Another AVC or overpay mortgage!

AhComeOn

Registered User
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Hi - My wife and I are reviewing our finances and were trying to get things in order/somewhat optimised. I know similar questions are asked all the time on AAM, so apologies if it’s a bit repetitive, but we were looking for some thoughts/insights with a specific view as to:
  1. What we are missing;
  2. Where to go next;
  3. How to set ourselves up for a potential early retirement should we so wish.

Age: 29
Spouse’s/Partner's age: 30

Annual gross income from employment or profession: €80k. €100k within 3 years (assuming no promo– unlikely scenario)
Annual gross income of spouse: €45k. €60k within 3 years (assuming no promo)

Monthly take-home pay:
€3.6k + €2.4k = €6k (this is post Single Scheme Public Sector Pension, PRD (will be significantly rolled back over next few years), AVC contribution (€400pm), Health Insurance deducted at source, other short term work savings schemes which smooth out yearly cash flow e.g. Christmas savings scheme/holiday savings scheme (€300pm)).

Type of employment:
me: public sector - full time, permanent
spouse: public sector - full time, permanent

In general are you:
Currently saving €1k-€1.5k per month cash after pension savings. With this level of savings and including the current mortgage overpayment we are quite satisfied with our current standard of living.

Putting €200 each into AVC pm.

Rough estimate of value of home:
450k with a mortgage of 306k =144k equity. Entered a 5-year fix (3 years left to run) @ 3%. Normal payments c. €1.2k. Overpaying mortgage by c. €600 pm so total payments of c. €1.8kpm. All other things being equal, we will have our mortgage cleared in c. 19-20 years. We are quite happy in the home having only bought in 2017 and would not see us moving in the medium term at least. Have requested breakage fee and it currently appears uneconomical to break.

Other borrowings:
None –Save for big purchases separately.

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

Savings and investments:
All of our savings to date were used to fund as big a deposit as possible on home and to pay cash for wedding in 2018. Savings built up since:
  • €25k cash savings/emergency fund

Do you have a pension scheme?

Yes: both public sector single scheme (post 2013)
Both paying into AVCs - €200pm each c. €10k balance
€5k DC pension from previous employment along with tiny DB pension of €300pa.

Do you own any investment or other property?
No

Children
1 child (3 months). Expected baby expenses over medium term (e.g. childcare) will be met from increased salaries (Increase of c. €35k gross over next 3 years) so hopefully minimal impact on current savings rate.

Life + Health insurance:
Life – Mortgage protection + cover provided by work for both + Death in service benefit for both
Health – Yes. Basic plan for the moment.

What specific question do you have or what issues are of concern to you?
As noted above, I was hoping to solicit some views as to
  1. What we are missing;
  2. Where to go next;
  3. How to set ourselves up for a potential early retirement should we so wish.

Specifically, what we can do on point 1 & 2 to set us up for point 3. As noted above, we are members of the Single Scheme, which allows for Cost Neutral Early Retirement (CNER) at 55. I know this is a long time away, but we figure the best time to plan and prep for it is now! We realise things change and this may not be what we want, but we figured that by prudently managing our finances we could only improve our situation whether or not we want to pull the trigger.

As it stands, were we to retire at 55 on a cost neutral basis, we would have a combined pension of c. €22k pa (CPI linked & including CNER actuarial reduction) and a lump sum of c. €150k (also CPI linked). €22k pa would not exactly fund the type of lifestyle we would like to have post retirement, and based on current habits (noting this will obviously change) plus a bit of a buffer I think this would equate to c. €40k pa.

So basically, wondering what is the most optimal/easiest to implement strategy to build up funds to bridge the gap. As noted above:
  • We have c. €1k-€1.5kpm of cash that we can use to save/invest currently to save for this.
  • We already make AVCs (which would be available to us at 55) of €400pm which we have scope to increase.

A non-exhaustive list of options (not mutually exclusive) we see as readily available to us:
  • Increase AVCs;
    • Pros:
      • Tax efficient
      • Available to us at 55
      • OK investment options available
    • Cons:
      • Investment returns variable
      • Illiquid
  • Aggressively pay down mortgage and then utilise the freed up cash flow to save;
  • Pros:
    • Guaranteed return of 3%
    • Frees us up to save more aggressively closer to retirement
    • More liquid than AVCs
  • Cons:
    • Forego tax efficiency
    • Funding an asset in the medium term that doesn’t produce an income in retirement.

      Appreciate any thoughts or observations anyone may have.
 
You are on a great path and seem to have a good idea on how to manage your finances well.

If I was in your position I would.
1- Keep 25k as emergency fund
2- Max AVCs for your ages/salaries
3- Overpay mortgage with the balance
4- Enjoy a comfortable lifestyle. No doubt you have worked hard to get to this point so make sure to enjoy the fruits of your labour.

Out of interest what was the break fee quoted?
 
Thanks Easel. Appreciate the steer. I know its a combination of the 4 above, just trying to get the balance!

Fee quoted was €8k. By my rough calculations, we will be charged c. €26k in interest by staying the course on the fix @3% over the remaining 3 years versus c. €21k were we to break and switch to 2.4% UB, including break fee brought me to €26k vs €29k. I know long term we would be better off, but the intention will be to switch as soon as the fix is over.
 
Who is your mortgage with that you're fixed at 3% and overpaying by almost 50% per month?
 
Who is your mortgage with that you're fixed at 3% and overpaying by almost 50% per month?

Mortgage is with BOI. I'm overpaying by the 10%, but have reduced the term as well to increase the payment. For simplicity I just referred to it as overpaying.
 
Were you to have more children that might skew your retirement plans somewhat. I would get additional standalone 20+ year life cover (convertible, dual, non-indexed term policy); one of you may leave/change work and getting a replacement life policy would depend on health at the time.
 
Were you to have more children that might skew your retirement plans somewhat. I would get additional standalone 20+ year life cover (convertible, dual, non-indexed term policy); one of you may leave/change work and getting a replacement life policy would depend on health at the time.

Thanks Michaelm, that seems logical. I'll look into it this weekend. Obviously it is situation dependent and subject to the cover we already have etc., but are there rules of thumb as to how much cover you should have in place? Apologies for a basic question.
 
You are doing really well. I would agree hat the plan should be to pay doen the mortgage more aggresively and then focus on increasing AVC's.

Out of interest...what type of public sector jobs allow you to jump from 80k to 100k over three years without a promotion...or even 45k to 60k?!
 
Out of interest...what type of public sector jobs allow you to jump from 80k to 100k over three years without a promotion...or even 45k to 60k?!

Curious about this as well, junior doctor would be my guess?

Fair play OP you're in a great position for your age.
 
You are doing really well. I would agree hat the plan should be to pay doen the mortgage more aggresively and then focus on increasing AVC's.

Out of interest...what type of public sector jobs allow you to jump from 80k to 100k over three years without a promotion...or even 45k to 60k?!

Thanks for the input. We are both non-traditional civil service (wider public service) and our scales do not align directly to civil service scale. Roles are quite specialised and at mid-level positions there is a lot less points on the scale than would be the case with civil service.
 
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