Looking for Advice on managing a windfall sum. Family of Four

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Luap76

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Hi All

I am hopefully looking for a steer from the AAM group regarding my finances.

I am 46 years old, married with two children aged 16 and 11.

I have worked in the same job for the past 26 years and I earn 67,500 gross per annum.

My wife does a four day week and she earns €40,000 per annum.

Our joint income into the house is €5467 per month. With myself earning €3041 (after paying into pension) and herself earning €2427

From the outset can I say that we have always worked as a partnership and there was never yours or mine, only ours. We trust each other financially but I always feel a burden that I do the best for both of us, hence the post in this forum.

I currently pay the avc max into my pension and my employer pays in 6%. I am in my company pension for 24 years now and the current value of it is €178000. According to pension projections I will have approx €550,000 in my pension pot at 60 (which is when company pension ends) if I keep paying my AVCs.

My wife doesn’t really believe in pensions and has worked in the public sector since 2006. As she does a four day week she won’t get a full pension on retirement but I don’t know exact details of what she will receive.

Our mortgage is approx €137000 and we have 16 years left to pay on it. We have a tracker mortgage and our current interest rate is 3.85% with repayments being €920 per month. Our house is currently valued at around €700,000.

Last year we came into a little windfall and as a result we have €200,000 sitting in our account. The big question I have is what is the best thing to do with it.

Do we buy a property ?
Do we pay off my mortgage ?
Do we just enjoy it knowing that when I reach 60 I will receive a lump sum of one a half times my salary. It’s only 13 years away.

If needs be we can also downsize when we hit 60 and buy a nice semi detached in a local estate and enjoy the remainder of the money.

For the record I don’t plan on retiring until somewhere between 65 and 68 years.



Any advice appreciated.
 
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As with many of these threads most will advise to pay your debt off first - you don't mention if theres any car loans etc but presuming you are Irish resident and domiciled you won't find a 100% safe investment that returns 3.85% after tax.

That then leaves you with 60k lump sum and an extra €920 per month to invest.

You may want to edit your post to add more detail - like what other Savings you have, any other loans etc if you want more advice about what to do with the remaining money.

Depending on how much accessible savings you have - chances are your best bet is to max out on pension contributions between the two of you first. You say your wife doesn't believe in pensions - that needs exploring/unpicking with her - it has many of the same investment options, tax relief on contributions and importantly on growth. Which investments/funds etc you choose within your pension is a bigger choice that requires the thought and advice - a lot more info is needed for anyone to advise you on that.

I personally wouldn't buy a property - the market isn't exactly at an all time low relative to earnings and you will incur a lot of hassle in renting and maintenance and do well to beat 3.85% yield after all costs and taxes.
 
Luap76 said:
My wife doesn’t believe in pensions and has worked in the public sector since 2006. As she does a four day week she won’t get a full pension on retirement but I don’t know exact details of what she will receive.
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As she joined the public sector in 2006 your wife's normal retirement age is 65.
Based on her current wte salary of €50,000 the maximum public service pension she could qualify for at that age is about €11,200 and a tax free lump sum of €75,000. But as she will not have full service she will qualify for neither amounts. I couldn't advise on your current lump sum investment but, based on your current comfortable overall financial position, it would certainly make sense for your wife to consider AVCs. Once she has a minimum of 20 years wte service she could use the fund to top up the tax free lump sum to the max, as well as enhance her retirement income. Also, an AVC fund would increase her flexibility if she at some stage considers either reducing her hours further or taking early retirement.
 
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Absolutely, pay off the mortgage.

At the moment you are paying 3.85% a year to put the money on deposit earning nothing.

After that you need to be flexible. You need to be able to access your money if you need it for education or whatever.

So invest what is left over in a portfolio of shares.

You will get a dividend income and if you need cash you can sell the shares quickly.

If you own an investment property and need money, you can't access it without selling the whole thing and that could take a long time.

The possible exception would be that if your kids go to college in a location far away from where you live, you might buy a property at that stage for them to live in rather than pay rent. But don't worry about that until the kids go to college.

Brendan
 
Sorry if I wasn’t clear but here is a more accurate assessment of where we are financially

Age:

46

Spouse’s/Partner's age:

44

Annual gross income from employment or profession:

E67,500

Annual gross income spouse:

E40,000

Type of employment:

Me - private sector employee

Wife - Public Sector

Expenditure pattern:

We are both generally spenders

Rough estimate of value of home

E700,000

Mortgage on home

E138,000- We got out a 35 year mortgage in 2004 and have 16 years left on it

Mortgage provider:

Ulster Bank but sold to AIB

Type of mortgage: Tracker, interest only, fixed rate

Tracker (0.85% above ECB)

Interest rate

3.85% I think or €908 per month

Other borrowings – car loans/personal loans etc

Personal Loan from Avant Money.

€383.87 over five years at 6.1%. Just after paying payment Installment 20 of 60.

