Case study Pay down mortgage or max pensions contribution

[Andrew365]

(I am a case study for this thread, early 30's, mortgage...)

The issue I struggle is what pension pot should I aim for in retirement? As you can't go back in time in retirement to tell yourself to save more and conversely I don't want to to over save and further now.

I am in my early 30's and have a pension pot of around 75k and it will grow by about 10k a year, assuming a 4% average growth that would leave me with a pension pot of 1million. That is 40k a year for 4 years.

I am currently paying tax at 40% should I be maxing out my pension contributions? I will have other investments by the time I retire as I currently have a stock porfolio. I also have a (new) mortgage and will be trading up in a few years although I could be moving more rural which may not result in a more expensive property, current mortgage is 450k.

It is appearing I should focus on overpaying the mortgage?

 

[Sarenco]

@Andrew365

I'm pretty sure Brendan would disagree with me but I think you should be maxing your pension in priority to paying down your mortgage ahead of schedule.

Conversely, the tax situation in Ireland is such that I don't think it makes sense for a higher-rate tax payer to make (or hold) after-tax investments while carrying a mortgage.

So, in your shoes, I would:

- max your tax-relieved pension contributions going forward (investing all or substantially all of your pension in a global equity fund); and

- sell the stock portfolio and apply the proceeds against your mortgage principal, while maintaining a reasonable cash reserve to address any unexpected expenses that might arise.

 

[Brendan Burgess]

I currently have a stock porfolio. I also have a (new) mortgage and will be trading up in a few years although I could be moving more rural which may not result in a more expensive property, current mortgage is 450k.

Hi Andrew

A very interesting case study. I wouldn't be able to answer it without knowing the following.

What is your salary?
What is your wife's salary if you have one?
How much is the house worth?
Is it a tracker mortgage?

I don't think it makes sense for a higher-rate tax payer to make (or hold) after-tax investments while carrying a mortgage.

Fully agree with Sarenco on this.

You are effectively borrowing at 3% (assuming you don't have a tracker) to buy shares whose income and capital gains will be taxed.

If it's an immaterial amount -e.g. €20k - then it's not a problem to have it as a sort of reserve or fun fund. But it's €100k, you should be either paying down your mortgage or maxing your contribution to a pension fund.

Brendan

 

[Brendan Burgess]

The issue I struggle is what pension pot should I aim for in retirement?

I might try to address this question in the first post. This is my initial answer but I will reflect on it more. You should aim for

• A mortgage-free house
• An adequate pension pot

A longer answer might be in milestones.

1st milestone: Get on the housing ladder
2nd milestone: Get the mortgage down to a comfortable level
3rd milestone: An education fund for you kids
4th milestone: A mortgage-free home and a good pension fund on retirement.

Brendan

 

[Andrew365]

Hi Andrew

A very interesting case study. I wouldn't be able to answer it without knowing the following.

What is your salary?
What is your wife's salary if you have one?
How much is the house worth?
Is it a tracker mortgage?


Brendan

Me: pensionable salary 120k, wife 90k, house worth 510k, 2yr fixed mortgage at 2.6%.

 

[Brendan Burgess]

One other key question is how much you have in other investments at present?

A mortgage of €450k is high, but if you also have €150k in shares, it's less important.

Brendan

 

[Andrew365]

One other key question is how much you have in other investments at present?

A mortgage of €450k is high, but if you also have €150k in shares, it's less important.

Brendan

Mortgage is just 2 months old and is almost 1/3rd cheaper than our rent plus cheaper Bill's. it was one of the motivators for buying.

I have a BTL out of the country that effectively pays for itself, roughly 60k mortgage on it. Other investments and savings total roughly 20k of which some are earmarked for refurbishments.

I'm thinking Pension pot should be priority. Initially I was considering paying down mortgage in order to be able to keep the place as an investment but the more I research I don't think that will be a wise case.

We are in a very fortunate position but I do not foresee that lasting so I want to be smart. I've moved around over the last 10 years and we have saved a lot, I'm extremely diligent with planning and budgeting but now is the time to plan the next 30 years.

 

[Andrew365]

I think what is often overlooked is the actual amount you need to live off in future probably because it is hard. There is also the factor that we are living longer, so should we be expecting a pension pot to last 30 to 40 years?

 

[David1234]

I think what is often overlooked is the actual amount you need to live off in future probably because it is hard. There is also the factor that we are living longer, so should we be expecting a pension pot to last 30 to 40 years?

