Early 30's, future planning for college and early retirement

CianG1989

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3
Age: 32
Spouse’s/Partner's age: 33

Annual gross income from employment or profession: €70000 (+ 12% bonus)
Annual gross income of spouse: €45000 (+10-12k in weekend pay when not on maternity leave)
Monthly take-home pay: Around 6,200 currently or 6,500 when she returns to work.

Type of employment:
I'm private sector and spouse is public sector.

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving around €1800-2000 a month but this is not always consistent.

Rough estimate of value of home:
Last valued at €220,000 in 2019, prices have shot up around here since then and we've added a small extension alongside some other renovations so it will be worth more currently.

Amount outstanding on your mortgage: Around €118,000

What interest rate are you paying?
KBC 2.25% fixed. Payments are €560 per month.

Other borrowings – None
Do you pay off your full credit card balance each month? Yes

Savings and investments:
Approx €14k in savings, we recently spent 45k on home improvements so trying to build this back up a bit. Saving around 2k most months but things like holidays, new furniture and other big purchases come out of these savings. I'd say we actually manage to save around 15k a year that doesn't get touched (with the exception of our renovations this year).

Have around 8k in employer shares scheme, won't get tax benefit on these for a few years.

Do you have a pension scheme?
Yes, I pay in 8% and employer pays in 10%, currently at 40k. 5% is the minimum I need to contribute in order to maximise employer contributions.

Wife is on the single service pension scheme, she will have 30 years service by the time she hopes to retire at 60, we believe this will be worth roughly 7k a year with a 51k lump sum if our maths are correct, assuming no breaks in service. She very recently started a PRSA to facilitate the early retirement and is contributing €400 a month to this also (€240 net).

Do you own any investment or other property? No

Ages of children: 7 weeks old

Life insurance: Yes but not sure what it's worth

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

1.
We've recently become parents and would like to start planning now for our child's college education to take some pressure off us in the future. We live close to 2 big universities, we also hope to have one more child in a couple years.

The plan is to invest the child benefit monthly and the fund we are considering is Zurich Prisma 5. Is this a decent choice considering we have very little knowledge of investments?

2.
We have been considering our pensions and when we would like to retire. Right now, 60 seems to be the golden number which gives us 27 years to prepare. Trying to strike the right balance between contributing enough to be in a good position but also not sacrificing too much now for something so far in the future. Our contributions at the moment are comfortable for us. I will be due a 2-5% raise early next year so I'll likely add that to my pension fund also.

3.
We are lucky to have a low mortgage and maybe we should be overpaying here? We are currently happy with where we are living. There is still the possibility of future upsizing in 5+ years depending on circumstances but its not a necessity.

4.
When my wife returns to work next year, my father will do childminding for us. We'd like the money we pay him for this to count towards his public pension contributions as he is still a bit away from retirement age and not currently working. Is this possible? Would he need to actually register as a childminder? How do we set this up?
 
4.
When my wife returns to work next year, my father will do childminding for us. We'd like the money we pay him for this to count towards his public pension contributions as he is still a bit away from retirement age and not currently working. Is this possible? Would he need to actually register as a childminder? How do we set this up?

I think this is permitted and he would pay PRSI, and you would as his employer. No idea what professional registration is required.

The following categories of 'Family Employment' are insurable under the Social Insurance system in exactly the same way as employments that have no family connection:
  • If you are employed as an employee by a 'prescribed relative'* and the employment is not related to a private dwelling house or a farm in or on which both you and the employer reside (PRSI Class A or Class J applies).

You ask about investment products:
1.
We've recently become parents and would like to start planning now for our child's college education to take some pressure off us in the future. We live close to 2 big universities, we also hope to have one more child in a couple years.

The plan is to invest the child benefit monthly and the fund we are considering is Zurich Prisma 5. Is this a decent choice considering we have very little knowledge of investments?
I appreciate that you are thinking of your newborn's financial future. But I am not convinced this approach makes much sense given how heavily any return would be taxed under Ireland's deemed disposal rules.

It makes much more sense to pay the money into your own pension now and take advantage of tax relief on contributions and tax free growth in the fund over the next two decades. If kids' education is costing you a lot in your 50s just reduce your pension contributions then. Fund their education out of regular income. If you live near two universities then you most likely won't have to pay for accommodation either.
 
