How much income do you need in retirement?
Posted on April 23, 2013 by Micheál Collins
Pensions and pension's policy are back on the agenda following the recent release of the OECD report on the Irish pensions system. Details and the document are here: http://www.welfare.ie/en/pressoffice/Pages/pr220413.aspx
At the core of much discussion on pension issues is the question of what is an adequate income in retirement. In general the answer to this question tends to be inflated, driven by a pensions industry that wants more investments and inflated expectations of likely expenditure costs in retirement by workers.
In retirement, the expenditure of many, if not most, workers falls significantly as mortgages have been paid off, children have been reared and typically pensioner's health is good. For those who rent housing costs do remain, and for home owners property taxes and maintenance costs persist.
It is worth looking at the research evidence on living costs in retirement. The most comprehensive assessment of this was published by myself and the Vincentian Partnership for Social Justice last year in a report on Minimum Income Standards for Ireland (Collins et al, 2012). That research established the cost of a modest standard of living for various Irish household types, in urban and rural areas, including pensioner households. Given this, it further established the income a household would need to be able to afford such a standard of living. Recently, the VPSJ have updated the figures to 2013 levels (adjusting for inflation and Budget changes). These updates have been incorporated into the on-line calculator developed from the Minimum Income Standards Research and available at http://www.misc.ie/
The update of these results show that an urban household with 2 pensioners requires €281.56 per week to achieve an adequate standard of living - that's one which covers all their costs, allows them to socialise, have an annual holiday etc. The calculations assume both pensioners are healthy. This adequate level of expenditure equates to €14,691 per year.
Using this as a baseline and adding in other costs which a better off pensioner household might desire gives a further insight into pension needs. My intention here is to outline what might be a very comfortable lifestyle for a pensioner couple and what they would spend and need in annual income for this.
If we allow an additional €5,000 a year for contingencies, €5,000 extra a year for a holiday, €3,000 a year health insurance, €3,000 a year for the cost of a car, €3,000 a year for household repairs/upgrades/maintenance and a 25% increase on the total adequate expenditure levels to allow for more luxurious purchases (better biscuits, curtains and more social interaction) (+€3,673); we get a revised total annual expenditure of €37,364 per year. This figure would be slight higher again for a rural household as expenditure costs are higher for rural households and there would be additional transport costs (add approximately €4,000).
An urban pensioner household needs to have an income of approximately €48,000 in total (€24,000 each) to afford this very high standard of living in retirement. A rural pensioner household would need an income of €52,500 in total.
A couple with an entitlement to one contributory pension and one qualified adult pension will receive a weekly income from the Department of Social Protection of €230.30 + €206.30 = €436.60; equivalent to €22,780 per annum. This alone is enough to cover the adequate living standard mentioned above and leave a discretionary amount of more than €5,000 per annum.
To afford the very comfortable lifestyle an urban couple would need a further income from a private/work pension of €25,250 per annum while a rural household would need an income of €29,750.
So, for a couple desiring a very comfortable lifestyle in their retirement; one better than most people enjoy in their working years, their aim from a private/work pension is a retirement income of less than €15,000 per annum each.
NOTE: the issue of pensions and pension policy will be highlighted at the forthcoming NERI Labour Market Conference on May 1st where three papers will examine pensions issues. Details of the seminar, which is open to all are available here. http://www.nerinstitute.net/events/2013/05/01/inaugural-neri-labour-market-conference/
The Report on Minimum Incomes is here:
Collins, M.L., B. Mac Mahon, G. Weld and R. Thornton (2012), A Minimum Income Standard for Ireland - a consensual budget standards study examining household types across the lifecycle - Studies in Public Policy No. 27, Dublin, Policy Institute, Trinity College Dublin.
The Online calculator and link to other updates from the Vincentian Partnership is here: http://www.misc.ie/
The Vincentian Partnership website is here: http://www.budgeting.ie/