# Financial Review



## Flybytheseat (7 Jan 2017)

Hi,
I would appreciate your views on my investment choices, financial status and general attitude to personal finance.

My specific questions are as follows: 
1. Am I being too conservative in my finances ?
2. Am I saving too great a proportion of my salary in my pension ?  
3. Are my investments & pension weighted too heavily in equities ?

I've always had an aversion to debt of any kind so paid off my mortgage after a couple of years, never finance cars, and never take any other loans out. I am not inclined to invest in Irish property (I see another bubble underway and owning my principal private residence is enough exposure for me) though my current house (120sqm 4 bed Semi D) is a bit cramped for a family of 5 with two teenagers & usual array of pets.  I also feel, like very many of us PAYE employees, that I pay way too much income tax and that tax on Irish savings & investments is a killer so most of my savings go into my DC pension pot and tax advantaged employee share scheme.


Details:

Age: *48*
Spouse’s/Partner's age: *47*

Annual gross income from employment or profession: *130k (plus bonus 20-30k & Health Insurance)*
Annual gross income of spouse: *4k*

Monthly take-home pay  *5.3k*

Monthly expenses: circa 5k
School Fees: 1.1K
Cars (Fuel, Insurance, Tax, Maintenance) : 630
Groceries, lunches etc.: 1.3K
Utilities,TV & Phones: 330
House maintenance & DIY: 130
Sports, Clubs, Gyms, GAA: 220
Doctor, Dentist, Pharmacy: 160
Holidays: 450
Clothes, shoes:240
Other: 400


Type of employment: *private sector*

In general are you:
(a) spending more than you earn, or BREAKING EVEN
(b) saving?

*Breaking even (apart from pension savings)*


Rough estimate of value of home: *560-600k*
Amount outstanding on your mortgage: *0*

Other borrowings – car loans/personal loans etc.: *0
*
Do you pay off your full credit card balance each month? *Yes
*
Savings and investments: *Global equities 100k, Employee Share scheme 44k, Cash/Precious Metals/Bonds 43k
*
Do you have a pension scheme? *DC schemes (wife 20k no longer contributing, mine maxing both AVCs & employer contributions - current value 715k all in global equities (investing about an additional 40K pa), old DB schemes equivalent value of 190K. *

Do you own any investment or other property?* No*

Ages of children: *15, 13, 11*

Life insurance: *policy that pays 4xSalary on death, with serious illness cover*


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## Steven Barrett (7 Jan 2017)

You know what? You're doing pretty damn well. 

I've never heard anyone give out about not having enough debt, so there's no harm in having an aversion to debt. It free up a lot of disposable income. By loading into your pension now, you are getting a lot of the heavy lifting out of the way too, so you will be in a position in later life of taking things a bit easier or retiring early, at least you will have a choice at that point. 

Double check the serious illness cover in work. This benefit attracts a benefit in kind on payout and it is very unusual for an employer to provide it. It may be income protection cover, which is something that you need as the family's lifestyle is dependent on your ability to earn. You are probably alright on life cover too. If you died, your wife would get €1,000 a month from the State and with a prudent investment strategy, the lump sum payout should get her to age 60, when she can mature the pensions. 

You are also at an expensive time in life regarding your kids, so I wouldn't be worried about spending what you bring home each month. You have no debt and a great pension. 

regarding investment strategy, you still have a while to go before you can draw down your pension. There will be at least 1 crash before then. If you are comfortable with seeing that €715k falling, knowing it will recover, then leave it as is.

Steven 
www.bluewaterfp.ie


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## Brendan Burgess (7 Jan 2017)

Flybytheseat said:


> my current house (120sqm 4 bed Semi D) is a bit cramped for a family of 5 with two teenagers & usual array of pets.



You are well off financially, so it seems to me that you can afford to move to a larger house, if you need to do so.  So you could probably move to a house worth €800k but then all your savings would be gone. 

I presume your net pay is after AVC contributions. If you do trade up, then you should stop making AVCs and build up some savings again. 

As Steven pointed out, you are going through an expensive time, but it will be expensive for you for another 10 years, so if you don't mind being "a bit cramped" stay where you are and enjoy the fact that you can afford anything you want in terms of education for your kids, etc. 

You can easily handle the risk of a medium term crash in the value of equities, so I agree with your full exposure to equities. 

If you do think of trading up, then you should reduce your exposure to equities. 

Brendan


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## Gordon Gekko (7 Jan 2017)

Your monthly net pay looks a little light for a salary of €130k. Are you sure that's right?

Plus you've €800 to €1,200 extra a month in the form of your bonus.


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## gnf_ireland (7 Jan 2017)

Brendan Burgess said:


> As Steven pointed out, you are going through an expensive time, but it will be expensive for you for another 10 years, so if you don't mind being "a bit cramped" stay where you are and enjoy the fact that you can afford anything you want in terms of education for your kids, etc.



