#9 - Will Your Pension be Enough?

Why it's naive to just assume your private, occupational or State pension will be enough

You’ve heard about the pensions ‘time-bomb’. But if you already have a pension it’s tempting to think you have that box ticked with nothing to worry about. That can be a naive assumption, regardless of what type of pension you’re expecting. Here’s why…

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Before starting, it might be helpful to read the previous posts on How Pensions Work, Types of Pensions, and How Pension Funds Grow. While the reason to question whether your pension will be enough depends on what type of pension(s) you expect, the underlying cause is our increasing lifespans:

• The Irish population aged > 65 will increase much faster than the working population in the coming decades (from 630k in 2016 to a forecast 1.6m by 2051). This means that the taxes of proportionally fewer workers will have to support proportionally more retirees - whether that’s pensions, healthcare or other costs. We will go from having had four workers per retiree recently to only two per retiree in the future. When you think about it, that means either higher taxes on future workers or lower supports for future retirees.

• Increasing lifespans will also affect how much you need for retirement. The amount you need to retire at 65 when you expect to live to 90 is a lot more than when you only expect to live ten more years.

These considerations affect pension adequacy differently, depending on the type of pension you’re expecting, but with the same effect.

Public Sector Pension / State Pension

It’s a common misconception that there is a ‘fund’ somewhere in the background to pay for these. There isn’t. They are paid with general tax revenue. And with proportionally fewer workers to generate these taxes, it seems probable that the value of future pension promises will be eroded over time. This won’t be a matter of policy choices or government priorities, just pure maths.

But don’t expect to see a headline - instead look out for gradual erosion over a long period. It could happen by not keeping up with inflation, by means-testing some pensions, introducing new taxes or increasing the pension age (which is already under discussion, by necessity). They key point is less about how it happens, and more about being prepared if it does.

Occupational Pension / Private Pension

These schemes will be affected differently since they rely entirely on how much is in your fund when you retire. If you’ve saved less, you’ll get less so the risk is that you don’t have enough to last your life expectancy.

The maths can get tricky, but you probably need 7-10 times your salary in your pension fund to retire at 65 with a pension equal to half your working salary. So if you make €50k and want a pension of €25k you will need €350-500k in your pension fund when you retire. Thats a BIG number. If your current savings rate and time horizon aren’t heading in this direction then prepare to be disappointed.

So what should you do?

There’s very little you can do about demographics, but as the saying goes - forewarned is forearmed. The biggest weapon to protect yourself against both of these scenario’s is time. If you have 20/30 years until you retire, you also have 20/30 years to benefit from compounding. I have a future post coming to explain just how powerful compounding is, but in the meantime if you’re in this situation it’s worth seriously thinking about your pension arrangements and talking to a financial advisor.

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