Review at 40 years old

[aristotle]

I am thinking about the next 10-20 years with a view to being able to cut down on 5 day weeks maybe when I hit 55-60.

Age: 40
Spouse’s/Partner's age: 40

Annual gross income from employment or profession: 112k
Annual gross income of spouse: 0k

Monthly take-home pay: 5.5k plus 280 child benefit

Type of employment: e.g. private sector employee

In general are you:
(b) saving about 6k per year (should be more but doing big AVC each year)

Rough estimate of value of home: 285k
Amount outstanding on your mortgage: 130k
What interest rate are you paying? 0.5% ecb tracker, 18 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: 165k cash

Do you have a pension scheme? Yes, 295k DC which I do max AVCs into, spouse 55k DC

Do you own any investment or other property? Yes, value 315k, mortgage remaining of 170k, 0.5% ecb tracker, 17 years left, rented currently at 900 per month, but rental market is at 1500-1600. Not ideal but happy with the tenant and situation.

Ages of children: 3, 5

Life insurance: Just me, covered for 430k via employment, 700k on separate policy I took out so family will ok financially should the worst happen.

I am thinking we could buy 3rd house for 300k with 150k mortgage and rent out existing house for 1300-1400 per month. So, in the long term after the mortgages are paid I would have rental income of about 3k before tax per month which means I could cut down to 4 day week maybe.

Wife will probably go back to work in the next 3-5 years as well.

I think I just carry on as is if we dont buy a 3rd house. Not sure there is anything obvious I am missing that I should be doing?

Both cars are 11 years old so will have to be replaced in next 3-5 years.

I dont have income protection is one thing I guess.

 

[michaelm]

I would get a term life policy on your wife also to insure a lump sum should she die before the kids are grown up. Do you really need further exposure to the housing market? Although I guess you could look at the two houses ultimately as houses for your two kids. Cars are usually trouble (for me anyway) I'd replace the two 11 year old cars now before they become a nuisance.

 

[Sarenco]

I am thinking we could buy 3rd house for 300k with 150k mortgage and rent out existing house for 1300-1400 per month. So, in the long term after the mortgages are paid I would have rental income of about 3k before tax per month which means I could cut down to 4 day week maybe.

That sounds like a perfectly viable plan, given your long-term financial objectives. However, as already pointed out, it does leave you very exposed to the housing market, interest rates, etc.

If I was in your shoes, I would probably just clear the PPR mortgage (even with the exceptionally low tracker rate) and be done with it. Maintain a high allocation to equities within your pension funds for the time being and gradually rebuild your cash reserves to a reasonable level, while enjoying a good standard of living. In other words, keep it simple! Financially, you have done fantastically well so far.

I dont have income protection is one thing I guess.

I don't see income protection as an optional extra - it's expensive but critical IMO.

 

[aristotle]

Yeah maybe keeping in simple is a good option, remove some debt and not be exposed to problems like decreased rent, increase interest rates and decreased income in the future should they happen. And sometimes they tend to happen all at once.

 

[Steven Barrett]

First of all, well done for being in a strong financial position at age 40.

A few things sprung to mind, which have already been mentioned:

1. Life cover for your wife. You will get about €1,000 a month Widow's pension but you will probably need to take some time off work to be with your kids if their mum died. A bit of comfort money. €150,000 in cover would cost you €20 a month.
2. I agree with Sarenco on income protection. I have clients who have been on income protection claims for decades and they said that they don't know how they would have survived without it. Sadly, most people think it won't happen to them and get put off by the price. It would cost you €95 to take out cover for 50% salary that would kick in if you were out of work for over 6 months. You get tax relief on the premiums too.
3. Diversify your assets. Investing in Irish property is concentrating on one asset class in one, very small part of the world. You are also increasing your risk exposure by borrowing. Harness the power of capitalism and of large companies that are in markets all over the world, not just Ireland. If property is your thing, why not look at a REIT instead of buying yourself? Some of the Irish REIT companies are involved in very large commercial projects at the moment. So instead of buying 1 apartment, have a smaller share in a whole block of apartments or a massive commercial property.
4. What are the plans for your kid's education? Do you intend them to go to fee paying schools and then onto university? If so, you are looking at €100,000 in fees. That needs to be looked at. Better to have it set aside rather than paying it out of cashflow each year.
5. Far too much in cash. I know you are looking at property and so intend to use it. How much should be left in cash depends on the security of your occupation, any short term needs ie those 11 year old cars may start causing problems soon.
6. Don't be overly concerned with receiving below market rent. I've lost count of the amount of people I've spoken to who are happy with lower rent because they have a good tenant. On the flip side, I'd another who got a call from the Gardai who had raided the brothel that was operating from the apartment he was renting out!!!

