Welcome to Ireland's #1 Financial Planning Blog & Podcast. Our purpose is to help you make informed decisions with your money, and importantly to avoid some costly mistakes that they rest of us have made! We are aiming to make this THE home of Financial Planning ideas and insight for normal people in Ireland!
This week, after last weeks' cracker about clearing your loans at 32, we are back with a bang, and what more do we love than a good oul list! Which is ironic seeing as only recently I had the fortune to have attended a Workshop on using Mind-Maps....which suggest that lists are the devil's work and that our brains hate lists really. I have to say I am a fan of Mind-Maps now, I'm converted, so don't be surprised if I land a financial one on you all in the very near future!
It was actually doing a Mind-Map for myself that got me thinking about what is absolutely of most importance to me at the moment in terms of personal, family, career etc. It got me thinking of what we might say to an 18 year old version of ourselves, had we the chance to go back and give ourselves a right good talking to!! So here's my take on the 5 Simple Things I would encourage myself to have done financially from that age:
Be A Life-Time Learner: Personally I'm a little late to this party, only really getting into 'informational sponge' mode in the past 5 years. Had we forced ourselves as 18 year old's to read, and be curious about all things financial it probably fair to say we would be in a much better position financially than we are currently. So if you have found that you are still a little financially illiterate (you couldn't be if you are reading this right!!) then may I suggest starting with this book, a true gem; Millionaire Teacher.
Harness The Power Of Compounding: We have flogged this one to bits here at Informed Decisions but there is absolutely no escaping what Einstein referred to as the 8th wonder of the world. Imagine starting off at 18 years of age saving €250 per month. If you achieved a growth of 6% per annum, by the time you are 48 years of age this is worth €250,000, you yourself contributed a mere €90,000, the rest, €140,000 was magiced-up via compound interest....what possibly are you waiting for dear friend!
Become An Owner As Early As Possible: We believe that owning is much much more advantageous than borrowing. Take a home, for most us we need to be a borrower before we can be an owner.....the earlier you borrow the earlier you own (clear the friggin mortgage!). Despite the ups and downs of property value it is quite often clear to see that the sooner you can get onto that ladder, barring disaster, you may well stand to benefit earlier. The very same can be said of owning investment assets, be they property, equities, or other, it is much better from a long term returns perspective, to own as opposed to borrow, which you essentially are doing by owning Deposits Accounts!
Spend What You Have Left After Saving: Another that we beat the drum about here. Nobody enjoys the process of actually delaying gratification (usually!). Why would I save this money when I can out on the town tonight with my pals and have a whale of a time!?! By removing this choice from our hands we are ensuring that while still enjoying enough nights-out, that we also squirrel some money aside to realise our goals in the future, whatever they may be. It is so easy now to set up standing orders and savings accounts online that there is really no excuse not to, right now, go and set up a standing order out of your current account and into a savings account, the day after pay-day! Again, what oh what are you waiting for dear friend!? Most of the time people find that they can adapt to the new spending amount, so it's a win-win! And while you are at it I'd also make sure to know exactly what is coming in and what is going out each month....and to turn up or down the savings element whenever the situation warranted it...the art of budgeting!
Keep An Eye On The Small Print: So many people are swamped with jargon and terms and conditions when they do anything remotely financial related. Unfortunately it is usually one EU regulation or another that is insisting that you get this stuff. However the providers of these materials don't always make it easy for you to understand and digest them. One of the biggest culprits here is the fees and charges that you may be paying on financial products, savings, pensions, investments. These fees vary so so wildly from provider to provider that the difference between one and another can be a staggering amount of money.......make sure that that difference is in your pocket. Always always, as painful as it might be make every effort to know exactly what the fees are before you enter into anything......if you can't bring yourself to do it then ask someone for help!
So there you have it.....our 5 Simple Things....Simple but not necessarily easy....but hey nothing worthwhile is easy right!? However with a bit of knowledge and some good old fashioned effort we believe they are realistic, timely and above all hugely impactful for anyone to apply. You might want to send this or share it with someone who could do with the nudge!
Oh, and we are going to be introducing an element of 'readers & listeners questions' on the show every few weeks, so if you have any question you would like answered on the show just pop me an email here and I will do my utmost to include it in the next weeks' show and to answer it coherently!!
Thanks a mill for reading.......
QFA | RPA | APA | Qualified Coach
Welcome to Ireland's #1 Finance Blog & Podcast. We are here to help you make informed decisions with your money...and ultimately to bring true Financial Planning to Ireland's normal people!
