Is this a good retirement plan

coolaboola1357

Hi all

I'm planning and working towards having 300k cash and 300k pension pot for when I retire. Is this a good amount by people's standards ? I could have less cash and more pension but I love building cash reserves and like having full control of the money and being able to access it if I need to

Peregrinus

Couple of points:

First, "cash" and "pension pot" are not two different things.

"Cash" is an asset class, like shares, bonds, property, etc.

A "pension" is an arrangement through which you can make investments. Broadly speaking, you can invest in the same asset classes through a pension as you could outside a pension. The result of using a pension is not that you have different investments, but that you get a particular tax treatment, more favourable than if you invested outside the pension, but access to your investments is restricted.

So, if you like cash, you can invest your entire pension in cash, and you can invest in cash outside your pension as well.

But, you have to ask yourself, is it wise to like cash all that much? Cash is not volatile; its value does not go up and down like the value of shares, or even the value of property. It earns a fairly steady return. But it's a low return — especially in real terms. The interest rates a cash depositor can get are often lower than the rate of inflation, which means that your cash deposit is actually losing value — even after interest is added, at the end of the year it will buy less than it would have bought at the start of the year.

This may be a price you're willing to pay in order to avoid short-term volatility and to get the other attractive characteristics of cash, like ready access. But if you're saving for the long term, short-term volatility shouldn't matter to you, and neither should ready access. It doesn't matter to you whether the value of your investments bounces wildly up and down from month to month, or even week to week; you won't need them for 10, 20, 30 years, so what matters to you is the long-term return. And what are called real assets — shares, property, etc — deliver much better long-term returns than cash does. So the usual strategy suggested to a long-term investor is that they should invest predominantly in real assets until they are maybe three or five years off the time they expect to want to draw on their investment, and then switch progressively into cash as their investing horizon becomes more short-term.

As for the balance between investing inside a pension and investing outside a pension, the trade-off here is between:

(a) the tax advantages of a pension, which will greatly increase your investment return over the long term, against

(b) the ready access you have to investments outside a pension, which you can cash in whenever you like.

How much investment return you are prepared to sacrifice for ready access is a decision only you can make; it's a matter of personal preference. But, since ready access costs you real money, you should think long, hard and realistically about how much of your investments you might really wish to uplift and spend at short notice.

Finally, when you talk about total retirement savings of €600k, you are of course speaking in today's terms. Let's say you're 30 years' off your expected retirement. Over the past 30 years, cumulative inflation in Ireland has been 91%. If that pattern is maintained, to have the purchasing power, in 30 years' time, of €600k today, you'll need total savings of €1.15 million.

coolaboola1357

https://www.boards.ie/discussion/comment/121103762#Comment_121103762

I doubt many people will have 1.15 million for their retirement years

Jim2007

No. Having full control and access to the savings, almost always leads to you ending up with less. I have spent most of my working life in Switzerland, so I don't have figures for Ireland.... So the average Swiss baby boomer hitting retirement has a net worth of about $600k, where are as the average US baby boomer in the same situation comes in with a figure of about $22k! And studies have shown that it is not because the Swiss are some how more savvy savers or investors than the Americans, it's because the Swiss have no chance at all to access their savings until retirement. There are many loopholes in the US system that allows access to pension savings and people alway manage to come up with a very good reason to do so.

Behavioural Finance is an emerging area of study and it very interesting because it allows us to better understand why people given the same circumstances often have very different financial outcomes. That is why financial advisors are starting to put serious efforts into building up a psychological profile of their clients so their advice can be more targeted and less likely to fall on deaf ears. And in that respect, there are very few people I'd bet on to keep 300k tucked away safely for say a period of 10 or 15 years.

So if you want to be sure to have your target savings on retirement, start by putting it out of reach. Then we can talk about whether it will be enough, portfolio construction, instrument select and all that jazz.

o1s1n

https://www.boards.ie/discussion/comment/121103895#Comment_121103895

I am in no way expert on any of this, but are you not way off with the average net worth of someone in the US hitting retirement?

