Moneymakeover Not sure where to save funds and whether it's worth trading up

[familylife]

Hi All,

Personal details

Your age: 47
Your spouse's age:42
Partner's age if not married: N/A

Number and age of children: 3 (5, 8, 10)


Income and expenditure
Annual gross income from employment or profession: approx 187k (145k base pay, 20K Bonus, 22K Vesting RSU)
Annual gross income of spouse/partner: currently stay at home parent

Monthly take-home pay: approx 6950 (excluding annual bonus and RSUs

Type of employment - e.g. Employee or self-employed: Employed
Employer type: e.g. public servant, private company: Private

In general are you:
(a) spending more than you earn, or
(b) saving? Saving


Summary of Assets and Liabilities
Family home value: Estimated 500K
Mortgage on family home: 230K
Net equity: 270K

Cash: 1K in a chequing account
Investments: 4.6k in ETFs, 25K in Zurich Investment account (high risk, level 5)
Defined Contribution pension fund: 320K ( currently allocating 16% salary to pension)
Company shares (vested) : 6K
Company shares (unvested): 92K
Buy to Let Property value: N/A
Buy to let Mortgage: N/A

Total net assets: 620K (excluding unvested RSUs)


Family home mortgage information
Lender BOI
Interest rate 3.3%
Type of interest rate: fixed.
If fixed, what is the term remaining of the fixed rate? 19 years
Monthly repayment: 1440

Other borrowings – car loans/personal loans etc

Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card?

Pension information

Value of pension fund: See above

Life insurance: Need to check, but I do have a life insurance policy (uncertain about payout, but I know it covers our mortgage) and 4x salary in death in service trhough my work

Other info:
Current RSU allocation is 100k USD, 4 year vesting period, with 25% vesting annually


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

We have finally caught up with ourselves financially and feel as if we are in at least somewhat of a stable place, in large part thanks to a couple of significant promotions over the last few years. I switched jobs at the end of the last year which meant losing most of our 'savings' which were tied up in my previous company's unvested RSUs (ie the golden handcuffs). I also purchased a car outright to accomodate transport to this new role- no longer working from home, so needed to a second car. So this took 28K out of our previous savings. This new role has come with a significant pressure- ie longer working hours- so my wife has taken another career break to take the pressure off between balancing work and raising our kids. She has an earning potential of around 70k (I think), but has dabbled in contract work since our second child was born 8 years ago. We're uncertain of when/if she'll return to work full-time, so any decisions are predicated on my income only.

Unfortunately we are on our own- ie. no family nearby to help with the kids and no inheritances down the line. This has led us to be conservative in our mortgage and finances more generally. The ability to easily afford our mortgage off one income has given us both peace of mind and also flexibility around whether and when my wife takes on contract work.

I suppose I have two questions/issues that we're now thinking about:
1) We need to rebuild our cash savings and are uncertain of where to put approx 1350 eur a month? Keep building our ETFs? Cash savings account? Some sort of trust for the kids to start dribbling funds into (to minimize inheritance tax down the line)? My wife (being American) is jaded by the lack of return on investments/ interest rates on savings accounts, along with punitive tax on ETFs, so we're not sure what would be the best option... Or would it be perhaps better to allocate those funds towards pension AVCs or paying down the mortgage? I suppose it's a question of allocative efficiency through which to build a stable and secure financial base for ourselves in the medium term. We're also hesitant to put more into my pension given lack of access before retirement age.

2) We're currently in a 3 bed-semi, in a wonderful area of Cork. The house is in ideal location, and permits us to afford a comfortable lifestyle. However it is a bit small for our needs...extending the house is no tenable, so considering 'upgrading' to a larger house. Our ideal house size would likely be in the range of 750-800K while staying in or near the location we're currently in. So that would mean taking out a mortgage of approx 500K. Online information suggests this is reasonable, but I can't help but wonder if it's completly foolhardy. Is it common for people of my age to take on a larger mortgage? Doing so would likely reduce our sense of financial stablity.

We do have the option of switching mortgage providers to avail of a lower mortage rate- ie 3% and therefore reduce our mortgage term while maintaining our mortgage repayment amounts

Thanks for any thoughts or advice inadvance

 

[Sarenco]

Whether you trade up to a larger house is essentially a lifestyle choice. It certainly looks like you could afford it based on the numbers posted.

Beyond that, I would forget about making after-tax investments for the moment.

In order of priority-

1. Maximise your tax-relieved pension contributions; and

2. Pay down your mortgage ahead of schedule with anything left over.

Keep it simple.

 

[conor_mc]

Our ideal house size would likely be in the range of 750-800K while staying in or near the location we're currently in. So that would mean taking out a mortgage of approx 500K. Online information suggests this is reasonable, but I can't help but wonder if it's completly foolhardy. Is it common for people of my age to take on a larger mortgage? Doing so would likely reduce our sense of financial stablity.