This week we are taking a little peep into the magical world of Jimmy & Aggie.....how they have different views on life and money, and ultimately how they went their separate ways with regards their pension options, and how that panned out for each of them!
Aggie is in her mid-30's, a sound woman by all accounts! She works as an Accountant in a medium sized law firm. She's as happy as a trout in her job, and plans on working her way up the ladder over the next 10 years in the firm. Good on Aggie! When she met her now husband Jimmy it was like a scene from a Disney Movie.....sparks were flying.....they were married within 6 months. That was 7 years ago now, and in fairness their gut feeling was right...they're having a ball!
Herself and her husband Jimmy have a wee baby girl, Jacinta, who is the centre of their universe at the minute! Even before Jacinta's arrival Jimmy had been at Aggie to start stashing some of her disposable income instead of spending it on more 'bloody cycling gear' (they are big cycle fans ya know!).
Being the loving and responsible sort she has given in to Jimmy's insistence and recently went to get some advice on getting herself a pension. Aside from Jimmy giving her the verbals about doing it she has read and noticed lots of articles and blogs about it over the last few years, generally scare-mongering her into doing one with headlines such as 'start a pension of die a penniless and miserable oul widow'...none of which really gave her the nudge to do one!
She met with an advisor, a highly qualified professional, also in her 30's. This advisor recommended that she should put in place the 'life-styling' option, which she was told will gradually move her funds from the 'volatile shares portion' of her pension pot to the 'more stable bonds & cash funds' as she gets nearer to retirement.
She is told that by the time she is 65 or so that 75% of the pot will be in 'steady and secure' cash while the other half will be in 'volatile shares'. Ultimately the intention would be to protect the hard earned savings that Aggie would have built up by that stage.
This sounds like a great idea to Aggie, she has heard one or two stories over the years of people 'losing' their pension pot as they get near retiring because of a crash or recession & she ain't a fan of that happening to her thanks very much!
Seeing this as sound advice Aggie duly accepts the recommendation and signs-up, starting off with a monthly payment of €300 to her PRSA. Based on the information that her advisor gave her when she gets to age 68 this should build up to about €200,000 after charges and accounting for the Lifestyling. As a result of reducing the % of your pot invested in funds which offer solid growth, it reduces your potential growth over time.
Fast forward 3o-odd years, Aggie and Jimmy are still blissfully married, their now 3 kids have grown up and left the nest educated and set up to go and do their thing! They are both eagerly anticipating their retirement and going to do all the things that they have been putting off for 30 years (you can see where this is going!!). Aggie has long dreamed of herself and Jimmy taking 6 months to cycle across America......a friend of hers did it a decade ago and she has been planning for it since. She reckons that trip alone is going to cost them in the region of €30,000, a fair chunk of her anticipated €50,000 tax free lump sum from her PRSA when she retires.
As luck would have it just as Aggie is turning 68 and about to cash in her pension pot the markets have a shocker.....a global financial crisis of 2007 proportions strikes....global equities fell in value by 50%. Luckily for Aggie only 10% of her total pension pot (€200,000) was sitting in an equity fund. It could have been an awful lot worse but because the bulk of her fund was in cash her fund value has only fallen by €10,000, from €200k to €190k, as she goes to retire.
At this point in time she is showering grateful blessings on the advisor she met all those years ago for recommending Life-styling. Had she not had Life-Styling she would have potentially still been fully invested in Equities, and therefore lost half of her total pot.
Aggie then takes her 25% tax free lump sum, squirrels the rest into an Approved Retirement Fund (Check this out if that means nothing to you!). With her €47k tax free lump sum she decides then to treat herself and Jimmy to a 1st class trip via Concorde (its 2058 now, Concorde has been reintroduced right!!) to the west coast of USA to begin their cycling adventures.....the rest is history!
On her return from the trip she decides to leave the fund 100% in 'safe' funds which offer no potential for growth but at the same time won't fall in value.....
So Life-Styling did a great job for Aggie here, it saved her large cash-pile of €200k falling in value by a full half just as she was going to retire.
So What Were The Benefits & Not-So-Benefits Of Life-Styling On Her Pension?
So Let's Now Hear Jimmy's Story!
