Moneymakeover Mortgage cleared, pension maxed, what do we do now??

J

jpmackey

Registered User
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Inspired by the other mid-life check-in MM posted yesterday by another user, I thought it was a good idea to ensure I am not doing anything wacky at this point of my life.

Personal details

Your age: 38
Your spouse's age: 43

Number and age of children: 0

Income and expenditure
Annual gross income from employment or profession: €95k basic, typically €105k with bonus.
Annual gross income of spouse/partner: €30k

Monthly take-home pay: €6,600 (max out AVC for me)

Type of employment: employed
Employer type: public

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving/investing €40k per year

Summary of Assets and Liabilities
Family home value: €400k
Mortgage on family home: None
Net equity: €400k

Cash: €40k
Defined Cont pension fund: €35k AVCs
Company shares : €90k
Total net assets: €165k
Plus have DB pension which is a 1/80th per year with 16 years service so far.

Family home mortgage information
n/a

Other borrowings – car loans/personal loans etc
No loans

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

Pension information

Value of pension fund: not sure how to value DB pension

Buy to let properties:
None

Other savings and investments:
None

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

Sold off a second property in 2023 and paid off our mortgage with the equity.
I have paid max allowable contribution to AVC since 2023 to present and I will continue to do so.
We are investing about €35k-€40k per year into the stock market (40-50 companies) started in 2023 also.

Goal is to both retire as early as possible (ideally in ~12 years or so).

Appreciate any feedback.

Thanks
 
jpmackey said:
Value of pension fund: not sure how to value DB pension
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A good guide here is that a non-adjusting annuity from age 65 would cost around 5% today, whereas an inflation-adjusting annuity is probably under 4%. So the state pension of an inflation-adjusting 15k per annum is worth around 400k.
 
conor_mc said:
A good guide here is that a non-adjusting annuity from age 65 would cost around 5% today, whereas an inflation-adjusting annuity is probably under 4%. So the state pension of an inflation-adjusting 15k per annum is worth around 400k.
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Wouldn’t the inflation adjusting be more expensive?
 
jpmackey said:
Wouldn’t the inflation adjusting be more expensive?
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For every 100k in purchase price paid, you get ~5% or 5k pa. 4% means 4k per 100k paid in. A lower annuity rate means less paid out annually, equals more expensive. Opposite of a mortgage rate.

Edit- or think of it like you’re the bank, 5% is more income than 4%.
 
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jpmackey said:
Wouldn’t the inflation adjusting be more expensive?
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Yes. 4% is, counter-intuitively, more expensive than 5%.

It works like this. You're aged 65. You have a pension fund of a nice round number like €100,000. You take it to a life office and ask what kind of lifetime annuity they will give you in exchange for your €100,000. The answer is:
  • an annuity for your life of €5,000 per year; or
  • a annuity for your life that starts at €4,000 in year 1, but rises each year by 2%.
Because the annual amount of the level annuity is 5% of the purchase amount, we can talk about the annuity rate being 5%. By the same reasoning, for an annuity increasing at 2% each year, the annuity rate is 4%.

(Annuity rates vary with long-term interest rates. Right now, I don't think you would get 5% for a level single-life annuity or 4% for an increasing annuity; I think current annuity rates are a shade lower. Plus, if you're in a couple what you may want is an annuity payable for your life, and the life of your spouse, if they survive you. The rates for that are lower again.)
 
Thanks guys, I understand the annuity rate concept now.

Using 4% rate (my pension is inflation linked) my DB fund (inc lump sum) is valued at €383k.

While I agree it is somewhat academic, it does explain and counter what looks like an underfunded DC AVC pot of only €35k.

Appreciate any other thoughts.

One question on my mind is should we start a pension for my wife or is the small tax relief hardly worth it, given we invest her money in liquid stocks that will hopefully bridge a gap from early retirement until pension drawdowns.
 
The obvious question is if kids are on the horizon. If so, they cost, if not then your financial future is clearer.

Secondly, and assuming you are in your "forever" home, then what, if anything needs doing to it?. Energy upgrades for example but what else do you really want/need to do?. Likewise, any change of cars needed?.