What would that cost over 23 years (to you being age 70) - €2600 or so, at 3-3.5%? Monthly mortgage repayment of €1440 and planned monthly saving amount of €1350 would cover it alright, but I personally would be a little nervous taking that on. But as said above, it's a lifestyle choice and if it makes you and the family happy the go for it.

 

[Brendan Burgess]

Investments: 4.6k in ETFs, 25K in Zurich Investment account (high risk, level 5)
Defined Contribution pension fund: 320K ( currently allocating 16% salary to pension)

You don't mention your wife's pension fund, so I assume that she has no fund and no defined benefit.

You are contributing €23k a year to the fund and I assume your employer is contributing as well.

Under the circumstances, I think you are probably contributing enough and, given that you are considering trading up, you should prioritise the mortgage with any surplus funds.

So that would mean taking out a mortgage of approx 500K.

Annual gross income from employment or profession: approx 187k (145k base pay, 20K Bonus, 22K Vesting RSU)

At age 47, a mortgage of €500k is a big multiple of your base salary of €145k.

I would get that down to about twice your salary or €300k before resuming maxing your pension contributions.

So make whatever contribution is needed to max your employer's contribution.
Pay the rest off your mortgage until you clear the present mortgage or if you trade up, get the new mortgage down to €300k.

This will give you maximum flexibility.
And in later years, you will have much smaller mortgage repayments, so that you have more to contribute to the pension.

 

[Brendan Burgess]

Review this strategy every year.
If your salary rises and your vested shares knocks the mortgage down earlier than expected, then you can resume maxing your pension contributions.

 

[Persia]

The new job has cost you a lot.

28k for new car (deprecating asset)
RSUs left behind
Long commute/heavy diesel consumption
Longer hours/more pressure
Wife having to give up her job to support at home.
- 70k before tax loss of her earnings
Pension contributions for wife paused.

Was this job worth it and could you get another job similar to your old one as new role seems to be a lot of take.

Whatever about trading up, is this role sustainable both to a work life balance or your family income?

 

[_OkGo_]

Monthly take-home pay: approx 6950

This figure seems a bit off for your circumstances, are you jointly assessed?

I switched jobs at the end of the last year which meant losing most of our 'savings' which were tied up in my previous company's unvested RSUs (ie the golden handcuffs)

That's the psychological effect they want you to have but in reality you have lost nothing, they were never savings in the first place.

Unvested RSU's are essentially the same as salary or bonus, you don't get it unless you work for the company.

Some sort of trust for the kids to start dribbling funds into (to minimize inheritance tax down the line)?

Definitely not, you don't have the wealth to do this. You need everything euro you can get right now. And anyway, there is an awful lot of money to be spent on your kids legitimately through education that you really don't need to be worrying about inheritance tax

Our ideal house size would likely be in the range of 750-800K while staying in or near the location we're currently in. So that would mean taking out a mortgage of approx 500K.

Your income gives you lots of options but you can't do them all. Personally I wouldn't take on a bigger mortgage despite your high income.

If you bought at €800k, your mortgage jumps to ~ €350k ( additional €300 plus €20k costs involved in moving). Keeping your 19 year term, you are committed to ~€3.3k per month all the way to retirement.

Fast forward 8 years to 3rd level and I think you could be struggling without another big salary jump. It will be expensive to maintain mortgage, make pension contributions, pay for 3rd level and have a life.

I think any decision around upgrading the house requires your spouse to return to work more or less full time. Maybe not this year or next but certainly in the next 3-5 years. Otherwise I think it all gets unnecessarily tight

 

[Steven Barrett]

It is quite usual for families to grow out of their home. As your children get older and bigger, you will feel that your house is getting smaller. People tend to like the areas that they are accustomed to and want to stay in the area, where supply is usually low. Moving house should be your first priority. Excess cash should be left in a deposit account and build it up as much as you can. Banks will also want to see regular saving as part of their stress test, so put it into a separate account so they can see it being saved (for your American wife, yes, interest rates on deposits are low, but in the US, mortgage rates are also 7%! ).

As RSUs mature over time, you can cash them in to pay down your debt.

After you have moved house, cash reserves should be built up again.

The tax regime on investing is hopefully changing over the next few years with deemed disposal going and tax reducing to 33% (when, I don't know). As your wife is American, she will have difficulty in setting up investment accounts due to reporting requirements. If using a life company, keep her off the policy as she will pay tax annually to the IRS which can't be offset against Irish tax.

You are not in a financial position to be setting up trusts for your children. You have big financial commitments coming up with moving house. You do not have spare cash to give away.

I switched jobs at the end of the last year which meant losing most of our 'savings' which were tied up in my previous company's unvested RSUs (ie the golden handcuffs)

Unvested RSUs are never savings as they are not yours. If you really wanted to hold onto them, you could have stayed in your old role and they would have vested over time. At least you are in a role with RSUs in this one too albeit starting from the beginning again.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)