Retirement is the point at which we are financially independent. Financial independence is when we have enough assets which provide us with a passive income to live our desired lifestyle. Big lifestyle, big income, small lifestyle, small income. Retirement is a major transition that affords us the ability of choosing how we spend our time without the need to work. Retirement is better described as a rebirth, an opportunity to enjoy what should be our golden years. Adjusting to life after our careers can be challenging and so it is important to ease ourselves into this next phase of life. The thought of retirement should excite us but for some it will be daunting. We need to plan for an active retirement, replacing our work schedule with activities we enjoy doing. Retirement was a term first created when we received a pension as a reward before death. A hundred years ago the average life expectancy was 55 years of age. Very few of the population survived long enough to receive a pension. Average life expectancy is now 80 years for men and 83 years for women and improving gradually over time. With a significant improvement in life expectancy, we may be asking ourselves how will we fund our lifestyle’s in retirement.
When preparing for retirement it all comes back to how much is enough? To answer this question, we start at the beginning, our state pension. Whether we wanted to or not we have been paying into a pension our entire working lives. We pay Pay Related Social Insurance (PRSI) on our income. This tax goes into the Social Insurance Fund which helps pay for social welfare benefits and pensions. The state pension age is currently 66 and was set to rise to 67 in 2021 and 68 2028. The change in state pension age to 67 in 2021 has been postponed and remains at 66. The maximum state pension we can receive today is €12,911. It is not means tested. Our entitlement will depend on the type and number of contributions paid throughout our careers. The first requirement is to have paid a PRSI contribution before age 56. The second requirement is to have paid a minimum of 520 PRSI contributions or 10 full years’ worth. The third requirement involves a calculation of either our yearly average contributions or the sum total of our contributions over a given time period. We can view a statement of our PRSI record on the My Welfare website under statements and refunds, contribution statement. An official hard copy can be requested if needed.
While the government makes every effort to maintain accurate records, the accuracy of our PRSI statement is our responsibility. Therefore, it is very important to reconcile our employment history with our PRSI statement. There are instances where women have multiple personal public service numbers (PPSN). PRSI statement mistakes are not uncommon, especially for those with an employment history of forty & fifty years. I have seen contribution statements with missing employments. Record keeping in the 1970’s and 1980’s isn’t what it is today. It is up to us to correct our record if it is inaccurate. We may be entitled to credited PRSI contributions if we took time out of work to raise children. We can also seek to plug any gaps in our record if we worked abroad or have been out of work for an extended period of time. This is done by paying voluntary contributions, so long as it is worthwhile to do so. The difference between an extra €5, €10 & €20 in pension income per week may not seem like much but it adds up to €5,200, €10,400 & €20,800 over the course of twenty years. The fund required to provide the income a full state pension provides is circa €400,000. Some of us will have a mixed contribution record having worked in both public and private sectors. Our PRSI statement needs to be reflecting correctly before applying for the state pension. We should apply for the state pension 3-6 months before State pension age. A person receiving the full state pension of €12,911 per year would be doing well to live on this alone.
The state pension will come under increasing pressure over the next thirty years. The ability of our government to fund the state pension into the future is a ticking time bomb for two reasons, debt levels and demographics. Current government debt stands at over €200 billion and continues to rise. Government debt increased significantly following the financial crisis of 2008. Then the Covid 19 pandemic added to government debt. We are a heavily indebted nation and a small open economy. We spend just under €4 billion a year in interest on our existing debt. We are in a very low interest rate environment at the moment. If interest rates rise, the interest we pay on our debt will rise. It is projected that by 2050 the working population to retiree ratio will have reduced from four people working for every one retired to two people working for every one retired. In simple terms, the percentage of retirees will double from 25% to 50% of those in the workforce. This poses a significant challenge to government finances due to the decrease in those working and increase in those receiving the state pension. The government are aware of this predicament. Increasing the state pension age is one such measure, albeit a politically unfavorable one when looking to be reelected. Auto enrollment is another measure planned to come into force over the next couple of years. This involves all workers being automatically enrolled in some form of work pension. Government hopes measures like these will make its future state pension obligations more manageable. Government finances are outside of our control and are subject to change depending on the circumstances of the time. Cutting spending and increasing taxes is a very real possibility. I would be prepared for the state pension to change considerably over the next thirty years. It is important we don’t leave control of our retirement in the hands of government; politics is short term in nature. What we can control is our ability to save and invest in our own pensions.
