Embracing the Golden Years: A Guide to Post-Retirement Planning
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Retirement is a well-deserved phase of life, a time to relax and enjoy the rewards of your hard work.
However, it is important to ensure that you are financially secure and well-prepared for this chapter, allowing you to fully embrace the best of what life has to offer.
This article is for you whether you’re approaching retirement or already there. We’ll break down the key aspects of post-retirement planning in Ireland, offering simple and practical guidance to help you make the most of your golden years.
Why is post-retirement planning important?
Post-retirement planning allows for the effective management of resources, ensuring that you have a reliable income stream, can cover your expenses, and have contingencies in place for unexpected costs.
Without post-retirement planning, you may face financial instability and reduced quality of life, so it’s vital for you to consider your future financial needs and take the necessary steps to ensure a comfortable retirement.
Planning for post-retirement is essential for several reasons, such as:
Financial Security
When you plan for post-retirement, you are more likely to have a stable and secure source of income during your retirement years. This income can come from pension funds, savings, investments, or other financial instruments.
Increasing Lifespan
With the increasing average lifespan, it’s crucial to plan for the possibility of living many more years in retirement.
Post-retirement planning ensures your money will last throughout your extended retirement years, allowing you to enjoy a comfortable and fulfilling life.
Lifestyle and Comfort
With adequate post-retirement planning, you can maintain the lifestyle you desire, including the ability to travel, engage in hobbies, and cover unexpected expenses.
Without planning, you might have to cut back on various aspects of your lifestyle, leading to a less comfortable and potentially stressful retirement.
Independence and Autonomy
Planning gives you greater control over your financial resources, allowing you to make decisions that align with your preferences and values.
Legacy and Inheritance
Having a post-retirement plan goes beyond securing personal finances; it’s a strategic move to safeguard and pass on a meaningful legacy.
The inclusion of inheritance considerations is a compelling reason to have a well-thought-out plan, allowing for provisions to support loved ones after one’s passing.
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What risks affect your retirement nest egg?
Life expectancy
People are living longer, so your retirement savings may need to last longer than you thought.
In 2020, the Central Statistics Office reported that men in Ireland could expect to live for about 80.8 years from birth, while women had a life expectancy of around 84.4 years.
It can be difficult to predict how long you will live. However, t there’s a chance that you will live longer than expected, and this can lead to the risk of running out of money.
The smart way is to plan for a long life, thinking you might need income into your 90s. With this long-term perspective, you might think about having your pension aligned with this goal of longevity.
Inflation
Post-retirement planning is like being the architect of your future comfort. So, imagine inflation as a mischievous force that can ruin your well-laid plans. If the prices of things keep climbing, the money you saved up might not have the same buying power when you need it.
Rising inflation increases the price of goods and services in the future and may reduce the value of assets set aside to pay for them. Purchasing power can be eroded by inflation, even at a low pace.
That’s why it’s so important to work with one of our financial advisors at True Wealth to develop your post-retirement plan. We can assist you in creating a strategy that will withstand inflationary waves and guarantee a comfortable retirement.
Inefficient Asset Placement
The decisions you make about asset allocation play a crucial role in determining the long-term performance of your investment portfolio. A poor asset allocation plan can seriously impair your retirement income in several ways:
- If your portfolio is overly concentrated in conservative investments, there’s an increased risk of outliving your assets.
- On the other side, an overly aggressive strategy can put you at risk for increased market volatility.
In times of uncertainty or pivotal moments, financial advice becomes the key that can open doors to financial well-being and peace of mind. Contact us today!
Withdrawing too much or too soon
Your retirement income may be significantly impacted by withdrawing money from your retirement account too soon or excessively.
If you take too much out, you run the risk of exhausting your savings too soon and endangering your ability to maintain your standard of living in your later years of retirement.
Maintaining a consistent and sustainable income stream during your retirement journey requires finding the correct balance and following a well-thought-out withdrawal strategy.
How much money do you need to survive at retirement?
At this stage, you probably have a good understanding of your expenses and budget as you approach retirement.
If you’re still unsure, it’s important to understand that the amount of money required to sustain your retirement can vary significantly based on your situation and the choices you make for your lifestyle.
It’s essential to consider factors such as your current savings, expected expenses, healthcare costs, and any additional sources of income, like State Pension.
We at True Wealth can assist you in calculating a personalised estimate that aligns with your unique circumstances and ensures a comfortable standard of living.
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You’re retired! What are you going to do?
If you’re retired, congratulations! It’s a well-deserved moment of celebration. Now, it’s time to consider how to maximise the funds in your pension pot.
Before choosing the most adequate solution for your needs discuss with your dedicated financial advisor at True Wealth the following factors:
- The size of your retirement fund.
- The level of income you would prefer during your retirement years.
- Your age and state of health.
- Other assets at your disposal, including the State Pension.
- Your preference in relation to risk and security.
- Your preference in relation to passing on your fund when you die.
- You should also consider your attitude to investment risk and what level of control you want.
What are your post-retirement options?
Take Your Tax-Free Lump Sum
When retired, you’re entitled to take a 25% tax-free lump sum, limited to €200,000 from your pension funds.
The amount between €200,001 and €500,000 is taxable at the standard rate of tax (20%). Any amount over €500,000 is taxed under Pay As You Earn (PAYE) at the marginal tax rate (40%).
