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29 Sept 2022

Making Cents: Our Limerick readers questions answered

Making Cents: Our Limerick readers questions answered

Have a question for Liam Croke? Email him on liam@harmonics.ie to feature in our next questions and answers

Question
Liam, I’m 62 and I have €86,000 in a pension fund and 19% of it is in an equity fund, 62% in bonds and 19% in a cash fund. The fund hasn’t performed well at all but regardless I’m not sure if I need to adjust these percentages based on my age or not. I haven’t a clue so any advice would be appreciated.

Answer
It can be difficult trying to figure out what the ideal split for anyone is because there are so many variables at play i.e. what your tolerance for risk is, have you other sources of income, how much you’ll spend in retirement etc. which is why in instances like this, I like to refer to a particular rule of thumb known as the 110 rule
This rule is based on subtracting your age from 110, and that’s the amount you should hold in equites, with the remainder going towards other asset classes.
So, with you being 62 and if you were to follow this rule, you should have 48% in equities with the remainder in bonds and cash.
And when it comes to applying different asset splits to anyone’s fund regardless of their age, you’ve got to apply the various %’s to your particular situation and no one else’s. Some people may need to be heavily invested in equities because they started saving late, or the fund they’ve accumulated isn’t big enough to tolerate smaller returns. And equally, if it’s big enough they could reduce your exposure to equities’ because they don’t need to take on any unnecessary risk.

Question
Liam, I’m gifting the sum of €12,000 to a sister of mine to help her with a house purchase. Can you let me know if the amount I’m giving her won’t create any tax implication for her?

Answer
The very quick answer is that it shouldn’t, provided she hasn’t received any gift from anyone similar in the past.
The amount you can receive money tax free depends on the relationship with the person you receive the money from. If you receive money from a sibling, the amount you currently are allowed to receive tax free is €32,500. And they fall into a category that includes grandparents, uncles and aunts and grandchildren and great-grandchildren.
This amount is currently the lifetime limit and is cumulative and applies to the total taxable benefits you receive from a sibling or anyone else who is in that group. So, if your sister has received no other gifts from any other sibling or from a grandparent or an aunt then she has no tax liability.

Question
Hi Liam. We have two questions for you. First, we are a couple living abroad but plan on returning home to Ireland in the next few years. We’re trying to do some forward retirement planning and we were wondering do you have any idea what the living costs for a couple and for a single person are in Ireland? And secondly, with the impact inflation is having on cost of living, how do you factor that into a pension fund in retirement?

Answer
The estimated annual amount I believe people need is, c. €31,546 for a single person and c. €43,119 for a married couple.
Some time ago I came across a method that The Association of Superannuation funds (ASFA) in Australia use to benchmark the annual amount people would need to fund a comfortable or modest standard of living in post work years. They used a detailed budget of what single and couples would need to spend to support their chosen lifestyle. And because I thought it was useful I applied the formula to Ireland and these were the numbers I worked out factoring in the amount required for housing, energy, food, transport, clothing, health, leisure etc.
And from my interactions with my own clients who are in retirement, the numbers I’ve suggested are good ones, but then again everyone will be different, it will depend on what lifestyle they’d like to have in retirement.
I worked out these numbers at the time at an annual inflation rate of 2%, and obviously they will be higher now, but again an individual and a couples personal inflation rate can be as different to everyone else’s, as their annual spending is.
When it comes to factoring in inflation, what’s recommend in this instance is that you add the inflation rate in a particular year, on to the amount you withdraw from your pension fund each year.
Let me explain.
Let’s assume you withdraw 4% from the value of your fund every year and that pays you €30,000 each year.
If inflation in that year is 9%, then you should withdraw €32,700 from your fund.
If the following year inflation is at 5%, then you withdraw €31,500 and so on.
So, you can alter the amount you withdraw every year to factor in that’s years inflation rate.

Question
We have a lump sum of c. €30,000 and we save €240 every month into a regular savings account for our children and their future educations costs. They are 8 and 10 and we would like something to mature when they are 18. We have a small mortgage on the family home which is about the same value as our lump sum, and it finishes in 2027. The interest rate is 2.75%. So one option is to clear that and then use the mortgage savings to save into for the kid’s future costs, what do you think?

Answer
The lifetime cost of putting a child through college who are living away from home is c. €61,000 and €30,500 if living at home. These numbers come from The Zurich Life Cost of Education Survey 2022.

So, if you look at a worst-case scenario (€122,000) and review what you currently have in place i.e., €30,000, and monthly savings of €240, you would hit that target if you achieved an annual net return of 9.2% per annum.
So, 9.2% is your target number, anything below that you’ll fall short of the number you need.
For example, if the return was 3%, you’ll accumulate €74,019 which is fine if they go to college and stay at home but €47,981 short if you need to hit the €122,000 target.
To get an annual return of 9.2%, that means investing in an investment fund that carries a risk rating of at least 5 which is considered high risk. Anything below that won’t achieve the amount you need.
Let’s look at the second option i.e. clearing your mortgage and using that once mortgage repayment and combine it with the current amount you’re saving.
And if you did that, over an 8-year period and at a rate of 3.3%, that will grow to a fund of c. €122,000.
The investment strategy to achieve this return is a fund which carries a risk rating of about 3.
So, I think clearing your mortgage and using that previous monthly repayment and combining it with your current regular lodgement is the route to go because you will (a) save interest payments on clearing mortgage which would be c. €2,144 (b) protect yourself from future mortgage interest rate increases and (c) it significantly de-risks the investment strategy required and (d) you’ll reach your target number in 8 years rather than 10 with the other option.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie

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