Money Mentor: how much do I need in my pension when I retire?

Question: I’ve been reading more about pensions lately, and it’s starting to hit home that I’ve got no savings set aside for retirement. The State Pension doesn’t seem like it will be enough on its own, and I want to maintain my current standard of living when I retire. I’m 40 years old and earning €45,000 annually.

What’s a realistic savings target for someone like me? How much should I be putting away each month to reach that target, and are there any strategies to make saving more affordable? I would appreciate some clear, practical advice to help me start planning for the future.

Answer: Planning for retirement is one of the most significant financial decisions you’ll make, and it’s excellent that you’re starting to think about it at the age of 40. With no existing pension savings, your goal should be to ensure you can maintain a comfortable lifestyle when you stop working. Let’s explore what that means for you.

From age 66, the State Pension currently provides approximately €14,000 annually. While helpful, it only covers basic living costs, often falling short of the income you’ll need to maintain a lifestyle similar to your working years. To bridge the gap, you’ll need a robust private pension or retirement fund.

Key factors to consider

Your ideal retirement savings depend on several variables, including:

When you plan to retire: If you wish to retire early (for example, at 60), your private pension will need to cover the years before the State Pension kicks in, meaning a larger fund is required. Conversely, retiring later reduces the strain on your savings.

Desired lifestyle in retirement: A rule of thumb is that you’ll need around 50-70% of your current annual income to maintain a similar lifestyle.

For you, that’s roughly €22,500 -€31,500 per year, factoring in that some significant costs – mortgages and children’s expenses – are often reduced or eliminated by retirement.

Inflation: The cost of living will increase over time, so your savings must account for this.

Life expectancy: Assuming you’ll live until your mid-80s or beyond, your savings need to last at least 20 years, if not longer.

Let’s calculate a rough target for your retirement fund. If you aim for an annual income of €30,000 in retirement and expect €14,000 from the State Pension, you’ll need an additional €16,000 annually from your private pension. Assuming a 20-year retirement: €16,000 × 20 years = €320,000 (in today’s money).

How do you get there?

With 25 years to save before reaching age 65, here’s how you can build your fund:

Start saving immediately: Time is your greatest ally due to compounding returns. If you save €500 per month (roughly 13% of your salary) and achieve an average annual investment growth of 5%, you could accumulate around €320,000 by age 65.

Employer contributions: If your employer offers a pension scheme, they may match or top up your contributions. For example, contributing 5% of your salary with a 5% employer match doubles your savings.

Tax relief: As a 40-year-old, you can claim tax relief on pension contributions up to 25% of your salary, meaning every €100 you invest effectively costs you €80 if you’re paying 20% tax; and €60 if you’re at 40% tax. This makes saving for retirement significantly more affordable.

Review and adjust: Regularly review your pension plan and adjust contributions as your circumstances change. These include salary increases, loans being paid off or your reductions in your mortgage.

Basically, the earlier you start, the less you need to save each month. Waiting until 50 to begin saving means higher monthly contributions or a reduced retirement income. For example, starting at 50 might require €1,000 per month to achieve the same target, which may be unaffordable.

Life milestones

Your retirement needs will likely evolve. Many of our largest expenses – mortgage payments and raising children – are concentrated during our working years. By the time you retire, these costs should diminish, freeing up funds for contributions in later years. Planning for this transition is essential.

Martin Glennon is head of financial planning at ifac which is the professional services firm for farming, food and agribusiness.