Amount outstanding on your mortgage: Around €118,000

KBC 2.25% fixed.

Approx €14k in savings,

The plan is to invest the child benefit monthly and the fund we are considering is Zurich Prisma 5.

You are getting 0% return on your savings.
You are paying 2.25% on your mortgage

So pay the savings off the mortgage and you will get a tax-free and risk-free return of 2.25% on the money.

With two of you working and a low mortgage, you don't need a big emergency fund. If you have some big expenditure planned, by all means, save up for it, but otherwise pay down your mortgage.

The same goes for the Child Benefit. A tax-free and risk-free return of 2.25% is great.

Clearing your mortgage has the added advantage of making it easier for you to trade up if do choose to do so.

Brendan
 
The main point is that clearing your mortgage is better than keeping it in a deposit account paying nothing or a risky and taxy and high cost fund like the Prisma.

However, you may well to choose to max your pension contributions instead. It's much of a muchness. Maxing your pension contributions is also much better than investing in a fund which will be heavily taxed.

You have a small mortgage.

However, at your age and with the level of contributions you are making, you will have a decent enough pension in time, so, on balance, I would clear the mortgage.

Brendan
 
I think this is permitted and he would pay PRSI, and you would as his employer. No idea what professional registration is required.



You ask about investment products:

I appreciate that you are thinking of your newborn's financial future. But I am not convinced this approach makes much sense given how heavily any return would be taxed under Ireland's deemed disposal rules.

It makes much more sense to pay the money into your own pension now and take advantage of tax relief on contributions and tax free growth in the fund over the next two decades. If kids' education is costing you a lot in your 50s just reduce your pension contributions then. Fund their education out of regular income. If you live near two universities then you most likely won't have to pay for accommodation either.
The deemed disposal rules don't preclude you from making money on investments. It is there because of gross roll up which people don't seem to quibble about and why would they, no taxation on dividends.

Starting a regular saver with a life company with the children's allowance is a great idea. With such a long investment term, you should be looking at an equity investment, Zurich Life have plenty of choices including the Blackrock Global Index.

I disagree with Brendan that you should put your savings into the mortgage at this point, you don't have enough cash. I would though overpay to the max under the fixed term contract and build up cash. When the fixed term ends, put excess cash into the mortgage.

You should look at increasing pensions over time. As you are probably finding out, kids are expensive, so you will burn through money over the next few years, so your saving rate will probably come down.

But overall, you are doing the right things. It's just where you need to put your money, not about making major changes.

steven
www.bluewaterfp.ie
 
The deemed disposal rules don't preclude you from making money on investments. It is there because of gross roll up which people don't seem to quibble about and why would they, no taxation on dividends.

OP has €1,000 today that he wants to deploy for his children's education in exactly 20 years. Assume growth rate in equities of 5%.

  1. Option 1. Puts €1,000 in an investment fund for child. Deemed disposal at 40% paid two-and-a-half times leaves a net amount of about €1,800 after 20 years
  2. Option 2. Puts an additional €1,000 into his own pension, with tax relief an effective contribution of €1,667 and with tax-free growth that's about €4,200 after 20 years.

So OP can have €1,800 in his kids' education fund and fund college from that. Or he can have €4,200 in his own pension fund instead and just fund kid's education by making lower pension contributions at the time, and can afford to do so because he's just had the benefit of 20 years tax-free growth.

Are my assumptions way wrong here?
 
OP has €1,000 today that he wants to deploy for his children's education in exactly 20 years. Assume growth rate in equities of 5%.

  1. Option 1. Puts €1,000 in an investment fund for child. Deemed disposal at 40% paid two-and-a-half times leaves a net amount of about €1,800 after 20 years
  2. Option 2. Puts an additional €1,000 into his own pension, with tax relief an effective contribution of €1,667 and with tax-free growth that's about €4,200 after 20 years.

So OP can have €1,800 in his kids' education fund and fund college from that. Or he can have €4,200 in his own pension fund instead and just fund kid's education by making lower pension contributions at the time, and can afford to do so because he's just had the benefit of 20 years tax-free growth.

