47, preparing for retirement.

T

theObserver

Registered User
Messages
101
Personal details

Your age: 47
Your spouse's age: NA
Partner's age if not married: NA

Number and age of children: 0


Income and expenditure
Annual gross income from employment or profession: 77k
Annual gross income of spouse/partner: NA

Monthly take-home pay: 3.4k net

Type of employment: Employee
Employer type: private company.

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

Saving 4.5k each month including pension contributions.
2k into pension
2k into ETF investments
350 into BoI Regular Saver paying 3% interest
Rest left in current account.


Summary of Assets and Liabilities
Family home value: 250k (conservative estimate)
Mortgage on family home: 0
Net equity: 250k

Cash: 17k
Defined Contribution pension fund: NA
Company shares : 5k vested
Buy to Let Property value: NA
Buy to let Mortgage: NA

Total net assets: 272k


Family home mortgage information
NA

Other borrowings – car loans/personal loans etc
None

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

Pension information

Value of pension fund: 157k
New Ireland.
Default life styling.
5% personal contribution + 5% employer + 20 AVC = 30% total monthly pension contributions.


Other savings and investments:

54k in Emerging Markets and S&P ETFs via Trading212. (Holding the S&P stock; not buying more).
53k in FTSE Developed ETF via Lightyear.
50k in Irish government NTMA ten year bond at 2.1% AER interest


Other information which might be relevant

Expected sole inheritance of parents estate including a three bed bungalow worth 300k. I intend to live in this bungalow long term and sell the Dublin apartment. I will become a full time carer to one or both of my parents if needs be. They are both in their 70s.

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

1) If I retire from full time work at 55, in seven years, and live off my personal investments until 65, should I adjust how my pension is invested?

My current rate of savings could potentially see my personal investments at over 360k and my pension at 320k in the next seven years, ignoring any unrealized p/l and ignoring any sale of property.

My thinking is roughly: Aggressively invest for the next seven years, then settle the deemed disposal tax and rebalance into a standard 30% bonds/70% stock portfolio to support myself on from ages 55 - 65 using the two bucket withdrawal strategy of holding 1-2 years cash and rebalancing quarterly then start drawing down my pension from 65 along with the state contributory pension from 67.

Should this change how I want my pension invested? Currently I am using the default Lifestyling with New Ireland which will see a gradual shift towards bonds especially during the last 5-10 years. Would I be better served instructing New Ireland to invest some or all of my pension in a more passive global index as I will already hold bonds in my personal portfolio?

2) Should I withdraw the 50k stored in NTMA bonds to invest the money in my ETFs instead?

Admittedly having nearly 33% of my portfolio in bonds earning just 2.1% AER after ten years is giving me FOMO when my ETF investments are returning 14% YTD. These bonds were intended as the safe portion of my investments, a “at least” fall back should the rest fall apart. Since then I have realized holding 12 months cash, around 25k, provides far more psychological comfort and holding these NTMA bonds don’t have any purpose. Is this just FOMO or should I really cash in the bonds and invest? I have 1 10k, and 2x 20k bonds.
 
I personally think your portfolio is too conservative. Property and bonds (via NTMA and bond portion of pension) must be close to 450k, or 60/70% of your portfolio. Your property alone gives you the same diversifying effect of bonds. You actually run the risk of not growing your portfolio aggressively enough to retire early imo.
 
To answer my owns questions a little, I made the following decisions:

1) Late October I moved a further 10k cash from my current account into equities.

2) I will instruct New Ireland via their portal to move my pension fund away from their default lifestyling and into their Prime Equities fund which are passive funds covering the Developed world and Emerging markets with a small 10% tilt into global small caps. My reasoning is I will almost certainty start withdrawing my own portfolio before my pension fund so I should start de-risking my portfolio first while allowing my pension to grow as much as possible.

3) I will keep the 50k NTMA bonds for now. A recent round of layoffs in work made me realize its reassuring to have the bonds as an option for emergency-emergency funds if needed.
 
In general, what you are doing with your wealth is fine. However, I think you have an issue on the spending side...

theObserver said:
Annual gross income from employment or profession: 77k

Monthly take-home pay: 3.4k net

Saving 4.5k each month including pension contributions.
2k into pension
2k into ETF investments
350 into BoI Regular Saver paying 3% interest
Rest left in current account.
Click to expand...

You are left with just over €1k a month for everything else which is very low by most standards. Are you sure the €350/m to BOI is actually savings or is it just budgeting for yearly expenses?
 
agree with above, monthly bills, petrol, entertainment and groceries would wipe that 1k out very quickly. Are you agressively saving or just dont have many expenses ?
 
Rasputin said:
agree with above, monthly bills, petrol, entertainment and groceries would wipe that 1k out very quickly. Are you agressively saving or just dont have many expenses ?
Click to expand...

