How Much Should I Really Be Saving for Retirement in Ireland?

How much should I actually be saving for retirement? The honest answer is - it depends.

Your ideal retirement savings target will be influenced by your lifestyle, when you want to retire, what income you'll receive from the State Pension, and whether you have other assets or sources of income. The good news is that it's never too early or too late to start planning.

Start with Your Retirement Lifestyle

Rather than focusing solely on a pension pot figure, think about the lifestyle you want in retirement.

Ask yourself:

• Will you travel regularly?

• Do you hope to help your children or grandchildren financially?

• Will your mortgage be paid off?

• Would you like to enjoy hobbies, dining out or golf?

• Do you expect to remain in Ireland or spend time abroad?

Your retirement income needs will be unique to you.

The State Pension Is a Foundation - Not the Full Solution

At the moment, the state provides a pension of up to €299.30 per week to pensioners under 80 increasing to €309.30 for those 80 and over. You may be able to get other allowances to assist you in old age, but they are all means-tested, so if you don’t think this amount will be sufficient to cover your needs in retirement you will need a private pension to cover the shortfall.

A Useful Rule of Thumb

Most people require 50-70% of their pre-retirement income to maintain their lifestyle.

For example:

This target may be lower than your current income because many retirement expenses reduce over time, including commuting costs, pension contributions and, in many cases, mortgage repayments.

How Much Should You Be Contributing?

In Your 20s

Generally, a pension is not a priority for young people, but it ought to be. It is not unusual for people in this age bracket instead to be focusing on paying rent or saving for a deposit on a house.

If you decide to put some of your wage into a pension, then the amount will be deducted from your gross pay, tax free. If you are paying the higher rate of income tax and if your employer is matching employee contributions, which is a common feature of employment contracts, you can effectively increase the value of every euro earned by almost 4 times as much by making a pension contribution instead of putting the money through payroll.

In addition, by making contributions early in life your pension benefits from the notion of compounding, as not only can the funds grow but growth can also grow.

Under the Revenue rules if you are aged under 30, you get tax relief on annual contributions on up to 15% of earnings in a year (subject to maximum earnings of €115,000). So, for example at age 25, on a salary of €28,000, you can contribute up to €4,200 per annum and get full tax relief.

Do not panic though if you have not a pension or have not yet started contributing, there is still time. If, however you are in a position to put some money aside, even regular small amounts will help build up your retirement pot.

In Your 30s

In your 30s, there is typically an even greater demand on your income than in your 20s if the cost of bringing up a family is added. This makes it harder to make contributions. At age 30-39, the allowable tax relief on annual contributions increases to 20% of earnings in a year. In doing this the Revenue is allowing people who maybe have not yet started contributing to a pension, to start doing so at a higher rate of their earnings.

If you have been building your pension for a number of years, you may consider if your financial circumstances have improved and if you are in a position to increase the amount you save in a pension each month. You may also want to talk to a financial advisor about the level of risk or type of assets you wish to invest in through your pension, in the hope of growing the pot in value along with new ongoing contributions.

In Your 40s

The allowable tax relief on annual contributions increases to 25% of earnings in a year for those aged 40-49. It is now increasingly important to look at your financial situation with a financial advisor, to see if you can afford to increase your pension contributions. You may be approaching your maximum earnings capacity in this decade, yet retirement is only 20 years away. Again, the more you can put in early, the longer you have to grow the overall value for when you come to retire.

In Your 50s

To keep with the trend, the allowable tax relief on annual contributions increases to 30% of earnings for those aged 50-54, and to 35% of earnings for those aged 55-59. This can allow you to put even more funds into your pension. Whether you, with the many, feel that you are playing catch-up on the pension or, with the few, your pension planning is well underway, you are at this point close enough to retirement to make plans for the final outcome of your pension. On the other hand, if there’s a shortfall, you still have time to adjust and correct the plan.

In Your 60s

The final tax relief limit is for those over the age of 60, where they can contribute up to 40% of their earnings and get tax relief on it, per annum. Of course, if you haven’t yet started contributing to a pension at this point it isn’t too late. Granted the amount of years you have available to make personal contributions that relief can be claimed on will be reduced, but even if you think you are behind it may be worth your while, at a minimum to fund for the tax-free lump sum which is available to you. The amount of this lump sum depends on the rules of your scheme, but typically you can take 1.5 times your final salary or 25% of the value of your scheme as a tax-free lump sum, up to a max of €200,000. A further €300,000 can be taken at a reduced tax rate of 20%.

What About Automatic Enrolment?

With the introduction of My Future Fund, many workers are now automatically enrolled into a workplace retirement savings scheme. This is a fantastic step towards improving retirement savings across Ireland.

However, automatic enrolment should be viewed as a starting point rather than the finish line.

For many people, the minimum contribution levels may not be enough to fund the retirement lifestyle they hope for.

Review Your Pension Regularly

Retirement planning isn't something you do once and forget about. It's worth reviewing your pension with your financial advisor whenever you experience major life events, such as:

• Changing jobs

• Getting married

• Buying a home

• Starting a family

• Receiving a promotion

• Becoming self-employed

Small adjustments made throughout your career can have a significant impact on your retirement income.

The Bottom Line

There is no single "magic number" that suits everyone. The right amount to save depends on your goals, your income, your retirement plans and when you start.

What matters most is getting started, contributing consistently and reviewing your plan regularly.

Every euro invested today has the potential to make a meaningful difference to your financial security in later life.

If you're unsure whether you're saving enough, a pension review with your financial advisor can provide clarity. Understanding where you are today is the first step towards building the retirement you want tomorrow.

Fiona Harris - ITC Marketing Manager