Professionals and business owners can be more guilty than most of putting retirement planning on the long finger. Often working long hours in challenging environments, they tend to have little time to focus on their own financial affairs and goals in retirement. Employers across the country are reporting a skills shortage, and the impact of these shortages means more responsibility, longer working hours and little or no time to focus on your own wellbeing.
However, setting aside some time to think about the life you want to live after your working life can greatly increase your sense of wellbeing and control, it can save you time in future years, and importantly, becomes one less thing to worry about.
Here are some important tips and considerations when developing your retirement plan.
Start with knowing how much income you might need
A common question asked is “how much money will I need to save for retirement?”. However, what retirement looks like can vary significantly from one person to the next. The answer is dependent on many considerations – including your age, desired retirement age, earnings, assets, health, and lifestyle. Most importantly it is about identifying your needs, your hopes and possibly even the dreams you have for yourself and your loved ones. From here a hypothetical ‘number’ can be established, which provides a starting point for your retirement planning process. Ultimately you will need to work with your financial planner to determine your own ‘magic number’ when it comes to providing for your retirement; one which reflects your unique circumstances, plans and lifestyle.
Phased retirement should be considered
Planning for a phased retirement is becoming an increasingly common approach to retirement planning for professionals and business owners. The basic idea is to create a path towards retirement where you don’t just go from working a full week to not working at all. There are big picture reasons phased retirements are more prevalent than in the past. First, people are living longer, with many people now living well into their 80’ and 90’s. People are also generally healthier and more active through their 60’s and 70’s than would have been the case in the past.
Take advantage of tax reliefs on pension contributions while you can
Whether you are a business owner, self-employed or an employee, maximising your pension contributions is still the most tax-efficient way of building your retirement fund. If you are a higher-rate taxpayer you will receive tax relief on your personal pension contributions at the marginal rate, subject to limits. This means that for every €1 you contribute to a pension, the exchequer will give you back approximately €0.40. If you are a business owner, your company can also make contributions on your behalf, subject to criteria and limits, which can attract full tax relief against Corporation Tax. To compound the benefit of pension saving, your pension funds grow tax-free, not being liable to Deposit Income Retention Tax – DIRT (33%), Capital Gains Tax (33%) or Exit Tax (41%) on the growth of the funds. Currently, you can build your pension fund up to a maximum of €2m. At retirement, you can take access up to 25% of this fund tax free, within certain limits.
As we approach the Income Tax deadline for 2021, which is 31st October 2022, you may still have scope to make contributions that qualify for tax relief for 2021.
Reduce the costs of your pensions and investments
Don’t let the benefits of tax relief get eroded by overpaying for your pensions and investments. Often overlooked, investment costs might not seem like a big deal, but they add up, compounding along with your investment returns. In other words, you don’t just lose the tiny amount of fees you pay—you also lose all the growth that money might have had for years into the future.
For example, if you have €100,000 invested in a pension plan and it earned 6% a year for the next 25 years and had no costs or fees, you’d end up with about €430,000. If, on the other hand, you paid 2% a year in costs, after 25 years you’d only have about €260,000. The 2% you paid every year would wipe out almost 40% of your final account value. 2% doesn’t sound so small anymore, does it?
Have an investment plan and understand how it should perform
This recent period of stock market volatility, inflation and economic uncertainty has exposed weaknesses in many investment plans. Lack of diversification, with overexposure to one or two asset classes, can put investors in high-risk positions that don’t align with their risk tolerance levels. Unfortunately, this is a common situation for business owners and professionals to find themselves in. They tend to be time-poor and focus on investments intermittently, and sometimes not at all. A lack of investment planning and poor ill-informed investment decisions over time can result in the need to push back retirement by a year or two or needing to work part-time in retirement. When developing your investment plan there are several important elements that should be considered; your investment beliefs and principles, competing goals, your current circumstances, your existing pension and investment assets, your timeframes, your capacity to take on risk and your appetite to take risk. Each of these factors must be considered carefully and must fully reflect your personal situation. Each is important, particularly in today’s challenging and volatile investment climate.
The value of retirement planning cannot be overstated, particularly for higher earners and business owners. The earlier you start, the more you can benefit from the annual tax reliefs available on pension contributions, together with the tax-free gains within a pension plan. Having a suitable investment plan which is personalised, and that you understand, can help you take advantage of investment opportunities that arise from market volatility and uncertainty over the long term.
Aengus Moran is an Investment Advisor and Certified Financial Planner (CFP®) with Acuvest. He has over ten years experience in the financial services industry, specialising in pensions and retirement planning as well as investment planning.