Investing

How Much Do I Need in a Pension to Retire Comfortably?

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Dec 12

Well, the simple answer to that depends entirely on the amount of income you want each month when you retire, over and above the state pension.

The more you want, the more you will need to have in your fund so the starting point to any retirement plan is figuring out what this is for you.

Assuming you qualify for it, the state pension will only give you €1,075 each month as a single person or €1,999 p/m if you have a dependent spouse. 

That’s your income floor which means anything you want on top will need to come from whatever income producing assets you manage to collect over the course of your career.

Things like a business, an investment property or a pension fund.

If you’re working with a pension then the actual amount you need to have can be determined by your income need and then working backwards to determine the fund required to generate it. 

To do that we would use the standard figure of 4%.

We would use this figure of 4% because it represents the standard annuity rate and is also the globally accepted, sustainable rate of withdrawal from post retirement investment funds i.e. Approved Retirement Funds.

If we work with that, then each additional €1,000 you want on top of your state pension each month, would need €300,000 in a pension fund to provide it.

In other words, you get €1 euro worth of monthly income in retirement for every €300 you have saved. Guaranteed income is expensive which is why you need to have an appropriate strategy in place to get the most out of the money you invest.

That said, annuities are not very popular because the rates are very low right now so they don’t offer great value. However, that doesn’t necessarily mean they should be dismissed out of hand though because they certainly have their place.

Ultimately, the amount you need to retire depends on the lifestyle you want to have.

That lifestyle will require a monthly income so here are a list of fund values from €50,000 up to the maximum €2 million, showing;

  • The maximum lump sum after tax, 
  • The expected monthly income it will generate at 4%
  • The effective rate of income tax payable at each level.

You can work your way down the list and stop at the one that you think is achievable.

That’s a good start.

So, here is the effective rate of income tax payable on income from funds starting at €50,000 up to €2,000,000.
 
*Assumes 4% annuity income for a 66 year old with a dependent spouse in receipt of the state pension with no other income sources;
 

€50,000 – €500,000

  • €50,000 fund = €12,500 lump sum + €2,125 p/m (Income tax rate 0%)
  • €100,000 fund = €25,000 lump sum + €2,250 p/m (Income tax rate 0%)
  • €150,000 fund = €37,500 lump sum + €2,375 p/m (Income tax rate 0%)
  • €200,000 fund = €50,000 lump sum + €2,500 p/m (Income tax rate 0%)
  • €250,000 fund = €62,500 lump sum + €2,625 p/m (Income tax rate 0%)
  • €300,000 fund = €75,000 lump sum + €2,750 p/m (Income tax rate 0%)
  • €350,000 fund = €82,500 lump sum + €2,875 p/m (Income tax rate 0%)
  • €400,000 fund = €100,000 lump sum + €3,000 p/m (Income tax rate 0%)
  • €450,000 fund = €112,500 lump sum + €3,125 p/m (Income tax rate 1.6%)
  • €500,000 fund = €125,000 lump sum + €3,250 p/m (Income tax rate 3.08%)

€550,000 – €1,000,000

  • €550,000 fund = €137,500 lump sum + €3,375 p/m (Income tax rate 4.44%)
  • €600,000 fund = €150,000 lump sum + €3,500 p/m (Income tax rate 5.71%)
  • €650,000 fund = €162,500 lump sum + €3,625 p/m (Income tax rate 6.90%)
  • €700,000 fund = €175,000 lump sum + €3,750 p/m (Income tax rate 8.01%)
  • €750,000 fund = €182,500 lump sum + €3,875 p/m (Income tax rate 9.03%)
  • €800,000 fund = €200,000 lump sum + €4,000 p/m (Income tax rate 10.00%)
  • €850,000 fund = €210,000 lump sum + €4,125 p/m (Income tax rate 10.91%)
  • €900,000 fund = €220,000 lump sum + €4,250 p/m (Income tax rate 11.76%)
  • €950,000 fund = €230,000 lump sum + €4,375 p/m (Income tax rate 12.57%)
  • €1,000,000 fund = €240,000 lump sum + €4,500 p/m (Income tax rate 13.33%)

€1,000,000 – €1,500,000

  • €1,050,000 fund = €250,000 lump sum + €4,625 p/m (Income tax rate 14.05%)
  • €1,100,000 fund = €260,000 lump sum + €4,750 p/m (Income tax rate 14.74%)
  • €1,150,000 fund = €270,000 lump sum + €4,875 p/m (Income tax rate 15.38%)
  • €1,200,000 fund = €280,000 lump sum + €5,000 p/m (Income tax rate 16.00%)
  • €1,250,000 fund = €290,000 lump sum + €5,125 p/m (Income tax rate 16.59%)
  • €1,300,000 fund = €300,000 lump sum + €5,250 p/m (Income tax rate 17.14%)
  • €1,350,000 fund = €310,000 lump sum + €5,375 p/m (Income tax rate 17.67%)
  • €1,400,000 fund = €320,000 lump sum + €5,500 p/m (Income tax rate 18.18%)
  • €1,450,000 fund = €330,000 lump sum + €5,625 p/m (Income tax rate 18.67%)
  • €1,500,000 fund = €340,000 lump sum + €5,750 p/m (Income tax rate 19.13%)

€1,550,000 – €2,000,000

  • €1,550,000 fund = €350,000 lump sum + €5,875 p/m (Income tax rate 19.57%)
  • €1,600,000 fund = €360,000 lump sum + €6,000 p/m (Income tax rate 20.00%)
  • €1,650,000 fund = €370,000 lump sum + €6,125 p/m (Income tax rate 20.41%)
  • €1,700,000 fund = €380,000 lump sum + €6,250 p/m (Income tax rate 20.80%)
  • €1,750,000 fund = €390,000 lump sum + €6,375 p/m (Income tax rate 21.18%)
  • €1,800,000 fund = €400,000 lump sum + €6,500 p/m (Income tax rate 21.54%)
  • €1,850,000 fund = €410,000 lump sum + €6,625 p/m (Income tax rate 21.89%)
  • €1,900,000 fund = €420,000 lump sum + €6,750 p/m (Income tax rate 22.22%)
  • €1,950,000 fund = €430,000 lump sum + €6,875 p/m (Income tax rate 22.55%)
  • €2,000,000 fund = €440,000 lump sum + €7,000 p/m (Income tax rate 22.86%)

There is a common misconception that pensions are nothing more than a tax deferral exercise and that any tax relief you get on the way in is simply taken back later on.

That’s a myth because the income tax thresholds change dramatically when you retire. The individual in our example above can earn up to €36,000 p.a. before paying any income tax whatsoever. 

This means they can be drawing an income from a pension fund of €400,000 completely tax free. It’s only when a fund starts to creep over this value before they start becoming liable to income tax.

Even at €2,000,000 the effective income tax rate is only 22.86% which is just over half of the current working marginal tax rate of 40%! And that’s in addition to getting a lump sum of €440,000.

Click here to see the kind of pension fund you can accumulate by the time you retire.

If you would like more information feel free to email me at kevin@thepensionstore.ie or you can call me on 01 442 3929.

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