€220k mortgage ; €157k in investments; maxing AVCs
- Thread starter Ndiddy
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......I remember that thread
And I have a double
On a more serious note, the math here is flat wrong......I shall leave it as a puzzle/challenge for others to work out. I want to see who has the mathematical gene!! Happy to líon na bearnaí myself, if required!
Well, in this case it obviously doesn't matter whether you use a real or nominal rate of return because you are comparing the rate of return on two alternative investments across exactly the same time horizon.
More than happy to have my maths corrected but I don't have the energy to re-do the calculations at this hour.
D
Dan Murray
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1. I was just kidding....
2. Username123 made a very valid point that my initial post risked bringing the thread off in a tangent. So just to cut the Maths question to enable the debate get back on track, your post implied that:
€1,000 * 1.0175^29 * 0.75 is greater than €800 * 1.035^29
which when simplified suggests
€750 * 1.6538 is greater than €800 * 2.7118
which simply ain't true....
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Gordon Gekko
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Correct, but my reference to USC/PRSI was in the context of a 20% taxpayer making AVCs. No relief from USC/PRSI on the way in, but USC/PRSI payable on the way out.
Ah sorry, I didn't mean to imply that and apologise if my post read that way.
Ah understood. Yes, USC/PRSI payable on the way out certainly reduces the attractiveness of an AVC somewhat but an income of less than €13,000 is now exempt from USC and would only amount to €280 on an income of €18,000. There is obviously no PRSI for over 65s.
Also wondering why OP opted for 30 year term? If brought back to 20 years then repayments are 1250 per month, which is within their remit since paying 1000 at moment as well as 400 into savings. Wouldn't a shorter term reduce overall interest paid quite a bit, since 10 years less?
Brendan Burgess
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This has got very complicated and there are two separate issues here.
1) Should the OP use his lump sum to pay off his mortgage. I think that the answer here is absolutely clear and agreed by most people. He should. It's set out here:
Should I overpay my SVR mortgage?
2) Should someone make pension contributions if they are getting only 20% tax relief?
This is discussed at length here: Pay down your SVR mortgage before starting a pension, but don't leave it too late
It seems to me that someone should not borrow at 3.5% to tie their money up in a pension for 29 years. If you make a lot of assumptions, and these assumptions turn out to be true over 29 years, it may work out right. But there are many changes which might happen over 29 years, and you will be kicking yourself that you spent money like this:
1) You earn income which puts you in the top tax rate, but you no longer have the spare income to put into your pension.
2) The tax relief changes so that everyone gets tax relief on pension contributions at 30%.
3) In 29 years, all pensions might be means tested. If you have a big private pension, then you might get no state pension.
4) Interest rates rise significantly - you will wish you had a lower mortgage
5) The lower your mortgage, the lower your LTV, the lower the interest rate you will pay. Although, if you are below 50% LTV, you probably won't get it any cheaper.
6) You might want to trade up within the next 20 years, and money tied up in a pension will be of no use to you.
Of course, against that, circumstances could change in the opposite direction and you may no longer be able to get tax relief at 20% on contributions e.g. if you quit paid work to mind your children or if you lose your job.
But,on balance, it's just wrong to borrow money at 3.5% to tie up your money for 29 years for tax relief at 20%. It's probably ok to do it at 40%. But with 29 years to go, I would not be convinced.
Brendan
1) Should the OP use his lump sum to pay off his mortgage. I think that the answer here is absolutely clear and agreed by most people. He should. It's set out here:
Should I overpay my SVR mortgage?
2) Should someone make pension contributions if they are getting only 20% tax relief?
This is discussed at length here: Pay down your SVR mortgage before starting a pension, but don't leave it too late
It seems to me that someone should not borrow at 3.5% to tie their money up in a pension for 29 years. If you make a lot of assumptions, and these assumptions turn out to be true over 29 years, it may work out right. But there are many changes which might happen over 29 years, and you will be kicking yourself that you spent money like this:
1) You earn income which puts you in the top tax rate, but you no longer have the spare income to put into your pension.