Steven
www.bluewaterfp.ie

 

[aristotle]

1. Far too much in cash. I know you are looking at property and so intend to use it. How much should be left in cash depends on the security of your occupation, any short term needs ie those 11 year old cars may start causing problems soon.

I am struggling to find other users for the cash. I am putting about €17k AVC per year into my pension so I feel I have enough going into equities for the long term.
The tracker rates are so low its hardly worth paying off a lump sum.

I did, at one stage have 130k in shares I invested in directly via a custody account but found I really couldnt do well in it and it was taking too much time reading and trying to do better. Off the 165k cash I mention I still have €28k of it in various shares actually.

If and when interest rates go up to 4% I think I would pay lumps off then.

 

[llgon]

What are the plans for your kid's education? Do you intend them to go to fee paying schools and then onto university? If so, you are looking at €100,000 in fees. That needs to be looked at. Better to have it set aside rather than paying it out of cashflow each year.

Hi Steven,

I'm just wondering what your thinking is behind not paying school/uni fees out of cash flow. There would be similarities between my circumstances and Aristotle's and I'm planning that when the time comes I'll have sufficient cash flow to do this. I know the risk that circumstances might change and the cash flow might not be there but as other investments have been made the contingency plan would be to use these. Is there something else to it that I'm not seeing?

Thanks

 

[Steven Barrett]

Hi Steven,

I'm just wondering what your thinking is behind not paying school/uni fees out of cash flow. There would be similarities between my circumstances and Aristotle's and I'm planning that when the time comes I'll have sufficient cash flow to do this. I know the risk that circumstances might change and the cash flow might not be there but as other investments have been made the contingency plan would be to use these. Is there something else to it that I'm not seeing?

Thanks

Use capital markets to pay for some of your school fees. By taking it out of cashflow, you work for 100% of the cost of school fees. Invest now and the growth of capital markets over the long term will partly pay for their school fees.

In my own circumstances, we're still not sure whether our kids will be going to fee paying or public school but we want to be prepared. We have 2 kids as well. We have 3 years school fees in cash. We are building up the rest through investing in the markets over time.

Steven
www.bluewaterfp.ie

 

[Steven Barrett]

I am struggling to find other users for the cash. I am putting about €17k AVC per year into my pension so I feel I have enough going into equities for the long term.
The tracker rates are so low its hardly worth paying off a lump sum.

I did, at one stage have 130k in shares I invested in directly via a custody account but found I really couldnt do well in it and it was taking too much time reading and trying to do better. Off the 165k cash I mention I still have €28k of it in various shares actually.

If and when interest rates go up to 4% I think I would pay lumps off then.

Leave some money in cash for when you need to replace the cars, holidays, cashflow etc and put the rest into a global equity index. You will need it in the future.

Not paying a lump sum into a tracker makes sense if you are making better use of the money. If you are not getting a better return (and you most likely aren't with it on deposit), it better to reduce your mortgage.


Steven
www.bluewaterfp.ie

 

[llgon]

Use capital markets to pay for some of your school fees. By taking it out of cashflow, you work for 100% of the cost of school fees. Invest now and the growth of capital markets over the long term will partly pay for their school fees.

Thanks Steven,

In my own case I'm investing in capital markets now and hope to see the growth there pay for something else in the future beyond the school and uni fees. I still plan to use cash flow for these if possible.

I try each year to take advantage of the annual cgt exemption by cashing in on some of the portfolio and I re-invest this along with the growth. I can see that this could alternatively be taken advantage of to pay the fees.

Obviously Aristotle's circumstances are not the same as mine and you have provided great advice to him - a very good birthday present I'd say

 

[gnf_ireland]

I'm just wondering what your thinking is behind not paying school/uni fees out of cash flow. There would be similarities between my circumstances and Aristotle's and I'm planning that when the time comes I'll have sufficient cash flow to do this. I know the risk that circumstances might change and the cash flow might not be there but as other investments have been made the contingency plan would be to use these. Is there something else to it that I'm not seeing?

