Tax-advantaged retirement accounts, or, a general 15-yr plan

jabberwocky

Registered User
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Hi all,

I was directed here from another site, I hope I'm not running afoul of your forum etiquette in this post. I've done a few searches and gleaned some good information although there are a few things I'd like to run by you.

In essence: I am Irish, resident here, 31, single and no kids, no debt to my name. I am entertaining a plan of having a working retirement from age 45 or so, the idea being to purchase a property somewhere in the Mediterranean and run either a pub or a hostel. I've lived there before and I speak Spanish, and while it's a pipe-dream and liable to change it's a decent goal to work towards.

With that in mind, I have some thoughts questions you good folk might be able to comment on.

First, I earn €70k per year and my company offer a 5% pension match. I maintain around about €12k in an AIB current account for emergency expenses.
I have not yet started to pay into my pension, which is offered by IrishLife, and starting end of March I am going to contribute 5% of my salary to get the match. Of this contribution (€7k annually with the match), I am considering a spread of 10% bonds and 90% equities, those equities being split between their Indexed World Equity Fund(1) at 10% (which has 59% of its distribution in US companies) and 80% towards their Indexed 50/50 Equity Fund(2) which has 50% Eurozone and 33% US, amongst others.

Given my age and situation, I think this is a good balance, although I would appreciate any comments on it. I am also considering giving 10% to emerging markets(3). All these funds have around 0.65 - 0.75% management fees. Does that sound reasonable?

Second, and getting to the meat of my question; because I work remotely most of the time, I have some opportunities to save on the cost-of-living and avoid paying Dublin-area rents. I can, for example, return to Spain for the summer months and pay rent of approximately €400 per month, and spend a few months over the winter with my parents, who are getting on in life. This means, over the course of a year, my expenditure is very low and it allows me to consider having €2,500 a month free to invest. Let's say €2,000 for the purposes of this post.

Which is where I am at a loss. I don't know what to do with it. I would like to put €1k a month into an AIB 21-day notice saving account, which only offers 0.25% AER but would be very beneficial to me if I wanted to ask them for a mortgage (for a Dublin apartment to rent, not live in). But there may be other options I am unaware of; for example picking some ETFs and using a company like Davy. I don't think we have many tax-advantaged accounts in Ireland that I can utilise and withdraw from in my early 40s? Would you have any suggestions for me on how I can most efficiently put €2000 per month to use over the next ten years that would give me some options when I hit the big four-zero?

Many thanks, and apologies for the missive.

(1,2,3) PDF documents and Links I cannot post! But they are on ILIM's website.
 
Hi jabberwocky

First off welcome on board!

As regards your pension contributions; given your age, I would invest the whole lot in a global equity index fund. You can certainly direct 10% to a bond fund and/or 10% to an EM fund if you want - truth is it won't make much difference. A small % of a small amount is not going to make a meaningful difference.

An AMC of 0.65%-0.75% doesn't sound too bad for Ireland - you will struggle to do better.

The important point is to start investing. As soon as possible.

As regards your after-tax savings; I think you should direct the whole lot towards the best regular savings account you can find (check out the "Best Buys" section).

Keep it simple would be my advice.

Hope that helps.
 
As regards your after-tax savings; I think you should direct the whole lot towards the best regular savings account you can find (check out the "Best Buys" section).

Solid advice, if you're not trying to avoid paying tax and you want to target a decent return then life company regular savers are the way to go.

Jabberwocky, regarding your pension fund choice, given current (and probable future) market volatility, it may be worth paying a slightly higher management fee and investing your pension into a fund with a degree of management involved eg. MAPS 5.

Gerard
www.proactivefinance.ie
 
.....regarding your pension fund choice, given current (and probable future) market volatility, it may be worth paying a slightly higher management fee and investing your pension into a fund with a degree of management involved eg. MAPS 5.

Hi Gerard,

Please take this question in the spirit of debate. I want to understand this for myself also.

Can you provide evidence to support this recommendation please? My understanding is that in general active managers fail to beat passive management. In other words, taking active management risk is generally not rewarded by higher expected return.
 
Hi Elacsaplau,

I agree, in recent years passive funds have quite often outperformed managed funds. But you must take into account that since 2009, the growth in equity markets generally has been unprecedented and therefore investing in a passive fund was almost guaranteed to deliver strong returns. However, with increased volatility, it's doubtful these growth levels in passive funds will continue and if it was my money (and while nothing is guaranteed) I'd rather have it watched that little bit closer at present.

I'm not familiar with the rules of the scheme but presumably Jabberwocky will be allowed switch funds on occasion free of charge so would not be confined to the original fund choice anyway.

Gerard
www.proactivefinance.ie
 
Hi Elacsaplau,

I agree, in recent years passive funds have quite often outperformed managed funds. But you must take into account that since 2009, the growth in equity markets generally has been unprecedented and therefore investing in a passive fund was almost guaranteed to deliver strong returns. However, with increased volatility, it's doubtful these growth levels in passive funds will continue and if it was my money (and while nothing is guaranteed) I'd rather have it watched that little bit closer at present.

I'm not familiar with the rules of the scheme but presumably Jabberwocky will be allowed switch funds on occasion free of charge so would not be confined to the original fund choice anyway.

Gerard
www.proactivefinance.ie

I don't think the passive funds have beaten active only over the last 8 years. I think historically they've beaten them for a lot longer. And it's not just quite often but I believe mroe than 80% of the time. You're paying extra for inferior performance.
 
Thanks Gerard,

I'm not only referring to relatively short-term performance (i.e. since 2009).

