Tax-advantaged retirement accounts, or, a general 15-yr plan

For what it's worth, here's S&P's scorecard of the % of active funds in the US that were outperformed by their respective benchmarks across all major equity investing styles during the last two bear markets (2008; 2000-2002):-

All Large-Cap Funds 54.3; 53.5

All Mid-Cap Funds 74.7; 77.3

All Small-Cap Funds 83.8; 71.6

Large Growth 90.0; 49.4

Large Core 52.0; 53.4

Large Value 22.2; 36.5

Mid Growth 89.0; 82.4

Mid Core 62.3; 70.2

Mid Value 67.1; 82.8

Small Growth 95.5; 87.5

Small Core 82.5; 70.8

Small Value 72.6; 58.3

And here's a Vanguard paper that looks at a longer timeframe and includes European data:-
 
Whilst the active vs passive debate is interesting, my observation is that the OP should be maximising the pension contributions. Forget 5%; 20% of €70k (€14k) is allowable as an employee contribution on an annual basis. That's only €700 per month in after-tax income. Yes, it can't be accessed at 45, but it can be accessed at 50.
 

This is not correct. The investment fund chosen has absolutely no bearing on the level of commission that can be charged under a product. Products with high management charge effect the amount of commission that can be charged. Active funds managers can charge more because of the additional cost of running the fund but the advisor doesn't see any of it.



It gives us an indication of what can happen in different conditions, especially for active funds where the fund is being sold on a manager's expertise. Being able to see how a certain approach did in a downturn when compared to a passive benchmark is a useful insight into a fund.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
SBarrett said:
Being able to see how a certain approach did in a downturn when compared to a passive benchmark is a useful insight into a fund.
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Hi Steven

I'm afraid I wouldn't agree with that conclusion.

It's actually pretty clear from the available evidence that any outperformance by an active manager in one bear market is not predictive of continued success in any subsequent bear markets.

Past performance is not a reliable indicator of future results - regardless of market conditions.
 
Gordon Gekko said:
my observation is that the OP should be maximising the pension contributions.
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I certainly agree that all available tax-advantaged pension space should be maxed-out before making any long-term investments outside a pension wrapper but surely that has to be balanced with the flexibility and optionality provided by having a reasonable liquid cash fund?

I would have thought that would be particularly important in the OP's circumstances.

As a matter of curiosity, do you have any insight into the tax treatment of drawdowns from an Irish pension fund by a Spanish resident? I assume it's reasonably favourable but it would be interesting to know the details.
 
Sarenco said:
surely that has to be balanced with the flexibility and optionality provided by having a reasonable liquid cash fund? I would have thought that would be particularly important in the OP's circumstances.
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The OP has €2,000 to €2,500 a month to invest. Maxing out the pension would only cost €700. Flexibility and optionality aren't really an issue; he/she can easily cover off both with the other €1,300 / €1,800.

I'm not really familiar with the Spanish rules; probably just Irish payroll tax on the ARF drawdowns with credit for same against the Spanish tax liability (which should be lower).
 
Well, that's certainly true as things stand. But personal circumstances can change pretty radically when people are in their early 30's.

I would be circumspect about recommending that anybody at that age goes "all in" with their pension contributions while their plans are still fluid/evolving.
 
Thanks all for your comments. I was following with interest throughout the day, and got answers to some questions I hadn't even asked yet. Good job!

Anyway, whilst I agree maximising the pension contribution might be a good idea tax-wise, I don't want to lock so much of it away, at least not right now. Having some flexibility within the next couple of years is a priority, for now, I just want to take advantage of the 5% match and I might look at increasing my contributions in the future. Based on all your comments, it seems like putting the lot into the Indexed World Equity Fund is the way to go, at least for now.

Great discussion going on here though, keep it up.
 

Sarenco,

The OP has investable spare cash of €2,500 per month. He/she is already planning to set aside €175 a month into his/her pension fund.

I'm recommending that he/she commits an additional €525 to the pension (only circa 20% of the spare cash).

There are no grounds for being circumspect about making a recommendation. Eschewing pension in circumstances where there is so much free cashflow would be preposterous.

Gordon
 
Gordon

The OP currently has significant cash-flow to save/invest. But things can change. Particularly at the OP's age.

As always, it's a question of balancing short-term, medium-term and long-term financial goals. When plans are fluid, maintaining an adequate degree of flexibility is entirely reasonable.
 
jabberwocky said:
Thanks all for your comments. I was following with interest throughout the day, and got answers to some questions I hadn't even asked yet. Good job!
Click to expand...

Thanks for coming back to us jabberwocky.

As you have probably gathered, disagreements are not unknown around these parts but hopefully you can gain something from the discussion.
 
Indeed, and I have. Sarenco has made the key point: I currently have a decent situation but it won't be like this forever. Keeping options open and maintaining a degree of fluidity is important at this stage. My COL is low right now but it will go up again sometime.

