Another 40ish financial evaluation

[maybeperhaps]

Age: 42
Spouse’s/Partner's age: 38

Annual gross income from employment or profession: 80k
Annual gross income of spouse: 45k

Monthly take-home pay: 6.5k combined

Type of employment: e.g. private sector employees

In general are you:
(b) saving : Me, ~12k a year. Spouse, ~8k a year

Rough estimate of value of home: 450k
Amount outstanding on your mortgage: 150k
What interest rate are you paying? 4.1% SVR BoI, 22 years left

Other borrowings – car loans/personal loans etc None

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

Savings and investments: 20k in current account

Do you have a pension scheme? Yes, 150k DC which I do 5% AVCs into, spouse 25k DC

Do you own any investment or other property? No

Ages of children: none currently

Life insurance: Both fully covered by employment. Also, have independent term life dual cover @ 175k each.

Questions/Concerns:
Mortgage is well under control and no major house spend is pending, so not sure on the best course of action at this stage in relation to available monthly cash (between us ~1.5k a month). Should I bump up AVCs or start regularly overpaying the mortgage? (Have been lump sum overpaying it from time to time up to now).

I have read the excellent "Pay down your SVR mortgage before starting a pension, but don't leave it too late" thread and was going to take the advice of from age 40 onwards, start prioritising pension contributions over mortgage repayments. However, when I checked how much I had already in my pension (150k) I wasn't sure if this needed prioritising yet or not. My spouse's pension does need attention though (only 25k currently).

Notes:
Spouse's car will also need to be replaced soon. Planned spend ~15k.
Thinking about switching mortgage provider to get a better SVR - AIB @ 2.75 looks attractive.

Also, other than the mortgage/AVC questions, is there anything else we should/should not be doing at this stage to be best set up for the future?

 

[Sarenco]

Hi @maybeperhaps

The first thing that jumps out at me is your mortgage rate. 4.1% - yikes!

You shouldn't be paying anything like 4.1% at your LTV. If you do nothing else, get that sorted ASAP - either switch to AIB @2.75% variable or fix at a lower rate with BOI. Pronto!

You should really move your €20k cash reserve into an instant access deposit account. Deposit rates are pretty lean at the moment but you might as well earn some interest on that amount, however trivial. Even small amounts compound over time.

Ok, now we're into the crux of your question - should you use your monthly "excess" cash-flow to pay down your mortgage ahead of schedule or should you max out your pension contributions?

To me the answer is pretty clear-cut - at your age and income level, you should prioritise your pension contributions ahead of paying down your mortgage (I'm going to assume you will move yourself off your current extortionist rate!).

That is not guaranteed to be the better long-term financial move (that largely depends on the markets, which you cannot control) but the odds are overwhelming favourable, at least if history is any guide.

Incidentally, at your ages I think your pension funds should still be predominantly invested in global equities (perhaps around 80%), with the remainder in cash/bonds. The exact allocation between different asset classes is really a point of detail - your contribution rate is far more important.

Hope that helps.

 

[Boyd]

Well done on getting mortgage down, 37.5% LTV at your ages is impressive going. BUT..............

4.1% SVR BoI, 22 years left

Thinking about switching mortgage provider to get a better SVR - AIB @ 2.75 looks attractive.

If you want free money, stop thinking and start doing - paying 4.1% is crazy at the moment. If you are doing overpayments, I agree AIB 2.75% is best option. Based on various https://www.drcalculator.com/mortgage/ie/, your current payments are about E860, so you should around E100 or more per month with this. Do it!!!

I would put the max from spouse (20% based on age) pension, as it is small.

E15k on a car seems a little high, how old is current one and what mileage? You could get replacement for E10K. Lash the E5k saved into spouse pension as lump sum.

