Term deposits versus investments

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Amsel26

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Could someone explain to me how it would be so much more advantageous to invest a sum of money like 50K in managed funds at low-to-medium risk than to place it in a term deposit account with an interest rate of, say, 2.8% to 3.15% (and yes, factoring in DIRT tax), or even National Solidarity Bonds?

Studying the projected returns on a typical investment bond for this risk level, it seems to me that the combination of management charges and 38% taxes on investments (plus the government levy) could amount to a hefty sum, eating substantially into any gains, certainly over the first 10 years. Are low-to-medium risk investments not ultimately benefitting the government and investment fund managers?

Or must you leave the money invested for 15-20 years or so to see a better return than a bank deposit account?

I’d be interested to hear opinions on this, because companies who are advertising/selling financial products often claim that term deposits won't keep pace with inflation but investments will.

I'm sorry if these seem like silly questions to the experts here, but I'm genuinely trying to understand this.
 
You’re not missing anything.

From 2000-2010, as it turned out, you would have been better off leaving your money on deposit rather than investing it in the markets.

High investment costs and taxes are a significant tailwind to achieving acceptable returns with after-tax savings.

Inflation reduces the real return on all investments - equities are not magically exempt.

IMO most folks should have no need to invest after-tax savings. Maximise pension contributions and pay down your mortgage ahead of schedule with anything left over. Once the mortgage is gone, start building a meaningful cash reserve while maintaining a high allocation to equities in your pension.

Simplicity is the ultimate sophistication.
 
Sarenco said:
Maximise pension contributions and pay down your mortgage ahead of schedule with anything left over. Once the mortgage is gone, start building a meaningful cash reserve while maintaining a high allocation to equities in your pension.
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Thanks for this. My mortgage is paid off, and I've been putting the max possible into an AVC with the aim of retiring early in 2 years. Can I just clarify, when you talk about equities in my pension, you are talking about a separate pension fund (I'm public sector) which I would pay into voluntarily, in effect a type of investment fund too?
When you say "after-tax savings", I assume you mean money I have available to save/invest, i.e. any surplus that happens to be sitting around?
 
Sarenco said:
IMO most folks should have no need to invest after-tax savings.
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Surely that really depends on the individuals, their personal/financial circumstances, their overall net worth/portfolio, their short/medium/long term goals, their desired lifestyle etc.

I would be very wary/skeptical of the general applicability of such a rule of thumb.
 
Amsel26 said:
Are low-to-medium risk investments not ultimately benefitting the government
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They can't benefit the government unless they also benefit the consumer.


Amsel26 said:
claim that term deposits won't keep pace with inflation
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They don't

Amsel26 said:
but investments will.
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They are likely to beat inflation


Amsel26 said:
National Solidarity Bonds?
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Guaranteed to lose you money to inflation, and quite likely to be less return that bank deposits.
 
ClubMan said:
I would be very wary/skeptical of the general applicability of such a rule of thumb
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Given my low fixed mortgage rate, I would be worse off following this "rule of thumb" and paying off my mortgage rather than putting it on deposit at 2.91% or higher.

Rules of thumb are often poor advice.
 
I did say most folks.

Most folks do not enjoy a fixed-term mortgage rate that is lower, after DIRT, than a fixed-term deposit rate with an equivalent term.

Also, bear in mind that you will typically have mortgage protection premiums associated with your mortgage.

Again, most folks do not want to retire at 48. And even if they do, there’s no rule that says the 2-year bridge to accessing their pension can’t be held on deposit.

Of course there will always be exceptions and edge cases.
 
The advice to maximise your pension contributions and pay down your mortgage before investing does apply to most folks, most of the time. A cheap tracker or a low fixed rate might make it slightly wrong, but it will never be much wrong.

Sarenco said:
Once the mortgage is gone, start building a meaningful cash reserve while maintaining a high allocation to equities in your pension.
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If they have cleared their mortgage, they don't need much of a cash-reserve. Invest the rest in equities.
 
A lot of folks will, for good reason, de-risk their pension funds in the run up to retirement.

My point is that they can achieve the same thing by maintaining a high allocation to equities in their pension and building a meaningful cash reserve with their after-tax savings. In other words, look at all their assets holistically rather than focusing on one account in isolation.

