Clearing Mortgage and Future Investments

[onfire]

Personal details

• Age: 45
• Spouse’s/Partner's age: 45
• Number and age of children: 2 (aged 13 & 9)

Income and expenditure

• Annual gross income from employment or profession:
  • €95K
• Annual gross income of spouse:
  • Zero (made redundant December 2022 from private sector salary €110K and likely to return to work Jan 2024)
• Monthly take-home pay:
  • €4K (after contributing max 25% AVC to pension)
• Type of employment:
  • private sector employee
• Monthly spend:
  • In general, current monthly spend (including mortgage payment) is similar to take-home pay

Summary of Assets and Liabilities

• Family home worth €800k with a €230k mortgage
• Cash of €350k (from savings, redundancy payment and selling company shares)
• Defined Contribution pension fund: €600k combined (Me €290K , Spouse €310K)
• Company shares : €10k
• Buy to Let Property: None

Family home mortgage information

• Lender: AIB
• Interest rate: 2.25% fixed - 6 months remaining

Other borrowings – car loans/personal loans etc

• None

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

• Yes

Other savings and investments:

• Do you have a pension scheme? DC pension as above
• Do you own any investment or other property? No

Other information which might be relevant

• Life insurance: €380K policy as part of employer benefit (4X salary)

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

• We feel very fortunate to be in the position of having €350k cash to clear our remaining mortgage. Our current thinking is to do this now but before going ahead wanted to review if this is the best use of this amount?
• If we do clear mortgage, we would like to understand best options for investing the remaining €100K cash (keeping €20K as emergency fund)
  • Ongoing savings from my salary should be €1,800+ based on not having mortgage
  • Spouse likely to have take home pay €4K+ within next 6 months
• Is the level of pension and insurance considered sufficient at our stage in life?

 

[BoscoTalking]

Would 20k Be an adequate emergency fund if the other 100 was tied up? It might not be - even a car packing in could cost you more than that.
FWIW i think you are well set up apart from the fact I don’t see income protection - which you probably do have as part of that work package.
the children will get that bit more expensive as they hit secondary and there is the fact that your partner may not return to the workforce (it seems definite but returning Mothers often find the packages they left difficult to replicate) that’s why I would clear the mortgage, invest 50 lump sum and the rest as it’s earned.

 

[Brendan Burgess]

1) Clear the mortgage. It's the best tax-free, risk-free rate of return you can get.
2) Max your pension contributions - but you can do that from income
3) Invest the balance in the stockmarket -either via shares directly or via an ETF.

(keeping €20K as emergency fund)

If you have liquid investments such as shares, you do not need an emergency fund.

If your car packs in and you need €30k, you can sell €30k of your shares quickly.

Brendan

 

[Sarenco]

I would clear the mortgage right away.

Personally, I would keep a higher cash reserve than €20k in your circumstances - I would keep at least €50k in cash.

But I would keep 100% of your pension funds invested in a global equity index fund for the time being.

Are there any improvements you could make to your home to make it more energy efficient?

I would also echo the point about the need for income protection cover.

 

[ClubMan]

Personally, I would keep a higher cash reserve than €20k in your circumstances - I would keep at least €50k in cash.

On what basis?
That seems like a crazy amount to keep as a rainy day fund.
Especially when, as @Brendan Burgess says, something like direct or indirect equity investments can be liquidated quickly if needed.

I would also echo the point about the need for income protection cover.

Bear in mind that many income protection policies are poor value for money, involve large charges, and only pay out in restricted circumstances and for limited time periods.

 

[Sarenco]

On what basis?

Well, it’s roughly 12 months’ expenditure for this family. Personally, I don’t think that’s an excessive cash reserve.

Let’s say we have a really grim recession, the OP loses his job and the value of global equities falls by 50%+. The OP would have to realise huge losses by liquidating equities just to survive.

And, in any event, I have suggested maintaining a 100% allocation to equities within their pension funds for the time being. These funds would represent over 90% of their investable assets so it’s hardly a conservative allocation for a couple in their 40’s.

Bear in mind that many income protection policies are poor value for money, involve large charges, and only pay out in restricted circumstances and for limited time periods.

Income protection is certainly expensive but, in my opinion, it’s critical in the OP’s circumstances.

What if the OP developed a medical condition that means he can’t work? Rely on social protection?

 

[PGF2016]

Well, it’s roughly 12 months’ expenditure for this family. Personally, I don’t think that’s an excessive cash reserve.

Let’s say we have a really grim recession, the OP loses his job and the value of global equities falls by 50%+. The OP would have to realise huge losses by liquidating equities just to survive.

If the OP does lose his/her job and is entitled to the dole and has no mortgage I'm sure an emergency fund of 20k should do for a year. They're not going to be dining in the Ritz in that scenario. Ultimately though it's up to the OP to decide what they are comfortable with.

Agree on the income protection and pension allocation though.

 

[Brendan Burgess]

Well, it’s roughly 12 months’ expenditure for this family. Personally, I don’t think that’s an excessive cash reserve.

Let’s say we have a really grim recession, the OP loses his job and the value of global equities falls by 50%+. The OP would have to realise huge losses by liquidating equities just to survive.

1) If the OP loses his job, he is likely to get a good redundancy payment so very unlikely to need an emergency fund
2) If the OP loses his job, it is likely that his wife will probably still have hers, so no need for an emergency fund.
3) Even if he does need to liquidate shares and they have fallen by 50%, he will not be liquidating the entire €20k in one go at the bottom of the market.

In a situation with two salaries of around €100k and no mortgage, you don't need an emergency fund.

Brendan

 

[Brendan Burgess]

Income protection is certainly expensive but, in my opinion, it’s critical in the OP’s circumstances.

I am not sure that it is worth the expense.

The family has two incomes of €100k and no mortgage. So if the OP can't work, they family still has an income of €100k and no mortgage.

You take out insurance to protect yourself against a risk of poverty. I don't think you should pay insurance to make sure that you will have more money than you know what to do with.

Brendan

 

[misemoi]

The emergency fund is a factor of a lot of things, eg potential to access to cash from family, access to credit cards in short term, ability to scale back on elements of spend (eg school fees not simple to roll back on, annual holiday can be pared back etc). I don't think this is something that can be calculated without a lot of details but I am sure that the OP can come to a sensible decision on that by considering all their options.

 

[Brendan Burgess]

A fuller discussion of the emergency fund is in this key post

Key Post - How much of an emergency fund do I need?

This comes up from time to time, and there is a custom and practice answer that everyone should have 6 months' expenditure in cash in case of some unforeseen expenditure. This is too simple an answer and it results in most people having way too much cash wasting away in a low interest deposit...

www.askaboutmoney.com