2) The tax relief changes so that everyone gets tax relief on pension contributions at 30%.
3) In 29 years, all pensions might be means tested. If you have a big private pension, then you might get no state pension.
4) Interest rates rise significantly - you will wish you had a lower mortgage
5) The lower your mortgage, the lower your LTV, the lower the interest rate you will pay. Although, if you are below 50% LTV, you probably won't get it any cheaper.
6) You might want to trade up within the next 20 years, and money tied up in a pension will be of no use to you.
Of course, against that, circumstances could change in the opposite direction and you may no longer be able to get tax relief at 20% on contributions e.g. if you quit paid work to mind your children or if you lose your job.
But,on balance, it's just wrong to borrow money at 3.5% to tie up your money for 29 years for tax relief at 20%. It's probably ok to do it at 40%. But with 29 years to go, I would not be convinced.
Brendan
Brendan Burgess
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This is not a valid argument. The overall interest is a meaningless term, although most people continue to use it.
The decision must be made on an annual basis. Is the rate of return on the investment higher than the current cost of borrowing money.
If he keeps to a 30 year term, he will pay more interest. But if he invests the money and earns a net return higher than the mortgage rate, then his total return will exceed the additional interest paid.
Brendan
That's a good summary of the two separate issues under discussion Brendan.
Agreed (although I would suggest holding back a liquid cash reserve equivalent to 6 months' household expenses to address emergencies).
It seems to me that the only significant assumptions you need to make are that (1) the annualised rate of return on the pension fund will at least match the interest rate on the mortgage over the 29 years; and (2) that the tax treatment of pensions and mortgage interest payments will not change over that time period to the point that it materially impacts this analysis.
I would have thought that it is much more likely than not that the rate of return on the pension fund will materially exceed the mortgage rate over that time frame, particularly when you bear in mind that the pension fund will have a 20% "head start" due to the tax relief on contributions.
It is obviously impossible to predict with any accuracy what politicians might do in the distant future but I would have thought that it is fairly unlikely that the tax treatment of pensions and mortgage interest payments will change so materially over that period that it fundamentally changes this analysis.
Well, if the OP follows the advice at 1. above he will have a very modest mortgage and if he earns income at the top rate he will obviously have additional income from which he can continue to make the maximise his annual pension contributions.
Would that not be an argument in favour of a standard rate taxpayer maximising his annual pension contributions?
It's certainly possible (although I think it's unlikely) that the contributory OAP will disappear completely so that we are just left with the means tested OAP. But surely that's an argument against making pension contributions (or even saving for retirement outside a pension vehicle) in any circumstances? Also, I don't think you can safely assume that a paid for home would always be excluded from a means test calculation.
If interest rates rise significantly, it is highly likely that the return on the pension fund will also rise significantly (albeit with a time lag).
Again, if the OP follows the advice at 1. above his mortgage will be well below 50% LTV.
True but the OP will presumably have significant equity in his house if he wants to trade up and will still need to fund his retirement in any event.
I absolutely agree that it's a question of balance but, in the OP's specific circumstances, I would come to the opposite conclusion on this issue.
If, for the sake of argument, the OP had a mortgage free house (or had a modest home loan on a tracker rate) would you still take the view that a standard rate taxpayer should never make pension contributions?
I also think it's worth making the points again that (1) there is an annual limit on how much can be contributed to a pension and this annual allowance cannot be carried forward; (2) the OP would lose his employer's match on his contributions.
Agreed (although I would suggest holding back a liquid cash reserve equivalent to 6 months' household expenses to address emergencies).
It seems to me that the only significant assumptions you need to make are that (1) the annualised rate of return on the pension fund will at least match the interest rate on the mortgage over the 29 years; and (2) that the tax treatment of pensions and mortgage interest payments will not change over that time period to the point that it materially impacts this analysis.
I would have thought that it is much more likely than not that the rate of return on the pension fund will materially exceed the mortgage rate over that time frame, particularly when you bear in mind that the pension fund will have a 20% "head start" due to the tax relief on contributions.
