While 68% of Irish workers expect to see retirement somewhere between age 60 and 69, more and more people are considering the possibility of early retirement. So while retiring before the age of 60 may seem impossible to some, the option may be available to more people than you think, and with the right strategy and plan in place, it could very well be possible for you too.
Planning for your retirement doesn't have to be an intimidating task. All you need is the right advice from the right advisor, and here at FitzGerald Flynn, that's precisely what you'll find. There are numerous reasons why one might consider taking early retirement. At FitzGerald Flynn, we strive to work with our clients to ensure that, if it's a comfortable and early retirement they desire, then a relaxed and early retirement is what they will get.
Establishing a personal pension may provide early retirement options from the fund any time between age 60 and 75. However, a worker's company pension defines their average retirement age. Therefore, retiring early from age 50 is possible, so long as a contract of employment allows it.
With state pension not being available until age 66, there are some conditions for retiring early. But, first, let's look at how people are retiring early.
Is Early Retirement Right for You?
As previously stated, 68% of workers intend to retire between 60 and 69; however, 8% of workers have no intention of retiring. While taking early retirement might be an excellent option for some, it does not suit everybody, and this depends on your personal, professional and, most importantly, financial situation. Early retirement means you can choose to live more of your golden years the way you would like and begin a new chapter of your life sooner.
The benefits of taking early retirement are numerous. Studies conducted on early retirees show that 68% of individuals say that their overall happiness improved due to retiring early, with particular improvements being seen in familial and personal relationships.
Additionally, more than 50% of early retirees saw a notable improvement in their physical and mental well-being due to taking early retirement. Retiring early means having more time to do the things you want to do, such as spending more time with friends and family, traveling, or even starting a new career. However, living a longer and more active retirement means requiring a more robust retirement plan to support you.
It may seem obvious, but taking retirement early means that your retirement income will have to cover you and your family for an extended period of time. This is why it is so important to have a solid retirement plan in place before you make the decision to retire early. So often, people who retire early do so without fully understanding the financial implications and, as a result, can find themselves struggling later on down the line.
How Much Do You Need to Retire Early?
Precisely planning your retirement finances as early in your professional life as possible is essential if you are considering retiring early. When trying to calculate how much money you will need for your retirement, the first step should always be to reach out to a qualified and experienced financial advisor. Here at FitzGerald Flynn, we have years of experience in helping people plan for and achieve their early retirement goals. We will work with you to understand your unique circumstances and develop a retirement plan that is tailored specifically for you.
While the figures below are simply hypothetical, let's look at a calculation of how much someone would need if they were planning to retire at 55 years of age. The current average salary in Ireland today is approximately €45,000. Additionally, according to the most recent Central Statistics Office figures, the average life expectancy in Ireland is 82 years of age. A general rule of thumb when planning for your retirement is to budget to spend 50% of your annual salary pre-retirement once you retire. Using this rule and the hypothetical figures above, we can see that if someone on the current average salary in Ireland wished to retire at 55, they would have to have accumulated a pension fund of approximately €600,000.
Of course, this is just a general guide, and your specific retirement needs will be determined by your unique circumstances. However, it highlights the importance of planning ahead and taking early retirement seriously if you wish to achieve it. The above figure does not take into account any future growth that would be needed to offset inflation, fees and actual growth so the fund would last past 82 years of age.
Below we will look at the various forms of retirement income and pensions that are available to you to make your dream of early retirement a reality.
Retiring in Ireland: Pensions
Financial planning to allow for a substantial pension pot is essential to early retirement. There are numerous options available to Irish workers that can provide you with a steady income as you enjoy your post-professional life—the most important of these being a pension.
There are a number of different types of pensions that you can avail of in Ireland, each with its unique benefits. The two most common types of pension are the occupational pension and the personal pension.
An occupational pension is a retirement fund to which both you and your employer contribute. It is an incredibly useful tool in planning for early retirement as it provides you with a regular income stream once you retire. Occupational pensions are often designed to allow for the employee to take early retirement, generally after 50 years of age, as long as consent has been given by the employer or trustee.
A personal pension is a retirement fund to which only you contribute. It can be used in conjunction with an occupational pension or on its own. The benefits of a personal pension include flexibility and control, as well as tax relief on your contributions. Personal pensions are portable, meaning they can be transferred from one job to another, and they offer greater flexibility in terms of early retirement options. Under a personal pension scheme, an employee can begin to draw down on their pension once they turn 60.
There are a number of other pension options available to you if you are strongly considering the possibility of early retirement. One option is PRSA's. A PRSA, or Personal Retirement Savings Account, is a long-term investment product that allows you to save for retirement tax-efficiently. Contributions to a PRSA are subject to revenue limits, these limits are based on an individual’s salary up to a maximum of €115,000 and from there there are additional age limits - your age determining the amount you can put into your PRSA. If you pay 20% or 40% tax then you will receive a rebate in your pay from revenue - this amount being free from USC charge. PRSAs, like all pensions, allow for a lump sum withdrawal of 25% of the overall pension tax-free. (Subject to revenue limits) PRSA's offer a great deal of flexibility in how and when you can take your retirement benefits from 60. Recent years have seen an increase in self-employed workers who are setting up Executive Pension Schemes under their own companies. These schemes not only allow for the company to put funds into your pension but the individual can also contribute under revenue limits. The revenue limits are very attractive for company pensions as the contributions are subject to revenue maximum funding limits. This is where using a financial advisor from FitzGerald Flynn is essential.
The state pension age is currently 66 but is due to increase to 67 in 2031. This means that if you are looking to retire early, you need to have an alternative source of income in place to cover the years between your planned retirement date and when you reach state pension age. The retirement age for a personal pension and the PRSA is 60 years of age, whereas with a company pension and an executive pension one can start taking benefits from 50, again subject to revenue rules and limits and again this is where an advisor is essential.
Annuity and ARFs
An annuity is a financial product that provides a guaranteed income for life, starting from the day you retire. Annuities can be bought with the proceeds from your pension fund. One advantage of an annuity is that it provides a guaranteed income for life, no matter how long you live. One has the option of taking a tax free amount equal to one and a half times their salary and then the balance of the funds is used to purchase the annuity. However, annuities are not suitable for everyone, and it is important to speak to a financial advisor before making any decisions.
Those who decide not to go down the annuity root would look at crystallising their pension fund under revenue rules from the age of 50. The maximum pension fund one can accumulate is currently €2 million. Under revenue rules one can take the first €200,000 of this fund tax free and pay 20% on the next €300,000. The balance of the fund will be transferred into an Approved Retirement Fund. This will grow tax free and there is a great deal of flexibility on the investment choice that one can avail of. From your 61st birthday one has to take an imputed 4% from the fund annually and from 70 years of age this increases to 5%. For smaller funds the tax free amount is 25% of the fund up to the first €200,000 and any amount above that up to the next €300,000 is taxed at 20%.
The approved minimum retirement fund (AMRF) no longer exists and all these pension funds have been transferred into approved retirement funds. If you have any questions on this you should call one of FitzGerald Flynn‘s financial advisors.
If you are planning to retire early in Ireland, there are a number of things that you need to take into account. From making sure you have a solid retirement plan in place to understanding the financial implications of each retirement decision, there is a lot to consider.
However, with careful planning and forethought, early retirement can be a reality. Reviewing your pension and investment plans, making a budget and sticking to it, and knowing your options when it comes to pensions are all key steps in making early retirement a reality. So, if you are looking to retire early, start planning today!
This post was brought to you by FitzGerald Flynn Insurances Ltd. We offer advice on a wide range of pension and retirement products. To find out more, please visit our contact page now.
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