Key Post "I am 65 – where should I invest my life savings? "

I have just come across a great article in the FT from May 2014.

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Few conventional pensioners would sleep easily at night knowing that the bulk of their wealth was tied up in the stock market. After all, there have been two major bear markets in the past decade or so, both of which resulted in key indices such as the FTSE 100 virtually halving.

But Don Ezra is not a conventional pensioner. A distinguished global pension investment consultant and author, he shows no signs of sleeplessness, even though the 70-year-old holds 70 per cent of his assets in equities. The other 30 per cent - the equivalent of five years’ household spending - is in fixed income products.
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and

Mr Ezra believes the best option for longevity protection, the first goal, is through an annuity paying a secure income. But he is far from convinced that the British habit - locking into a lifetime annuity immediately at the age of 65 - is the way to do it.


“I want insurance against living too long, but to buy an annuity when I am 65 that pays me if I live to age 66 . . . Well, gosh, I am 99 per cent likely to do that. At the very least, I want less than a 50 per cent chance of collecting on my insurance. That means that my insurance should not start until the end of my life expectancy.”


Mr Ezra has instead arranged a deferred annuity, a product that is not readily available in the UK but commonplace in the US. It will begin to pay an income if he reaches the age of 85. “If I don’t survive that long, I’ve paid my insurance premium in and I don’t collect, that’s OK,” he says.
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I love that idea of a deferred annuity. Insurance against living too long.

I have been paying a mortgage protection policy for years in case I die. As I have no dependents, dying is not a risk I need to worry about. I would much prefer if I had put the premiums into a policy which would pay out if I hit age 90.
 
In theory investing in 10 or more blue chips is a good one and dripping in money over time despite where the market is to catch the lows and highs. However peoples biggest obstacle in doing this are themselves. If they have an online account where it is easy to buy and sell stocks and if they are faced with a 2008 style meltdown where everything plunges 50%, what do they do? It is very difficult to watch the value of your stocks dropping day after day for months as happened in 2008. In that scenario i think some of the best long standing mutual funds might be a better alternative. The best fund managers have the resolve and experience to cope with meltdowns that private investors dont have. I would bet that most mutual funds have done much better than private investors over the last 10 years. Many irish investors invested in property and irish banks 10 years ago which were decimated in the meltdown. Even the worst mutual funds have performed much better than this. There are mutual funds with long standing returns of 7% and more surely these should be considered.
 
I was asked this again recently and thought it worthwhile revisiting this thread.

Has anything changed in the meantime to alter the advice?

Returns on deposits are even lower than they were.

I know one can't time the stockmarket, but it just does seem to be a bit high at the moment.

Brendan
 
Marc Westlake has produced a new report 'Managing cash deposits in a low interest environment' (there is a link to it on his Twitter feed) which, I think, adds value to this debate.
 
Brendan Burgess said:
I was asked this again recently and thought it worthwhile revisiting this thread.

Has anything changed in the meantime to alter the advice?

Returns on deposits are even lower than they were.

I know one can't time the stockmarket, but it just does seem to be a bit high at the moment.

Brendan
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As long as Aryzta and (the newly-listed) AIB or PTSB shares weren't part of the portfolio, chances are Irish pensioners without an idea of what to buy would be more likely to opt for stocks they're familiar with. The 10 'blue chip' companies would need to be diversified, but maybe then they opted for (say) BT or Vodafone in the UK, because they knew of them too...
OK then you could say that this investment was for the longer term and not to be concerning themselves with volatility. In that regard, they would still find something to worry about even if they were only getting annual statements.
 
Sarenco said:
I would suggest keeping 25k on deposit and buying 5-year State Savings Certs with the balance
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I'd agree. An often overlooked feature of state savings (even by professionals who publish material on the topic) is that the funds are available at 7 days notice. There's a huge optionality there, so massive amounts don't have to be kept at 0% on demand.
 
Sarenco said:
Given the original fact pattern, I would suggest keeping 25k on deposit and buying 5-year State Savings Certs with the balance.

Nice and simple.
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How safe is an Irish state Guarantee in a downturn if the state has not got the money to pay out, possibly finish up giving you IOU until they can afford to pay out,you could be long dead by then,
I would keep most of the deposit away from Irish banks same goes for the state on balance,
 
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RedOnion said:
An often overlooked feature of state savings (even by professionals who publish material on the topic) is that the funds are available at 7 days notice. There's a huge optionality there, so massive amounts don't have to be kept at 0% on demand.
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True but the bulk of the interest is lost if the investment is not held to term.

Also, there is always the possibility that interest rates could materially increase during your holding period.
 
The couple have €34,380 of annual income and they can earn up to €36,000 a year tax-free.

Any advisor would need to understand the couple’s appetite for risk.

It is also relevant that, as things stand, the couple are not obliged to submit a tax return.

Nonetheless, they have the capacity to earn another €1,600 of annual income tax-free. They are also exempt from PRSI and USC.

The taxation of investments doesn’t really work in their favour; a life company investment bond wouldn’t necessitate a tax return but the 41% rate plus the 1% levy are big negatives.

Something like a US ETF or a UK Investment Trust would be good from a tax perspective but the former can’t be accessed that easily.

I think if they were my parents I’d advise them to do the following:

- Keep €10k in the Credit Union
- Buy €15k worth of State Savings
- Invest €75k in cheap US-domiciled MSCI World ETF; or alternatively a global equity UK Investment Trust.
 
The situation posited in the opening post is close enough to my own.
If we have enough and more for the life-style we want, why are we holding onto the money?
My "investment" policy is to pass the money on to my sons now, rather than have it sit there at miserable interest rates, or have me worried about share prices. They should have the use of it now, not have it all eventually spent on caring for me if I am not capable of taking care of myself, and no longer wish to drag myself from one day to the next.

