Case study 53yr old Healthy finances: Diversify or stick

Luternau

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Age: 53

Spouse’s/Partner's age: Not applicable

Annual gross income from employment or profession: €74, 000

Annual gross income spouse: Not applicable

Type of employment: Public Sector

Expenditure pattern: Definately a saver

Rough estimate of value of home: €340,000

Mortgage on home: None (paid off early)

Mortgage provider: Not applicable

Type of mortgage: Tracker, interest only, fixed rate: Not applicable

Interest rate: Not applicable

Other borrowings – car loans/personal loans etc.: None

Do you pay off your full credit card balance each month? Yes

Savings and investments:
€200,000 cash savings in low interest accounts.

€120,000 An Post Saving Certs (2 to. 2.5 yrs into 5 Yr term)

€80,000 to €100,000 in shares.

(I am carrying €65,000 loss on bank shares to offset on profits from these shares or investment properties below.)

Do you have a pension scheme?
Yes, defined benefit. 34 yrs reckonable. PRSI Class D so only paying in about €1k per annum in contribution.

Maxxing out on full contribution AVC to benefit from tax credit. Concern about over funding but unlikely to work to get full pension.

Do you own any investment or other property?
5 investment properties.
All guaranteed interest only trackers for the remaining terms (8 to 10yrs average). Cannot be removed (legal agreement).

Total borrowings: €1.1
Current values: €1.45m
Generating pre-tax profit of about €45,000 to €50,000.

I am considering selling down the properties over the next few years, the first this year due it being vacant now.

As it currently stands the properties could be sold with minimal CGT exposure as two are valued less than purchase price.

Ages of children: None.

Life insurance: Yes. Tied to mortgage, now paid, plus that associated with occupational pension.

What specific question do you have or what issues are of concern to you?

I am aware I am in a good position. I have an income over expenditure of nearly 3k a month which is just sitting in my bank making nothing. What options do I have to diversify?

My appetite for risk is moderate, and thinking towards early retirement. Cash is cash so maybe State Savings, even with the low returns now are best?

Would it be a good idea to invest more in a unit linked fund to get better return on the lump sum and then put more in over time instead of on deposit ? My bank are suggesting this but I am not sure this is for me. These suggested retrurns are just that and there is risk too. If I go this route I would need to look around rather than take the pitch of the bank sales team ahead of others.

I know I could afford some risk. However, with the properties I am carrying a lot of risk and exposure to one sector.

I don't intend to work until I am 60, most likely not beyond 55, so two more years is very likely. As it stands now, I could quit and be OK until 60, and then get approx 30k pension allowing for actuarial reduction for leaving before normal retirement age.

I think its time to start to enjoy the benefits of some good decisions when younger and some good fortune to benefit from them.

Suggestions / advice welcome.
 
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Marc

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You definitely have far too much risk in the rental properties with that level of borrowing.

I can’t think of any other county in the world where 5 rental properties with over €1m of debt would ever be considered possible, let alone suitable for someone on a €70kpa salary.

You should avoid unit linked funds when you have CGT losses as the gains on these policies can’t be offset against your losses for tax. That represents negligent advice from the bank -the fact that they can’t provide a more suitable alternative is no defence. Banks should simply refuse to act in these circumstances, but of course they have sales targets to meet!!

Your Defined benefit pension represents a substantial promised financial security which along with the AVCs should provide your core financial security forever.

We’d put all this into a single forward looking projection and ask a very simple question “what on earth are you going to do with all this money?”

I'm a financial planner but I don’t think people have financial goals - like just having more money.
People have lifestyle goals that have financial implications.

Like can I afford to retire right now?

To my mind you need to be comfortable in how financially secure you are and the choices it affords you -and my guess the answer is that you will most likely pass what I call the biscuit tin test.

This is where you simply imagine selling everything you own and putting it into cash in a tin. Help yourself to enough €50 notes everyday to cover your living expenses and see if you would ever run out of money. You need to be able to do this for at least the next 47 years.

