How to make your ARF retirement income last well into your old age
Q. Having recently retired at age 66, I have an Approved Retirement Fund (ARF) available to me of €125,000. My current income is State Pension of a little under €12,000 per annum and an income from another Pension of €10,000 per annum. My income needs in retirement are €30,000 per annum Gross before tax. I need to know how to structure the investment and withdrawals from my ARF, so that it lasts well into old age. Can you please help? A. Thank you so much for your query. With so many people now entering retirement age and availing of their Pension Provision, this type of conundrum is becoming more and more common.
An (Approved Retirement Fund) ARF is designed to allow retirees have control and flexibility of their retirement arrangements. It is used to provide you with an income in retirement, whilst also allowing you to retain ownership of your fund.
The question posed by many people in your position is how to ensure: 1) A low level of risk with regards to how their ARF is invested in retirement, given the importance it plays in providing an income in retirement and, 2) What level of income can be taken from the ARF in retirement, that is both appropriate and sustainable, to allow for sustainability of income well into old age.
The level of Gross income you wish to drawdown from your ARF, as identified by you, is as follows: Income Needs €30,000 per annum Current Income is: State Pension €12,000 p.a. Private Pension €10,000 p.a.
Total Income at present =€22,000 per annum
Income Shortfall is €8,000 per Annum (€30,000 less €22,000). This is the amount you wish to draw from your ARF each year.
Assuming you were to invest your €125,000 ARF in a Deposit Based ARF with a Guaranteed Return of for example 2.5% Net of Charges per annum. Based on an income being taken of €8,000 per annum, indexed @ 3% per annum to account for inflation, the ARF Investment would sustain you for a little over 15 years.
In essence this would mean that at age 81, the ARF value would be €0. However, based on the same set of figures, were you to reduce you starting income from €8,000 per annum to €6,000 per annum, the ARF Investment would sustain you for a little over 20 Years. This would mean the ARF would provide an income until age 86. This represents 5 extra years of income provision.
As you can see, careful planning and consideration of both the way in which the ARF is invested and also the amount that you drawdown from the ARF can have considerable effects on the time for which your ARF will be able to provide you with a sustainable income.
Whilst there is no limit to the amount you can withdraw from your ARF (although all income of this nature is assessable for income tax), the key issues lie in the way in which you invest your monies, the level of income you need to take from it and the sustainability of this income.
Jim Doyle ACMA QFA is a partner in RDA Accountants offering full accountancy, business advisory, tax advisory and financial services. RDA Accountants | 5 Upper George Street, Wexford | Louisville House, Waterford Road, Kilkenny | 053 91 70507 | www.rda.ie RDA Wealth Ltd trading as RDA Accountants is regulated by the Central Bank of Ireland