- Some updates in mid-2016 based on feedback and conversations with people.
[ originally from a facebook and linkedin post ]
I posted this on facebook, but someone pointed out it might be better here. And since I’ve never really posted here [ LinkedIn ] I thought I would. Note that it mainly applies to people who work and live in Ireland, but there’s also general advice that applies to other places. This article is by no-means expert advice and if you have suggestions for improvements I am all ears.
I’m not a big career planner. I work on stuff I find interesting and just go with that. Luckily those things have paid well because I’m also not big on budgeting or long term financial planning. But I do listen to advice so I’ve always put money in retirement plans and made sure to invest windfalls into longer-term assets like a pension or property. But when I hit 40 I realised I should try to come up with a longer-term plan.
Without really consciously deciding to, this year has apparently been the year I did that (I’m nearly 44, so there was some procrastination involved). It started late last year with finally organising all my private Irish pensions (2 from employers, 1 personal). In the process I learned the following:
- Many Irish pension plans allow you to start drawing down from them at age 50. There are downsides to this, but if you have several of them it allows you more room to avoid stock market downturns when you purchase annuities. An annuity is designed to give you a monthly income through retirement. There are different kinds, but for now that’s enough info. I’m sure by the time I get to this there will be new rules and options so learning this now seems useless.
- You can get 25% of each pension as a tax-free lump sum.
- Through the middle of the year I also learned a few property things. The key thing is that if you have a buy-to-let property you should not pay off its mortgage early. You can deduct 75% of the interest you pay against the taxes you’d owe for rental income. That means the interest you pay will essentially be close to or even under the rate of inflation. A residential mortgage might have a lower interest rate nominally, but the effective interest rate is higher.
Additionally in the past few months I learned about the Irish state pension. The big thing is that it’s changing. If you are 68 after 2020 the rules have changed - and they’re now much simpler. Work for 10 years and you get the minimum state pension (1⁄3 of a full pension). Work for 20, you get 2⁄3 of of a state pension. Work for 30, you get a full pension. But you can’t collect it till you’re 68 and remember that Irish employers can apparently force you to “retire” at 65 (ageism is legal). So you need to bridge those 3 years (or hope they change the law to stop employers from doing that).
When I “retired” I kept a part time job for a number of reasons, but one was because I suspected I needed more PRSI credits for a pension. And it turns out this was correct. Part-time work counts as long as you make more than €38/week. And self-employment counts as long as you make more than €5,000/year. You can also make voluntary PRSI contributions (around €500/year but very situation dependent).
If you’ve worked in Europe or the US or Canada or a few other countries, you can get credits for social welfare payments in those countries. But if you have enough here and you have enough for some pension in the other country, you can draw a pension from both.
Lastly most people I’ve talked to about retirement this year (and through my working life really) have used the analogy of legs on a stool. Every source of post-retirement income is a leg on the stool - the more legs, the more secure your retirement. There are lots of options for legs:
- Rental income. This is a little wobbly as legs go - at least for me. But if you have more than one rental property - and better yet some commercial rental property - this leg firms up a bit. Talk to an accountant about your tax options here. Make sure it’s insured to reduce risk and be realistic about potential expenses and periods where properties might be vacant. This leg will required a bit more care and feeding than others so be aware of that.
- Savings. This isn’t very tax-efficient, but it can help fill in blank spots some legs have (like rental income or age restrictions) or maximise another legs value (weathering downturns for stock-based legs). And in retirement you can even build savings up. Sell a house, the private pension lump sum, etc. But remember you’re retired, go have fun. Savings won’t do you much good when you’re dead.
- Stocks. I’ve cashed all mine in, but some friends have been more restrained in cashing in stocks they might have gotten from employers. This is a volatile leg, but it can pay off rather well if you know what you’re doing. But be honest with yourself. I know I absolutely don’t know what I’m doing on this so stayed away. Remember your private pension also is likely to be in stocks to some degree.
- Government pension. This is generally a reliable source of income in retirement. It’s usually not a lot, but it does tend to last from retirement to death and it shows up every month. You apply once and then it just shows up each month. If you’ve worked in multiple countries, you can hedge some bets by taking a pension in each country you qualify from. You did pay into them after all.
- Private pension. This can also give you a solid source of income but you need to pay into it. And paying in during your 20s and 30s really pays off later. But you need to make your investments less risky as you get into your late 50s - so make sure to start looking at them then. And you need to provide yourself some flexibility for starting to draw it down in order to survive market drops. The crash in 2007 didn’t fully recover until 2012 - that’s 5 years.
- Your home. Paying off your mortgage and your home can be a leg. Not having to pay rent/mortgage is a large expense removed and makes the other legs more effective. You can also “sell down” or look into things like reverse mortgages, but the former can take time and has costs while the latter usually seems to have a lot of fine print you should read up on. Even once paid off, houses are an expense though. You can reduce those through home improvement projects (before or after retirement) but there will always be some expense related to them.
- Part-time work. I know a number of people who took part-time jobs when they retired. If you can find something that doesn’t take a huge amount of time that you’d enjoy doing and that people will pay you for, fantastic! Do that. And it gets you out of the house and keeping active. For friends who are geeks and in my age cohort, I note that it will be 2037 around the time we hit 65. If you know why that matters, ka-ching!
- Lastly it’s a really good idea to talk to people about this. Talk to people who have retired, but also talk to people who have experience related to those various legs. Also, quite honestly, if you’re a guy talk to women about this. The reality is that because women get paid less and have larger expenses through life, they’re more focused on figuring this out. If you’re a woman, yes, I know we should do better.
You don’t need to sort it all out tomorrow. This all plays out over decades. All you need to do is chip away at it. If you’re organised you might do it at a specific time each year (birthday, new year, labour day, etc) or if you’re like me just whack at it randomly when you feel like you’ve ignored it too long. Just don’t feel like it all has to be solved in one go. In fact due to changes in society and economies it’s almost impossible to do that - ten years from now there might be new legs for your retirement stool and some existing legs might be better/worse than they are now.
Some reference articles:
- Irish Times article, “Six things every woman needs to know about the State pension.”
- Citizens Information page on State Pension (Contributory).