Gordon Gekko
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But you just cut and pasted some boiler-plate stuff from one of your reports…
Looking for Advice on managing a windfall sum. Family of Four
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Brendan Burgess
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OK, so we seem to be agreed that he should pay off the mortgage.
That will leave him with about €60,000 and saving a further €1,000 a month.
Are we agreed that he should invest the bulk of this in equities?
How much of an emergency fund would you recommend that he keeps in cash?
Let's assume you think he should keep €20k in cash.
I say that he should put it in equities.
Disaster hits. An emergency arises and he needs €20k just as the one in forty year event of a 40% fall in the stockmarket.
So he has to sell off €30k of shares to raise the €20k. He will lose €12k.
Can he handle this loss? Absolutely.
Is the risk of this loss of €12k worth the potential gain? Absolutely.
So my point stands. If you have invested in shares, you do not need an emergency fund.
Brendan
Brendan Burgess
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Just to be absolutely clear. This is for an emergency fund. For some unforeseen large expenditure.
If he has €60k in shares and plans to spend €20k in one year on a new car, he should probably keep that in cash.
Brendan
If he has €60k in shares and plans to spend €20k in one year on a new car, he should probably keep that in cash.
Brendan
Gordon Gekko
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People often forget that their credit card limits form part of their emergency fund also.
I start with 100k and unit price of 1 I purchase 100,000 units.
2008 comes along and the market drops 40% (you are advocating individual stocks which can, and do go to zero which would be catastrophic but let's assume that we are at least sensible enough to buy a globally diversified index and the loss is "only" 40%)
So now my unit price is 0.6
I need to raise €20,000 in your example. So I need to sell €20,000/0.6 = 33,333.33 units
So my remaining investment is 66,666.67 units valued at 0.60 each. €40,000
To get back to par and my original €100,000 what return do I need. In your analysis I've only lost €12k so what's the problem?
In reality I need a 250% return just to get back to where I started. The US Market has averaged around 10%pa for the last 8 decades so that will only take me about 25 years to achieve.
This is called sequence of return risk. Its a real thing and Its why I repeat.
@Brendan Burgess advice is really really terrible in this instance
2008 comes along and the market drops 40% (you are advocating individual stocks which can, and do go to zero which would be catastrophic but let's assume that we are at least sensible enough to buy a globally diversified index and the loss is "only" 40%)
So now my unit price is 0.6
I need to raise €20,000 in your example. So I need to sell €20,000/0.6 = 33,333.33 units
So my remaining investment is 66,666.67 units valued at 0.60 each. €40,000
To get back to par and my original €100,000 what return do I need. In your analysis I've only lost €12k so what's the problem?
In reality I need a 250% return just to get back to where I started. The US Market has averaged around 10%pa for the last 8 decades so that will only take me about 25 years to achieve.
This is called sequence of return risk. Its a real thing and Its why I repeat.
@Brendan Burgess advice is really really terrible in this instance
Marc, while I agree with the overall premise of having an emergency fund in cash, or near cash, I think some of the maths might be off?
Why do you need to get back to 100k? You only need to get back to 80k to be in the same position as if you had kept 20k in cash as an emergency fund?
So you only need 100% return on your remaining 40k.
(By the way, a 250% return on 40k would leave you with 140k, unless your original 40k disappears completely. Or maybe my maths is wrong?).
Gordon Gekko
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Your maths is wrong…
But it's good to get a professional opinion all the same...
Anyhoo, getting back to the OP…
One point that I think may have been overlooked is that the OP only recently increased his pension contributions from 4% to 25% of his salary.
Once his debts are cleared (which I agree is certainly the right approach), I suspect the remaining €60k will find its way into his pension fund over the next couple of years, which I assume is largely invested in equities.
He could also consider making an additional lump sum contribution for 2022.
One point that I think may have been overlooked is that the OP only recently increased his pension contributions from 4% to 25% of his salary.
Once his debts are cleared (which I agree is certainly the right approach), I suspect the remaining €60k will find its way into his pension fund over the next couple of years, which I assume is largely invested in equities.
He could also consider making an additional lump sum contribution for 2022.
Brendan Burgess
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Hi Marc
Sometimes people try to prove things with maths and it's totally inappropriate. You are trying to figure out the return needed so that if he needs the money in a hurry and the investment falls 40% in the first year. This is a pointless exercise. But applying some complex maths to it gives it an air of credibility and authority which it does not deserve.
He has €750k of directly owned assets and €178k in a pension.
If he has to cash €30k of shares in a hurry, he will lose €12k. This will not have any material impact on his overall wealth.
To get back to your original post. Can he handle the risk? Yes, of course, he can.
Is it worth taking the risk of investing in equities for the potential return? Absolutely.
Brendan
Sometimes people try to prove things with maths and it's totally inappropriate. You are trying to figure out the return needed so that if he needs the money in a hurry and the investment falls 40% in the first year. This is a pointless exercise. But applying some complex maths to it gives it an air of credibility and authority which it does not deserve.
He has €750k of directly owned assets and €178k in a pension.
If he has to cash €30k of shares in a hurry, he will lose €12k. This will not have any material impact on his overall wealth.
To get back to your original post. Can he handle the risk? Yes, of course, he can.
Is it worth taking the risk of investing in equities for the potential return? Absolutely.
Brendan
Brendan Burgess
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Hi Sarenco
We have cleared the mortgage.
I would be tempted to keep the €60k outside the pension fund to fund education expenses and this emergency.
He will be saving €1k a month, so maybe build it up to about €100k and then start maxing the pension.
Maybe €100k is too much. But he certainly needs an education fund of some sort.