Are my assumptions way wrong here?
He's still a member of the pension scheme and can't access the value of the fund to pay for his child's education...
 
He's still a member of the pension scheme and can't access the value of the fund to pay for his child's education...
Of course, but he will more than likely have other income at the time that he can divert.

A household on a gross €115k in early 30s is unlikely to be unable to fund college 20 years later.
 
Of course, but he will more than likely have other income at the time that he can divert.

A household on a gross €115k in early 30s is unlikely to be unable to fund college 20 years later.
Not if he puts it all in a pension!! ;) He has to get that other income from somewhere, the exact kind of place you are telling him not to put his money. Should he leave the money on deposit then? And 18 years of the money not working for him.

Using the assumption that he should have the money in the future is the same as not having a plan at all. Who knows what the next 18 years will be like.
 
Not if he puts it all in a pension!! ;) He has to get that other income from somewhere, the exact kind of place you are telling him not to put his money

Sacrificing over a 4x return in favour of a 2x return over 20 years is daft.

There are much better ways to protect against unfortunate outcomes: income protection, life insurance, etc.

Sorry I won't go further into the weeds on this.
 
Not a financial tip but a personal one. You say "we also hope to have one more child in a couple years". Personally I think if you can afford it its better to have your next Child as soon as possible. Life is much easier when you have kids in close age proximity. With just 2 children an age gap can be a pain.
 
Thanks all, wasn't expecting to see so many replies so quickly! Definitely a lot of food for thought here!

Brendan, I see your logic in putting the savings in to the mortgage to save on the interest but must admit the thought of having no savings makes me a little quesey! I guess I just get a sense of comfort from knowing there's money in the bank whether it's logical or not. After spending the last 10 minutes running some figures through an overpayment calculator however, it seems like a no-brainer to divert some savings in that direction! Not sure why we didn't start this years ago.

NoRegretsCoyote, thanks for the link, I think I'll give Revenue a call to see if they can clarify for me exactly what we need to do on the PRSI side of things.
Pensions have certainly been on our minds lately (largely from reading threads on here) and in the last couple months my wife has started her PRSA and I've upped my own contributions from 5% up to 8%. So we've made some recent progress here and the plan is to increase these further as we get older.

Steven, thanks for your insight. This is not my area at all and I'll admit you lost me on the first paragraph, I hadn't even considered the taxation to be honest. I'm going to do more research and I will check out the Blackrock Global Index also.

Sharkattack, again food for thought there but I'm not sure herself is ready to even begin thinking about popping out another one just yet!
 
Using the assumption that he should have the money in the future is the same as not having a plan at all. Who knows what the next 18 years will be like.

That logic is itself flawed. If the OP had no ongoing or future income then the education fund would be not exist. You couldn't afford to ringfence a 50k pot while struggling to pay a mortgage. But that is besides the point, the OP is in a pretty healthy financial position and should be planning for a future with continued level of earnings similar to now

The cost of childcare now is usually as much if not more than the cost of 3rd level education so why worry about an expense in 20 years when you have effectively the same expense starting next year.

With a net take home of €6500 (more when your bonus is included) and a mortgage of €560, you have a lot of scope to do whatever you like. You can increase your pension contributions, pay your father for childcare and still have a significant leftover pot to overpay the mortgage.

Upgrading your PPR will have a much bigger impact on your ability to finance 3rd level education than putting the children's allowance in a fund so I think your priority now is to decide whether your current home is suitable for the next 15-20 years.

So back to your points in order of priority:
2. If you want to retire early then you need to increase pension contributions now as much as possible. It is the most efficient way to do it
3. Really think about your housing needs. Taking on a bigger mortgage will limit you ability to fund education and your pensions but you might genuinely need a bigger property so it is a balance
1. Use everything else to overpay your mortgage for a guaranteed risk free return of 2.25% net but do not reduce the mortgage term. If in the future there is a material change to your earning ability, you can always revert back to the minimum mortgage payment and reduce your pension contributions for the 4/5 years before 3rd level becomes an expense allowing you to build a fund in those years
 
The cost of childcare now is usually as much if not more than the cost of 3rd level education so why worry about an expense in 20 years when you have effectively the same expense starting next year.

That's an interesting point actually and I hadn't thought about it that way!
 
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