Saving
Me, ~12k a year. Spouse, ~8k a year

Where are you saving this? Does this include pension, or is it separate regular savers? If regular saver AND you are paying 4.1% on a mortgage, you are basically borrowing at 4.1% to save at 0.05%. I would stop saving this and redirect it to mortgage overpayments and/or towards pension for your spouse. You should only have about 6 months expenses in emergency fund, anything more in cash/savings is really a waste, if you have debts.

However, as you mention you have no children, not sure if that is in plan or not, but that could change the above.

 

[Steven Barrett]

Besides the made interest rate you're paying on your mortgage, another thing popped out at me:
If you are saving €20,000 a year between you, why is there only €20k in cash? Did you overpay into your mortgage already?

You always have to look at what your future plans are. When you know what they are, you can work backwards and allocate your funds accordingly. So what do you want to do in the short, medium and long term?
How stable are your jobs or if you got made redundant, how quickly can you find another one?
If you are planning on updating the car, that's €15k of your €20k gone. You will need to build this cash up again before making any decisions on pensions or mortgages. Remember, when the money goes into those, you can't take them back out.


Steven
www.bluewaterfp.ie

 

[gnf_ireland]

First, agree 100% re mortgage. Sort it out asap. If you fix with BOI, then at least avail of the 10% overpaying facility, so you can at least shave a few years off the mortgage. I assume you have been overpaying it previously to get the LTV you have

I am now wondering what you spend your money on? You make 6500 between you, the mortgage is 900 and you are saving 1667 roughly. That leaves 3900 a month or 46800 a year. I think you need to review your spending patterns to see where your money is going and are you getting 'value' for that spend. Given there are no children, it does seem a little on the high side.

E15k on a car seems a little high, how old is current one and what mileage? You could get replacement for E10K. Lash the E5k saved into spouse pension as lump sum.

You are also planning to upgrade the car. I agree you can spend as much or as little as you like on one. What is the annual mileage etc? We upgraded both of our cars last year and put a nice hole in the pocket, but at least it is done now for another while !!

Before you think of either pension or mortgage overpayments you will have to build up some cash reserves again (after car spend). The general consensus is 6 months spend - yours would be 29,000 euro (6500*6 - 10,000 savings)

Question above re kids - any plans here. Childcare will have a massive impact on your rate of savings, and push you onto the back foot. Same would apply for your ability to take the unpaid maternity leave.

To me the answer is pretty clear-cut - at your age and income level, you should prioritise your pension contributions ahead of paying down your mortgage (I'm going to assume you will move yourself off your current extortionist rate!).

I am not as clear-cut as Sarenco on this, but I do think your partners pension needs a boost. Try pump it up to the max permitted for a few years and then look to target the mortgage again. Personally, I think you can do both, as I do believe there is capacity in the spend to save some more.

And think you should be saving into regular savers accounts and notice deposit accounts rather than the current account !

 

[maybeperhaps]

Hey guys, thank you very much for having a look at this and for your very valuable input.

The first thing that jumps out at me is your mortgage rate. 4.1% - yikes!
You shouldn't be paying anything like 4.1% at your LTV. If you do nothing else, get that sorted ASAP - either switch to AIB @2.75% variable or fix at a lower rate with BOI. Pronto!

I have no defence on this one – I have been ‘thinking about it’, but due to being very busy with stuff I kept putting it on the long finger. Long finger no more, will set the wheels in motion on this TODAY – I’ve pissed away a stupid amount of money on not taking action here sooner and am mad with myself!

You should really move your €20k cash reserve into an instant access deposit account. Deposit rates are pretty lean at the moment but you might as well earn some interest on that amount, however trivial. Even small amounts compound over time.

Again, stupid of me not to have done this already, will set one up immediately.

Incidentally, at your ages I think your pension funds should still be predominantly invested in global equities (perhaps around 80%), with the remainder in cash/bonds. The exact allocation between different asset classes is really a point of detail - your contribution rate is far more important.

Currently have mine @ 100% equities and spouse’s more risk averse - will rebalance both of these.

Ok, now we're into the crux of your question - should you use your monthly "excess" cash-flow to pay down your mortgage ahead of schedule or should you max out your pension contributions?

