Early 40's, starting family need help with financial planning

[purplesnacks]

First time poster, learning a lot from the site, all advice very much appreciated. Thank you.

Age: 41
Spouse’s/Partner's age: 40

Annual gross income from employment or profession: E82,000 (private sector)
Annual gross income spouse: E30,000 (private sector)
Monthly take home pay: E 5500 (in total approx...)
Expenditure pattern: We are both generally risk averse savers.

Rough estimate of value of home: E200,000
Mortgage on home: E174,000
Mortgage provider: Ulster bank
Type of mortgage: Fixed (for 4 years, we are roughly two years in) : E930pm
Mortgage insurance is E18pm
Interest rate : 2.6%

Other borrowings: None.

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

Savings and investments:
E2,200 monthly into regular saver accounts.
Approx E120,000 across current, notice and regular saver accounts, includes E20,000 as an emergency/rainy day fund.
Additionally E23,600 (current value) in an Irish Life MAPS3 fund, already invested for two years. It has lost approx 6% in that time.

Do you have a pension scheme?
Yes, I pay E350pm into company pension, company pays roughly the same. Two years ago I started paying monthly AVCs to bring me close to the revenue limits. Fund value approx E155k
Spouse, paying into a private pension started two years ago E100 pm.

Do you own any investment or other property? No.

Ages of children: Our first is due next year.

Other policies: Yes. Both paying into policies for life insurance/serious illness (E144pm total) and income protection (E124pm total).
My job pays for my health insurance and makes a contribution for spouse.

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

- large sum in various accounts that are earning virtually nothing. They were started 2 - 3 years ago but dropping rates make them worthless. I know that this money could be working harder. Not sure where to move them.
- I would keep the existing emergency/rainy day fund and look to re-organise the rest somehow, particularly as we'll have additional outgoings with the baby and its future. What's the best way to plan for this?
- How best to save for the childs third-level education?
- Could we afford to pay extra into mortgage, we can overpay by 10% of the yearly cost per annum?
- I realise I may need to invest some of the money to make a return, but don't know the best choices, be in a managed fund or direct investing in stocks.. The MAPS fund being 6 % down does not fill me with confidence.

 

[RedOnion]

Have I read correctly, you've 120k in savings / current accounts, and 23k in a life fund, while carrying mortgage debt at 2.6%?

Why are you not just paying off the mortgage? Tax free, risk free return.

 

[_OkGo_]

Were you sold the mortgage, income protection, mortgage protection and life insurance and MAPS3 fund by the same broker/financial advisor??

 

[Steven Barrett]

First thing is babies are expensive. Child care in this country is expensive and you will have about 3 years of it. Also, will your wife be taking unpaid leave as that will also have to be paid for.

Next up is the future cost of education. Will your child go to private/ public school? Plans for university, will they need to move away from home (more expense). The earlier you start saving for this, the less you need to put in. The term is long enough for you to invest in shares. I'd stay away from MAPS though, they are expensive and don't perform very well. There are plenty of other options besides them.

If you can have enough cash to save €2,200 per month, you can afford to redirect some of that money into overpaying the mortgage.

I disagree with other posters on here about paying down the mortgage as quickly as possible. While there is an obvious long term benefit, when the money is paid in, it can't come out. You may have financial needs in the short term that have to be met and you'll need cash.

With a new baby on the way, I wouldn't rush into making big financial decisions until you have a better idea of your finances with a child. Have you seen the price of buggies etc . You are in a good position financially and are really asking how to make your money work better for you rather than get out of a financial pickle, so take your time.

Steven
www.bluewaterfp.ie

 

[purplesnacks]

Thanks for all the replies, will try to answer some questions here.

Have I read correctly, you've 120k in savings / current accounts, and 23k in a life fund, while carrying mortgage debt at 2.6%?
Why are you not just paying off the mortgage? Tax free, risk free return.

It has been on our mind to overpay the mortgage, but for various good reasons it didn't happen. I completely see the logic in clearing it, I'm not sure if I'd be completely comfortable in doing that and not having some cash reserves.

Were you sold the mortgage, income protection, mortgage protection and life insurance and MAPS3 fund by the same broker/financial advisor??

