Financial Wellbeing and literacy expert Frank Conway from MoneyWhizz looks at retirement plans in Ireland.
Most workers are responsible for their own retirement savings these days, this means they must make savings and investment decisions about products they will often know little about. After all, since we don’t really teach investments in school here in Ireland, the vast majority of Irish workers are being asked to make complex financial decisions blind.
The following is what you need to know about saving for life after you stop working and getting on the path toward a comfortable retirement, no matter your career or the size of your pay.
The best day to start saving is today, even if you can save only a little bit.
The most important advice about saving for retirement is this: Start now. Why? Two reasons:
1. The magic of compound interest. This is one of the most fundamental questions in saving, financial planning and investing, and retirement planning incorporates all three; the sooner you begin, the less you’ll have to worry about it later.
Alert Einstein once called compound interest the “Eight wonder of the World” and for good reason. In this example, we explore the case of two people, both young; one is aged 22 and the is 32. If both put the same amount of money away each year (€5,000), earn the same return on their investments (six per cent annually) and stop saving upon retirement at the same age (67), the one that began saving at age 22 will end up with nearly twice as much money as the person that began at age 32. Or to put a value on the difference, the person that began saving 10 years earlier would have about €500,000 more at retirement. It’s that simple.
2. Saving is a habit. It may make rational, mathematical sense to start saving early, but it isn’t always easy. But the instinct to save grows as you do it, in other words, as you see a savings pot develop and grow, so will your motivation to keep it going. It’s a little goal achieved that lifts the lid on endless possibilities.
“Don’t be greedy and don’t be stupid”
Understanding your retirement investment options
Now that you have decided to take action and begin making contributions to your retirement account, the next decision you’ll have to make is how that money should be invested.
The options for retirement are cumbersome and even confusing for a lot of people: PRSA, AVC, OPS, PPP, BOB, ARF and AMRF. They came into existence over the decades for specific reasons, designed to help people who couldn’t get all the benefits of the other accounts. But the result is a system that leaves many people confused.
The first thing you need to know is that your account options will depend in large part on where and how you work.
If you work for an employer
If your employer offers any workplace retirement savings plan, it’s probably an Occupational Pension Plan. Each employer will have their own rules as to when new employees can sign up to join the OPS. All you have to do is fill out a form saying what percentage of your pay you want to save, and your employer will deposit that amount with a company that will hold it for you.
Employer doesn’t offer OPS plan or self-emplyed?
If your employer does not offer an Occupational Pension Scheme, do not worry. The law still has provision where you can still save for retirement and receive the same tax benefits as those that save through an employer-sponsored OPS. Typically, people will be dealing with a Personal Retirement Savings Account (PRSA) or Personal Pension Plan. The PRSA is used more these days.
Self-employed people can do the same, except they will need to ensure they have the PRSA (or Personal Pension Plan) contributions factored into their tax accounts as they are also entitled to tax-relief that same way as employees are.
“Nothing in life is free, even when it comes to saving for retirement”
When you leave an employer, you may choose to move your money out of your old Occupational Pension Plan or your own PRSA and combine it with other retirement savings from other previous jobs or add it to the pension savings account at your new employer. You can also leave your money where it is; under the existing arrangement with the employer you are leaving.
How to invest your money
You don’t need to be financially whizz to make smart investment decisions.
Don’t be a star!
There are mountains of books that promote how to invest and get you believing that investing is so, so easy. It’s not! The most common question that arises in MoneyWhizz financial well-being seminars is how to invest when presented with a range of investment options.
Think humble, boring and simple!
The great investment guru Warren Buffet is often credited with the “…don’t be greedy and don’t be stupid…” investment comment. What he is saying is for those that are investing for retirement or for everyday, the trick is to keep it as simple as possible. Retirement funds are managed and they fall into a series of ‘risk’ categories. High risk means that they are weighted towards shares in companies. These can rise and fall in value a lot. There are Bonds and they rise and fall in value also, but the swings in prices are much less dramatic. Then there are so-called ‘money markets’ and this is equivalent to leaving money on deposit…or cash; value rises and falls are not a concern…but inflation reducing the long-term value can be. So, be a little humble. Try opt for investment options that stand a good chance of beating inflation.
Most employer-based retirement options, like Occupational Pension Schemes will generally offer employees on-site advisers that can offer some guidance on a range of investment options. Make sure you take advantage of this when presented.
No help available?
If you’re on your own, one option is to pick a medium risk investment option that minimises your exposure as you don’t really want to take on the role of day-trader. That way, you have reduced your exposure to investment risk.
“Your retirement can last 20 years or much more and you really will need to have money in the bank to pay your way”
Nothing in life is free, even when it comes to saving for retirement. In Ireland there is a new push by the Central Bank of Ireland to make the whole fees landscape a lot more transparent.
The inside story on retirement savings accounts
Retirement accounts are not free, and the fees you pay eat into your returns, which can cost you plenty income in retirement. If you are employed, the company that runs your plan is charging your employer fees for the service. Plus each individual fund in the plan has its own costs. If you are self-employed, you’ll be charged for your PRSA or whichever plan you opted for when you met with your retirement planning product adviser.
Index funds tend to be the cheapest investments available, in addition to doing quite well over time when compared to other funds run by people trying to outperform everyone else’s market predictions.
Routine financial tune-ups
For most people in Ireland today with a defined contribution retirement account, they will have online access to view the performance of their investment. It’s a good idea to keep an eye on it but also, not become too obsessed by it as values can rise and fall. That said, try review once per year and if necessary, make tweaks to the investment strategy if necessary; this could include increasing or decreasing your risk exposure.
1. Nudge your retirement savings up a little
If you followed our earlier advice, you set up your retirement savings account, you will have money automatically taken out of each pay for your retirement fund. It’s a savings hack and you will barely miss it since it is gone before even taxes are taken out. So each year, try increase the amount you set aside by half a percent once you turn age 29.
2. Reconsider your investments
Are you committing too much to paying off a mortgage early and not near enough for your retirement? This can be as a result of a family bias. Mortgages will take care of themselves and yes, you will pay it off. But your retirement can last 20 years or much more and you really will need to have money in the bank to pay your way.
3. Rebalance your investments
It’s been a great half decade for stocks. So if you set up accounts five years ago with the intent of having 70 per cent of your money in stocks, the growth in those stocks may mean that your investments are now in a stock allocation that’s many percentage points higher. If so, it’s time to sell some stock and buy, say, more bond mutual funds to put things back into balance.
Getting your money when you need it
Presently, the set retirement date in Ireland is age 66. This is set to increase to 67 and 68 for younger workers. However, if you have a personal retirement fund it is possible to get access to your money before you qualify for your State contributory pension. This can start from age 50.
The good news: You can receive up to 25% as a tax-free lump sum in the case of a defined contribution plan. Defined benefit retirement funds offer up to 1.5 times salary as a tax-free lump sum.
But there is bad news too: The sooner you begin to cash in on your retirement fund, the less your fund will be benefiting from investment growth.
By Frank Conway
Frank Conway collaborates with Bank of Ireland on Financial Wellbeing and promoting financial literacy. He is a qualified financial adviser, founder of MoneyWhizz and chair of the Price Monitoring Group at the Department of Communications, Climate Action and Environment.
Published: 23 December, 2019