Depending on people's situation, it is likely they will have a child care cost up to the point the child enters secondary school. It is unlikely most would have a primary school child on their own from say 2:30 until the parents arrive home from work. In those cases its likely that the school/uni fees can easily be absorbed from cashflow - one cost just offsets the other one
OP is different as there are currently no childcare costs as the partner is stay at home. There should be some planning/thought put into this. Similarly if a grandparent is minding the children afterschool and the costs are likely to step rise once they enter the paid education system

 

[gnf_ireland]

Use capital markets to pay for some of your school fees. By taking it out of cashflow, you work for 100% of the cost of school fees. Invest now and the growth of capital markets over the long term will partly pay for their school fees.

OP's kids are currently 3 & 5 - so chances are have just entered primary school. That means its 8 years before there will need to be a drawdown on private secondary fees. Is it good to compartmentalise funds for a period >5 years. Surely the funds should be saved as part of medium term savings and used as required if & when. Whether you call it education fund or savings fund, does it make a difference until closer to the time. OP may end up considering moving house or anything in that window. 8 years is a lot time with kids
I had the same discussion last year on the below thread - and my kids are the same age. I ended up clearing down the education fund I had at that stage, paying it against the mortgage and replacing it with a general medium term savings fund !
https://www.askaboutmoney.com/threads/financial-resolutions-for-the-new-year.201887/

I also note that most people here say the minimum investment term for equities should be ~7 years. OP will need access to some of the funds in 8 years. Does that change the view in any way?

Not paying a lump sum into a tracker makes sense if you are making better use of the money. If you are not getting a better return (and you most likely aren't with it on deposit), it better to reduce your mortgage.

It makes no sense now with ECB being very low, but there are 18 years left in it. Any over-payment now will definitely see benefits when the ECB starts to rise.

 

[Steven Barrett]

OP's kids are currently 3 & 5 - so chances are have just entered primary school. That means its 8 years before there will need to be a drawdown on private secondary fees. Is it good to compartmentalise funds for a period >5 years. Surely the funds should be saved as part of medium term savings and used as required if & when. Whether you call it education fund or savings fund, does it make a difference until closer to the time. OP may end up considering moving house or anything in that window. 8 years is a lot time with kids
I had the same discussion last year on the below thread - and my kids are the same age. I ended up clearing down the education fund I had at that stage, paying it against the mortgage and replacing it with a general medium term savings fund !
https://www.askaboutmoney.com/threads/financial-resolutions-for-the-new-year.201887/

I also note that most people here say the minimum investment term for equities should be ~7 years. OP will need access to some of the funds in 8 years. Does that change the view in any way?


It makes no sense now with ECB being very low, but there are 18 years left in it. Any over-payment now will definitely see benefits when the ECB starts to rise.

You can have the education fund mixed in with other savings alright. It's more about the planning for future fees and getting capital markets to do some heavy lifting. When he has 2 kids in school, that's €12k - €14k a year of net income that will have to be found. Wouldn't it be nice to already have that taken care of?

I agree that it doesn't make sense to pay off a tracker when the rates are so low IF you put the money to better use. Are people putting the money to better use though? You may be paying interest on your mortgage of 0.75% - 1%. Leaving a lump sum on deposit, you may only be getting 0.5% and paying 37% DIRT on it, so you are only getting 0.315%. So it would be better to pay a lump off your mortgage. If you invest the money and have the potential for higher returns, then invest the money instead, even if it falls in value in the short term. Or put it in a pension and get tax relief.


Steven
www.bluewaterfp.ie

 

[gnf_ireland]

You can have the education fund mixed in with other savings alright. It's more about the planning for future fees and getting capital markets to do some heavy lifting. When he has 2 kids in school, that's €12k - €14k a year of net income that will have to be found. Wouldn't it be nice to already have that taken care of?

Absolutely agree with this - its more the medium terms saving strategy, and reviewing it periodically. School/Uni fees just becomes part of the medium term expenses - similar to maybe buying a new car or doing up the house.

If you invest the money and have the potential for higher returns, then invest the money instead, even if it falls in value in the short term. Or put it in a pension and get tax relief.

Absolutely - subject to the risk appetite of the person.
This is where I believe an ISA would be a major 'game-changer' in Ireland and would encourage individuals save for the future, without taxing the crap out of them for doing so. Money goes into the fund after tax, but can grow within the account tax free. Even if it was capped at 3k a year per individual, it could change peoples mindsets. Practically everyone has something they could save towards, no matter what stage in life they are in.