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

Don’t have one

Savings and investments:
€200,000 sitting in our current account

€1800 in our credit union account.

Do you have a pension scheme?

I have paid 10% of my salary into a pension since 1999. The breakdown was I paid 4% and my employers paid 6%. The current value of the pension of €175,862. It is a unit linked dc pension from Aviva.

In the past few months I have increased the pension by maxing AVCs out and my employer still pays 6%. It means I pay close to zero of the 40% tax rate.

The projected value of my pension at retirement is €554,784 when I am 60 years old. It also says that the estimated retirement fund at retirement date is projected to provide you with an annual single life pension of:

  • €15,179.92 per annum increasing at 1%, or
  • €35,887.02 per annum with no increase in payment.
These figures are based on me retiring at 60 (which I don’t intend to )

My wife has a public sector pension. I notice from her pay slip that she pays €171 into her pension each month. I don’t know much about these pensions or the way they work (nor does my wife). Will she get a state pension alongside it ?

As I said she works a four day week and has been employed in the public service since 2006.
Do you own any investment or other property?

No.
Ages of children:

16 and 11

Life insurance:

Just the one that pays off the mortgage and also death in service for work where my wife gets three times my salary if I die before 60.

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

What is the best thing to do with the €200000 in our account ?

Any other advice.
 
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Pay off your mortgage.
Put 6 months expenses on account somewhere - emergency fund.
Use rest for college fund topped up monthly with some of previous mortgage cash.
Your wife should go find out about her pension, its important to know.
 
Luap76 said:
Will she get a state pension alongside it ?
Click to expand...
Yes, with the calculation based on her overall PRSI record.

Current "full state pension" is about €13,800. If she qualified for a full State Pension and a full PS pension (40 years full time service or equivalent part-time) she would get a combined total of €25,000, based on a whole-time equivalent salary of €50,000 (€40,000 for 0.8 of whole time). Also a tax-free lump sum of €75,000.
 
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In summary...

- clear the personal loan
- clear or, at least, significantly reduce the mortgage
- then assess what you need in terms of emergency fund and/or ongoing savings/investments (e.g. see @Brendan Burgess's suggestion) that generate income and/or capital growth
 
If you invest in shares, you do not need an emergency fund.
You can sell some of the shares in the event of an emergency.

Brendan
 
Why?

I've technically no emergency fund in place but as Brendan suggested I've a portfolio of shares (32 holding in an execution type account).. These are generating dividends (tax treatment is horrendous). Total of 10 are under water (25% average), 12 (35% +) and the remainder threading water.

If a need some emergency funds I would simply flog the one's threading water and funds are in my account in 3 days?
 
In brief the comment makes no attempt to assess an individuals Capacity for loss.

The U.K. regulator the FCA defines capacity for loss as;


” a client's ability to absorb falls in the value of their investment. If any loss of capital would have a detrimental effect on their standard of living, this should be taken into account when assessing the risk the client is able to take.”


There is no one size fits all solution when it comes to determining a suitable and appropriate portfolio which is consistent with a client’s risk profile and capacity for loss.

When constructing investment portfolios, it is essential that we understand exactly what we mean by “Investment Risk”.

Many, if not most, investors see risk though a myopic lens of short-term volatility, that is to say the rapid changes in price of say the Stock market compared to, say, a bank account.

Whilst it is true in the short-term that a bank account “seems” safer than an investment in the market, when looked at over the longer term, historically at least, the bank account has struggled to keep pace with inflation and savers have “lost out” to the additional wealth created by global capital markets.

Are you a saver or investor?​


The first step when thinking about any investment decision is to establish if you intend to consume all of the cash under consideration over a term of 5 years or less?

By consume we mean that they are saving up for a specific purchase which will use the cash such as the purchase of a car or a house. These are not investment decisions, and the correct advice is to save in a traditional bank account/State Savings. However, if you do not intend to consume all the capital in the short-term, then, you are, by definition an investor.

Investment objectives​


So, we do not say that our objective is say that are “saving for our retirement” we are “investing for our retirement” and short-term volatility should not be a relevant consideration for anyone with a sufficiently long-time horizon.


Time horizon​


Over the long term, the risk of investing in capital markets is reduced and returns will move toward long-term historical averages. The longer the time horizon, the greater the capacity for risk as the short-term volatility of the markets loses its significance.

1680365663693.png

The blue line shows the average expected return, in this case around 3%pa over inflation. The orange and red lines indicated the range of returns around this average with a 50% and 95% probability respectively over 1 to 10 years.

The “slice through” graph illustrates the range of expected returns over a one-year time horizon.


We can see that although we expect the return to average about 5%pa there is considerable short-term uncertainty as the returns are expected to lie between -12% and plus 23% in any given year.



Whereas over 10 years the expected range of returns for the same portfolio looks like this

1680365694645.png


The distribution of expected returns is now much closer to the annual average return ranging from around -2.5% to +10%pa on a rolling 10-year investment term.


