How to generate an Income from your Retirement Fund
When you reach retirement you will be faced with many choices. You might think about spending more time with your family, more holidays, more hobbies and more time to do the things you enjoy. However how are you going to finance your retirement when your pay check has stopped?
If you are lucky enough to have a Defined Benefit pension then no worries. You have a guaranteed income for the rest of your days. Go enjoy your retirement. (its not all plain sailing of course, your DB scheme could be underfunded but I’ll stick a pin in that for now)
However if you have a Pension Fund that has been accumulated in a Defined Contribution scheme then you will have some questions to answer and some choices to make.
How long will you live? / How much income do you need?
At this stage it is best to sit down with a Financial Planner to crunch the numbers. First you need to work out your planned expenses in retirement. Then you make an estimate of how long you will live. Nobody knows exactly how long they will live but you can have an informed guess. A female retiring at 65 has a 51% chance of living to age 91 and a male retiring at 65 has a similar chance of living to age 87. When I am crunching the numbers with my clients I like to assume everyone will live to age 100. This gives my clients comfort that they will not spend their resources too quickly.
Is your Pension Fund large enough to pay the income you want for the rest of your life?
Once you know the level of income you need in retirement and you have an estimate of how long you will live then you need to see what your pension fund will do for you. Many will not have saved enough in their pension pot and will be dis-appointed with their projected retirement income. However if you are lucky enough to have saved a pension pot of €500,000 then you can expect the following with an annuity or ARF (Approved Retirement Fund).
Do you want to buy a guaranteed income with an Annuity?
If you buy an annuity then you can expect to get an income of approx €4,000 per year for each €100,000 in your pension fund. So if you have a pension pot of €500,000 then you can buy an annuity income of approx €20,000 per year. This may seem quite low but that’s the reality of the low interest rate environment we currently find ourselves in. Add this to your state pension of approx €233.30 per week and you have an annual income of approx €32,131. This is less than the average industrial wage but if you do not have an extravagant lifestyle and are mortgage free then you should be able to live quite comfortably on this.
Will you invest your pension fund in an ARF?
Another option is to invest in an ARF (Approved Retirement Fund). This is a more popular option for a number of reasons. You keep control of your Pension Fund and it can continue to grow tax free. You can also decide how much or how little income to draw down (subject to a minimum annual withdrawal starting at 4%). A Pension Fund of €500,000, with a tax free growth rate of 4%, could provide you with an annual income of approx. €29,000 for 30 years. Add this to your state pension and you have an annual income of approx. €41,131.
So you can see why an ARF Pension Fund is a more popular choice. In the example above you could get an extra annual income of €9,000. Who would not want an extra €9,000 per year? However the ARF option is not without risk, far from it. With the ARF option you need to invest wisely and navigate the highs and lows of equities and other investments.
Seek Independent Advice
Whatever your situation at retirement it is really important to seek advice. Choosing the correct pension structure and the correct choice of investments for your pension funds is very difficult if you do not have the correct information and expertise. If you are not familiar with pension structures and investments then it is really important to seek the help of an expert.
It is very easy to take the standard options offered by your bank or pension provider. However the easy option is very rarely the best option. Seek a second opinion and see what your real options are. Pick an experienced CFP® qualified Financial Planner who will act in your best interests and complete an annual review to keep your personal finances on track.
Do you have any pension or retirement questions? Please use the comments below.