I don't think the passive funds have beaten active only over the last 8 years. I think historically they've beaten them for a lot longer. And it's not just quite often but I believe more than 80% of the time. You're paying extra for inferior performance.

Thanks PGF2016 - This is precisely my understanding also.

I find the implication that active managers (in general) somehow know how to effectively time the market as, frankly, scary and is inconsistent with the majority of the literature that I have read on the subject.

Can you provide evidence to support this recommendation please?

Gerard - I've a massive data bias. The question remains the crucial for me!
 
Solid advice, if you're not trying to avoid paying tax and you want to target a decent return then life company regular savers are the way to go.

Jabberwocky, regarding your pension fund choice, given current (and probable future) market volatility, it may be worth paying a slightly higher management fee and investing your pension into a fund with a degree of management involved eg. MAPS 5.


The Irish Life MAPs funds have a fairly significant allocation to (unidentified) alternative strategies and employ a mysterious market-timing algorithm. Definitely not somewhere I would risk my hard earned savings.

Life company regular saver products are a pretty expensive way of gaining market exposure and the tax treatment is pretty awful. Personally, I don't see the attraction.

In any event, I think it makes more sense for a 31-year old to keep long-term retirement savings invested in (volatile) equities and short/medium term savings in (stable) cash deposits.
 
So you don't believe that an actively managed fund would be a better option in a non-bull market?

Gerard
www.proactivefinance.ie

No I don't. And when I asked for some evidence that it might on a separate thread recently I got no response.

http://www.askaboutmoney.com/threads/arf-questions-to-ask-broker.202324/#post-1504266

Gerard, You are in the business of selling investments. You have suggested on more that one occasion that active investments out perform passive. Well they certainly pay more commission to brokers. If you have no evidence to support your point of view please stop repeating it.
 
So you don't believe that an actively managed fund would be a better option in a non-bull market?

I'm afraid it's a complete myth that active managers, on average, out-perform index funds during bear markets.

But I suspect you already knew that...
 
No I don't. And when I asked for some evidence that it might on a separate thread recently I got no response.

http://www.askaboutmoney.com/threads/arf-questions-to-ask-broker.202324/#post-1504266

Gerard, You are in the business of selling investments. You have suggested on more that one occasion that active investments out perform passive. Well they certainly pay more commission to brokers. If you have no evidence to support your point of view please stop repeating it.

Cremeegg...the commission for passive investments is the exact same as active. Please advise where you see otherwise as this is news to me.

Also provide evidence of where else I have suggested active outperforms passive. I'm an independent advisor who is entitled to give an opinion. I believe (and I've never stated this as fact) that in a volatile market, active management is a better place to be.

Gerard
www.proactivefinance.ie
 
The Irish Life MAPS portfolios have only been running since May 2013, so their record is only in a bear market.

I would question your fund choices for your pension. The World Index fund is based on global market capitalisation and so is heavily invested in the US. The second fund you mentioned will have the exact same US and European stock as the World Index fund, just a different weighting. I'd agree with Sarenco in that I would invest in the global index fund.

On your savings, it very much depends on what you want to do with your money. If it's to be used to purchase a property in a few years, there is no point in taking the risk of there being a market crash. It may set you back 4/5 years (but for your pension, you can't access the money anyway, so a crash will won't put back retirement). I would keep it in cash if you intend spending it within 5 years. EBS pay 3% fixed for their regular saver. Maximum monthly contribution is €1,000.

And congratulations on being so focused on what you want at a young age. Most people don't know what they want.


Steven
www.bluewaterfp.ie
 
Cremeegg...the commission for passive investments is the exact same as active. Please advise where you see otherwise as this is news to me.

Also provide evidence of where else I have suggested active outperforms passive. I'm an independent advisor who is entitled to give an opinion. I believe (and I've never stated this as fact) that in a volatile market, active management is a better place to be.

Gerard
www.proactivefinance.ie

You believe ? Thats it ? Well thats my mind set at rest then.
 
The Irish Life MAPS portfolios have only been running since May 2013, so their record is only in a bear market.

Hi Steven,

I did not suggest MAPS based on their historical return. I'm a firm believer in not using historical returns as a main basis for an investment recommendation as it can be very misleading. I'm aware that plenty of advisors do though.

Just wanted to clear that up.

Gerard
www.proactivefinance.ie
 
Well if I could predict the future with certainty I wouldn't be posting in here!

Also would you mind backing up your claims about what I said and about commission or else retract them please.

Gerard
www.proactivefinance.ie

Retract what, my suggestion that the idea that active managers out perform passive is incorrect and misleading. No I dont see why I should retract that. Here is one basis for that suggestion.



Retract my suggestion that as a professional investment advisor that you can earn more commission from an active than a passive fund. I will if you can show some evidence that it is incorrect. After all it your turn to bring some evidence to this debate.
 
You should retract your claim that I have said that 'on more than one occasion' when in fact I have not said it once. All I said is where I would like my money to be in a volatile market. It's your entitlement to disagree with this but not to fabricate statements.

Retract my suggestion that as a professional investment advisor that you can earn more commission from an active than a passive fund. I will if you can show some evidence that it is incorrect. After all it your turn to bring some evidence to this debate.

You made the claim, the onus of proof is on you. Anyone in the industry will tell you that commission to an intermediary is not directly based on whether a fund is actively or passively managed. I'd love to know where you got that from.

This 'debate' has become silly.

Gerard
www.proactivefinance.ie
 
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I don't know that it has become silly. I think the points made regarding active vs passive and broker commissions are important. However it has perhaps become repetitive so I will leave it at this. Readers who are interested enough can make up their own minds.
 
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