Agree here. You appear to be maxing your pension contribution to reduce the level of tax you are paying. Nothing wrong with that per say, but you may be also 'deferring' your quality of life in the immediate term. 

The big issue may be the house - if it is cramped now, what will it be like in 5 years when two are in college? Will they be living with you then, for example? I think you should give serious consideration to the house situation now. You can always downsize again when you are 70 if you wish to have something smaller. That said, my mother always says the house can never be too big when the grandchildren descend on them !



Flybytheseat said:


> Employee Share scheme 44k,


Personally I am not really a fan of these schemes - maybe because I know so many who got burned with them in the dot.com era. 
If these shares are possible to sell, I would do so immediately and invest them elsewhere.
If the company is doing well, you salary and bonus will no doubt reflect this. If the company is going poorly, you have your income attached to them. Just something worth considering !


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## Flybytheseat (8 Jan 2017)

Thanks for the useful insights; you've given me a lot of good pointers and things to consider.



SBarrett said:


> Double check the serious illness cover in work. This benefit attracts a benefit in kind on payout and it is very unusual for an employer to provide it. It may be income protection cover, which is something that you need as the family's lifestyle is dependent on your ability to earn. You are probably alright on life cover too. If you died, your wife would get €1,000 a month from the State and with a prudent investment strategy, the lump sum payout should get her to age 60, when she can mature the pensions.



Thanks for pointing this out Steven. I don't have much details on the serious illness cover - seems to be a form of disability insurance / income continuance that would kick in after 6 months if I was unable to work and pay up to 60% of salary. I didn't know that my wife would get so much from the State so that is reassuring.



SBarrett said:


> regarding investment strategy, you still have a while to go before you can draw down your pension. There will be at least 1 crash before then. If you are comfortable with seeing that €715k falling, knowing it will recover, then leave it as is.



I've been through a number of crashes so I'm not overly concerned when I see large drops in the fund value as I still have a good while to go before I retire, besides when a crash occurs my future contributions buy more fund units on the cheap. I'm assuming nowadays with the rise in popularity of ARFs that if a crash occurs when close to retirement I can just wait it out in an ARF rather than being forced to buy an annuity when the fund is down.



Brendan Burgess said:


> As Steven pointed out, you are going through an expensive time, but it will be expensive for you for another 10 years, so if you don't mind being "a bit cramped" stay where you are and enjoy the fact that you can afford anything you want in terms of education for your kids, etc.



I find it very satisfying knowing that I've enough savings & investments so see out my kids educations through to 3rd level. If I were to move house, I'd probably keep 70% of my savings as an education fund so I'd be taking a mortgage out for the balance of the cost of trading up (assuming that I can get a mortgage at my age). I'd be forced to cut my AVCs as you suggest to pay the mortgage. So I'm about 65/35 at the moment on whether to stay or trade up.



gnf_ireland said:


> Personally I am not really a fan of these schemes - maybe because I know so many who got burned with them in the dot c era.
> If these shares are possible to sell, I would do so immediately and invest them elsewhere.
> If the company is doing well, you salary and bonus will no doubt reflect this. If the company is going poorly, you have your income attached to them. Just something worth considering !



I agree so I generally sell the shares after the 3 years are up and move the money into a low management charge passive global equities fund. Some of that money though is share options which I plan to let run until close to expiration.


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## gnf_ireland (8 Jan 2017)

Flybytheseat said:


> seems to be a form of disability insurance / income continuance that would kick in after 6 months if I was unable to work and pay up to 60% of salary


This is income protection insurance rather than serious illness. Serious Illness is where a lump sum is paid out if you are diagnosed with a particular set of illnesses. Steven is right here, as this is subject to BIK and therefore not commonly part of a company offering. Income protection is not subject to BIK



Flybytheseat said:


> I'm assuming nowadays with the rise in popularity of ARFs that if a crash occurs when close to retirement I can just wait it out in an ARF rather than being forced to buy an annuity when the fund is down.


Absolutely. You will probabaly have to purchase a small annuity, but with the fund you have it is likely you will always maintain some sort of ARF. I would expect a level of this to be included in your estate since its unlikely you will spend more when you retire than now.
You just need to be careful of the 2m cap on the size of pensions. Do you know when you are likely to hit this?




Flybytheseat said:


> Some of that money though is share options which I plan to let run until close to expiration.


I know a guy in the dot.com days who sold 'futures' on his company share options on their vesting date to realise their worth immediately (he needed the money for some reason and his brother worked with one of the major investment companies and facilitated it). The shares had split twice in the previous 12 months and were trading at $47.50 that day. The options were vesting in 1/2/3 years time from the date in question. He got between €55 and €60 each depending on the vesting date.

By the time the first vesting date came, the shares were worth €25, a year later $5 and the third year $1. He was the only person in the company to make money from that round of options issued and was purely related to the fact he needed the money urgently at the time. For everyone else, the options were worthless.

