Keeping a close eye on the numbers

Retirement income calculators are normally fairly rough and ready tools designed to give a very broad indication of what an individual might hope to receive in retirement. They also usually come with a long list of terms and conditions highlighting the fairly wide margin of error involved.

One of the problems with these tools is that they, like the rest of us, can’t really predict the future. What happens if we live 10 years longer than we expect to? What if there is another global financial crisis? What if the Government pushes the State pension age out to 75?

A new service might help Americans contend with the uncertainties surrounding their pension plans. United Income claims big data is the solution. It is utilising vast databases on investment performance, personal spending in retirement, longevity, and other key factors to simulate a huge range of potential outcomes. The software calculates the chances of success for a client’s retirement strategy and then refines the plan if it won’t. The company behind the service claims the calculations are based on as many as 18 million simulations per client.

But what are Irish people who don’t have access to 18 million calculation software applications meant to do? On the other hand, most of us probably don’t need that number of calculations, or anything like it.

Alistair Byrne, head of European DC investment strategy with State Street Global Advisors, advises taking a straightforward approach to it. “As a starting point, you should think about what you might need in retirement and break it down into the essentials,” he says. “And then look at your lifestyle aspirations in terms of holidays and so on. People can often be pleasantly surprised when they calculate what they actually need.”

Debt has to be considered as well, of course. “This obviously has to be taken into account,” he notes. “People are having children later and might still be paying off mortgages later in life.” For some, this could mean pushing out retirement until the mortgage is paid off.

In calculating what you will actually receive, he says that it is important not to include what you might get from the State. Many people on average incomes will find that this will have a significant impact on their retirement income.

“The other element should be pretty straightforward,” he says. “Look at any entitlements you have from defined benefit and defined contribution schemes and then look at the gaps.”

In addressing those gaps, Davy financial planning consultant Peter Feighan says that people can increase contributions to their pension scheme or look at alternatives. “You can look at marrying pension with non-pension saving,” he says. “We look at these options when advising clients on financial planning.”

He also advises keeping an eye on your pension savings from day one. “The younger you start monitoring it the more chance you have of doing something about it if you find you are not on track to meet your needs.”

Mercer DC partner Mairead O’Mahony says the benefit statements sent out by most good pension providers will give you a good indication of what income people will get from that source. Other income sources have to be taken into account as well. “Look at your State pension entitlement and any other pensions from previous workplaces that might be still sitting there. You have to look at all sources to get a handle on your retirement income. After that, look at what you need and this will change over time. Will your kids be grown up? Will your mortgage be paid off? These things have to be taken into account when calculating if you are on track for retirement.”

It appears that most of us won’t need the power of big data to help us figure out our financial situation in retirement, but that doesn’t mean we shouldn’t be paying close attention to the numbers.