Investing for Retirement

[Rhymnoceros]

Hi all, new to the forum, I've read a few threads on similar topics to mine and ye all are fairly knowledgeable so hoping ye can spare some time to help me.

Some background info - 28, Higher tax rate salary wise , current savings 15k approx, debts 0, no pension or anything set up.

I've been reading a few books, or trying to on investing. Got through the millionaire teacher which seems to recommend a passive strategy with low fees and over the long term you could expect an approx 10%return P/A. Of course by the time I go to withdraw I could be on the down cycle there so that's an obvious risk.

The naked trader I tried to read but to be honest it reads to me like one of those get rich quick guides even though it claims not to be. Maybe I'm doing it a disservice, it's claiming 25-30% return per annum is possible without a ridiculous amount of work. Everything else I've read states beating the market over the long term is impossible but this guy says it's possible.

I'm trying to decided between managing my own pension via Davy and getting a diversified ETF, bonds, basically following the passive strategy and it will be in place for at least 20 years while getting the tax benefits.

The other part thinks that because my employer pays no pension contributions, I would almost be as well off just setting up a trading account and just managing myself (with a passive strategy). At least this way I can withdraw if an emergency ever came up, I'm not subject to any random levys the government decide to introduce and my hands are not tied when I retire as to what I need to do with my money. Of course there are other charges that I need to research too, tax implications etc.

Due to inflation being pretty much zero maybe holding onto cash is a better strategy for now, but currently I'm saving 1,000-1,500 a month and I plan on keeping some of this into my savings and not investing it all.

Sorry for the confusing first post, but confused perfectly sums up my thoughts on investing at the minute so any recommended reading, tips etc are greatly appreciated.

 

[Gordon Gekko]

Start a pension. It's an incredibly efficient way to invest. By all means keep cash aside for a rainy day, but a pension is one of the best ways to generate real wealth. And given your age, invest 100% in equities (with sufficient diversification).

 

[Boyd]

From my investigations, all those books sound great in theory, but when you get into implementation in Ireland, it becomes a nightmare. Search on this forum and you'll see loads of threads about tax of UCIT ETFs etc.
At the moment, I think best investment is overpaying SVR mortgage to get 3%-ish guaranteed return. Perhaps this is relevant to you, perhaps not.
Your employer not contributing to pension makes that less attractive but still definitely worth starting. I think you can get self managed PRSA from Davy for about 1% fees I remember reading recently.
I assume you've no credit card/car loans etc before you consider investing....

 

[Rhymnoceros]

Hi Gordon/Username123,

Thanks for the input, I guess the only reason I was hesitant on the pension was the money being tied up, even though that's my investment plan anyway and having a limited number of options (though more than likely apt) for it upon retirement. I also don't like being subject to any rules the government decides to bring in such as the pension levy though the future is hard to predict either way.

I have no mortgage or any debt of any sort at the minute and no immediate plans for either.

 

[Joe_90]

This is a quandary that most people looking at pensions grapple with.

People have different views, but the taxation of income and gains is the fundamental issue.

Let's take a very conservative person who is looking for a long term yield of 4% after fees for 20 years.

They have €1,200 per month to spare and invest in various assets that grow over time, they pay their income tax and CGT and after 20 years the pot before tax has grown to approx. €350k.

They decide to invest in a pension through a combination of employee and employers contribution of €2,000 per month (because of the limits). Let's say that the cost is 1% per annum. So the yield is 3%.

That would be worth approx. €650k in 20 years. Clearly the former is your money and the latter is in a pension but with a tax free lump sum and personal tax credits and the over 65 exemption a reasonable amount could be accessed tax free or at minimal tax.

But the question does remain what will the position be in 20 years or 37 years when you retire.

Perhaps a hybrid with some direct and some through a pension is the answer.

 

[Gordon Gekko]

The possibility of changes to the rules is not a reason to eschew what is one of the best deals in town.

 

[Dan Murray]

This is a quandary that most people looking at pensions grapple with....

Hi Joe

It seems that your analysis is based on a 4% net yield on non-pension investment and 3% net yield on pension investments.

My problem with these assumptions are:
1. I think the assumed additional 1% expenses for pension investment is too high; and
2. I think you have not appropriately allowed for the tax exempt nature of pension fund growth.

 

[Gordon Gekko]

I started my pension fund at age 25. The time horizon for the investment is probably circa 65 years. It's invested 100% in diversified equities and always will be. It is the best way to invest by a long way.