I havent paid an electricity bill since the lockdowns thanks to gov cost of living handouts. My transport costs are 130 a month (50 for leap card + 80 for intercity train tickets) and groceries are 200 a month. I do spend Fridays and the weekends staying with the parents to help out with bits and bobs and they in return feed me over the weekend. I also leech their internet with a ten eur all-you-can-use mobile addon to the mammys eir package. That's really it. My hobbies are chilling out on the pc, reading, writing and cycling and avoiding leaving my house. After a "sinking fund" for clothes and my yearly apartment management fees, there's around 350eur left to spend on whatever i want.
 
I think you need to be careful about retiring early. I've seen people retire early only to become full time carers for their parents, in whatever guise. You may claim otherwise, but you spend your weekends with them - if you retire will that become full time? At least your work keeps you busy.

You could consider cutting back on work to a few days per week as an intermediate step?

I just think you could fall into a trap of essentially living with them from 55 and feeling duty-bound not to enjoy your retirement with travel, hobbies etc.
 
Seaniemed said:
I think you need to be careful about retiring early. I've seen people retire early only to become full time carers for their parents, in whatever guise. You may claim otherwise, but you spend your weekends with them - if you retire will that become full time? At least your work keeps you busy.

You could consider cutting back on work to a few days per week as an intermediate step?

I just think you could fall into a trap of essentially living with them from 55 and feeling duty-bound not to enjoy your retirement with travel, hobbies etc.
Click to expand...

An insightful comment. In truth I suspect the retirement will be forced by the need to care for one or both parents. But I am ok with that.
 
As many of us would do. Could I request then that you factor in the cost of employing carers in your retirement budget:
Example:

A carer costs e350 per day
By working one day per week, and by asking my parents to pay another 100e per week, I can afford 2 carer days per week.

I do think you need to factor your parents retirement income in as well. Not to fleece them, but you cannot be on call 24/7.

You can be a wonderful carer by providing SOME of your own time as well as overseeing others providing care.

Remember being a carer is a physical job and you will not be any younger.

Best of luck.
 
Also bear in mind that you might not be suited to doing some of the caring work. Will both your parents for eg be comfortable with you doing intimate and toileting care ? And yes as thr poster mentioned above, ensure that all resources are going into the care cost, not just yours.
 
theObserver said:
2) Should I withdraw the 50k stored in NTMA bonds to invest the money in my ETFs instead?
Click to expand...

I considering this question over Christmas. The basic problem is I cannot justify why I hold this investment or it's purpose. Below is a summary of my deliberations.

Happy to accept advice or corrections !

I began by (very scientifically) taking my yearly expenses then doubling that figure then rounding everything up from 26k to 28k anyway after reading the Pension Countil guidelines. I plugged the target 28k a year into a three bucket withdrawal strategy to picture the endgoal (my pension dicates three buckets, rather than two, until drawdown) :

Bucket 1: Two years in cash for day to day
24 months in cash and cash-like
Target: 69k+ by 2032 or 56k in todays money

Bucket 2: Eight years in personal investments. Used to refill bucket one
Target: 276k after tax by 2032 or 224k in todays money

Four years in bonds is 112k and a 50/50 split. Three years in bonds is 84k or a 30/70 split.

Bucket 3: Funding for Twenty+ years
Target: 463k by 2042 with 17 years of 3% inflation. 280k in todays money
Click to expand...

There is a shortfall of around 205k in todays money, or around 4-5 years of investing/saving at my current rate. This doesn't consider my Dublin apartment which I would love to sell but represents a point of no return.

But here I am concerned with bucket 2, the bond portion of the portfilio. What follows is me thinking through the problem in my slow, plodding, style.

The case against bonds: Why hold them in the first place?

At first glance bonds, held either individually or inside a bond fund, appear a poor investment. Bonds are, arguably, more complex than holding a broad market passive index fund, and typically offer a lower return. Nor are they risk free: 2022 was the worst year on record for bonds with the value of US bonds decreasing by 31%, far more than the S&P which dropped by 18%.

US treasury bonds are considered the safest in world with an average annual return of 3.6%. However, the real return, the return after inflation and taxes, is much much lower. Given an average inflation rate of 2.9%, these bonds return just 0.7% meaning many safe bonds with low yields fail to protect purchasing power after inflation and taxes. Even investment grade individual bonds are not entireally risk free if we wish to preserve purchasing power.

Bond funds appear even more risky for a supposedly safe asset class as the fund is exposed to volatility cause by interest rate changes.

Stocks, the apparently riskier and more volatile asset class, have on the other hand done better at preserving purchase power over a long time span.

So why own bonds in the first place?

This comes down to risk capacity. Risk capacity is how much risk can we accept in our portfolio. This capacity to take on risk should not be confused with Risk Tolerance, which is an individuals comfort level for taking on risk.