If you don’t run out (pensions are added in the top) then you are set financially you might chose to invest some of your cash but you most likely don’t “need” to

However, to the extent that you might want or need to invest some cash you need that investment to be low cost, tax efficient and flexible. We’d use a portfolio of non-EU, probably US ETFs which would give you around 12,000 stocks in your portfolio and no tax on your gains until you use up your CGT losses. It would be practically impossible to come up with a more suitable alternative.

You then need to start to learn how to reverse your saving habit and turn that into an ability to enjoy it

As we always say there are no prizes for being the richest person in the graveyard and life isn’t a dress rehearsal.

Work out what you really want out of life and get out there and do it. Your money is simply a tool to that end

You need to invest in some good financial planning advice and then rebuild your portfolio around the life you want to lead.

“If you don’t know where you are going, you might end up somewhere else”

Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie
 
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Luternau

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Thank you for that detailed reply and advice Marc.

I dont disagree with what you said at all.

I don't want to be the richest person in the graveyard. Saving like I am is something that will result in that. So it needs to change.

I took a big risk on the property and got away with it. It is not something I am comfortable with now and I will be addressing it. Covid has just slowed my plan.

The amount of money in the bank is good comfort but a minor stressor too. It is as you say like a big biscuit tin. I know its not the right place for it/silly to have so much there. I want to enjoy the money and need to change my saving habit.

I don't have an expensive lifestyle but its comfortable, not frugal. I enjoy my holidays, have a nice car, buy nice things when needed, etc. When more money is coming in than you can reasonably spend, money accumulates quick enough.

It is a good situation to be in so I want to maximise or secure my position now. I don't know a lot about ETF's. I must look into these.

What would you your thinking be on trading up on the home? I like where I live but could do with more storage space. The extra space is a pro but the negative is money tied up in the property/paying a mortgage again, even if its a small one over a short period of time and just moving! It would help me declutter as I seem to be bad at that too.
 

Marc

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There is a detailed analysis of taxation of investments in Ireland in our tax guide


Yes having a more expensive main residence than you "need" makes a lot of sense in Ireland, certainly from a financial perspective

1) You can rent a room tax free income up to €15kpa - not that you maybe "need"the income but there is something to be said for having someone else in the house (if you are away etc)
2) Capital gains on your principle residence are free from tax

Then you have additional utility benefits a garden where you can grow your own free fruit and veg for example is good for body and soul

Equally using some of the cash to "upgrade" your existing property solar panels, better insulation etc are all a good use of money that is otherwise lying around.
 

noproblem

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What about 6 months here and 6 months in a nice warm country that meets your requirements? If there's only yourself what do you want more storage for? Sell off or give away anything you don't need, take care of any family who might need a helping hand, we all have a few of them. By the looks of things you're a lucky person. Keep it that way by getting yourself good Private health insurance that'll cover you when you're abroad as well in case you decide to live there for a few months a year. Good luck to you and well done but ENJOY LIFE. We only get one shot at it.
 

Brendan Burgess

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44,678
Your financial goal should be to preserve your wealth, rather than maxing it.

So how risky is your portfolio?

Do you own any investment or other property?
5 investment properties.
All guaranteed interest only trackers for the remaining terms (8 to 10yrs average). Cannot be removed (legal agreement).

Total borrowings: €1.1
Current values: €1.45m
Generating pre-tax profit of about €45,000 to €50,000.

I am considering selling down the properties over the next few years, the first this year due it being vacant now.

Looking at these in isolation, they are "a bit" risky. But in my view, it's a very small risk and you can handle it comfortably.

With an interest-only cheap tracker, these are very profitable.

Over the next ten years you will generate about €500k in profits. Sure the values could fall from €1.45m to €1m over the next ten years, but they could rise as well.

If they are not hassle, I would not be selling them. If they are hassle, I would sell them.

You have €320k in cash. It is probably earning you less in interest than you are paying after tax for your cheap mortgages. It might make sense to pay down some of the mortgages.

Who is the lender. It's very unlikely, but at some stage, they might offer you a discount for early repayment.

Brendan
 

Marc

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@Brendan Burgess The estimated equity in the properties is about €350k and the borrowings are €1.1m so we are looking at leverage of a little over 3 times!

peak to trough residential property in Dublin dropped what about 70% in 2008.