It is obviously impossible to predict with any accuracy what politicians might do in the distant future but I would have thought that it is fairly unlikely that the tax treatment of pensions and mortgage interest payments will change so materially over that period that it fundamentally changes this analysis.
Well, if the OP follows the advice at 1. above he will have a very modest mortgage and if he earns income at the top rate he will obviously have additional income from which he can continue to make the maximise his annual pension contributions.
Would that not be an argument in favour of a standard rate taxpayer maximising his annual pension contributions?
It's certainly possible (although I think it's unlikely) that the contributory OAP will disappear completely so that we are just left with the means tested OAP. But surely that's an argument against making pension contributions (or even saving for retirement outside a pension vehicle) in any circumstances? Also, I don't think you can safely assume that a paid for home would always be excluded from a means test calculation.
If interest rates rise significantly, it is highly likely that the return on the pension fund will also rise significantly (albeit with a time lag).
Again, if the OP follows the advice at 1. above his mortgage will be well below 50% LTV.
True but the OP will presumably have significant equity in his house if he wants to trade up and will still need to fund his retirement in any event.
I absolutely agree that it's a question of balance but, in the OP's specific circumstances, I would come to the opposite conclusion on this issue.
If, for the sake of argument, the OP had a mortgage free house (or had a modest home loan on a tracker rate) would you still take the view that a standard rate taxpayer should never make pension contributions?
I also think it's worth making the points again that (1) there is an annual limit on how much can be contributed to a pension and this annual allowance cannot be carried forward; (2) the OP would lose his employer's match on his contributions.
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Brendan Burgess
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My main argument is that one should not contribute at 20%, if one can contribute later at a higher rate. If a 30% rate is brought in, then it would be better to contribute at that rate.
I have made it abundantly clear that if the employer is matching the contribution, then the employee should contribute the maximum. I don't think that this is happening in this case.
There is an annual limit, but most people can't afford the annual limit. If the OP puts all their money in at 20% and then find themselves in later lives under financial pressure with kids in college and still paying the mortgage, then they will be forgoing contributing at 41%.
But it is a judgement call at the end of the day. I simply would not borrow at 3.5% to fund pension contributions at 20% tax relief, when there is a fair chance that I will be able to get 40% tax relief at some stage in the future.
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Great discussion, given me a lot to think about.
Some additional info.
Savings is at 27k because this is our emergency fund (ideal 1 year of bare bones expenses as we have been through 3 redundancy cycles between the 2 of us in last 5 years, took a year to find last job) and we are looking to buy a used car very soon . Expect about 10k to go to car. Then ideally keep cash fund at 20 -25k. Also planning for 2nd child in next year so allowing for getting only the minimum maternity benefit and taking the additional 4 months unpaid.
Because of the redundancies and plan for 2nd child, we opted for 30 year so our mortgage payment would still be payable with one salary, although we are planning to pay more to shorten the term. Either in additional principal repayments monthly ( 200?) and/ or in a lump sum once a year. Plugging in to Karl’s Mortgage calculator. If we increase 200 from Dec 2015, we shorten our mortgage to 22yrs and 9 months and once car ordeal settled, any extra cash over our emergency find threshold will go to paying mortgage down. Aiming to pay off in 15 to 20 years.
Also 130k is in an American IRA ( retirement account) with .18% expense ratio, no taxes for now as its in a tax efficient pension account and annualised 9.8% return for last 10 years. I will have to think about this later on as wife is Irish and we probably will be here near her family but for now, to access this would incur taxes and penalties.
We are very risk-conscious and like to plan, but also want to maximise our options. Was taught to fund retirement early when you have less expenses and that way more wiggle room when kids get older and you need to cut back on pension funding. But maybe need to run numbers to see if this is still best.
Any thoughts on other questions below ie health insurance for under 12s and cost of topping up free preschool to full day? What are the long term options for saving toward kid’s futures that the thedaddyman mentions?
Thanks again
Some additional info.