It is worth considering as a 'complex' option though, although the downside is if you leave the company you could be caught 'on the hook' so to speak.


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## Steven Barrett (9 Jan 2017)

gnf_ireland said:


> Personally I am not really a fan of these schemes - maybe because I know so many who got burned with them in the dot.com era.
> If these shares are possible to sell, I would do so immediately and invest them elsewhere.
> If the company is doing well, you salary and bonus will no doubt reflect this. If the company is going poorly, you have your income attached to them. Just something worth considering !



Agree 100%. It's madness to have your salary and savings all linked to one company. Look at Lehman Brothers and Bear Sterns. It was seen as a sign of loyalty to buy company stock with your bonuses. Where did that get them?


Steven 
www.bluewaterfp.ie


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## gnf_ireland (9 Jan 2017)

SBarrett said:


> It was seen as a sign of loyalty to buy company stock with your bonuses.



I remember seeing ENRON (the play) a while back and it was the same theme. Buying stock in the company means loyalty... Just something to keep in mind !


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## Flybytheseat (9 Jan 2017)

I still feel that it is prudent to invest in tax advantaged employee share schemes. I can invest up to 12700 pa which is free from income tax at 40% rate as long as I hold the shares for three years. That equates to circa 13% pa return even without any rise in share price or capital gain. I also receive dividends during that period. To me it's a no brainer as long as the company is blue chip and that I sell once the 3 years are up and diversify elsewhere.


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## gnf_ireland (9 Jan 2017)

Flybytheseat said:


> I still feel that it is prudent to invest in tax advantaged employee share schemes. I can invest up to 12700 pa which is free from income tax at 40% rate as long as I hold the shares for three years. That equates to circa 13% pa return even without any rise in share price or capital gain.


Fair enough, and that is your choice. Central to this comment is the classification of blue chip. What are the chances of the share price reducing?  How often in the last number of years has the value of the shares being worth less than when it comes to selling them. Most blue chips move with the market, so as long as you have considered that in your diversified portfolio, then I am sure it is fine.

I would not be holding them any longer than I had to though.

The thing about personal finances is only you truly knows what is best, as only you have the full picture available to you


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## trasneoir (10 Jan 2017)

gnf_ireland said:


> The big issue may be the house - if it is cramped now, what will it be like in 5 years when two are in college


In terms of opportunity costs, I'm not sure "more house" is a great buy. The same 200k you'd spend on a bigger house would instead rent a lot of student accomodation when it's wanted - let the kids spread their wings after leaving cert.

For the next few years, can you trade some income for free time? During the short time that family holidays are still cool, spend a summer cycling around Italy and a "winter" on a boat in the Maldives. Ye are 5/10 years away from total financial freedom, seems like a great time to figure out what ye'd like to do with it.


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## trasneoir (10 Jan 2017)

Flybytheseat said:


> I still feel that it is prudent to invest in tax advantaged employee share schemes. I can invest up to 12700 pa which is free from income tax at 40% rate as long as I hold the shares for three years. That equates to circa 13% pa return even without any rise in share price or capital gain. I also receive dividends during that period. To me it's a no brainer as long as the company is blue chip and that I sell once the 3 years are up and diversify elsewhere.


Agreed. Given the tax incentive, I'd buy as much as I was allowed, and sell as fast as I was allowed.

Time to start buying bonds. When ye are ready to quit (paid) work, I don't want a down market pressuring you to stay (or sell equities at a discount).


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## Steven Barrett (10 Jan 2017)

Flybytheseat said:


> I still feel that it is prudent to invest in tax advantaged employee share schemes. I can invest up to 12700 pa which is free from income tax at 40% rate as long as I hold the shares for three years. That equates to circa 13% pa return even without any rise in share price or capital gain. I also receive dividends during that period. To me it's a no brainer as long as the company is blue chip and that I sell once the 3 years are up and diversify elsewhere.



It is a great tax saving scheme but when your 3 years are up, sell and diversify into another industry. 



Steven 
www.bluewaterfp.ie


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## gnf_ireland (10 Jan 2017)

trasneoir said:


> In terms of opportunity costs, I'm not sure "more house" is a great buy. The same 200k you'd spend on a bigger house would instead rent a lot of student accommodation when it's wanted - let the kids spread their wings after leaving cert.



Interesting point - 200k @ 3.3% would be 6,600 in interest per year. I had a quick look at the cost of UCD student accommodation and you that is roughly the same rate as a place is some of the college residences. I am sure there are cheaper options available off-campus. It would definitely be worth exploring.




trasneoir said:


> For the next few years, can you trade some income for free time? During the short time that family holidays are still cool, spend a summer cycling around Italy and a "winter" on a boat in the Maldives. Ye are 5/10 years away from total financial freedom, seems like a great time to figure out what ye'd like to do with it.



Absolutely 100% support this view if you are in a position to do it !


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