To me the answer is pretty clear-cut - at your age and income level, you should prioritise your pension contributions ahead of paying down your mortgage (I'm going to assume you will move yourself off your current extortionist rate!).

I agree, pensions need attention, particularly my spouse's. Regarding my pension buildup of ~150k - how does that compare for my age, 42? Bit on the low side, should have started AVCs earlier?

If you want free money, stop thinking and start doing - paying 4.1% is crazy at the moment. If you are doing overpayments, I agree AIB 2.75% is best option.

Guilty as charged, will move to AIB 2.75 SVR.

I would put the max from spouse (20% based on age) pension, as it is small.

Make’s sense, have totally neglected this when we thought we were still young. Need to address now.

E15k on a car seems a little high, how old is current one and what mileage? You could get replacement for E10K. Lash the E5k saved into spouse pension as lump sum.

Car is 15 years old and on the way out. Mileage is ~12,000km a year. Spend will be 10k-15k, will try to keep it down and divert any leftover into spouse’s pension as a lump sum as suggested.

@username123:
@SBarrett:
@gnf_ireland:
There were questions about our savings and mortgage overpayments. Basically this is what we have been doing, hope it answers most of the questions:

We have ~6.5 take home pay a month between us and live a comfortable but not extravagant lifestyle. Monthly spend in general would be fairly low, apart from 2 holiday weeks a year. We both get paid into our current accounts and also have a joint current account that we put 1k a month each into to cover mortgage and bills etc. We typically allow the funds in these current accounts grow, always aiming to have a minimum of 20k available as an emergency fund. Periodically then when there is a ‘spare’ 10-15k available we have been overpaying the mortgage. So even though I mentioned that we save ~1.5k between us a month, or ~20k a year, it would be more than that, just not tracked very well as build ups have been spent on overpaying the mortgage and home improvements etc. Thinking about it, if we tracked it properly, with our current mortgage/avc payments structure, we probably have the ability to save ~40k a year.

You always have to look at what your future plans are. When you know what they are, you can work backwards and allocate your funds accordingly. So what do you want to do in the short, medium and long term?

Unsure at this stage what we want to do. Up to now we’re just been focusing on getting the mortgage down as much as possible (albeit while not paying attention to the interest rate) and it was only when I stumbled across another few Money MakeOver threads like this that got me thinking about provisioning for the future etc.

How stable are your jobs or if you got made redundant, how quickly can you find another one?

Both should be stable enough and we would both hope to be able to pick up something similar if needed.

You are also planning to upgrade the car. I agree you can spend as much or as little as you like on one. What is the annual mileage etc? We upgraded both of our cars last year and put a nice hole in the pocket, but at least it is done now for another while !!

After we upgrade the car, both of us shouldn’t have the need to invest here again for a few years so we don’t mind spending in the 10-15k bracket here, but no more.

Before you think of either pension or mortgage overpayments you will have to build up some cash reserves again (after car spend). The general consensus is 6 months spend - yours would be 29,000 euro (6500*6 - 10,000 savings)

On the 6 months emergency fund, so we take home ~39k, mortgage & bills etc ~9k, other spend let’s say ~10k, leaving us with ~20k to save. Therefore, with current lifestyle etc, would it be advisable to have ~20k or ~39k set aside as our 6 month emergency fund?

I am not as clear-cut as Sarenco on this, but I do think your partners pension needs a boost. Try pump it up to the max permitted for a few years and then look to target the mortgage again. Personally, I think you can do both, as I do believe there is capacity in the spend to save some more.

Definitely my partner’s pension needs attention – we should be able to bump this to the max and increase mine from 5% AVCs also. It will take a bit of calculating, but once we upgrade the car and build up savings again, in 6 months time or so, we could even have enough income to overpay the mortgage a little each month also – if there are any spare monthly funds.

And think you should be saving into regular savers accounts and notice deposit accounts rather than the current account !