Those of us who are working or have worked in the public sector will have been automatically enrolled in a public pension scheme upon starting work in the public service. A public pension provides a tax-free lump sum also known as a gratuity and a defined level of income in retirement. The level of tax-free lump sum and income we receive will depend on when we joined service, our salary, and our length of service. There are pension estimator calculators available for some of the public service schemes. We may have the option to enhance our public pension with added or purchased notional service and can supplement our public pension by making additional voluntary contributions through a group PRSA or PRSA AVC. If we worked in both the public service and private sector, we can have both public and private pension entitlements.
In the private sector there are two types of occupational pensions, defined benefit and defined contribution. A defined benefit pension is similar to a public pension. It pays out a specified amount of tax-free lump sum and income depending on our salary and service. A defined contribution pension is where we contribute a portion of our salary to a pension fund on a regular basis. We build up a fund from which we receive a tax-free lump sum and income in retirement. We can receive other types of income in retirement such as an annuity, rental property income, sale of a business, downsizing the home, part time work and so on.
Being financially independent doesn’t mean we have to stop working. Some of us will want to continue on working because that is how we are wired. However, our want or ability to continue working today might not be the same in the future. The future is uncertain, no personal or professional routine is immune from change. Financial independence is our security blanket in case things change.
Time is our most valuable asset, so choosing how we spend our time is the ultimate freedom. Achieving a passive income to live our ideal lifestyle is only one aspect of the retirement journey. A large part of who we are can be attached to what we do. Our profession forms part of our identity, especially after decades working. Folks rarely ask who we are but rather what do we do, to get a measure of our social status. It makes sense given we spend at least half hour waking hours at work during our careers. Having retired from a thirty- or forty-year career we can be somewhat institutionalized and struggle to create a new identity. Leaving a body of work we were good at, enjoyed doing and the people we shared those experiences with behind can result in us feeling put out to sea.
Professional sports people experience this change earlier than most. They often miss the structure and rigor of their professional schedule, the routine of being in a certain place at a certain time to complete a certain task. Learning, leading and growing with others. When retired we become the master of our own time. When our career ends the sudden adjustment and lack of routine or structure that a career provided can feel like the rug being pulled out from beneath our feet. We need to create and transition into a new identity. We do this by planning an active retirement filled with hobbies, interests and experiences. We are free to fill our timetables with what we enjoy most, whatever that may be. Dust off the bucket list, volunteer for a charity, set up a business, pursue our hobbies, spend quality time with family and friends, try new exercises, become an out-of-town tourist, work part time at a job we really enjoy and so on. Focusing on what sustains our happiness is the key. Happiness is a choice, and we can choose to exploit our newly found freedom. We’ll never know if we like something unless we try it. We’ve got to be willing to risk disappointment to discover what we enjoy.
FIRE is an acronym that stands for Financial Independence Retire Early. It is an aggressive pursuit of financial independence to enable retirement over a shorter period of time when compared to a traditional retirement. Ten or fifteen years rather than forty. It is a movement that has gained an increasing following in recent decades. FIRE requires extreme frugality to save and invest as much of our income as possible. Building wealth that can provide a passive income for the next sixty odd years. A savings rate of 50 to 80% of our income is usually required depending on our level of income and our desired FIRE lifestyle. To achieve a high savings rate we need to spend very little while earning as much income as possible. The bigger our income and the lower our FIRE lifestyle spending the quicker FIRE can be achieved. A rule of thumb is to multiply our desired gross annual income by 25. If we can live on €30,000 a year we will need a fund of €750,000, €60,000 a year we will need a fund of €1,500,000. FIRE requires significant sacrifices over many years.
Some of the pros of the FIRE movement are:
1. Taking back control of our time and being able to do more of the things we enjoy. No golden handcuffs.
2. Ninja like focus of our personal finances and finding creative ways to save, boost income while still enjoying life. Asking how can I optimize each spending decision.