Jimmy was always smart with his money, he was reared with a prudent approach to looking after his money and was a diligent saver from early on in his career. When he set up his pension in his early 20's Jimmy decided to let the constant upward curve of the great companies of the world do their positive thing to his pension pot over the long term, and hence he decided to forego the Life-Styling option on his pension pot. He wanted to leave his funds exposed to the full power of a global equity fund over the long term. He was aware of the fact that volatility is your friend over the long term and so did not want to move the bulk of his money into cash funds as he got older.
Jimmy has been saving €300 into his PRSA since aged 25. Assuming the same annual growth rate as above, however this time without the impact of Life-Styling removing the potential benefit of growth, he will achieve a fund of €540k at age 68. (the power of starting early!!).
Like Aggie Jimmy is mad into the cycling. Loves it, however he doesn't buy all the gear, he rides a 10 year old bike, wears the same 3 bib tights and top for the past 5 years, and services his bike once a year himself.....the ultimate prudent cyclist...he prefers to enjoy his holidays, experiences, and saves the rest...hence his saucy pension pot going on!
As with Aggie lets fast forward 30 years. Jimmy's pot is worth a smoking hot €540k and he is licking his lips at the thought of the big 25% tax free lump sum of €135k.....and again because he is so prudent he is letting Aggie pay for the big US cycling trip...this money is to last him for another 30 years hopefully!
But of course, as you already are aware he suffers the same crash as Aggie (it's the same time of course!). Aggie's fund was well protected from the crash and the 50% equity fund falls however his wasn't, he was 100% in global equity fund, so you guessed it his fund falls from €540k to €270k, yikes! Just as well Aggie is taking care of the US trip.
So what does Jimmy do now? Well he has options....he can leave the funds there and let them recover. And here is the kicker ladies and gentlemen............the average period of time it takes the market to go from 'very bottom' (trough) to 'very top' (peak) over the last 23 bull/bear market cycles has been 1096 days, less than 3 years (based on our own calculations from Standard & Poors Corporation data).
This suggests that if Jimmy leaves the fund alone and lets Aggie look after things for a few years his €540k will be restored in full....and he can then go about taking his tax free lump sum and invest in his ARF/AMRF, and yes still continue to invest in the constant upward curve of the great companies of the world...happy days! Yes for sure it would have been a challenging time and one in which he would have had to resist the temptation to move his pot out of the rapidly declining equity funds and into the 'secure' cash fund, but that would have been the singly most financially costly mistake he would have made over his entire life, fact. Well done Jimmy for not doing that, for trusting the upward curve and for remaining optimistic.
The Benefits & Not-So-Benefits Of Not Having Life-Styling On His Pension?
So what's the moral of the story? Should I use Life-Styling on my pension funds? Should I remain invested in what are deemed to be high risk funds in my pension? Is Life-Styling a genuinely useful element on my pension and as part of my overall Financial Planning here in Ireland?
It really depends on your outlook, and on your capacity to ride the crash(es) when it/they hit. If you can do that then perhaps Life-Styling serves little of no purpose for you. In fact Life-Styling, while reducing your volatility as you approach retirement will potentially rob you of much of the gains to be had by investing in the first place....not forgetting that you will be paying in the region of 1-to-2% in fees each year just to be in the PRSA...so if you aren't achieving at least that then you will be losing money anyway- never mind also beating inflation over the long term! To do all that you could be needing to earn in the region of 4% growth per year to thread water!
As always we believe those who work with a competent and effective financial advisor/coach can do it most effectively, can resist the urge to make knee-jerk decisions based on temporary declines in equity values....in the history of the market all declines have been temporary, and that's another fact!
So if you plan to embark on an adventure of a life-time like Aggie & Jimmy did then make sure you know what number your current pension is likely to give you, and if Life-Styling is something which you believe will aid you or hinder you in getting to enjoy that adventure.
Thanks so much for reading.
QFA | RPA | APA | Qualified Coach
P.S: Thanks so much to Devined5 for our latest iTunes Review.......he/she called it a 'super informative investment podcast'.............thanks so much Devined5. If you would like to support us then an iTunes Review is a great way to do so....just follow this link
This week we are chuffed to share with you the story of the guys at '2 Cup House' in USA. They were living the life of modern trappings, and one day decided that they wanted a different route.
It may not be for everyone but it is a great story that proves if you want to achieve something, and are willing to apply yourself if is often very achievable!
As promised in the episode there are a few snaps below of what their home looks like, and here's a link to their Blog.
Hope you enjoy the show, we certainly did!
QFA | RPA | APA | Qualified Coach