For 65-75, Forbes puts it at $1,215,920 average and $266,070 median.

https://www.forbes.com/advisor/investing/financial-advisor/average-net-worth/

Peregrinus

https://www.boards.ie/discussion/comment/121103885#Comment_121103885

It will be as attainable as 600k today is.

Peregrinus

"Net worth" and "retirement savings" are very different things. For most middle-class people reaching retirement age, their net worth is largely represented by their home, which has a high value and little or no outstanding mortgage. But most people do not want to have to sell their home in order to put groceries on the table in retirement; they want to continue living in their home and pay their living expenses out of their retirement savings.

So, retiring Americans have a median net worth of $266k (that's per household, by the way, not per individual) doesn't mean that they have that amount in retirement savings. They almost certainly have a significantly lower amount in retirement savings.

Viscount Aggro

https://www.boards.ie/discussion/comment/121103885#Comment_121103885

On the contrary, that's on the low side for a private pension pot.

The 4% safe withdrawal rate SWR is no longer seen as safe. Take 2% from this figure yearly, and you can see it's a small income to survive on.

People in my social group are aiming for 2M pension pot.

coolaboola1357

https://www.boards.ie/discussion/comment/121104031#Comment_121104031

yeah but i dont understand this SWR thing, thats for people that dont actually want their pension fund to decrease in value . I dont see the point of that, why would you want to die and leave behind a full pension pot. My plan would be to have a certain amount to spend over a 20 year period from 67 - 87 and if im still alive then downsize and live off the proceeds but in all liklihood i wont be alive at 90 years old anyway

Why do people want to maintain this SWR ?

coolaboola1357

https://www.boards.ie/discussion/comment/121104009#Comment_121104009

600k doesnt sound too bad then

Viscount Aggro

Its known as "bomb out" risk.

Jim2007

https://www.boards.ie/discussion/comment/121103932#Comment_121103932

No because the US has a magical way of valuing pension benefits - they are for the most part unfunded as opposed to under funded which is sometimes the case in Europe, but of course senior executives pensions are in fact funded like European ones.... One of the well know examples of this was Enron, one day the retirees had great pensions and the future looked bright, the next day they had zero. Of course there are wealth Americans and some pension benefits are excellent and properly funded, but if you peel that layer backs, it's a different story for most people. One of the big issues or me is the way the roll pension savings over to a new employer, there is an option at that point for the employee to access the savings and if the person is on a low income that is what happens. And it's justified often by the soft sell - buy new a "X" because it will save you money in the long run and you can use the extra savings to pay back your pension savings and them some. But it never happens.

The behavioural aspect of savings is very important and the person you see in the mirror every morning is the one that will have the biggest impact on the outcome. That is why you need to be very honest with yourself and then pick the type of investments and savings products what you are likely to stick to over the long haul. If you find it very easy to talk yourself into spending money or often make impulse purchases, then it is best to put your pension savings out of reach.

Peregrinus

https://www.boards.ie/discussion/comment/121104071#Comment_121104071

In some cases, because they want to leave an inheritance for their children.

In other cases, because they don't want to run out of money while still alive, and they don't know how long they might live. Thus they want to manage their fund in a way that will enable them to draw a stable (in real terms) income more or less indefinitely.

Average life expectancy at age 65 is 18.28 years. You might think that this means you should manage your retirement savings so that they will last about 18 years but no, that would give you a 50% chance of running out of money while still alive, which is the very problem you are trying to avoid.

You say you probably won't make it to 90 but, actually, you quite possibly will. Obviously I don't know anything about your family history or about the, um, lifestyle choices you have made but, just based on average figures, out of every 1,000 people aged 65, 216 will still be alive at age 90. So there's more than a 20% chance that you will need to fund yourself into your 90s, and at that age your expenses are quite possibly going to rise fairly sharply, because you'll need to buy more and more services, and more and more care. So the majority of people who live to this age are not in a position to "downsize" their expenditure and a strategy which depends on doing this is, um, not likely to be viable.

Which points to possibly another reason why some people target the stable withdrawal rate. They want to leave the real value of their savings more or less untouched so that, if in later life they need to fund major expenses like a move to a residential home, adaptations to their own house so they can stay there, the employment of a companion or carer, etc, the fund is there to do that. The plan is to start eating into the value of the fund if and when major new expenses start to hit.

sbs2010

Don't disagree that you could be hit with some unexpected major outgoings late in life but in cases I've seen, it's the opposite.