It brings me to another question - and maybe I should open a new thread for this - but let's say I want to use this time to gain some experience and exposure to managing funds myself. As in, using a small amount to invest in ETFs. I have the time to read and learn more and devote a few hours a week to managing it. What would be a good approach to start? Maybe investing €50 a month over six months and using a platform like Davy? I mainly want to pick them and sit on them, so I don't expect to have too much in transaction fees, but keeping these low is obviously important. Longer-term, I think this would be good knowledge to have, considering the withdrawal tax on a pension fund is around 41% vs around 33% for certain ETFs, and, it's an interesting subject in its own right that I want to learn more about.

I don't know too much about the subject just yet but I'm interested to hear your thoughts. Most of the information I find is specific to the US and not entirely transferable to an Irish investment plan.

Thanks again and have a great day.
 

Sarenco,

Instead of posting vague generalisations, it is more helpful to assess the facts and address the OP's specific circumstances. Your advice is suboptimal. Is it any wonder that we have a pensions crisis in this country when a 31 year old with €2,500 of investable cash per month is in any way discouraged from setting €700 a month aside into a pension? €175 of which, I might add, will be matched by his/her employer.

The OP also wants to retire early; tax-free compounding within a pension can be the cornerstone of this strategy.

OP, max out your AVCs. Any advice to the contrary is utterly ridiculous in the context of your circumstances. The other spare €1,800 you have every month can provide all the flexibility you need. You also have the flexibility to stop contributing to your pension at any time.

Gordon
 
Gordon

I'm sorry but I don't think it's fair to accuse me of posting vague generalisations. My advice was quite specific and actionable and it certainly took the OP's specific circumstances into account. You are obviously free to disagree with the advice but to dismiss it as utterly ridiculous is hardly reasonable.

Again, the OP is 31-years old, has a good income, currently has a low cost of living but has minimal savings. He has the outline of a long-term plan but recognises that plan may well change over time.

I would suggest that given the age of the OP there is every possibility that his plans may in fact change quite dramatically over the coming years. He might decide to buy a place of his own, travel the world, get married, start a family - who knows? Building a reasonable liquid cash fund will give the OP flexibility and optionality.

If the OP had already built a reasonable cash fund - of, say, €50k - then I would absolutely agree with you that he would be well advised to maximise his pension contributions before investing elsewhere. However, he doesn't currently have any meaningful savings so I think it's reasonable for the time being to contribute enough to his pension to secure the employer match and to build a reasonable cash fund with after-tax money.

Again, it's simply a question of balancing short-term, medium-term and long-term financial goals and allowing for the reality that those goals may change over time.
 
I fundamentally disagree with your analysis.

The OP has €2,500 of spare investable cash per month. It makes absolute sense to contribute €700 of that to his pension, thus maximising the tax benefit. There is more than enough in the other €1,800 to build up a cash fund or do other things. And if circumstances change, the AVCs can of course be stopped.

The thread was hijacked by an active vs passive debate, when in fact the salient issue is HOW the OP invests; pension makes absolute sense in this case.

Gordon
 
Reactions: mtk
Gordon Gekko said:
I fundamentally disagree with your analysis.
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I appreciate that Gordon but that doesn't necessarily mean another viewpoint is "utterly ridiculous" or "preposterous". I'm sure you are not arrogant enough to think you have any monopoly on wisdom.

Obviously AVCs can be reduced or stopped entirely at any point in the future - nobody suggested otherwise. However, say the OP decided in a years' time that he wanted to buy a house or to start a business. Well, he wouldn't be able to drawdown the AVCs that have already been made so that would certainly limit his options. Hence maxing out AVCs at this stage of the OP's financial life would reduce his flexibility to do other things in the short to medium term.

The OP himself has told us that he doesn't want to max out his AVCs as keeping his options open is important to him over the next couple of years. That seems entirely reasonable to me given his age and circumstances.

Again, we are in violent agreement that any available tax-advantaged pension space should be maximised before any long-term investments are made elsewhere. That is not in dispute.

Gordon Gekko said:
The thread was hijacked by an active vs passive debate, when in fact the salient issue is HOW the OP invests; pension makes absolute sense in this case.
Click to expand...

Well, the OP specifically asked for opinions on his investment choices for his pension and appears to have welcomed the points raised in the discussion that followed. Not sure it's up to you (or me for that matter) to decide what is of interest to the OP.
 
- A 31 year old with €2,500 to spare every month, an existing emergency fund of €12k, and a desire to retire early.

- €700 (i.e. only 28%) of his spare monthly cash would leverage the tax advantages of a pension to the max, leaving him with €1,800 a month to add to his existing €12,000.

- He would have €34,000 in cash after 12 months, all whilst maxing out his pension and building towards an early retirement in the most tax efficient manner possible.

I find it incredible that anyone could question the wisdom of the above approach.

I have nothing further to add to this thread.
 
Gordon

Nobody is questioning any of that. But the OP has told us he doesn't want to follow this approach. He has given his reasons and I think they are entirely reasonable given his age and circumstances. You don't agree - fine, we get it - but there's no need to be rude about it.
 
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