Counting the cost of living in retirement
Life expectancy has been steadily increasing for decades and while this means that people are living longer, are we doing the sums now to ensure we can afford that long life in retirement, asks Kristen Foran?
Each stage of retirement brings different challenges and opportunities. Photograph: Shutterstock.
Like many developed countries, Ireland is facing significant population challenges. While we currently have one of the youngest populations in Europe, the number of people aged 65 or over is now the fastest growing demographic in the country*.
Increased longevity and better medical care are transforming ‘old-age’ and Ireland is now predicted to have over 1.4 million people over the age of 65 by 2046. As a nation we are getting older and by 2046 the 65+ dependency ratio could double what it was in 2011*.
Of course this is good news, but it is not without its challenges. Old age is being transformed; retirement is now seen as bringing a whole new lease of life, an opportunity to kick start new learnings and opportunities. The days of the ‘carriage clock’ retirement already seem outdated.
So how much does life in retirement cost and why should we be planning our pension when we might not be retiring for another 20, 30, or 40 years?
Kristen Foran, national sales director of Zurich Life explains: “The theory has always been that we need two thirds of our current pre-retirement income to retire comfortably. The thinking is that costs reduce in retirement as the mortgage should be paid off and the children have fled the nest. Indeed, Revenue limits on pension funding uses this figure also. However, life has changed dramatically in recent years following the Celtic tiger and the subsequent recession, so this theory may well be defunct.”
A recent Zurich Life Pension Survey found that one in five of those with a mortgage are so heavily indebted they expect to be still paying off the home loan when they cease working, and four out of 10 people expect to be forever renters**.
Foran says that this coupled with the fact that the average age that Irish women are having their first baby is 32.5*** and the average age at which young Irish people now leave the family home is 26.3 years**** the actual cost of living in retirement may be more demanding than we realise.
“The picture of life in retirement is going to look different for everyone but it's worth thinking about when planning for spending in retirement,” Foran says. “It’s also important to look at the different phases of retirement when planning for the income needed at that point.”
She identifies four phases in retirement to consider when saving for retirement income.
First is the honeymoon phase. “This is probably the most exciting stage of retirement. It’s great to be retired, leaving behind the rat race. People may have access to a lump sum and realise some dreams or ambitions such as travelling the world, going on a cruise, paying off debts, etc. However, this doesn’t last too long as a regular lifestyle begins.”
The second phase Foran talks about is the active stage, which she says sees a new normality start. “People take up hobbies and leisure interests, spend more time with family and perhaps travel more. This lasts up to approximately the age of 75. Most people would hope to be debt free at this point, or before, and the children should certainly have left home.”
The passive phase is usually between the ages of 75-85, according to Foran. At this point spending on hobbies and leisure pursuits may decrease, while spending on health will increase. There may be a focus at this point on downsizing a home and on estate planning.
The last stage is the dependant or supportive phase. “Life may change dramatically at this point,” Foran says. “Mobility may be restricted and the need for care increases. Medical costs may be at their highest at this point, and although a medical card may be available, many still have private healthcare.
At the current rate of €243.30 per week or €12,651.60***** per year, the State pension is designed to cover the basic costs of living in retirement. If you consider your actual financial commitments and phases of retirement or even that the current average earnings in Ireland are under €40k****** it’s easy to visualise the overwhelming gap between the desired lifestyle in retirement versus the real life situation.
According to Foran, the key to a successful retirement strategy is to start planning it many years before the actual date. “Retirement advice in Ireland is undergoing a change,” she says. “No longer is it advice on a one-off product choice when a person retires; it has become much more complex and involves process planning for the various different stages of a person’s life in retirement.”
Given the complexities involved in financial planning for retirement, it is a good idea to talk to a financial advisor to begin retirement planning and review the plan regularly to ensure that life in retirement is affordable and enjoyable.
“It’s never too early to plan for retirement,” Foran says. “Each stage of retirement brings different challenges and opportunities. But one element connects them all and this is the continuing need for professional advice.”
* Source: Central Statistics Office, Population and labour force projection 2016-2046, 2013
**Source: Zurich Pension Survey, 2018
*** Source: CSO Average Age of Mother, 2017
**** Source: Eurostat Being young in Europe today, 2017
***** Source: Department of Employment Affairs and Social Protection, 2018
******Source: CSO Earnings and Labour Costs, 2017
It’s important to think about the future. The choices you make now could impact your future and this is especially the case when thinking about pensions. If you’re wondering where to start, you can find a local financial advisor near you with the Zurich Advisor Finder.
Zurich Life Assurance plc is regulated by the Central Bank of Ireland.