Investing to fund early retirement

A

appd

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37
Age:
43

Annual gross income from employment or profession:
E85,000. I expect my salary to remain stable for the next 10 years. Growth rate will be low. Perhaps 2 %.

Type of employment:
Private sector employee

Expenditure pattern:
I do not have a savings plan but would like one.

Rough estimate of value of home
E300,000
Mortgage on home
E170,000
Type of mortgage: Tracker, interest only, fixed rate
Tracker
Interest rate
1.15

Other borrowings – car loans/personal loans etc
None

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

Savings and investments:
E220,000 in bank account

Do you have a pension scheme?
Yes. Approx. value 320K spread across 3 occupational plans (current and 2 previous). All Defined Contribution.
Company contribution 10%. Employee Contribution 25%

I believe the allocation of the current DC plan is 80% equity. Charges are 0.25%.

I also have 7 years membership of a Defined Benefit plan. Last benefit statement estimated 7K per annum pension at 65.

Do you own any investment or other property?
No. 650 euro pm - Rent a Room.

Ages of children:
None.

Life insurance:
I took out a policy 15 years ago when I drew down the mortgage. But I do not really know what type of life insurance it is. 28 euro per month.

What specific question do you have or what issues are of concern to you?
Ideally I want to retire as soon as possible. So the timeframe is 10-15 year. Not sure what a target would be to retire between 55-60 between pension and investments.
I have left investing very late I suppose.
I can't reach that goal leaving my savings in the bank but am wary of investing my savings in equites all at once during a pandemic.

Annual Expenses
I would hope to have income of 30-35 K per annum if possible.

Many thanks
 
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A few details you should add which will be necessary for the calculations and advice:

Pension
Just to confirm - the full €320k is Defined Contribution?

What is the equity allocation of this sum? Is the €320k invested 100% in equities or is it split into equities, bonds, property etc?

What is the expense ratio of your pension funds approximately? Is it 0.75%, 1.00% etc?

Annual Expenses
In today's money, what kind of lifestyle (per annum approx) would you be expecting your investments to support?

Salary
Would you expect to stay at your current salary more or less for the next 10 years?
 
What I’m about to say goes against the grain somewhat, but I would clear the mortgage, notwithstanding the tracker rate.

I’d keep around €25k in cash for emergencies.

I’d keep maximising my pension contributions.
I’d review the investment strategy for those various pension pots and take a look at the costs. Hopefully, your misguided worries around Covid and its impact on your long-term investment plan haven’t infected the investment strategy. You should be 100% invested in equites and you should not react to these shocks that come along.

I’d use the other €25,000 to seed an equity account into which I would contribute the “old” mortgage repayment plus anything I was saving previously plus whatever else you can afford without impacting on your lifestyle.

All into equities whilst ignoring Covid etc; you probably have a circa 40-50 year time horizon.

You would be in rude and enviable financial health.
 
In your shoes, I would pay off your mortgage and cancel your mortgage protection policy.

I would then invest all your pension funds in a global equity fund and use your after-tax savings to purchase (tax free) 5-Year State Savings Certificates.

To be mortgage free in your early 40's, with a decent level of retirement savings, puts you in a very strong position to aim for retirement at 55.
 
Sounds like you can comfortably contribute the max pension eg 25% until 50.

Keep maxing those and increase to 30%

Aim to clear cheap tracker mortgage in 10 years (1500 per) month

Then using the 220k savings purchase rental property. Only concern here is tax on rental income. That will be insignificant after retire.

You're well placed then to retire aged 55 with good diversification.
 
Don't forget your pension is an investment vehicle too so I would keep maximising that. You don't have to have "investments" outside of the pension wrapper that have a lot of rules and more frequent taxes attached. For example if you like a 80 equity/20 safe allocation split for you overall finances, you could keep 100% global index equity in the pension and think of your cash as the 20% "safe" part.