If you have no mortgage and good health insurance, your outgoings reduce significantly after age 80.

People plan their retirement needs based on active social life, foreign holidays, all that stuff. But once you go 80+ your interest in that goes way down.

A 90yo doesn't have much expenditure at all. So needs way less cash that a 70yo.

But its tricky to plan that tapering off. You don't want to spend too much too soon and run out. Equally, if you die at 95 with 800k in savings, think how much you might have enjoyed spending some of that back when you were 70.

Peregrinus

This is true but what it means is that, if you live well into your 80s, your routine expenditure falls to quite modest levels but, the longer after that you live, the greater the chance that it will rise again, possibly very sharply.

A further complicating factor is that most people retire as part of a couple, and their (joint) retirement savings need to be managed in a way that will last for the lifetime of whichever of them lives the longest. The chances that one person age 65 will be alive at age 90 are, as noted, 21%, but that chances that, given two people aged 65, at least one of them will be alive at age 90 are considerably higher than that - my back-of-the-envelope calculation says its about 37%.

The other unknown is whether you will, in fact, need to move to residential care, install a lift, hire a companion or whatever. The longer you live, the more likely it is that you (or one of you) will need something like this, but it is not inevitable.

It follows from all this that a fair proportion of the money that people save for the rainy day of extreme old age and/or infirmity is not spent for that purpose, and ends up as an inheritance for their children, who typically are already in their 60s. But as long as we take the view that each individual or couple should largely fund their own retirement that seems to me to be inevitable.

So the path you want to follow comes down to a matter of personal preference: which mistake would you rather make — miss out on travel opportunities and other experiences in your 70s and save money for later expenses which, in the event, never arise, or take those opportunities and have those experiences, and then not be able to fund later expenses which, in the event, do arise?

Habata

https://www.boards.ie/discussion/comment/121104031#Comment_121104031

That must be unusual for anyone that isn't self employed or a director?

It would be very difficult for your average Joe to accumulate anything like that?

Viscount Aggro

Not quite correct. If one is determined and ruthless enough, you could do this. Focus on every cent, live on next to nothing for years.

esker72

There's a balance between scrimping and saving to have a big pension pot and actually enjoying life while you're younger and more likely healthier. Lots of cases where people went without through their working life and then eihter got sick or died quite quickly after retiring.

Peregrinus

I think the 2m figure is pretty meaningless unless it's linked in some way to the earnings you enjoy while working and the level of income you hope to enjoy in retirement. Viscount Aggro says that this is the target for people in "his social group", but we've no idea what that social group is. (Though he is a viscount, after all 😉).

The state retirement pension in Ireland is about 13.8k. Viscount Aggro says that he targets a 2 million retirement fund because he wants to work on a 2% withdrawal rate; that suggests he plans to draw 40k per year. The combination of the two gives him retirement income of 53.8k. If you work off the rule of thumb that in retirement you aim for an income of two-thirds of what you earned while working, that suggests he envisages earnings just before retirement of about 81k.

(I'm assuming here that VA is a single person. If 2 million represents the targetted combined retirement fund of a couple, these calculations look different.)

If you're in the kind of job where salaries of 81k are common, can you hope to accumulate retirement savings of 2 million over your working life?

In general, by the time you retire the bulk of your retirement fund will represent not the contributions you paid in, but the income and gains earned by those contributions over the years. In fact, if you start 40 years before retirement and contribute consistently, as a rough rule of thumb €6 out of every €7 in your retirement fund comes from earnings within the fund; just €1 from contributions.

Which would mean that total contributions to the fund over the 40 year period would need to be about 286k, or about 7.2k per year. (In fact it's not as simple as that; typically your salary starts small and grows over the course of your career, so your contributions are lower in the earlier years and higher in the later years. But here we're just doing back-of-the-envelope calculations.)

If you earn 81k gross can you save 7.2 k, bearing in mind that pension contributions are tax-deductible? Yeah, you can, if you want to.