How big a pension pot do I need to retire comfortably?

QI’M a 47-year-old dad of three young children, and I’m selfemployed with a PRSA pension that I diligently started about 15 years ago. I’ve kind of let it slide in terms of paying attention to its performance and how much I should be putting in, particularly at this stage of my life. But hearing that Enda Kenny is going to be retiring from politics with a pension pot of €3m has made me sit up and wonder just how big of a pot I need to retire comfortably by the age of 68. Granted, he has been in public service a long time and has a DB plan, but still.

Conor, Athy, Co Kildare

ANSWERING a question like ‘how much do I need for retirement?’ requires me to know lots about you, your standard of living, your dependants and your ability to ring-fence assets for later life. In the absence of that knowledge, I suggest you focus on: 1) how much you can set aside each year for your retirement, and 2) the growth of those assets long-term.

For many people in your situation, there are lots of competing demands on finite resources.

As you appear to be playing catchup, I urge you to take advantage of the generous tax relief of 40pc (if you are paying tax at the higher rate) on your pension contributions (provided your annual contributions are no greater than 25pc of your annual salary).

Saving into a pension is one of the most tax-efficient things you can do.

That might motivate you to up your monthly contributions or add a lump sum.

There are more ways to save for retirement than through a PRSA, but let’s stick with that vehicle for now.

Find out what percentage of growth vs defensive assets (cash and bonds) are in your investment portfolio.

Many Irish investors who should be embracing market volatility shy away from it, and it costs literally thousands of euro over a lifetime.

Let’s assume a monthly contribution of €500, time left to retirement of 20 years, and an accumulated fund to date of €100,000.

Investing with an annualised return of 1pc p.a. leaves a pot at retirement of €255,000. Move along the scale to 4pc and the pot at retirement is €405,000. Embrace growth assets over the long term for a return of 8pc, and the fund is €763,000.

Assuming you have 20 years of living to fund in retirement, a fund of €255,000 will provide you with an income of €12,750 (ignoring inflation, etc), whereas a fund of €763,000 will provide you with over €38,000 every year. Big difference.

And yet we are inclined to focus all our attention on how much we can contribute, ignoring growth potential.

If you pay attention to both those factors, you’ll get a fighting chance of a stress-free life in retirement.

Investment paralysis

Q I HAVE a large lump sum sitting in a deposit account with a rubbish interest rate and with no sign of rates rising any time soon. So my mates have been on at me to invest in this, that or the other. All of them seem to be in something, but I’m a sceptical person by nature and I think I just love the security of cash in the bank. The last time I invested in anything was Telecom Éireann shares and needless to say, that didn’t work out well. How can I get over this hump?

Paul, Dublin 22

YOU were burned by a bad experience and you weren’t the only one. Telecom Éireann shares were recommended by the very people who shouldn’t be giving investment advice, including Government ministers.

I don’t blame you for being slow to take your mates’ advice.

You have learned from your mistakes, but your experience is also paralysing you.

Let’s consider first what would happen if you yielded to the warm, fuzzy feeling of cash in the bank.

Say you have €100,000 saved. Over 10 years, at 2pc inflation per annum, you’ ll be losing close to €20,000 in real terms over the term.

The rubbish interest rate is not your only niggle when it comes to money on deposit. Even a bad investment strategy is better than leaving cash in the bank.

It’s clear to see that you are in a good position to invest.

The hard work is accumulating the lump sum, and you have already done that. Now comes the easy part — investing it long-term.

This is the bit that you’re finding difficult, partly because of your bad experience with Telecom Éireann, but also because I suspect you do not truly understand risk.

Risk increases where you are unduly exposed to the fortunes of one company (Telecom Éireann or AIB), one country (Ireland), one sector (construction), one asset class (property). In addition, the more complex a proposition is, the more risky it is.

To mitigate risk, I recommend a globally diversified fund which has a broad spread of securities in many sectors, in many asset classes and in many countries.

Look for passive (or hands-off) funds, which mean fees will be lower and, more importantly, transparent.

This is not shares in AIB. This is not a structured product with the potential for capital loss over a term. This is not a kick-out bond. You need something that is open-ended and invested across global markets.

Such funds are now available to Irish investors at very reasonable prices. Consult with a fee-only financial planner on the options available.

Property punt?

Q I RECENTLY came across a company called Property Bridges, which sells itself as a peerto-peer investing platform. Like many, I’m attracted to the idea of investments linked to property, but what’s the catch?

Amelia, Caherciveen, Co Kerry

THE Irish love affair with investing in property needs to stop. I’ll sum up the problem in one sentence: there are too many fingers in the pie.

Let’s list them: the estate agent, the solicitor, the seller, the buyer, the lender, the ECB, the insurance company, the letting agent, the tenant, the accountant, Government, Revenue, tradesmen and the Residential Tenancies Board.

If there is a breakdown with just one of these parties, your investment becomes too much like hard work.

By investing in Property Bridges, you do not have to deal directly with most of these parties but are still joining the ranks of the property speculators.

The difference is you have no control over what type of property your money is invested in or where.

Property Bridges has two full pages on risks.

To be fair to the people behind the company, they give an honest account of many of the risks associated with the type of investment.

Risk number one: loss of capital. Risk number two: illiquidity. Risk number three: security risk. There are 11 risks listed overall.