Net Worth​

​
Example - Differences in capacity to tolerate risk.

Let's consider the fate of three investors who each see a 50% drop in the value of their portfolios.
C. Montgomery Burns - Mr. Burns is over 100 years old and has made billions as a captain of industry. According to Forbes Magazine his estimated net worth is $16.8 billion.
Homer Simpson - Homer is in his late-50s and works as a safety inspector in Mr. Burns' nuclear plant. He has a family to support and is slowly nearing retirement. We'll be generous and give him a retirement portfolio of $100,000.
Bart Simpson - At age 10, Bart is just beginning his investment career. His current net worth is $500.
A loss of 50% would drop Mr. Burns down to a paltry $8.4 billion. While Burns would no doubt be incensed at the loss, $8.4 billion should still be sufficient for his needs given his age. Bart, too, has the capacity to absorb a financial hit of 50%. He has many years to continue saving and investing before he needs to think about retirement.

Homer, however, does not have the financial capacity to tolerate risk, even though he might be more than willing to gamble it all away on some ill-conceived risky investment. He has a family to support and less than a decade left until retirement. A 50% drop in the value of his portfolio would be potentially crippling.



Those with high income and high wealth can make higher risk investments because they have money coming in regardless of the market conditions.

A higher net worth allows an investor to be able to bear more risk in their portfolio. However, this does not necessarily mean that they need to take more risk. For many High-Net-Worth investors, wealth preservation is more important than increasing their wealth.

Risk tolerance or willingness to take risk​



When making investment decisions, clients will be asked to complete a risk profile questionnaire. You may have considered your tolerance to risk in the past, and may have thought of this in terms of a scale of 1 to 10. Many people would say they fall somewhere between 3 and 5, but what does that actually mean and how can this information be used effectively when constructing an investment portfolio?

On average we are all average so without thinking about it, most people should be in the middle of a risk tolerance distribution. Even at that, Risk is subjective, and an individual’s attitude to risk can vary depending on how well their investments are performing. When investments are performing well there is a tendency to downplay the risks and when they are performing poorly, to assume them to be much greater than they actually are.

We believe that picking an investment based on the result of a risk profile questionnaire is a flawed approach and is the financial services equivalent of “painting by numbers”

For most investors, the importance of risk is an understanding of how much they are prepared to lose. In reality, investors need to distinguish between short-term volatility and the risk of a permanent loss of capital.

For example, a saver with more than €100,000 in an Irish Bank has a risk of a permanent loss of capital of everything above the bank guarantee. What’s more, this is an uncompensated risk. They are not being paid a premium interest rate to reflect the small but highly damaging possibility of the potential for a permanent capital loss.

Likewise, an employee with a position in their employer’s Stock is also taking a high risk of a permanent loss of capital and this would be a catastrophe as they would also most likely lose their job at the same time as their investment. Enron was a classic example of this.

So, when considering risk, we need to consider both probability (how likely something is to happen) AND impact (what is the most likely result of the event)

Bank account with more than €100kGlobally diversified stock portfolio
Probability of lossVery small2.5% chance of a 40% decline occurring in any one year
Impact of lossCatastrophic – loss is uninsured and uncompensatedTemporary. Markets often recover these losses over subsequent years


We can see that the probability of a loss in the stock market is higher, but the impact is lower


Marc Westlake CFP, TEP, APFS, QFA, EFP
Chartered, Certified and European Financial Planner
Registered Trust & Estate Practitioner
Everlake

​

 
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Hi Marc

I said "If you invest in shares, you don't need an emergency fund".

It's not clear to me what you are disagreeing with?

Are you disagreeing with investing in shares?
Are you disagreeing with my statement that someone who has invested in shares does not need an emergency fund.

Brendan
 
Brendan Burgess said:
Hi Marc

I said "If you invest in shares, you don't need an emergency fund".

It's not clear to me what you are disagreeing with?

Are you disagreeing with investing in shares?
Are you disagreeing with my statement that someone who has invested in shares does not need an emergency fund.

Brendan
Click to expand...
It’s the blanket statement that if you invest in shares you don’t need an emergency fund.

If I have 20m in shares I’ll earn about €400 grand a year in dividends. Arguably I don’t NEED 10 grand in the bank just in case.

Whereas if I ONLY have €100k and I invest in shares, 2.5% of the time I expect to lose about 40% in year one.

So I have to sit it out for years.

If I don’t have an emergency fund what am I supposed to do? Borrow money?

That’s why some people need an emergency fund. They lack the capacity for loss. See my post
 
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Luap76 said:
What is the best thing to do with the €200000 in our account ?
Click to expand...
Will your children live at home during third level?

If not it could make sense to purchase an apartment near where they are likely to go to third level.

A lot of boxes would need to be ticked for this to make sense and the advice above (pay off debt, wife to make AVCs) should be the default.
 
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