In this section we set out what we think the priorities should be for individuals at different stages of life and different situations.
- Age 21-35, just getting started and may be in a position to save money
- Age 36-50, may own a house and may have children
- Age 51-65, may be thinking about retirement
Aged 21-35, just getting started and in a position to save money
If you fall into this category, we suggest your financial priorities may be the following:
1) Join your employer’s pension scheme
Will your employer contribute to a pension on your behalf? A contribution from you may also be required to qualify for this. If so, you should consider making that contribution: it will stand you in good stead in the longer run. Contributions qualify for automatic tax relief at source: putting €100 in your pension will result in a reduction of less than €100 in your take home pay, and you won’t need to fill in any tax forms to benefit from this.
2) Eliminate non-mortgage debt
Many people enter the world of work with a nasty financial hangover from their student days, often in the form of high-interest credit card debt. There is only one thing to do about this, and that is to get rid of it. Interest on credit cards can run to more than 20% per annum, while interest on personal loans commonly exceeds 10%.
3) Save for a house deposit
We at Mercer do not endorse the ‘get on the housing ladder at any cost’ mentality that characterised the late housing bubble. However, leaving aside current market considerations there are many reasons for buying a house, including setting up a family home.
Typically a 20% deposit may be needed to qualify for a mortgage. To buy a €200,000 house, you may need a deposit of €40,000, along with perhaps a further €10,000 to cover furnishings, stamp duty and transaction costs. It may seem old fashioned, but if you wish to enter the housing market in a sensible fashion, start saving.
4) Save for child-related expenses
Raising a child costs a lot of money. The US Department of Agriculture in 2010 estimated the cost of raising a child for a middle income family at $222,360 in total. The amount you will need will depend on your circumstances. For example, will you need childcare or does one parent intend to stay at home? Do you intend to send your child to a fee paying school? Do you need a larger house?
Many of the costs of childcare are more properly dealt with as part of day to day budgeting rather than longer run financial planning. However some bulk costs can be anticipated – for example school fees or university costs. A regular saving plan may be appropriate to provide for these. These savings could go into a bank account or, if you wish to target a higher return, into an investment.
5) Make additional or private pension contributions
If you are lucky enough to have excess savings after paying down debt, buying a house and devising a savings plan for your family, it is advisable to find a tax efficient way of investing any leftover cash. The most tax efficient means of all is a pension.
We have already discussed employer-sponsored occupational pension schemes above, and the need to opt into these. If your employer does not provide a pension scheme, or if you are self-employed, you should look at taking out your own pension plan.
If you are a member of an occupational pension scheme, you should be able to make Additional Voluntary Contributions (AVCs) to increase your pension. Why should you do this? It’s not just about ensuring you can live comfortably in retirement, though this is very important. If you are a higher rate taxpayer, you receive relief from income tax for your pension contributions. Depending on your exact tax situation, saving €100 in a pension may only reduce your take home pay by €60. We can think of no other way to turn €60 into €100 instantaneously.
Aged 36-50, own a house and have children
If you fall into this category, then we suggest your financial priorities may be the following:
1) Keep back money for a rainy day
You don’t know what life may have in store, and a mortgage that is manageable now may be less manageable if something affects your costs or your take home pay. As a rule of thumb, it is advisable to ensure that you have at a minimum of six months of take home pay set aside to deal with unexpected events.
2) Manage your non-mortgage debts
Many non-mortgage forms of debt carry very high interest rates. On no account should you take out personal loans that you don’t need. Credit card and store card debt can be particularly toxic, carrying annual interest rates of 20% or higher. It doesn’t make financial sense to repay the minimum every month – you should pay it off as soon as possible.
3) Protect yourself and your family
You may be lucky enough to have the following employment-related benefits:
- Life assurance
- Income protection
- Health insurance
- Death in service benefit
Life Assurance may protect your family’s wellbeing in the event of your unexpected death. Income protection is designed to provide you with an income should illness or accident prevent you from working. Health insurance will help to defray or cover the cost of care should you become ill.
If you do not have an employer who provides these benefits, you should strongly consider purchasing them.
