Investment scenario for 54 years old

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Franc1

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All,

I have about 160k cash to invest in the medium term 7-8 years (I’m 54 years of age, home owner with no mortgage, single, no outstanding debt, no credit card debt and pension contributions already maxed out (pension pot is currently at ~500k). I like the job (~85k/year) so if all goes well I still plan to be working in 10 years from now.

I was thinking of this investment strategy

- 30k home improvement (better insulation etc.)
- 30k cash left in the bank for a rainy day
- 100k lump sum: I have transferred it to Degiro and sitting on cash at the moment but thinking of the following:
  1. 30k Vanguard FTSE All-World IE00BK5BQT80
  2. 30k iSHARES S&P Core 500 IE00B5BMR087
  3. 40k Vanguard Eurozone Gvt. Bond ETF IE00BH04GL39

iShares offer the equivalent ETFs at point 1 and 2 but hedged in Euros. I wonder if it makes any sense to purchase the ETFs hedged in €€€ to avoid any currency fluctuation risk. ?

The investment horizon as mentioned is 7-8 years: all funds are accumulating to simplify the tax burden, after which I plan to sell the funds and pay the due exit tax or rebalance them.

Thanks
Franc
 
1) you can put it in an ETF.
2) you can put it in your pension fund.

With an ETF you pay deemed disposal after 7 years, with your pension fund your returns are not subject to CGT and you can withdraw 25% tax free on retirement. I am not sure what the appeal of the ETF is.

Am I missing something?
 
Thanks Coyote for replying. I need to check that, and honestly I didn't even think of it because my company contributes 6% of my salary into the pension and I put and additional 30% AVC on top of it. I thought that this 30% was the maximum that I could contribute to the pension in a tax efficient way hence this is why I started looking at the ETFs
 
How is your pension pot invested?

One option would be to maintain an aggressive allocation within your pension, perhaps even something close to 100% global equities, and keep your after-tax savings in cash.

It’s important to look at your assets as a whole and not to simply focus on an individual account.

At 54 you should probably keep a meaningful portion of your assets in “safe” investments (cash/government bonds).
 
Franc1 said:
The investment horizon as mentioned is 7-8 years:
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I am curious about this.
Why do you have an 8 year horizon?
If you have no mortgage, a well funded pension and you will be earning more than you are spending for the next 10 years, surely you have an indefinite investment horizon?

One of the most tax efficient investments after pensions is direct investments in equities as the Capital Gains disappear on death. So your beneficiaries would get a fair bit more.

Brendan
 
Franc1 said:
Then after 7 or 8 years rebalance the portfolio and have it more geared torwards cash and bonds and less shares.
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Why would you switch to cash at age 62 when you still have an investment horizon of 20 years?

You should invest in some form of equities now given that your horizon is about 30 years. You should not be investing now with a view to churning in 8 years.

Brendan
 
Time horizon for a 54yr old 25yrs plus.
Cover the bases and equity investments,
 
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IMO a 54 year-old man doesn’t have an investment horizon of anything like 30 years.

For planning purposes, he should assume that he will start spending down his retirement savings within 10 years. We don’t always get to choose our retirement date.

I personally wouldn’t invest in equities with an investment horizon of less than 10 years - the returns over a shorter time horizon are just too variable. Hence, I plan to have around 10 years’ worth of anticipated expenditure in cash/government bonds at retirement and I would build up this reserve gradually over the 10 years prior to my expected retirement date.

I would also want to ensure that all appropriate housing upgrades are completed prior to retirement and that all debts are cleared in full.

But my main point is to check how the pension pot is invested. I’d bet that the pension has a substantial allocation to cash/bonds given the OP’s age. So by simply increasing the allocation to equities within the pension - and retaining the after-tax savings in cash - the OP gets to the same place, without the tax headaches.
 
Sarenco said:
IMO a 54 year-old man doesn’t have an investment horizon of anything like 30 years.

For planning purposes, he should assume that he will start spending down his retirement savings within 10 years. We don’t always get to choose our retirement date.

I personally wouldn’t invest in equities with an investment horizon of less than 10 years - the returns over a shorter time horizon are just too variable. Hence, I plan to have around 10 years’ worth of anticipated expenditure in cash/government bonds at retirement and I would build up this reserve gradually over the 10 years prior to my expected retirement date.