Decide what to do with the remaining money
The remaining balance can be used to fund your retirement in the following three ways.
1. Approved Retirement Fund (ARF)
An Approved Retirement Fund (ARF) offers you control over how your retirement savings are managed.
You can take out money when you need it, and even use it as a regular source of income.
The funds in your ARF can be passed on to your family after your passing. However, it’s important to be cautious, as poor planning can drain your funds prematurely.
With an ARF, you have the flexibility to choose from a variety of investment funds, depending on how much risk you’re comfortable with. The best part is that any growth in these funds is tax-free.
Consider an ARF if:
- You want your retirement savings to keep growing.
- You prefer having more say in how your money is invested.
- You wish to leave the remaining balance to your loved ones after your death.
- You want the option to withdraw funds as needed.
Learn more about the differences between an ARF and an Annuity by reading our article, What is an Approved Retirement Fund (ARF)?
Annuity
An annuity ensures a stable income for the rest of your life, regardless of how long you live.
While this offers financial security, it’s important to note that you won’t be able to leave any remaining funds to your family after your passing.
You can choose an Annuity that offers yearly increases, ensures payments for a set period, or provides a portion of your income to your spouse in the event of your passing.
Consider Annuity if:
- You prefer a steady income for your lifetime.
- You want to avoid taking risks with your retirement savings.
Learn more about the differences between an ARF and an Annuity by reading our article, Pension Annuities: Retirement Income For Your Whole Life
Taxable Lump Sum
In some cases, you can receive the remaining balance of your pension fund as a taxable lump sum.
However, you will be required to pay income tax at the marginal rate, the Universal Social Charge (USC) through the Pay As You Earn (PAYE) system, and Pay-Related Social Insurance (PRSI) contributions if you are under the age of 66.
Consider this option if:
You wish to have access to your remaining savings as a taxable lump sum.
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How can I access my pension funds?
The policy you select will determine how you get your retirement income.
You have the choice of either an Approved Retirement Fund (ARF) or an Annuity.
To maximise your retirement, it's important to comprehend how each option works and potential tax implications.
Withdrawing from an Approved Retirement Fund (ARF)
An ARF allows you to keep a portion or all of your retirement savings invested while giving you the flexibility to make withdrawals when needed. With an ARF, you have several options:
- You can take regular, fixed-amount withdrawals before tax.
- You can opt for regular withdrawals as a percentage of your policy’s value before tax.
- You have the flexibility to adjust the amount of your regular withdrawals as needed.
- You can also choose to take lump-sum withdrawals.
Note that withdrawals from an ARF are considered income and are subject to taxation under the Pay As You Earn (PAYE) system.
Additionally, every December, there may be a requirement to withdraw a specific percentage from your ARF to align with Revenue regulations:
- 4% if you are 60 years or older for the entire tax year.
- 5% if you are 70 years or older for the entire tax year.
- 6% if your combined ARF and vested Personal Retirement Savings Accounts (PRSA) assets amount to €2 million or more, and you are 60 years or older for the full tax year.
Learn more by reading our article about Approved Retirement Fund (ARF).
Withdrawing Income from an Annuity
An annuity transforms the funds from your pension into a guaranteed income for life.
When it comes to annuity payments, you have several choices:
- Receive a fixed amount as your regular income.
- Opt for an automatic yearly increase in your income.
- Set up arrangements for your spouse or civil partner to continue receiving income after your passing.
- Choose to have your annuity income paid for a specific duration, known as a “guaranteed period,” even if you pass away before that period concludes.
Your choice of options will impact the amount of income you receive. For instance, the more income you want to provide for your spouse or civil partner after your passing, the lower your income during your lifetime will be.
It’s important to note that annuity payments are considered income. This means they are subject to taxation under the PAYE system and are subject to income tax and the Universal Social Charge.
Learn more by reading our article about Annuities.
What if I die after Retirement?
Retirement Lump Sum
When you pass away, this money becomes part of your estate. Different levels of taxes will apply depending on who inherits the money.
Annuity
You have the option to determine what will happen with your pension upon your passing. For instance, it can stop immediately, or it can continue to be paid, at a reduced rate, to your widow/widower or partner.
There is a “guaranteed period” that means if you die within a set period of time, the money you would have received for the rest of that period will be paid as an income to your chosen beneficiary or personal legal representative.
For example, if you buy an annuity with a 10-year guaranteed period, and you pass away one year after retiring, your family will receive your income for the remaining 9 years.
Approved Retirement Fund
The worth of your ARF is transferred to your estate when you die. The applicable tax levels vary depending on who inherits the money.
Consult our financial advisors at True Wealth
Seek advice from our financial advisors at True Wealth to receive personalised guidance on your retirement options and post-retirement planning.
Whether you’re nearing retirement or have already embarked on this new phase of life, our advisors will work closely with you to assess your unique financial situation, create a tailored plan, and provide valuable insights to ensure your financial well-being in retirement.
We understand that every individual’s circumstances are different, and we’re committed to helping you make informed decisions that lead to a financially stable and fulfilling retirement.
We are also experts in personal and business protection, savings and investments, pension tracing, personal and business financial planning, mortgages, and wealth extraction.
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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.
