in one single purchase each year.
Over time, this smooths out your average by avoiding the extreme highs and lows of the market. It’s just a matter of changing how you invest rather than anything else but can greatly benefit your fund over time.
A self-employed 35 year old has a choice on how to invest into the future. Make one large lump sum contribution at a single price point for each of the next 33 years, or make 420 smaller monthly contributions with scope for 35 smaller lump sums at the annual tax deadline (that’s 455 in total).
All told, the latter will prove a much more effective way to use the same amount of money.
The other variable you have control over is the amount you contribute. It’s easy to convince ourselves that we’re doing all we can when we know deep down that we’re not. (I know that I’m guilty of this one).
Obviously, the more you put in to a pension the more you get out so, if you’re not too sure whether you’re paying enough to achieve your goal, use our calculator to get a good idea of where you should be at.
Solution: Increase your contribution frequency by simply paying monthly and leave room for an optional contribution at the tax deadline.
Reason #4: You’re Not Keeping Up With Inflation.
Inflation is incredibly destructive but it’s not something that tends to get factored into the financial plans of most investors. This is a mistake because the value of money erodes over time if allowed.
To illustrate the impact, let’s take our average pension fund of €107,000 and apply a rate of 2.5% inflation on it. Here is the resulting impact it has on its real value after;
- 1 year – €104,325
- 5 years – €94,572
- 10 years – €83,594
- 20 years – €65,299
- 30 years – €51,011
It’s very easy to fall behind on this treadmill if you’re not actively trying to keep up with it so you need to continuously fight against it.
Solution: Take a deliberate investment position to outgrow its impact or increase your annual contributions by an equivalent rate instead.
Reason #5: You Make Emotional Investment Decisions.
Losing money is painful.
However, when it comes to investing, there’s a big difference between paper losses and actual losses.
As an example, I once had a client who crystallised a loss of over €100,000 in the 3 seconds it took him to send an email during the 2009 crash.
Not the outcome he wanted obviously, but despite my protests that it was the wrong thing to do at the time… he did it anyway. He just couldn’t accept that it was too late to do what he felt he had to do.
From my 15 years experience I can tell you that the people who win with their investments are those who can detach themselves from the emotions of a big financial decision.
Emotional decision making can be very costly and it’s the main reason why institutional investors win out over retail investors in the long run. Markets move in cycles so it pays to learn how to navigate them properly if you want to be successful.
Financial decisions need to be made cold so just ignore the noise and focus on the relevant numbers because one poor decision can cost you more than a lifetime worth of charges.
Solution: Get good professional advice before making any big decisions.
Reason #6: You’re Losing a Fortune on Charges.
Wealth needs to grow but it also need to be protected.
Charges are part and parcel of financial services and they’re the incentive that keeps everyone motivated to increase the value of your assets over time.
That said, it’s easy to pay much more than you should because some charges are excessive for what you get, whilst others are merely a byproduct of where you took out your plan in the first place.
Most retail outlets have one universally high set of charges whereas a broker can have up to 90 different charging structures for any one individual plan.
In the absence of justifiable value, the charges you pay can serve to both dilute your contributions and drag down your fund performance so it always pays to see if you can lower them.
How do you know if this applies to you?
Well, if you can’t answer the question “What charges do you have on your pension?” then it’s likely that you can save on fees. People who have good deals know they have them and you could get one too.
Wealth is hard made and easily eroded so it’s worth taking the time to try and protect your fund from them….especially the avoidable ones.
Solution: Get yourself a broker because they have better charges, a panel of providers and a wider range of investment options than banks or tied-agents.
Reason #7: You Haven’t Set a Clear Financial Goal.
If you want to lose 5lbs by June then an appropriate plan can be created to help you achieve that objective. However if, on the other hand, you want to lose 3 stone by April then you would need an entirely different plan to achieve that objective.
Having a goal gives you purpose and helps you to perform better because the size of the goal you choose directly determines the strategy you need to adopt.
Without one you have nothing to aim for and nothing to measure your progress against, in which case your strategy doesn’t really matter.
Solution: Try our calculator to find a clear financial goal for your retirement in 30 seconds. Click here.
How Do I Change Things?
Well, the thing about financial services, and pensions in particular, is that you don’t need to change too much to make a meaningful difference…but you do need to change something.
So, if you’re serious about reaching retirement in the best possible shape then get in touch with me today and let’s have a chat about your future.
You can reach me by;