I would also want to ensure that all appropriate housing upgrades are completed prior to retirement and that all debts are cleared in full.

But my main point is to check how the pension pot is invested. I’d bet that the pension has a substantial allocation to cash/bonds given the OP’s age. So by simply increasing the allocation to equities within the pension - and retaining the after-tax savings in cash - the OP gets to the same place, without the tax headaches.
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Dont really agree. Pension pot currently at 500k. Maxing out and wants to stay working for another 10 years. Should have a tidy sum by retirement. Upon retirement lump sum plus for the sake of debate 4% draw down I would consider to be in real terms my cash/bond to live on. Dont know but if state pension is also in the pot that also would add to the position. Single no debt. Additional funds I would still go equity route.
 
If somebody retired at the start of this century with an all-equity portfolio and drew down 4%, adjusted for inflation, annually they would now be flat broke.

Not a good result.

However, if they had lived off cash savings for the first 10 years of that retirement - and left their equity portfolio alone - they would now be in great shape.

Yes, equities are expected to outperform cash and bonds over long time periods. But when you are spending down a portfolio, the sequence of those returns matters enormously.

Maintaining a 100% allocation to equities when you are within 10 years of your expected retirement is a risky strategy.
 
Franc1 said:
All,

I have about 160k cash to invest in the medium term 7-8 years (I’m 54 years of age, home owner with no mortgage, single, no outstanding debt, no credit card debt and pension contributions already maxed out (pension pot is currently at ~500k). I like the job (~85k/year) so if all goes well I still plan to be working in 10 years from now.

I was thinking of this investment strategy

- 30k home improvement (better insulation etc.)
- 30k cash left in the bank for a rainy day
- 100k lump sum: I have transferred it to Degiro and sitting on cash at the moment but thinking of the following:
  1. 30k Vanguard FTSE All-World IE00BK5BQT80
  2. 30k iSHARES S&P Core 500 IE00B5BMR087
  3. 40k Vanguard Eurozone Gvt. Bond ETF IE00BH04GL39
Click to expand...
Of your total amount available for investment (160k) you are investing 18.75% in property (i.e. improvement of your home); 37.5% in equities (American and global large cap); and 43.75% in euro fixed income (i.e. cash and euro gobernment bonds).

On the equities, the fact sheet for the Vanguard FTSE All-World Intl_Share_Class_Fact_Sheets – IrishETF_GE2 (fundinfo.com) says that 60% of this product is invested in USA equities. Also, the top 10 shares, which make up 15% of the fund are also American. In total, the All-World product is 60% invested in American equities, so if you buy both the All-World and the S&P products you are allocating 30% of your funds to USA equities. If you are happy with this fine, but you may possibly be duplicating investment in equities that are common the both funds.

You have no EUR equity investments so you could consider dropping the All-World ETF; increasing your allocation in the S&P 500 product (or in other foreign developed market equities); and also buy an EFT that tracks domestic (i.e. EUR-denominated) equities. Or just drop the All-World and substitute an EUR-equity ETF for it.

As you will leave 30k in the bank for a rainy day fund, you are allocating (30+40) 70k i.e. 43.75% of your total funds to fixed income products., which is more than you are investing equities. This implies you are placing a high importance on the preservation of the [nominal] value of your savings.

In this regard, the factsheet for the bond EFT Intl_Share_Class_Fact_Sheets - IrishETF_GE2 (fundinfo.com) shows that 60% of the bonds have a maturity of greater than 5 years; with 12% having a maturity of greater than 20 years. Many would regard this as a risky product, i.e. a product with a high risk of price volatility. As bond prices are sensitive to interest rate risk, i.e. bonds prices and interest rates move asymmetrically, a rise in interest rates will cause the price of bonds with a coupon lower than the interest rate to fall in value. As central banks are mandated by their governments to maintain inflation at around 2%, this is typicality achieved by interest rate policy (e.g. increasing interest rates to ‘drive out’ inflation). And inflation currently is a problem. So bonds, particularly long duration bonds, may not at this point in time, provide the stability you seek for your portfolio. Equities should provide the risk in your portfolio, and bonds stability. If you wish to invest in a bond ETF, it would be prudent to look for an ETF that holds / tracks EUR-denominated short duration government bonds.