No. Mortgage protection came with the mortgage. Income protection, serious illness/lifeassurance was something I looked into myself, to provide for spouse/children if anything bad was to happen.
The MAPS3 was a way to try and make money work harder instead of sitting in a current account.. Kind of regretting that now, but I either pay the early exit penalty or hope it bounces back over the next 5-10 years.

First thing is babies are expensive. Child care in this country is expensive and you will have about 3 years of it. Also, will your wife be taking unpaid leave as that will also have to be paid for.

Next up is the future cost of education. Will your child go to private/ public school? Plans for university, will they need to move away from home (more expense). The earlier you start saving for this, the less you need to put in. The term is long enough for you to invest in shares. I'd stay away from MAPS though, they are expensive and don't perform very well. There are plenty of other options besides them.

If you can have enough cash to save €2,200 per month, you can afford to redirect some of that money into overpaying the mortgage.

I disagree with other posters on here about paying down the mortgage as quickly as possible. While there is an obvious long term benefit, when the money is paid in, it can't come out. You may have financial needs in the short term that have to be met and you'll need cash.

With a new baby on the way, I wouldn't rush into making big financial decisions until you have a better idea of your finances with a child. Have you seen the price of buggies etc . You are in a good position financially and are really asking how to make your money work better for you rather than get out of a financial pickle, so take your time.

Steven
www.bluewaterfp.ie

Lots of food for thought there. Thank you. I had not yet given thought to some of what you have said. I do think that it makes sense to redirect some regular savings to overpay the mortgage, at least until baby arrives and see how the finances go after that.
With regard to options besides MAPS. Do you mean multi-asset funds from other vendors, or more direct personal investments in stocks/shares. I'm not specifically asking for recommendations of product X from vendor Y, just looking to clarify. I know very little about investments, so its time that i learn.

Other questions as a result of replies (again Thank you).
- Is 20k enough of a rainy day / emergency fund.
- Are we over protecting ourselves with additional insurances (income/illness etc). The mortgage protection is needed, but the others were a decision we made.
- I think i will continue to try and max out my pension contributions for as long as i can, via AVC's. Does this make sense? At retirement, will I need to pay tax specifically on the amount of AVC contributions I have made?


Thank you.

 

[Steven Barrett]

Thanks for all the replies, will try to answer some questions here.



It has been on our mind to overpay the mortgage, but for various good reasons it didn't happen. I completely see the logic in clearing it, I'm not sure if I'd be completely comfortable in doing that and not having some cash reserves.



No. Mortgage protection came with the mortgage. Income protection, serious illness/lifeassurance was something I looked into myself, to provide for spouse/children if anything bad was to happen.
The MAPS3 was a way to try and make money work harder instead of sitting in a current account.. Kind of regretting that now, but I either pay the early exit penalty or hope it bounces back over the next 5-10 years.


Lots of food for thought there. Thank you. I had not yet given thought to some of what you have said. I do think that it makes sense to redirect some regular savings to overpay the mortgage, at least until baby arrives and see how the finances go after that.
With regard to options besides MAPS. Do you mean multi-asset funds from other vendors, or more direct personal investments in stocks/shares. I'm not specifically asking for recommendations of product X from vendor Y, just looking to clarify. I know very little about investments, so its time that i learn.

Other questions as a result of replies (again Thank you).
- Is 20k enough of a rainy day / emergency fund.
- Are we over protecting ourselves with additional insurances (income/illness etc). The mortgage protection is needed, but the others were a decision we made.
- I think i will continue to try and max out my pension contributions for as long as i can, via AVC's. Does this make sense? At retirement, will I need to pay tax specifically on the amount of AVC contributions I have made?


Thank you.