Savings is at 27k because this is our emergency fund (ideal 1 year of bare bones expenses as we have been through 3 redundancy cycles between the 2 of us in last 5 years, took a year to find last job) and we are looking to buy a used car very soon . Expect about 10k to go to car. Then ideally keep cash fund at 20 -25k. Also planning for 2nd child in next year so allowing for getting only the minimum maternity benefit and taking the additional 4 months unpaid.
Because of the redundancies and plan for 2nd child, we opted for 30 year so our mortgage payment would still be payable with one salary, although we are planning to pay more to shorten the term. Either in additional principal repayments monthly ( 200?) and/ or in a lump sum once a year. Plugging in to Karl’s Mortgage calculator. If we increase 200 from Dec 2015, we shorten our mortgage to 22yrs and 9 months and once car ordeal settled, any extra cash over our emergency find threshold will go to paying mortgage down. Aiming to pay off in 15 to 20 years.
Also 130k is in an American IRA ( retirement account) with .18% expense ratio, no taxes for now as its in a tax efficient pension account and annualised 9.8% return for last 10 years. I will have to think about this later on as wife is Irish and we probably will be here near her family but for now, to access this would incur taxes and penalties.
We are very risk-conscious and like to plan, but also want to maximise our options. Was taught to fund retirement early when you have less expenses and that way more wiggle room when kids get older and you need to cut back on pension funding. But maybe need to run numbers to see if this is still best.
Any thoughts on other questions below ie health insurance for under 12s and cost of topping up free preschool to full day? What are the long term options for saving toward kid’s futures that the thedaddyman mentions?
Thanks again
Fair enough but we don't know if the OP will ever pay substantial amounts of income tax at the higher rate - he has told us that they don't envisage any significant increase in their incomes in the future.
You have indeed but I didn't want this important point to get lost in the detail.
Yes but the point is that you can't subsequently increase your contributions over and above the annual limit at a later stage in an effort to "catch up".
Absolutely but if you take the mortgage out of the equation (or if the mortgage is a cheap tracker) would you still take the view that a standard rate taxpayer should never make pension contributions (unless it carries a generous employer's match)?
Brendan Burgess
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I think that this is better discussed in the other thread, as this should be focussed on trying to answer the OP's question. The OP has a mortgage at 3.5% not a cheap tracker. When he pays off this mortgage in full, he can ask again about this.
Brendan Burgess
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Now, it's even clearer to me that you should not be contributing to a pension while you are getting only standard rate tax relief. It's impossible to figure out the long-term tax implications of all this. Sarenco made a reasonable assumption that you would be subject to Irish taxes on your retirement. You may well be, but I think it's too uncertain to tie up your money like that.
Agreed - that fact changes the picture completely. I wouldn't know where to start advising the OP in these circumstances but I certainly wouldn't be making AVCs until the long term tax implications are clarified.
Incidentally, I personally don't think health insurance makes financial sense for anybody under the age of 35 but that is a somewhat controversial opinion around here.
Fair enough. It might actually merit a stand-alone thread.
Kids cost a lot of money. Think about this. Burgess mentioned up thread that not everybody agrees in paying down the SVR, that would be a poster like me. And I can tell you this, if I need to I can call on the sale of a house to fund third level for our children. And I like that. A lot.
GirlTuesday
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I haven't read the whole thread but I don't think the free preschool years question have been answered. It's basically a con. You can enroll you child at 3 points in the year depending when they turn 3 - September, January and April. So in the case of my daughter who was born mid September she can't start until the following Jan. So she'll do Jan, Feb, March, April, May, June, then Sept, Oct, Nov, Dec, Jan, Feb, March, April, May and June. Then in September she'll go to school at almost 5. So she'll have 16 months of preschool not "two years" (24 months) also the creche my daughter goes to has preschool from 9-12 daily. The cost is €394 a month. The government "free preschool" takes €200 off the monthly bill. We'll have to pay the balance.
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GirlTuesday
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Oh I should say then you'll have to pay for the rest of the day in creche at the full rate. Preschool is just generally just from 9-12. The paternity leave brought in is 2 weeks at €230 a week. Your company may or may not top this up. And I think you can take it at any stage in the first year of your child's life but I may not be right about that