Will do today!

 

[gnf_ireland]

I agree, pensions need attention, particularly my spouse's. Regarding my pension buildup of ~150k - how does that compare for my age, 42? Bit on the low side, should have started AVCs earlier?

I will let someone else comment on how good or bad it is for early 40's.
But as a side note, I use a 5% rule as a rough guide to what that would mean for me in retirement - so target roughly 3% growth and 2% reduction in capital. At 5%, this equates to 7,500 a year at the moment. How obviously it depends on how much that would grow for the next 20 odd years etc.

We have ~6.5 take home pay a month between us and live a comfortable but not extravagant lifestyle. Monthly spend in general would be fairly low, apart from 2 holiday weeks a year. We both get paid into our current accounts and also have a joint current account that we put 1k a month each into to cover mortgage and bills etc. We typically allow the funds in these current accounts grow, always aiming to have a minimum of 20k available as an emergency fund. Periodically then when there is a ‘spare’ 10-15k available we have been overpaying the mortgage. So even though I mentioned that we save ~1.5k between us a month, or ~20k a year, it would be more than that, just not tracked very well as build ups have been spent on overpaying the mortgage and home improvements etc. Thinking about it, if we tracked it properly, with our current mortgage/avc payments structure, we probably have the ability to save ~40k a year.

Ok so the savings are not really 20k but higher - but not structured. I think it would make sense for you to do a clear budget out especially on the joint account spending. Does the 2k a month cover all household costs such as bills, food, mortgage, medical, fuel (petrol/diesel) etc?
If so, do you have a target spending amount on discretionary in your own accounts and how does the mortgage overpayment work?
I would suggest you sit down see what you spend money on and do up the budget to see what the financial status should be. That will give you a much clearer view of things.
Also, there is a wage disparity between both of you - that should be factored into the financial equation someway (in my personal view)

As an FYI, lets say you ended up in an accident and was unconscious - what access does your partner have to funds while you are in hospital? Is the bulk of the savings in your current account as opposed to the joint one? Emergency funds has to keep in mind both parties may need to have access separately depending on the emergency

Therefore, with current lifestyle etc, would it be advisable to have ~20k or ~39k set aside as our 6 month emergency fund?

6 months EXPENSES - so exclude the amount you save etc. Its basically if you lost you job or became ill how long could you survive financially without starting to come under pressure.
You may not need 6 months if you are a .NET developer and could get another job in the morning, but most need to be practical on how fast they would get another role and what the benefits would be

Definitely my partner’s pension needs attention – we should be able to bump this to the max and increase mine from 5% AVCs also. It will take a bit of calculating, but once we upgrade the car and build up savings again, in 6 months time or so, we could even have enough income to overpay the mortgage a little each month also – if there are any spare monthly funds.

Just keep in mind you can still pay into a pension for 2017, so if you want to give it a boost, keep an eye on the closing date for that.

 

[Boyd]

There were questions about our savings and mortgage overpayments. Basically this is what we have been doing, hope it answers most of the questions:

Unfortunately, no it doesn't! Your mixing mortgage, bills and leftover in the one account, so as you have found out, its impossible to know how much is going where. You would be better to have separation. I suggest you complete something like the following:

I think you need to do a monthly breakdown as follows

Combined income: ~6.5k
Actual Mortgage: ~900
Loan payments: ?? (seems to be N/A but just included for completeness)
Combined Bills (Car tax, Car insurance, TV, bins, sky, car loan, car insurance, electricity, gas etc): ?? (even if you pay these monthly, all them all up and divide by 12 to get average for a month)
Groceries: ??
Mortgage overpayments: ??
Extra Savings: ??
Personal/Social Expenses (Clothes, eating out, drinks etc) : ??

Note, these are ordered by my own consideration of their importance. Personal and social expenses are last, as they are discretionary, and should be the last thing (IMO) to accounted for.

If you do the above, you will at least know where your money is going, as currently its very unclear.