1. There are loads of different options regarding investing, multi asset options, index funds, property funds. Life companies and their risk profiling tools tend to direct you towards one of their multi asset options at the end of the questionnaire. This is bad practice and should not be followed as it does not take into account loads of other factors that influence an investment decision.
2. Is €20k enough emergency? I can't say. How secure are your jobs? What level of cash do you need to feel comfortable. New baby will change all that.
3. Insurances - life cover is cheap. better leaving your spouse in a good financial position rather than a poor one. Kids will change all that too. I've talked to women with 2/3 kids who have received €50,000 from the life cover plan their husband had. It doesn't go very far. Without seeing the numbers, it's difficult to give a definite.
4. Always keep the pension working away. When you get into late 50s, early 60's, you will have lots of choices

Steven
www.bluewaterfp.ie

 

[_OkGo_]

3. Insurances - life cover is cheap. better leaving your spouse in a good financial position rather than a poor one

I would agree that the spouse should be looked after but in this case I think the OP could be over-insured, depending on the value of the policies. Right now, they live on €2370pm (€5500-€2200-€930) as a couple, roughly €28.5k per year or lets round up to €15k per individual. While it is a bit morbid and people don't like discussing it, they should discuss it and write down exactly what would be paid out in the event of a) OP dying or b) spouse dying. Most agents selling the policies will just use multiples of your salary but not look at your own situation and cost of living.

a) as OP is the primary earner, this is the biggest risk to insure but as it stands

1. Mortgage protection clears mortgage
2. They have approx €140k cash already
3. Life policy pays out xxx? I'm guessing by the policy premium that it is the €300-400k range
4. Plus employment payouts - does your benefits package include a death in service payout? Usually in the 3-4x salary range but depends on your package obviously
5. Percentage of pension pot value paid to estate
6. Widows pension

So the spouse could be mortgage free with a widows pensions and cash pile above €500k. Their current lifestyle is €15k so factor in some additional cost as a lone parent but because they live a modest lifestyle, they would be very well set up

b) Mostly the same as above but in this case, the OP would not need a huge cash pile, they could comfortably continue earning at 80k while having no mortgage and paying for childcare

I would also look at the income protection, if you are already covered in your employment benefits then it is probably wasted on you. If you don't have it in work then fair enough but I would be surprised if it wasn't part of a benefits package

Find out what the early exit penalty is on the MAPS fund, that money would serve you much better if it was used to clear some of your mortgage. Similarly find out what the break fee is on your fixed mortgage. You don't have to act on it now but if you decide to make a lump sum payment greater than the 10% that is allowed, then at least you will know what the cost is. Personally I would make a much larger payment and bring it down to at least €100k balance but as you are more cautious, you at least have the option to overpay by 10% this year and next year to make it more comfortable.

 

[purplesnacks]

Thank you both for your replies, very informative and thought provoking

2. Is €20k enough emergency? I can't say. How secure are your jobs? What level of cash do you need to feel comfortable. New baby will change all that.

Good points, I guess i was asking a question that cant be answered without knowing more about our lifestyle/spending habits... If I were to re-phrase it, is there a rule of thumb for how big an emergency fund should be? Six months general household expenses/ 3months salary, maybe the answer is "level of cash you need to feel comfortable"!

I would agree that the spouse should be looked after but in this case I think the OP could be over-insured, depending on the value of the policies. Right now, they live on €2370pm (€5500-€2200-€930) as a couple, roughly €28.5k per year or lets round up to €15k per individual. While it is a bit morbid and people don't like discussing it, they should discuss it and write down exactly what would be paid out in the event of a) OP dying or b) spouse dying. Most agents selling the policies will just use multiples of your salary but not look at your own situation and cost of living.

I would also look at the income protection, if you are already covered in your employment benefits then it is probably wasted on you. If you don't have it in work then fair enough but I would be surprised if it wasn't part of a benefits package

Insurances/payouts:
On death: 200K paid if I die and 300K if my spouse dies. (Which seems a lot based on the example from Steven.)
Serious illness cover is 100K each.

My Employment benefits.
Death in service is 4x my salary. Availability of income protection is at best vague & not guaranteed.

My spouse does not have such benefits with her job.

Find out what the early exit penalty is on the MAPS fund, that money would serve you much better if it was used to clear some of your mortgage. Similarly find out what the break fee is on your fixed mortgage. You don't have to act on it now but if you decide to make a lump sum payment greater than the 10% that is allowed, then at least you will know what the cost is. Personally I would make a much larger payment and bring it down to at least €100k balance but as you are more cautious, you at least have the option to overpay by 10% this year and next year to make it more comfortable.

Early exit penalty on MAPS is 5%. Would need to ask about the break fee on the mortgage