This wouldn't be for everyone. I am fortunate to know there will always be a room for me.
 
Ah, I see I covered it at the time.


The pros and cons of investing in residential property
Many people feel that there are some great bargains to be had in the current (February 2014) property market. The rent is good. Investing in bricks and mortar is seen as safe. And some people feel comfortable with property as they think that they know the market.

Investing in residential property without the need to borrow is probably better than putting money on deposit. Over the longer term, property prices tend to rise.

But there are many reasons for you to avoid property
· You already have an exposure to property as you have €300,000 invested in your own home. If property prices do well, you will benefit.

· Property requires a lot of management – getting tenants, collecting the rent, maintaining the property, complying with the PRTB, etc.

· If you get bad tenants, you will have a nightmare. Most tenants are fine, but some wreck the place, pay no rent and refuse to leave. It will take at least a year to get them out and although they will owe you money, there is no realistic way of getting it from them.

· Property is risky. It’s not a one way upward only movement. It does fall in value, as many recent investors have found out.

· It’s not a very liquid investment. If you need money in a hurry, you won’t be able to sell your property and get your hands on the cash. With an investment in shares, you will be able to sell some or all of them and get cash within a week.
 
Gordon Gekko said:
The couple have €34,380 of annual income and they can earn up to €36,000 a year tax-free.
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I suspect the increases to the State contributory pension over the last few years would bring the total income of Brendan's hypothetical couple to within a whisker of the €36k tax-free threshold.

Would your recommendation change if dividends from the investment trust were taxed at 40%?
 
Brendan Burgess said:
Investing in residential property without the need to borrow is probably better than putting money on deposit. Over the longer term, property prices tend to rise.
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But you can invest in property through the stock market anyway by buying REITs , you get exposure to the property market ,you get dividends like rent. Yes there are disadvantages the main one being that the REIT company does the buying and selling and management so you are dependent on how good they are at their job, but guess what these guys are professionals where as you are an amateur. This is also an advantage in that they do all the dirty work of managing bad tenants and maintaining the properties so you wont be getting a call about a blocked toilet while you are on holidays in Spain. Another disadvantage is that it will follow the stock market volatility and less the property market in the short term so you have to be able to cope with that,
 
joe sod said:
Yes there are disadvantages the main one being that the REIT company does the buying and selling and management so you are dependent on how good they are at their job, but guess what these guys are professionals where as you are an amateur.
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There is also the fact that the REITs have lots of managers and employees who take their cut of the rent before it reaches the shareholders. If individual investors are prepared to do this themselves they cut out the middleman.

Who's to know how professional these guys/ladies are? Maybe an amateur could do a better job. An individual investor will certainly have more incentive to sort out bad tenants and maintain the property well. The 'professionals' are guaranteed to be more concerned with looking after themselves than their shareholders if history is anything to go by.

Diversification and a hands-off approach can obviously be advantages, if they're your priorities.
 
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Gordon Gekko said:
No, I think that life companies are more efficient at collecting withholding taxes than brokers, online or real. It obviously depends what someone is buying. Yes the actual fund/trust should be efficient but if someone is buying other things, there may be irrecoverable taxes.
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Ah, understood.

I don’t think any brokers offer a DWT reclaim service but I certainly take the point that most direct holders of shares leave money on the table by not pursuing reclaims.

Personally, I don’t think the savings products offered by life companies here represent good value. High and largely opaque charging structures, with the 1% levy and 41% exit tax. That really skews the risk/reward analysis, IMO.

Which is why I think State savings certificates would be the best home for the bulk of the €100k life savings of Brendan’s hypothetical couple.
 
Sarenco said:
Ah, understood.

I don’t think any brokers offer a DWT reclaim service but I certainly take the point that most direct holders of shares leave money on the table by not pursuing reclaims.

Personally, I don’t think the savings products offered by life companies here represent good value. High and largely opaque charging structures, with the 1% levy and 41% exit tax. That really skews the risk/reward analysis, IMO.

Which is why I think State savings certificates would be the best home for the bulk of the €100k life savings of Brendan’s hypothetical couple.
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Yes, they can be opaque alright but I tend to think that it’s the brokers who add the unnecessary level of cost.

I think if you can get 0.75% or less (which is doable), it’s not the worst route and the investment performance tends to be in line with what you’d want.

And for people who don’t already submit a tax return, it’s a big advantage (both cost and hassle wise) not to have to do it.

If an old aunt of mine told me she was paying 0.5-0.75% to invest in something like Zurich Life’s International Equity fund, I’d be happy enough.
 
Interesting thread - I have been thinking about taking the plunge into equity investment for a number of years but never pulled the trigger. I have 820k in state savings, 80k in current accounts (yes, I know) and am hoping to have approx 215k from the sale of a house in the next few months. I'm also a public servant - no doubt some will be appalled at how exposed I am to the solvency of the Irish State!

Up until recently, I would likely have considered investing the 215k in equities then dismissed the idea and put it into yet more state savings or prize bonds etc. However my situation has changed significantly in that I may now need to become a full time carer for a family member, my income would drop from 60k per year to 12k per year carer's benefit for 2 years and then 0 thereafter - so I need to look at ways of maximising return from my capital and/or generating a regular passive income.

The Zurich Life fund as mentioned by Gordon Gekko above sounds decent and avoiding hassle is also appealing. I've also been reading a lot about investment trusts in this forum. I may well start a new thread on this lest I start to drag this thread off topic. I am only aged 42 but perhaps my family circumstances, appetite for risk and decent savings are not dissimilar to those of many 65 year olds.
 
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