3. Being financially free allows us to explore other opportunities we wouldn’t be able to if required to work.
4. FIRE is a philosophy which advocates a self-sustaining way of life. Social status, material possessions and keeping up with the Kardashians is not important.
5. FIRE breaks away from tradition and seeks to carve out it’s own path. Independence is a key driver.
Some of the cons are:
1. It requires consistent financial discipline and sacrifices when it comes to spending money over the saving stage. Very much a case of short-term pain for long term gain, if we call ten to fifteen years short term.
2. Similar to retirement achieving FIRE is only half the battle, sticking with FIRE and transitioning into our FIRE lifestyle may not be all it’s cracked up to be. Much of the structure we get from a traditional career ceases to exist. In general, the FIRE lifestyle continues to be frugal.
3. From an investment and health perspective the future is uncertain so we will need to be able to adapt to change accordingly.
4. FIRE attracts different people for different reasons but what’s the rush. FIRE is on the extreme end of saving. Why not work towards our ideal life without the urgency to become financial independent. Part of living is enjoying the journey as much as the destination.
5. FIRE can also mean relocating from a high cost of living location to a lower cost of living location. Meaning our savings and investments will go further. This however can present all sorts of different challenges in itself. Not to mention leaving family and friends.
It really all comes back to what we value and what we are willing to do to achieve it. Different strokes for different folks. Whether it’s traditional retirement or FIRE with all major life changes it helps to do a trial run financially and practically. I cannot emphasize this enough. There are times where we can dream of big changes, but the reality is very different. It’s always a good idea to dip the toe and if possible, talk to others in similar circumstances before making a wholesale change. This is even more important if it involves significant financial outlay. I’ve heard many a story of people making big changes to fulfill their dream and actually end up hating it. Look before you leap.
Some housekeeping when it comes to retirement, be debt free (no mortgage), have a valid will, an enduring power of attorney and health insurance if you don’t already. Before gifting any money make sure our financial future is secure and all future potential costs have been accounted for. It’s similar to a safety briefing on a plane when we are told to secure our own oxygen mask before tending to others.
In summary, reconcile our employment history with our pension entitlements across state, public and private pensions. Know what we are entitled to, determine if we can boost our entitlement, and how to apply. When it comes to retirement and pensions it is an increasingly DIY world so seek good advice. Financial planning is one part of the transition to retirement or FIRE. A lot of what we do during our working life still applies in retirement, eat well, exercise the body and mind, get good sleep and enjoy life’s simple pleasures. I would always encourage clients to aim for financial independence and see retiring early as optional. The Retirement Planning Council of Ireland do a number of courses that can assist with the transition into retirement. It also helps to have a chat with those who have already transitioned from employment to retirement.
This week’s book recommendations are How to Retire Happy, Wild and Free: Retirement Wisdom That You Won’t Get from Your Financial Advisor by Ernie Zelinski. Thrive in Retirement: Simple Secrets for Being Happy for the Rest of Your Life by Eric Thurman. And Retirement Reinvention: Making the most of the Next Stage of Your Life and Career by Robin Ryan. All great books that provide insights on money, mind and meaning in life and retirement. If you are interested in learning more about the FIRE movement check out the YouTube channel Our Rich Journey. It follows a families journey up to and achieving FIRE at 39 years of age in 2019 and moving from America to Portugal. This week’s movie recommendations are Ford vs. Ferrari, Matt Damon plays Carroll Shelby the first American to win Le Mans and is now attempting to build a car to win the race for Ford. And The Curious Case of Benjamin Button, Brad Pitt plays a man who is born old and gets progressively younger throughout his life.
Link to Spotify podcast episode: https://open.spotify.com/episode/3rMfqDcuhe0oJ6auG2WLQJ?si=83fb28ee0c5d4a06
Link to Apple podcast episode: https://podcasts.apple.com/ie/podcast/s1-e10-retirement-fire/id1539630506?i=1000505950946
For personal financial planning advice email email@example.com or call (01) 539 2670.