Retirement Planning: How Much Should You Save for a Secure Future?
Marta Pelc
28.02.2025
Creating and Maintaining Wealth that Transcends Generations
Targeting Retirement Income: Planning for Financial Income
The amount of retirement income you need depends on your lifestyle expectations. The amount of income you’ll need depends on your lifestyle expectations, and many people underestimate their future financial needs. While some expenses may decrease, others, such as travel, healthcare, and leisure, can increase. Without careful planning, the dream of a comfortable retirement may fall short.
To build a strong financial foundation, it’s crucial to consider other potential income streams during retirement, such as investment or rental income. Maximizing your eligibility for the state pension is also a factor. Let’s explore the key pillars of a robust retirement strategy.
State Pension
Your eligibility for the state pension depends on either the Average Rule or the Total Contributions Approach (TCA). To receive the maximum pension under the TCA, you must accumulate 2,080 PRSI contributions – equivalent to 40 years of contributions.
If you’ve taken time off work to care for children under 12 or an incapacitated person, Home Caring Periods can allow up to 20 years to be included in your contribution count.
For those planning early retirement, before the state pension age of 66, voluntary PRSI contributions after retirement can boost your pension entitlement. Checking your PRSI contribution statement here regularly ensures you remain on track.
Private Pensions
Our approach typically involves building a fund ranging from 7 to 13 times your gross earnings, depending on your current household income and age.
Keep in mind that the actual pension fund value needed for your retirement will depend on your personal lifestyle needs.
Since private pensions are typically inaccessible until age 60, consistent contributions are key. One effective strategy is increasing contributions in line with salary raises. This method minimises the impact on disposable income while ensuring steady pension growth.
Tax Relief Benefits
Personal contributions benefit from tax relief, significantly reducing the real cost of saving. For example, if you’re 42 years old, earning €50,000 annually, you may qualify for tax relief on €12,500 of pension contributions per year, meaning your effective cost could be just €7,500. See table below.
Age-related percentage for tax relief on pension contributions*
| Age | Percentage Limit |
|---|---|
| Under 30 | 15% |
| 30-39 | 20% |
| 40-49 | 25% |
| 50-54 | 30% |
| 55-59 | 35% |
| 60 or over | 40% |
(*source: Tax relief limits on pension contributions)
Employer contributions can significantly enhance your pension savings. If given the choice between a salary increase and a higher employer pension contribution, opting for the latter can be more financially beneficial due to tax efficiencies. A €1,000 employer pension contribution goes directly into your fund, whereas a €1,000 salary increase results in significantly less after tax.
Starting early enables you to contribute smaller amounts while still building a substantial pension fund over time, thanks to the power of compound interest. Additionally, funds invested within a pension grow tax-free, further accelerating wealth accumulation.
For business owners and company directors, you can efficiently direct substantial pension contributions into your pension fund in a tax-efficient manner. It’s advisable to consult with a pension advisor to determine the appropriate amount, as this can vary depending on the specific pension structure.
Will Auto-Enrolment Meet Your Needs?
Auto-enrolment serves as a solid starting point for retirement savings however, it’s essential to take proactive measures to ensure your savings will meet your future needs. With the proposed 14% contribution rate after 10 years, many individuals may find that their savings still fall short of providing their desired retirement lifestyle. Relying solely on auto-enrolment could result in a pension that covers only basic expenses, leaving little room for discretionary spending.
Please refer to the table below for more information:
| Year of the auto-enrolment scheme | Employee contribution rate | Employer pays | Government pays |
|---|---|---|---|
| 1 to 3 | 1.5% | 1.5% | 0.5% |
| 4 to 6 | 3% | 3% | 1% |
| 7 to 9 | 4.5% | 4.5% | 1.5% |
| 10 and after | 6% | 6% | 2% |
To close this gap, additional voluntary contributions and diversified investment strategies should be considered. A tailored approach, factoring in risk tolerance, investment timelines, and expected lifestyle costs will provide a more comprehensive and secure retirement plan.
Building a Resilient Retirement Plan
To ensure financial freedom in retirement, take proactive steps today:
- Define your retirement lifestyle and estimate your income needs.
- Diversify income sources beyond the state pension – consider private pensions, rental income or investments.
- Optimise state pension entitlements, ensuring full eligibility by monitoring PRSI contributions and making voluntary contributions where necessary.
- Take advantage of tax-efficient savings options and employer contributions.
The sooner you begin planning for retirement, the more options and financial security you will have. Wealth planning is not just about securing an income, it’s about creating the freedom to live the life you envision.
A forward-thinking approach, guided by expert financial advice, can transform your retirement from uncertain to secure. Your future self will thank you for the choices you make today.
Marta Pelc, Pensions Advisor
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