Josephine and I met with a husband and wife last week, we were reviewing their existing pension planning. They run a successful family business through a limited company.
As they are fast approaching retirement age we were discussing the income that their funds might generate for them in retirement. Also and very importantly they wanted to know what would ultimately be left to their children when they died.
We first met them a good few years ago on the recommendation of their accountant and the husband recalled our first meeting. He had asked me one question in particular that he could remember. He had asked me how much should have in their fund at retirement age?
My reply then was and I suppose it hasn’t changed much since “if you want to have income for life at retirement age of €50,000 a year then you better try to have at least €1 million in your pension fund”.
Looking back at our business relationship I think that once they understood what they needed and why it was needed they took the necessary ownership of their pension planning back then, and that really is so important. Everyone must be on the same wavelength.
My brother George was one of the first people that I can remember to take ownership of his pension planning from an early stage. He started a company called Eurostyle when he left our old family business Dwyer & Co back in 1972. George has two of his sons Alan and Peter in the business and he understood that small family businesses are not really very saleable especially if you have sons or daughters working with you in the business. He knew too that he would need to have sufficient independent income outside of the business to fund his income in retirement.
I remember him telling me of a conversation he had with a customer of his who also had a family business. This customer was older than George and George asked him how much he had in his pension plan. The customer didn’t know and George was amazed at this. He said to him “you probably could tell me how much your shop took in the till yesterday”! His customer agreed. George replied that what he took through the till in his shop really didn’t matter as the only important money ultimately for him was what he had is accumulated in his retirement plan as that was the only way he would ever be able to retire from his business.
When people are young it is naturally difficult to get them to focus on something which is so far out there into the future. Trying to get a 25 year old to start a 40 year savings plan even with tax relief is not an easy task but it will be absolutely magic for them if we can help them to make it happen.
Let me give you a few numbers to explain what I mean. In this example I am assuming a net annual return of just 5%. This is a number plucked from the sky and in a 40 year period there will be plenty of years when the fund will fall in value. A well invested fund well diversified, could however over this time framework do much better than that if invested well and in real assets like shares and property.
To start off the pension plan for a 25 year old lets target €1,000,000 at age 65 and see what needs to be invested each month.
It comes to just €655.30. Imagine that ….the magic of time and compound interest! As tax relief is allowed on pension contributions within certain limits our 25 year old could get tax relief if paying tax at the standard rate of €131 per month (€1,500 pa). If tax is being paid at the high rate then tax relief of over €3000 a year could apply.
If our young person feels that a monthly gross payment of €655.3 is too high and not affordable then we must find a target fund they are comfortable with. How about €500,000 at 65? This will require only €327.65 gross per month. If still too much we might reduce our target fund to €250,000 which will require just €163.83.per month.
Let’s assume we now have agreement to go ahead and that amount is acceptable. We now set up a pension plan to invest that amount each month. We have done something of real value for our customer and something of real importance.
We have done two things. We have got them to start and we have given them a fund to aim for. They now have a target and most importantly the start of the understanding and ownership of their retirement fund.
We all realise that this original target fund is on the low side but we will then explain that every year we will be back and will meet with them to see how did the fund perform and maybe next year if they can afford it we will put the next piece of their retirement planning jigsaw in place and bring the target funding to perhaps €350,000 or the €500,000 level. As they would say in Kerry now we’re sucking diesel!!!
Ted Dwyer Family Business