4) Increase your pension contributions
If you are a higher rate taxpayer, there is a compelling case for making additional pension contributions with any excess income you may have up to revenue limits. You will receive relief from income tax by making pension contributions. To illustrate this, depending on your exact tax situation, it may cost you only a €60 reduction in your take-home pay to put €100 into a pension.
After you have maximised your pension contributions, if you still have extra cash available, it is worth considering investing that money. Investments offer increased accessibility to your cash than pensions do, and can be ideal if you have a large lump sum. However, be mindful that, when investing, it is advisable to take at least a 5-year (and ideally a 10-year) view.
Aged 51 to 65 and thinking about retirement
People in this category will want to consider the following financial priorities:
1) Pension contributions
You may have accrued pension entitlements over your lifetime, or you may not have started on your pension. Either way, at this point it may make sense to maximise your pension contributions within the limits of what the Revenue will allow and what you can afford. The following are some good reasons why you should do this:
- Pension contributions benefit from tax relief –higher rate taxpayers can get €100 into their pension for a reduction in take home pay of only €60
- Much of the money may be coming back to you at retirement as a tax free lump sum
- The maximum allowable contributions that you can make will rise from 30% of earnings at the age of 50 to 40% of earnings from the age of 60 onwards
- The more you contribute, the more income you will have available to you in retirement, all things being equal
2) Timing retirement
If you are a member of a defined benefit pension, the more years of service you accumulate, the higher your retirement income will be. Many defined benefit schemes, however, will not permit early retirement – so if you want to stop work early you will need to accumulate savings (outside of pensions) to tide you over to the normal retirement age of your pension scheme.
If you are contributing to a defined contribution type of pension arrangement, the size of your fund, your age at retirement and the level of annuity rates at retirement may be the key determinants of your retirement income. You can’t do anything about annuity rates, but the other two factors may be under your control. All things being equal, the more you contribute to your pension and the older you are when you take your benefits, the more income in retirement you should receive.
Try using our Pension Calculator to see how much retirement income you could reasonably expect to get at a given retirement age.
3) Reducing Debt
It is normal for income in retirement to be somewhat lower than income during your working life. To a degree this is fine, as living expenses typically fall as well when your children are grown up.
However you will help yourself significantly if you can ensure that all debt is cleared by the time of retirement, as having no interest or repayments to make will in itself radically reduce your outgoings. Consider increasing your mortgage repayments. If this is not possible, though, remember that your pension (if you have one) should yield a tax free lump sum. Examine how much this might be and consider using it to clear or significantly reduce your debts.
4) Saving and Investment
The state pension age is gradually being raised, and will be 68 by 2028. There may be good reasons not to take early retirement benefits from your pension plan. For this reason, saving and investment outside your pension may be important. The level of growth that you can target will depend on your risk tolerance – which in turn should be driven to some degree by the amount of time that you expect you can leave the money untouched.
If you are retired, the following are our suggested financial priorities:
1) Manage the risk on your investments
As you grow older, there may be a strong case for reducing the level of risk you take with your investments. A general investment rule of thumb states that the longer your time horizon, the more risk you can afford to take. If you plan on using your money in your lifetime, the case for taking risk may decline as you grow older.
You should note that this is not a strict rule – if you are lucky enough to have a large enough pension or significant and safe savings to provide for your needs in retirement, you may wish to continue targeting growth with your investments, and thus taking relatively significant risk. It does, however, make sense to question why you may originally have chosen to take investment risk and whether the reasons for doing so still apply. There may be little point in targeting growth for growth’s sake.
2) Plan for inheritance
If you have not made a will you should do so, for two reasons. Firstly, you earned your wealth, and you should decide what happens to it after you are gone. Secondly, if you die without making a will, the legal complications for those you leave behind in dividing your estate can be significant.
If you have significant wealth and wish to minimise the tax burden on your heirs, you should find out more about planning for inheritance.
3) Long term care
Statistics for the likelihood of an older person requiring long term care in Ireland are limited. However the US Department of Health and Human Services has estimated that 70% of people aged 65 or over will require long term care at some point in their lives. In many cases, this care will be provided by relatives, but over 40% will need care in a nursing home for at least some period of time. If you have substantial savings or a retirement income in excess of your needs, it may be worth saving money against the possibility of needing to pay for long term care.