You should review other things, health insurance (do you need to upgrade that as you get older), ensure wills are up to date, basic life admin in effect

Thirdly, retirement in 12 years is fine, but have you given any thought to what you really want to do then? Travel, mature student? You'll need something to occupy your mind and time.
 
jpmackey said:
One question on my mind is should we start a pension for my wife or is the small tax relief hardly worth it, given we invest her money in liquid stocks that will hopefully bridge a gap from early retirement until pension drawdowns.
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You get to a point where you’re saving 40% on the way in, but you’ll be expecting to pay 20% on the way out.

So if you’re maxing out your AVC’s, then your partner could be saving 20% on the way in but taking it out tax-free through increased allowances so it’s the same deal really, but you’ll be getting more into the collective pension pot sooner to allow tax-free compounding work its magic. You’ll also benefit from 2x tax-free lump sums.

Also if you intend to sell stocks to fund retirement costs, use both names to use 2x CGT allowances. Holding stocks for dividend income though requires a bit more careful consideration to optimise your joint tax profile.
 
Presumably your DB pension pays out at 50% of final salary (1/80th per year for a 40 year career?), what is the spouse’s benefit like? You’ll have 16+12 years, so about 33k pa in today’s money? Plus 2x COAP’s at about 75% each (assuming 30 years of stamps each, give or take), so maybe another 2x €11-12k per year? But you’ll have to bridge from age 50 to 65 for all of the above?
 
Peanuts20 said:
The obvious question is if kids are on the horizon. If so, they cost, if not then your financial future is clearer.
Click to expand...
Not planned!

Peanuts20 said:
Secondly, and assuming you are in your "forever" home, then what, if anything needs doing to it?. Energy upgrades for example but what else do you really want/need to do?. Likewise, any change of cars needed?.
Click to expand...
House is a new build, A2 rated with full roof solar. Hard to say it is our forever home but if anything we would be downsizing to a cottage in the country!

Cars are fairly new. I allow €7k per year in our expenses for changes.

Peanuts20 said:
You should review other things, health insurance (do you need to upgrade that as you get older), ensure wills are up to date, basic life admin in effect
Click to expand...
My wife has health insurance, I don’t. I will consider it.
Peanuts20 said:
Thirdly, retirement in 12 years is fine, but have you given any thought to what you really want to do then? Travel, mature student? You'll need something to occupy your mind and time.
Click to expand...

Travel the world.

Thanks for your inputs!
 
conor_mc said:
So if you’re maxing out your AVC’s, then your partner could be saving 20% on the way in but taking it out tax-free through increased allowances so it’s the same deal really, but you’ll be getting more into the collective pension pot sooner to allow tax-free compounding work its magic. You’ll also benefit from 2x tax-free lump sums.
Click to expand...
Thanks, I hadn’t considered the tax free lump sum advantage.

conor_mc said:
Also if you intend to sell stocks to fund retirement costs, use both names to use 2x CGT allowances.
Click to expand...
Good catch! Thanks.
 
conor_mc said:
Presumably your DB pension pays out at 50% of final salary (1/80th per year for a 40 year career?), what is the spouse’s benefit like? You’ll have 16+12 years, so about 33k pa in today’s money? Plus 2x COAP’s at about 75% each (assuming 30 years of stamps each, give or take), so maybe another 2x €11-12k per year? But you’ll have to bridge from age 50 to 65 for all of the above?
Click to expand...
I’ll have to look up the spouse’s benefit exactly, but I believe it is quite decent from hearing others.

My calcs are showing that we will have about €45k per year at age 66. However I will be eligible to drawdown pension at 60 inc AVC ARF.

The gap is to be bridged by our portfolio of shares which will hopefully be valued somewhere around €570k net of CGT at age 50.
 
IMO health insurance is pretty important as you get older.

You will have to pay a premium loading now that you are over 35, which will increase the longer you leave it.
 
Sarenco said:
IMO health insurance is pretty important as you get older.
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I’m not so sure. There is a net profit built into health insurance premiums. Thus if you end up healthier than average you are quids in to pay for health outlays from cash reserves.
 
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