Earlier The Better To Work Out Your Retirement Number

What’s your retirement number? That’s the starting question for clients of Davy. What they mean is what level of assets or core capital do you need to accumulate over your working life in order to secure a desired level of retirement income?

It’s going to be a lot. Defined benefit pensions typically pay two-thirds of final working salary. Adding on the state pension brings gross income to c.70% of final salary. However, individuals also have to factor in spending and expenses that won’t be there in retirement, such as children outlays and probably mortgage payments.

Paula Finlay, Director at Davy Pensioneer Trustees, explains: “If the target is a pension fund of €1m at age 60, assuming a rate of return of 5% per annum, a 25-year-old would need contributions of €10,000 p.a., whereas a 35-year-old targeting the same fund would need contributions of €18,600 p.a. The sooner you start the better.”

Rates of return across pension plans vary, depending on the investment option selected. “Above all your pension fund should be invested in line with your own individual tolerance to risk, and getting the right

Paula Finlay, Davy Pensioneer Trustees

balance of risk and return is not an easy task,” Finlay advises.

“The three key questions to ask are what is your time horizon, how much growth do you want, and what amount could you afford to lose in the worst-case scenario? Pensions are long-term investments, so most people can afford to take a little more risk in these than with their own personal funds.”

For many people, saving cash and leaving it on deposit is their default method for financial reassurance. Cash can pile up in some pensions too, and this year has seen the introduction of negative interest rates on cash assets in pensions.

Finlay points out that money is purchasing power. “If your living costs double and your bank account remains the same, you have effectively lost half of your money. So while cash seems like a low-risk investment, the greater risk is the risk of not taking any risk at all. Don’t confuse certainty with security. Cash certainly does provide certainty of outcome, but in the current environment, this does not mean that your pension assets are secure.

“With negative interest rates and inflation now eroding the value of cash holdings both on deposit and in pensions, we believe a conversation about cash with your financial adviser is the best investment you can make.”