[The above is comment / observation and is not a recommendation to follow any particular investment strategy or to buy / not buy any particular fund or stock.]
 
PMU said:
Of your total amount available for investment (160k) you are investing 18.75% in property (i.e. improvement of your home); 37.5% in equities (American and global large cap); and 43.75% in euro fixed income (i.e. cash and euro gobernment bonds).

On the equities, the fact sheet for the Vanguard FTSE All-World Intl_Share_Class_Fact_Sheets – IrishETF_GE2 (fundinfo.com) says that 60% of this product is invested in USA equities. Also, the top 10 shares, which make up 15% of the fund are also American. In total, the All-World product is 60% invested in American equities, so if you buy both the All-World and the S&P products you are allocating 30% of your funds to USA equities. If you are happy with this fine, but you may possibly be duplicating investment in equities that are common the both funds.

You have no EUR equity investments so you could consider dropping the All-World ETF; increasing your allocation in the S&P 500 product (or in other foreign developed market equities); and also buy an EFT that tracks domestic (i.e. EUR-denominated) equities. Or just drop the All-World and substitute an EUR-equity ETF for it.

As you will leave 30k in the bank for a rainy day fund, you are allocating (30+40) 70k i.e. 43.75% of your total funds to fixed income products., which is more than you are investing equities. This implies you are placing a high importance on the preservation of the [nominal] value of your savings.

In this regard, the factsheet for the bond EFT Intl_Share_Class_Fact_Sheets - IrishETF_GE2 (fundinfo.com) shows that 60% of the bonds have a maturity of greater than 5 years; with 12% having a maturity of greater than 20 years. Many would regard this as a risky product, i.e. a product with a high risk of price volatility. As bond prices are sensitive to interest rate risk, i.e. bonds prices and interest rates move asymmetrically, a rise in interest rates will cause the price of bonds with a coupon lower than the interest rate to fall in value. As central banks are mandated by their governments to maintain inflation at around 2%, this is typicality achieved by interest rate policy (e.g. increasing interest rates to ‘drive out’ inflation). And inflation currently is a problem. So bonds, particularly long duration bonds, may not at this point in time, provide the stability you seek for your portfolio. Equities should provide the risk in your portfolio, and bonds stability. If you wish to invest in a bond ETF, it would be prudent to look for an ETF that holds / tracks EUR-denominated short duration government bonds.

[The above is comment / observation and is not a recommendation to follow any particular investment strategy or to buy / not buy any particular fund or stock.]
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Thanks a lot PMU for the time that you took to explain all this. I will take in consideration your suggestions. Im the meantime I wish you a happy 2023
 
Hi Franc,

In general, I think your plan is a good one. However, I would reconsider the 40K to Vanguard EUR Eurozone Government Bond UCITS ETF.
Generally Bonds are supposed to be the boring safe part of your investment portfolio. But over the last 12 months they have been anything but. That fund is down 19% for 2022 and as far as I can make out is yielding less than 1%. If you are set on bonds, I would swap it out for a global bond fund like iShares Core Global Aggregate Bond UCITS ETF EUR Hedged (Acc) (down 12% in 2022 but yields more than 1%). Or consider Sarencos suggestion of increasing your equity exposure in your pension and hold a bit more in cash. Raisin Bank is offering 2.5% plus on deposit accounts.
 
2022 was the first calendar year where both stocks and bonds declined by double digit percentages (stripping out currency effects). That has literally never happened before.

It’s a good reminder that in the short term literally anything can happen in the markets.

Focusing on the performance of any asset class over 1, 5 or even 10 years is a mistake. When it comes to investing, you really have to think long-term. As in decades, not years.
 
Sarenco said:
Focusing on the performance of any asset class over 1, 5 or even 10 years is a mistake. When it comes to investing, you really have to think long-term. As in decades, not years.
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I agree in general

But by 2021 bonds were basically bumping off the ceiling of what they could ever be worth. Many sovereigns were negative and corporates were at levels that had never been seen before.

The zero lower bound is not quite zero but a little below, but there is a point at which people just wont buy newly-issued bonds if what they get in return is materially lower than what they paid for them.

Equities have no theoretical upper limit. Bonds do.

I didn't predict the bond crash of 2022. But I made long-term bets on my own mortgage interest rate on the basis that what was on offer would never be lower again.
 
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