At what age can you access your DC plan? Some plans allow from age 50 provided that you "retire" from your current job.

If you pay off your mortgage, you would still have 50k cash and can easily build back up with no mortgage and tax-free rent-a-room coming in. Tracker might be "cheap" money, but it still costs you 1.15% whereas your 220k cash prob gets close to nothing in post-DIRT interest.
 
As the others have said, and given what you have laid out, your financial circumstances should not see you eating cat food in retirement!

Of course, best laid plans o' mice an' men and all that!

You actually have not left investing too late - you've been investing all along via your pension - and if you were to discharge your mortgage today, your investment allocation is probably where it needs to be for someone of your age and the investment horizon you have.

Another minor-ish point to consider is the State Contributory Pension (SCP).

As far as my understanding goes (and I am not a professional financial adviser), it is presently calculated using 2 approaches for anyone reaching retirement after 1 Sep 2012: using the averaging rule and the Total Contributions Approach (TCA). The aim is to solely utilise TCA in the future. Under TCA, a person would be entitled to the full SCP once they had 2,080+ contributions, which is 40 years of contributions (40 x 52).

If you retire at 60, and say you have 35 years of contributions (1,820), then my understanding is that you would be entitled to a pro-rata share of the SCP and so you would receive 87.50% (1,820 / 2,080) of it.

Of course, it has yet to be legislated for I gather and there might be some horse-trading on whether the requirement could be 40 years, 35 years etc.

But, I'd look at contributions you currently have and when you'd be due to reach the 2,080 contributions threshold.

There are plenty of options of course. You could take up part-time employment post 55/60 or self-employment for example. If you decide on an absolute hard stop on employment/self-employment, if you had a portfolio of shares or investment trusts or a rental property, the income (not capital gains) on these (once above €5k I think, with minimum PRSI payable of €500), would be subject to PRSI at Class S and allowable as reckonable contributions for the SCP.

So, keep an eye on developments in this space re TCA and PRSI on earnings solely from investment income and state pension eligibility.

In terms of helping you stay the course in equity markets as encouraged by Gordon and Sarenco above, two books I'd recommend are:

A Random Walk Down Wall Street - Burton Malkiel (get the revised and updated edition, 2015/2016 I think)

The Four Pillars of Investing - William Bernstein
 
Ndiddy said:
Don't forget your pension is an investment vehicle too so I would keep maximising that. You don't have to have "investments" outside of the pension wrapper that have a lot of rules and more frequent taxes attached. For example if you like a 80 equity/20 safe allocation split for you overall finances, you could keep 100% global index equity in the pension and think of your cash as the 20% "safe" part.

At what age can you access your DC plan? Some plans allow from age 50 provided that you "retire" from your current job.

If you pay off your mortgage, you would still have 50k cash and can easily build back up with no mortgage and tax-free rent-a-room coming in. Tracker might be "cheap" money, but it still costs you 1.15% whereas your 220k cash prob gets close to nothing in post-DIRT interest.
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Hi Ndiddy, my pension documents state a retirement age of 65. I do not know if earlier access would be possible. I assume not unless my company goes through a restructuring phase at the time.
 
SBarrett said:
Any occupational pension can be accessed from age 50 onwards. That includes employer PRSAs.
Any personal pension plans can be accessed from age 60 onwards. That includes personal PRSA's.

You can access pensions at any age if you have to retire early due to ill health.

Steven
www.bluewaterfp.ie
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so I think this means that if you are still at the same company and want to access post age 50, you would have to " retire" from that company but that does not stop you from taking up other work
 
Ndiddy said:
so I think this means that if you are still at the same company and want to access post age 50, you would have to " retire" from that company but that does not stop you from taking up other work
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No, you have to retire from the company pension scheme. You do not have to stop working for the company. If you are 50 with a retirement age of 65, you'll be leaving a lot of money on the table.

Steven
www.bluewaterfp.ie
 
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