Making Ends Meet
If ever there was a time to bear in mind Mr Micawber’s observation it’s when you start living on your retirement income. ‘Annual income twenty pounds, annual expenditure nineteen pounds, nineteen shillings and sixpence, result happiness. Annual expenditure twenty pounds nought and six, result misery.’
Incomes and currency may have changed but the challenge of ensuring that ends meet is just the same. The first step on the way to making them do so is to know approximately what your retirement income will be: it may come from several different sources; state pension, occupational pension scheme (only half of Irish retirees have these), maybe a personal pension fund, or other assets such as investments or property and maybe ongoing earnings. Equally important is to know where your money is going (surprising how much you can spend casually when you are used to a regular salary). You can then tailor a budget so that you will be able to live within your means.
Making ends meet is a useful expression but what you really want to do is to make sure that the ends overlap to create savings. Having a financial pillow to cushion you against extra or unexpected expenses makes sound sense, it’s comforting and can also be used to have fun! Every financial guide you read will advise you to pay yourself first so that the money intended for your next nest-egg doesn’t get eaten up by other expenses.
This section is not intended to replace sound financial advice from experts but to help you manage your budget. Somewhere between five to ten years before you expect to retire it’s a good idea to check with your financial adviser to see how your financial plan is shaping up and to tailor it according to your future needs and the kind of retirement you hope to have. If you aren’t financially-minded now is the time to become familiar with all those acronyms like PRSA (Personal Retirement Savings Accounts), ARF (Approved Retirement Fund) and DIRT (Deposit Interest Retention Tax).
It can happen that one half of a couple looks after finances while the other remains in misplaced blissful ignorance; this is information that should be shared! As you near retirement it’s time to consider the most advantageous way to receive your pension taking into account both your future needs and tax efficiency. For example it may be better from a tax point of view to take some of your retirement package as pension and 25% (the maximum allowed) as lump sum since lump sums are tax free below a certain level. It’s a good idea to get expert advice about this.
It’s unlikely that your income in retirement will equal your annual salary – unless you win the Lotto– a quarter of over 65s rely only on their state pension and the average weekly household income for a retired couple is just over €750. But there are plenty of ways to make sure that you manage your money efficiently and plenty of possibilities to make extra cash so that those ends really do overlap.
State pensionable age is currently 66, this will be raised to 67 in 2021 and 68 in 2028. At present the contributory pension is €243.30 (2018) a week for those who qualify (non- contributory is less) but be warned that at some date in the future there are proposals to base the payment on the number of contributions claimants have made so that if you only have half the required number of contributions you will get half the pension. Remember to apply for your state pension four or so months in advance of your pensionable date.
One of the best birthday presents when you reach 66 is a Free Travel Pass which allows you to travel gratis on trains, buses, Luas and Dart and also some private buses like the Air Coach (unfortunately it doesn’t apply to planes!). You can also get a Senior Smart Pass for Northern Ireland. Sometime soon a change will be implemented where your free travel will be included in a Public Services Card which will replace the Social Services Card used to collect social welfare payments. From age 70 the Household Benefits Package (sounds like a parcel) entitles you to a free TV licence and allowances towards gas or electricity. Remember you have contributed to these services and you are entitled to claim them.
Wise-up to being tax wise
You will have to pay tax if your income is over the exemption limit for pensioners, alas at the highest rate but it does pay to be older as you may qualify for extra tax concessions. These may include additional tax credits, relief for dependent relatives or on nursing-home fees and in some instances DIRT tax can be reclaimed. Make sure that you get a tax credit certificate when you retire. Your financial advisor is the best person to help you with tax efficiency.
VAT is sometimes labelled a stealth tax as you don’t realise how much you are paying. The 23% standard VAT on items which aren’t exempt or low rated out of already taxed income certainly makes the amount you are handing back to the Revenue mount up. Practice savvy shopping, buying second hand or through Gum Tree if appropriate.
Just remind yourself that out of €5 spent on a pint €1.97 goes to the Government, on a €10 bottle of wine the take is €5.58 and if you are a smoker – you probably soon won’t be – out of €10 spent on cigarettes the Government’s take after the 2015 October budget is €8.12.
The good news
Before you retire you may be concerned that your retirement income is lower than your final salary. The good news is that you can live on far less. Most retirees can live comfortably on 65% or more below their former income. Working out innovative ways of saving can be fun.
To be able to live on less, it is advisable that:
Your mortgage is paid off and happily 70% of homeowners near pension age have done this.
You have got rid of your debts.
Your children are fully independent.
You have done any major repairs on your home and introduced energy saving measures like extra insulation.
You have a shared budget that is regularly updated.
Why the ends don't meet
Lack of proper planning. If you fail to plan you will plan to fail.
Starting late. Many people start too late and often do not have clearly defined goals with a budget to reach them.Longevity. Because we are living longer we may have to provide for 20-30 years of retirement. In some cases, this may be longer than a retiree’s working career.
Medical costs. These tend to increase as you get older. It is a paradox that as new treatments are developed so do the costs.
Fledglings staying on or returning to the nest. Unfortunately, many young people are unable to find secure well-paid jobs and stay on longer or are obliged to return home. Having to support children, and even grandchildren, places strain on the budget.
This excerpt was taken from Rewire Don’t Retire, sponsored by Irish Life and Active Retirement Ireland. You can download the full guide HERE.