I think in a lot of cases people will end up working longer in line with increases in life expectancy.

@Andrew365 how is your wife's pension pot looking? Do you want to have kids? How will potentially only having 1 salary impact your repayment on a €450k mortgage?

I am a similar age to you with similar salary and mortgage @ €360k but my wife is currently a stay at home mother to 2 kids so only one of us contributing to a pension. I have about €500k equity in my house, I have no other significant assets or investments. I keep a €30k emergency fund, I am contributing 10% to pension and everything else goes off the mortgage. Whilst this may not be the optimal approach It's one that I feel works best for me.

The fact that you have conflicting opinions from a number of financial "experts" would lead me to believe that there isn't a generic correct answer to your question. You will very rarely hear people give out about paying down a mortgage early or having too big a pension pot. Why not do a combination of the two for now and adjust in line with any material future life events

 

[odyssey06]

OP, you haven't mentioned if your employer provides matching contributions or are you into total AVC territory? I think that would be relevant.

 

[Andrew365]

OP, you haven't mentioned if your employer provides matching contributions or are you into total AVC territory? I think that would be relevant.

10% Contribution from Employer, no matched contributions i.e. they put in 10% regardless of my contribution.

I think in a lot of cases people will end up working longer in line with increases in life expectancy.

@Andrew365 how is your wife's pension pot looking? Do you want to have kids? How will potentially only having 1 salary impact your repayment on a €450k mortgage?

I am a similar age to you with similar salary and mortgage @ €360k but my wife is currently a stay at home mother to 2 kids so only one of us contributing to a pension. I have about €500k equity in my house, I have no other significant assets or investments. I keep a €30k emergency fund, I am contributing 10% to pension and everything else goes off the mortgage. Whilst this may not be the optimal approach It's one that I feel works best for me.

The fact that you have conflicting opinions from a number of financial "experts" would lead me to believe that there isn't a generic correct answer to your question. You will very rarely hear people give out about paying down a mortgage early or having too big a pension pot. Why not do a combination of the two for now and adjust in line with any material future life events

We do plan to have children and my wifes pension pot is relatively small at roughly 25k as she has not had as favourable schemes as I have had and has changed jobs more frequently due to international moves. Living on one salary alone will be fine but I do not foresee either of us being fulltime stay at home parents by choice. I think the best approach is a combination of the two and I can dial the levers up and down as needed over time.

 

[nest egg]

...I am a similar age to you with similar salary and mortgage @ €360k but my wife is currently a stay at home mother to 2 kids so only one of us contributing to a pension. I have about €500k equity in my house, I have no other significant assets or investments. I keep a €30k emergency fund, I am contributing 10% to pension and everything else goes off the mortgage. Whilst this may not be the optimal approach It's one that I feel works best for me...

Interesting to compare notes. Our story is not too dissimilar, and we frequently ask ourselves the question whether what we do is the best approach.

Our background: Both 36, with 2 young kids. I earn 135k, my wife 50k. We have a 435k mortgage with a ~55% LTV. I have a DC pension scheme, while my wife has a company sponsored PRSA.

In our case, we're prioritising my pension contributions, over my wife's contributions, and / or our mortgage. The basis for this is the "use it or use it" annual tax free allowance, and low charges on my pension fund.

In practical terms, I make the maximum pension contribution possible, my wife makes a 4% contribution, as its company matched, but no more than this, as charges are high. We then make a mortgage overpayment of 30% of the regular repayment, which if memory serves shaves approximately a decade off the term.

 

[nest egg]

To add, we're at a particularly expensive time of our lives, more so as my wife is going to take unpaid maternity leave, which will be followed by a period of double creche fees. By late next year though, all being well, things should have normalised. If we're in a position to, the question then will be, do we start contributing more to my wife's pension, or to the mortgage? At this stage, we're inclined to again favour retirement saving, although setting a better PRSA with lower charges for my wife's AVCs will then be a must.

 

[SPC100]

Paying down mortgage is safer. But risk generally brings higher returns.

Best outcome depend on future market performance, your actual future earnings, future mortgage rates, etc, and is only knowable looking backwards.

Time in market is what generally predicts stock market returns (i.e. getting it in sooner is better). Pension is best vehicle in ireland to use to invest in stocks (as it can grow tax free till you draw it down). but you are limited in how much you can get in per year, so you want to maximise that...

I'd max pension first, and then work on mortgage.