So that’s literally an actual decline in value of around €1m in the recent past. That’s not a theoretical risk it actually happened.

So you could easily be left with substantial negative equity of some minus €500k or more and a million in debt.

That’s more than a “bit” risky
 
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Brendan Burgess

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Hi Marc

I don't think he could "easily" be left with €500k negative equity. It's certainly possible.

But he has 10 years before he has to repay the loans. In the meantime, he is generating €50k profit a year, or €25k after tax.

If he sells all his property, he will have €350k to invest. He won't generate €25k a year net on that.

I think the existence of the cheap trackers makes the risk worth taking.

Brendan
 

NoRegretsCoyote

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The estimated equity in the properties is about €350k and the borrowings are €1.1m so we are looking at leverage of a little over 3 times!

Yes but with a non-amortising tracker. Say 0.7% on a million euros can always be serviced with 5 properties.

peak to trough residential property in Dublin dropped what about 70% in 2008.
National prices fell 50% peak to trough and it took six years.

OP has buckets of time to sell if prices turn and he's approaching negative equity.
 
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Luternau

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Thanks for all the replies and input. I dont think a unit linked fund is a runner as nobody is mentioning them. That's sorted then. Maybe the ETF are worth looking at but I am sort of reluctant on these too.

Negative equity on the properties is possible but as Brendan said, I am generating a lot of profit on them. I was probably conservative on the value, maybe closer to €1.5m.

It is hard to let go of that income but its coming near time to run the risk down a bit.

@Brendan, the lender is ptsb. I should have been clearer, my goal is the preserve my finances so selling down the portfolio will do this and generate some more cash as it stands. That will see me with a big sum for the rest of my life.

The next 10yrs will generate a lot of profit if I keep them. That's a dilemma itself. They are not causing me any trouble. I have a company looking after them and it's hands off for me. Sell or keep. Make more money or preserve what I have and keep it safe and risk free from here on.

That's an interesting point on repaying some capital from v keeping it on deposit or State Savings, even with the small returns now. I assumed it was better to put the full interest against income for tax reasons rather than pay it back, especially now its back to 100%. If they moved to cap it again then it would for sure.

I dont think the lender will offer a discount to repay early. That would be good though.

@NoRegretsCoyote I would love. 0.7% but that's more PPR territory. Mine are 1.1% to 1.35%, say an average interest rate is 1.25%.
 

Marc

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Hi,

It’s time to hand this over to a competent professional financial planner and make sense of all the issues based on a detailed analysis of all the facts.

There are just too many variables now.

it would only cost you a few thousand Euro and you’d have a written, insured Professional analysis and recommendations

 
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Brendan Burgess

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I assumed it was better to put the full interest against income for tax reasons

Mine are 1.1% to 1.35%, say an average interest rate is 1.25%.

Hi Luternau

You just do a calculation of the net interest you receive and the net interest you are paying.

You are paying 1.25% interest
You are getting about 50% tax relief on it.
So the net cost to you is 0.6% after tax.


€200,000 cash savings in low interest accounts.

You would need to be earning 1% before 40% DIRT(?) to justify this.

Brendan
 

Brendan Burgess

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1) It is better to pay off your mortgage than keep €200k on deposit.
2) The next question is whether it is better to pay off a mortgage costing you 0.6% or investing in shares.

In other words, you would be borrowing money at 0.6% to invest in a portfolio of shares.

The economic outlook is very uncertain at the moment, so even if the cost of borrowing is very cheap, it's probably too risky to borrow cheap money to buy shares.

Brendan
 

NoRegretsCoyote

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@Luternau

You are in great financial shape. A few thoughts:

  1. I would hold the investment properties and sell as the mortgages fall due. They are profitable on these tracker rates but wouldn't be if you had to re-finance on amortising BTL rates. If house prices start falling you'd have plenty of time to get out without a capital loss.;
  2. You have no dependents but with your wealth you might want to start thinking about estate planning already;
  3. I wouldn't take actuarial reduction on the CS pension at 60. As far as I know it's designed so that the state does better than the pensioner. I would hold on until 65 and claim your full entitlement. You have more than enough wealth to draw down for the five years;
  4. Not sure why you have life assurance with no dependents and no mortgage on your PPR.
 