Risk itself can be thought of as preserving capital. But perhaps a better definition is ‘how do we minimize the permanent lose of purchase power by protecting against inflation and protecting against losing capital by selling during drawdowns ?’.

After all the stock markets might be down 20%,30% or 40% some years and those years represent the greatest risk to financial security by permanently eroding the our capital so these are the years we don’t want to sell stocks.

Well, why didn’t bonds hedge against the 2020 fall in the stock market?

High inflation is toxic to both bonds and equities so the ability of bonds to hedge equities depends on inflation being at a reasonable level.

Why not just hold cash then?

If bonds are not a risk free, defensive, safe asset class, why not just hold more cash? The answer is that historically cash is a terrible long term investment with a low real return, which after taxes and inflation, often fails to preserve purchasing power. Worse, most banks offer little to no interest on instant access account and impose withdrawal restrictions on saving accounts.

I am still not sold on bonds.

So start with as little in bonds as possible by asking: what is the least amount of bonds needed and still have a portfolio that delivers my needs in a safe way over the course of retirement?

A good generic answer for most people is five years of living expenses set aside outside the market as an emergency fund for market down turns. Why? The longest its taken the US markets to drop and recover is 5.5 years. So five years in bonds and cash should minimize the impacts of any downturn. Consider this the conservative portion of the portfolio put aside for emergencies.

Five year in bonds? What about cash?

First calculate any steady income from eg social welfare or dividends and deduce this from the yearly expenses and multiple the result by five. This is the shortfall to fund the conservative bucket. If the answer is more than a shortfall of one or two years, the bonds will likely have a role.

Individual Bonds or Bond Fund?

Individual bonds held to maturity are often considered safer than bond funds which are exposed to an interest rate risk and perhaps a currency risk . However this is not necessarily always true as we may need to sell the bond on a secondary market exposing ourselves to the same interest rate risk as the fund. There is also the likely taxes on yields, tax returns paperworkd, replacing bonds after their maturity and the inflation risk. Individual bonds are good for a specific outcome or as instructment to manage risk tolerance by creating a stable income ladder over the short term.

An accumulation bond fund however will automatically reinvest the coupon payments and the fund manager will handle the buying and selling. A hedged fund will reduce the currency risk. Bond funds may be good for risk management for risk capacity where there is no specific target date.

What about the interest rate risk to bond funds?

Keep the duration short and use multiple bond funds of different durations that match their potential use: One year of living expenses in a stable, liquid fund with a duration of 1 year or less. Then another year of expenses in a separate fund with a maturity of 1-3 years and so on. It will take time for interest rate changes to ripple through intermediate bond funds

Corporate bonds for the higher yield or government bonds?

Corporate bonds are more tightly correlated with the stock market than government bonds. However short term investment grade corporate bonds normally have a higher yield than government bonds.

What region? Global, US or EU?

Prefer the euro-zone when possible for home protections against political instability. However EU government bonds are known to have low yields which may not protect against inflation and the IMF is forecasting low growth in the EU region for 2025.

What about EU inflation protected bonds then?

Definitely worth considering however the yields may become negative under certain conditions.

Enough of the soliloquy. Just list the potential funds.

Duration of 0-1 year

JPMorgan BetaBuilders US Treasury Bond 0-1 yr UCITS ETF USD (Acc) (BBIL)
Amundi Prime Euro Gov Bonds 0-1y UCITS ETF DR (PRAB.DE)
iShares EUR Ultrashort Bond UCITS ETF EUR (Acc) (ERNX)

Duration of 1-3 years
Xtrackers US Treasuries Ultrashort Bond (Acc)(XT01)

3 years +
Vanguard Global Aggregate Bond (Acc) (VAGF)
 
The reasoning in the post above "feels" sound: make bonds the conservative, emergency fund of the portfolio to draw upon when the stocks are down to protect spending power.

But why do I need three to four years of living expenses while I still earn a monthly paycheck? Answer: I surely don’t.
So: rebalance the portfolio whenever the time comes. Perhaps in seven years, perhaps in seventeen; some bonds are needed but not too much.

My cash emergency fund feels light but I can expect around redundancy if they do sunset me. That leaves a scenario where dipping into my portfolio is necessary. The same logic applies in such a scenario where bonds are treated as an emergency fall back to protect shares when the market is down.

But how much to hold?

I know there are historical periods where a 90/10 or even a 80/20 portfolio outperformed a 100% equities portfolio, but why 10%? For me that number is 28k or one year of anticipated living expenses or two years of lean living.

All this leads toward cashing in the NTMA bonds and placing 28k in short term ETF bond fund and 22k into equities. The advantages are:
  • The short term bond fund is more liquid than NTMA
  • Likely higher return on the equities portion over the long term
  • The bond fund should protect my purchase power after taxes
Disadvantages:
  • Highest yielding investment grade bonds funds are US based
  • Makes me more reliant on neo-brokers like Trading212
  • Fund is more volatile
 
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