We regularly get asked “how should I invest €X?”, without any information on how their pension/AVC PRSA is invested.
 
Amsel26 said:
nd I've been putting the max possible into an AVC with the aim of retiring early in 2 years. Can I just clarify, when you talk about equities in my pension, you are talking about a separate pension fund (I'm public sector) which I would pay into voluntarily, in effect a type of investment fund too?
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When you started the AVC, you selected funds into which to put your savings.

These funds contain assets, and you own a small slice of these assets.

The assets are typically a mix of cash / bonds / shares / property.

So typically, your AVC funds are held is assets like shares.
 
Amsel26 said:
Yes, or rather, they were selected for me, on the basis of my risk profile. The fund hasn't performed that well, but possibly because I went with medium risk.
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If you're looking for better performance than maybe you should consider your understanding of the word 'risk' in this context. Equities are generally more volatile in the short term than cash or bonds but have historically given better returns over longer terms including the 10-15 year period of interest to you. Any 'risk' associated with such short term volatility is usually offset by the gains especially if its a diversified fund such as a passive global index. The trick is not to tune into the short term volatility noise, trust the equity weighting is right over the long term, avoid reacting and let the fund performance grow to acceptable levels.

While you are right to think somewhat conservatively if you're planning on retiring in 2 years time, you should also factor in the security of your public sector pension and the likelihood that the fund will probably be invested for a long enough term to seriously outweigh any short term swings. Think about walking up a hill whilst using a yo-yo! It goes up more than it goes down over time :)
 
Surely if mortgage paid off and avcs maxed out to gobal equities index fund, if you are say 25years to retirement it is still best to invest in say global etfs then just let cash pile up? My situation btw.
 
confused87 said:
still best to invest in say global etfs then just let cash pile up?
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There's always a requirement to have an emergency fund. It's down to a person's own attitude to risk as to what form that should take. Beyond that, it would be sensible to invest rather than just working to earn money that reduces in value each year due to inflation. That would probably raise a more philosophical question about your job and why you do it for the "excess" earnings.
 
Amsel26 said:
Or is it even worthwhile with only 2 years (slightly less) to planned retirement date?
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This complicates things somewhat, as some lifecos don't like short policies, as obviously they won't make much money on them.



I will have a quick look at an EO broker:





There is mention of age 63, but that seems to apply to just lump-sum contributions.

I advise sending an e-mail to this broker, and asking his terms for a PRSA-AVC?

I wonder can the accumulated AVC fund be transferred?

The 2.75% AMC is killing the fund each year.
 
confused87 said:
Surely if mortgage paid off and avcs maxed out to gobal equities index fund, if you are say 25years to retirement it is still best to invest in say global etfs then just let cash pile up? My situation btw.
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I would agree with the gist of this, particularly for the original poster who seems to have a guaranteed public sector job today also comes with a defined benefit pension that will be supplemented by AVCs. All factors which give them a significant cushion allowing them to be able to take on more risk/volatility with some of their after tax savings than just sticking it on deposit or in State Savings products. Someone without such a guaranteed job and pension might want to take a more cautious approach. Just my opinion though...
 
Fortune said:
here's always a requirement to have an emergency fund. It's down to a person's own attitude to risk as to what form that should take. Beyond that, it would be sensible to invest rather than just working to earn money that reduces in value each year due to inflation. That would probably raise a more philosophical question about your job and why you do it for the "excess" earnings.
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But can't you just dip into etf fund and have your money in a few days in case of emergency.
ClubMan said:
would agree with the gist of this, particularly for the original poster who seems to have a guaranteed public sector job today also comes with a defined benefit pension that will be supplemented by AVCs. All factors which give them a significant cushion allowing them to be able to take on more risk/volatility with some of their after tax savings than just sticking it on deposit or in State Savings products. Someone without such a guaranteed job and pension might want to take a more cautious approach. Just my opinion though...
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My situation is i also have defined benefit pension and maxing out my avcs as a supplement since I paid off my mortgage a few years back. Currently investing in etfs 20k a year the last 2 years but thinking of upping that significantly soon as current account is accumulating cash not earning but im waiting to hear what new investment scheme is. I was just confused by knowledgeable poster suggesting accumulate cash but maybe he meant for older closer to retirement person.
 
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