Luternau

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Thanks for the input

@Brendan Burgess
That is how I was working it out.
It looks like a marginal call to pay down capital or keep it on deposit. Something like State Savings over 3/5 or 10 years seems better than a unit linked fund with low to moderate risk.

Avoiding the unit linked funds makes even more sense if keeping all or some properties.

I take it when you refer to borrowing to buy shares you also mean or include ETF in this. That's OK by me. My cash is my buffer so I want to keep it safe and accessible if needs be.

@NoRegretsCoyote
Thanks for your comments. Things have worked out well for and I am very grateful for that.

Just to clarify, I am not in the CS pension and did not have would say the rules/workings of mine are very similar though thankfully we had no pension levy.

I don't know/fully understand the impact of actuarial reduction on my pension if I retire early. My normal retirement age is 60 and I should have 40yrs (full pension) just before then. If I left at say age 55, 4 yrs short of full pension service, is the % reduction on preserved pension at 60 years significant or marginal? I am OK with it being a small bit but not a sizeable amount. The AVC is sort of a hedge on this reduction. I need to look into all this more.

My life assurance policy was taken out as term life cover for the PPR mortgage (20yrs). I dont need it now so I will be cancelling the DD which is a single annual premium. Its already paid for 2021.

Clearing the mortgage should have been done years ago but I was waiting for the outcome of the interest only tracker issue on the investment properties. I kept the cash (somewhat out of fear of the uncertainty) to put towards interest and capital payments until I was certain the interest only terms were guaranteed. This went on for years and cost me thousands in legal fees. Thankfully all is resolved now so the PPR amount outstanding was paid off.

Normally you would go and celebrate that milestone but in covid times its deferred.
 

NoRegretsCoyote

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I don't know/fully understand the impact of actuarial reduction on my pension if I retire early.
When I looked at the adjustment factors (years ago) it seemed that they adjusted downward for a bit more than life expectancy would dictate. So on balance you would receive materially less over a lifetime by taking the actuarial reduction.

To me it only makes sense to take actuarial reduction if you have no other means, and this isn't the case for you

But do look it up and post the options here for advice. The actuarial adjustment factors can change.
 

Luternau

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What about 6 months here and 6 months in a nice warm country that meets your requirements? If there's only yourself what do you want more storage for? Sell off or give away anything you don't need, take care of any family who might need a helping hand, we all have a few of them. By the looks of things you're a lucky person. Keep it that way by getting yourself good Private health insurance that'll cover you when you're abroad as well in case you decide to live there for a few months a year. Good luck to you and well done but ENJOY LIFE. We only get one shot at it.

@noproblem
Thanks for that. You have hit the nail on the head. I do need to simplify and declutter. I could do with your clear view of things.
 

mtk

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Clearing the mortgage should have been done years ago but I was waiting for the outcome of the interest only tracker issue on the investment properties. I kept the cash (somewhat out of fear of the uncertainty) to put towards interest and capital payments until I was certain the interest only terms were guaranteed. This went on for years and cost me thousands in legal fees. Thankfully all is resolved now so the PPR amount outstanding was paid off.

fair play for sticking it out, it must have been tough
 

time to plan

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@Brendan Burgess The estimated equity in the properties is about €350k and the borrowings are €1.1m so we are looking at leverage of a little over 3 times!

peak to trough residential property in Dublin dropped what about 70% in 2008.

So that’s literally an actual decline in value of around €1m in the recent past. That’s not a theoretical risk it actually happened.

So you could easily be left with substantial negative equity of some minus €500k or more and a million in debt.

That’s more than a “bit” risky
Riskiness is a combination of the likelihood and impact of the risk event you describe occurring, Marc. While Dublin prices could repeat this fall, I doubt he bought all 5 properties in Dublin and at the peak and will then sell at at the trough. That seems like a very unlikely combination. It wouldn’t be my choice of investment but it is in my opinion a nearly negligible risk that they will end up with that much negative equity.
 

Brendan Burgess

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@time to plan

I agree with your general point, but the price he paid for them and when he bought them is no longer relevant. It is the value today and the potential fall from today's values that is most relevant.

Brendan
 
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