Brendan
Hi Brendan
I guess the point I was focused on is that the OP has very recently increased his pension contributions from €2,700pa to €16,875pa.
Given the “use it or lose it” nature of the tax relief on pension contributions, I think this strategy makes sense.
However, to maintain this level of contributions, particularly with impending eduction costs, I suspect the OP is going to “run down” the €60k over a relatively short number of years.
In other words, the OP would effectively “equitise” the €60k (by continuing to maximise his pension contributions) fairly quickly in any event.
So, I don’t think there is any need to introduce the complexity of constructing a taxable stock portfolio.
Really, I’m just advocating for a “keep it simple” approach - pay off all debts and maximise pension contributions.
Education costs are just an expense like any other - I’m not a fan of constructing buckets or funds for any particular expense.
I guess the point I was focused on is that the OP has very recently increased his pension contributions from €2,700pa to €16,875pa.
Given the “use it or lose it” nature of the tax relief on pension contributions, I think this strategy makes sense.
However, to maintain this level of contributions, particularly with impending eduction costs, I suspect the OP is going to “run down” the €60k over a relatively short number of years.
In other words, the OP would effectively “equitise” the €60k (by continuing to maximise his pension contributions) fairly quickly in any event.
So, I don’t think there is any need to introduce the complexity of constructing a taxable stock portfolio.
Really, I’m just advocating for a “keep it simple” approach - pay off all debts and maximise pension contributions.
Education costs are just an expense like any other - I’m not a fan of constructing buckets or funds for any particular expense.
Brendan Burgess
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Now, I am confused about what you are proposing.
He is already contributing the maximum 25% to his pension and meeting mortgage repayments of €1,000 a year.
So he can't contribute any more anyway and has money to spare as he won't have a mortgage.
So he should just invest the €60k in shares.
His wife seems to be putting in about €5k. So she might as well max that by another €5k.
Then when it comes to education expenses, if they have run down their investments, they can take a pension contribution holiday.
Brendan
He is already contributing the maximum 25% to his pension and meeting mortgage repayments of €1,000 a year.
So he can't contribute any more anyway and has money to spare as he won't have a mortgage.
So he should just invest the €60k in shares.
His wife seems to be putting in about €5k. So she might as well max that by another €5k.
Then when it comes to education expenses, if they have run down their investments, they can take a pension contribution holiday.
Brendan
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His wife should contribute to her own AVC and avail of tax relief. She will be short a full PS pension but she has the opportunity to go beyond this anyway. She should have these pension benefits in her own name. And it may be better for their joint income tax situation in retirement.
Pay off his debts and keep maximising his pension contributions.
Pretty simple really.
He could also make an additional contribution of €14k for 2022 but that’s a minor issue.
I would just keep the remaining balance in cash for the time being - it will gradually transition into the pension if he keeps maximising his contributions, given the other demands on his cash flow.
There’s simply no good reason to introduce complexity and risk into the situation by constructing a taxable share portfolio.
Keep it simple!
Brendan Burgess
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But that is my point. He is already maximising them and so probably won't need to touch the €60k to do so?
So it really is a question of how to invest the €60k that he won't need for a few years.
And the best way to do that is to invest in equities.
Brendan
sonandheir
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A lot of your thinking is thinking for the future:
-max contributions for pension
-pay off mortgage
-find best return on 200k
None of your plans or the suggestions from this forum appreciate the maxim 'carpe diem'.
My suggestion would be take a portion of this windfall and:
-take as much unpaid parental leave you can, your youngest is 11, you must use it by their 12th birthday. You'll be working for maybe another 20 years and you can never get back this time with them.
-go on a trip of a lifetime with your family.
-invest in yourself: your health, your nutrition, your interests.
Of the 200k the above suggestions would not take up a large chunk. But I would argue it would have the biggest return on investment for you and your family.
-max contributions for pension
-pay off mortgage
-find best return on 200k
None of your plans or the suggestions from this forum appreciate the maxim 'carpe diem'.
My suggestion would be take a portion of this windfall and:
-take as much unpaid parental leave you can, your youngest is 11, you must use it by their 12th birthday. You'll be working for maybe another 20 years and you can never get back this time with them.
-go on a trip of a lifetime with your family.
-invest in yourself: your health, your nutrition, your interests.
Of the 200k the above suggestions would not take up a large chunk. But I would argue it would have the biggest return on investment for you and your family.
Gordon Gekko
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I would clear the mortgage, make a top-up AVC for last year, explore the wife’s potential for purchase of notional service etc and/or AVCs, I’d keep some cash for an emergency (I keep 6 months’ expenses minus our credit card limits), and I’d start building a portfolio of directly held equities with any surplus.
By eliminating the mortgage, the OP’s cashflow will increase by €1,000 anyway, so that can probably go into the personal share account anyway.
I also agree with the idea of doing a special trip…Disney/Universal or the like perhaps?
By eliminating the mortgage, the OP’s cashflow will increase by €1,000 anyway, so that can probably go into the personal share account anyway.
I also agree with the idea of doing a special trip…Disney/Universal or the like perhaps?
Maybe you’re right but that’s not how I’m reading the figures.
The OP doesn’t seem to have built up any meaningful level of (after-tax) savings when he was only contributing 4% of salary (the €200k is described as a “windfall”).
Jumping to a 25% contribution, coupled with additional expenditure as the kids near college age, is going to have an impact.
IMO maintaining the ability to keep maxing pension contributions should be the priority.
In case it's of any use, you could use some of the lump sum to top-up your pension to the max age related tax relief limit for 2022, and get the relevant tax refund, if you do this (i.e the pension top-up payment and the tax reclaim) before October 31st 2023.