As for changes to the rules, I believe that it's unlikely. A decrease in the €2m cap would bring more mid-ranking public servants into chargeable excess tax territory. Turkeys don't vote for Christmas. In addition, the pensions time bomb and uncertainty around the viability of the State Pension make it more likely in my view that the rules will relax rather than tighten. On the macro side, we have also "turned the corner" so to speak.

 

[Joe_90]

1. I think the assumed additional 1% expenses for pension investment is too high.

That's fine I accept that, it was the point of the comparison I was making rather than the exact cost.

2. I think you have not appropriately allowed for the tax exempt nature of pension fund growth.

On the basis that the return is projected tax free I'm not sure what you mean.

 

[Dan Murray]

Hi Joe

On the basis that the return is projected tax free I'm not sure what you mean.

I guess the point I was trying to make is that if you invest assets inside a pension and outside a pension - (at let's say, for simplicity, that the asset allocations and the charges are identical), you would expect that the tax free growth within the pension fund would be higher than the net (after tax) return outside the pension fund. Accordingly, what I was questioning was that, in your example, I felt that you had not ascribed sufficient "weight" to this element in your analysis.

For what it's worth, my belief is that broadly it would be more accurate, for assumption purposes, to say that the net yield from the pension fund investment is 4% and the corresponding net yield from non-pension assets 3%!....i.e. simply invert the two returns....

 

[Dan Murray]

As for changes to the rules....

This is really getting silly......not you, Gordon!!

I'm an 'oul codger - and here's what I think

- Most people will spend a lot of time in retirement
- In order to make this time reasonably comfortable, you need to save (nay, invest) sensibly for a long-time
- You need to have reasonable comfort that such responsibility will be validated by future public policy

The fact that Gordon and others need to constantly try give their best guesses of what may happen in the future really just highlights the ineptitude of the policy makers in not establishing a robust, principle-based and co-ordinated pension framework in the country.

The simply truth is that (for most people) having sufficient retirement assets requires very long-term savings - so in order for them to start such investments (or contribute sufficient amounts), they need to be convinced that public policy will be equitable, appropriately co-ordinated and not subject to the short-term whims of the latest Minister of Finance, etc.

 

[Gordon Gekko]

I have no doubt that the pension levy shattered many people's confidence in the system and will result in bad outcomes in 20/30/40 years time.

Moronic policy making basically.

 

[Boyd]

I agree. However, it was only recently I was told that it was fully documented in FG's pre-election manifesto. We (The Irish people) voted them in, along with their policies, so its just as much our fault as those who made up the policy.

 

[Dan Murray]

Hi Username

I agree. However, it was only recently I was told that it was fully documented in FG's pre-election manifesto. We (The Irish people) voted them in, along with their policies, so its just as much our fault as those who made up the policy.

I don't like your however bit!

The fact that it was only recently that you became aware that it was "fully documented" in the FG manifesto is not surprising. There was very little coverage in the run-up to the 2011 election of the levy (and, in any event, the levy is just one element on the broader point I was making). Even if you were arsed to read the manifesto of each party, you do so in the knowledge that what's written in the manifesto may or may not come to pass. A specific example being that what was set out in the FG 2011 manifesto regarding the pension levy did not, in fact, occur as prescribed in the manifesto!!

The substantive point is that pension policy is currently subject to change, pretty much at the whims of the then Finance Minister. The bit about "it's as much our fault as those who made up the policy" is the great notion that as everyone is responsible, no one is responsible and serves to perpetuate the ineptitude of public policy in this and other matters.

 

[Steven Barrett]

Thanks for the input, I guess the only reason I was hesitant on the pension was the money being tied up, even though that's my investment plan anyway and having a limited number of options (though more than likely apt) for it upon retirement. I also don't like being subject to any rules the government decides to bring in such as the pension levy though the future is hard to predict either way.

Do a little bit of A and a little bit of B, as well as some C(ash on deposit for emergencies). It would be foolish to tie up all your money up in an asset that you can't access for 32 years. It would also be foolish not to take advantage of the tax breaks available to pension contributions.

The government have rules on pensions...the most basic one being they will give you tax relief on your contributions. In return, you must use your savings for retirement so you cannot access the fund before age 60.

Invest as Gordon said, a diversified portfolio of equities.


Steven
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