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21/10/2021

Making Cents: More financial questions answered

Making Cents: More financial questions answered

When it comes to pension planning, there’s some good data that show the level of savings you should have at different ages relative to your income

Question: Hi, I’ve recently gone sale agreed on a 1 bed property for a purchase price of €340,000. The bank has agreed to a loan of €272,000 which means I would be funding the remaining €68,000 from my savings which I have. My gross annual salary is €72,000 and I'm wondering what your advice is and whether I'm over borrowing or funding too much of the price myself?

Answer: Your loan to value is 80%, which is the max a bank is allowed go to lend to second time buyers.

And whether you're a first or second-time buyer, a contribution of 20% from you is very good. That extra 10% from what a typical FTB has to make, lowers the monthly repayment in your instance by c. €142 per month and over the term of a mortgage (say 30 years) the interest saving is c. €67,892.

So, I guess when you look at both numbers, contributing 20% has a very good outcome, and I don't think you're funding too much yourself as long as you’re not exhausting all of your savings.

In terms of monthly repayment and the % it accounts for your net take home pay, if you arranged the mortgage over 30 years, the repayment would account for c. 28% of your net take home pay and over 25 years, it's 32%.

And for me, the acceptable amount i.e. your mortgage/income ratio shouldn't be > 30% of your net take home pay. That's the number that allows you to continue to save at a reasonable pace, go on holidays, survive an income shock, have a life etc. so I don't think you're over borrowing provided you're below that 30% number which is why I personally would choose a term of 30 years to begin with.

But know you're not going to have it for that long, because when you apply monthly overpayments and or annual capital repayments against the mortgage, the term can reduce significantly e.g. a monthly overpayment of €300 reduces the term by 8 years 8 months and interest saving of €35,071.

In summary, an LTV of 80% is fine and that extra 10% you're contributing is impactful from a monthly repayment and total interest paid perspective, and the monthly repayment as a % of your monthly income is fine once the term is 30 years. And I'd start off with that length anyway but apply the strategy that I just referred to, will mean it will end up being 21.

Question: Liam, I’m 33 and my current annual gross income is €62,000. Can you give me any benchmark as to how much I should have in my pension fund based on my age and income please?

Answer: There’s a lot of data that would suggest people like rules of thumb and many use them as guides and reference points when it comes to assessing where they are from a financial perspective.

And when it comes to pension planning, there’s some good data that show the level of savings you should have at different ages relative to your income. This doesn’t replace having a logical, well thought out retirement plan, but it is a quick way to gauge how you are doing, and better than just making it up as you go along.

So, to answer your question, somewhere between a half and one times your salary is what I’d like to see in your pension fund, which is about €46,500 based on your current salary.

And below are other benchmarks which I personally like and think are useful to bear in mind when planning for the future:

Age             Savings Benchmarks

30                 half of salary saved

35                 1x to 1.5x salary saved

40                1.5x to 2.5x salary saved

45                2.5x to 4x salary saved

50                3.5x to 6x salary saved

55                 4.5x to 8x salary saved

60                6x to 11x salary saved

Question: Hi there, can you tell me what, is the difference, between life Insurance and Life Assurance. I have both. Life Assurance covered by my company and my own Life Insurance that l had to take out when l applied for a mortgage. I am wondering if l need both.

Answer: Technically, insurance is for a fixed period of time and assurance is ongoing cover or until such time as if someone was to pass away.

They tend to be spoken and referred to, as if they are the same thing, and in many cases the interpretation and meaning are indeed the same.

Anyway, in relation to your mortgage, it’s a legal requirement to have life cover in place that covers the amount your borrowed over the term of the mortgage. So, you don't have an option with this, and you have to have it in place.

Life assurance with your employer is a death in service benefit but you’re not allowed to assign this as life cover to a mortgage. Because a bank won't accept it, and for good reason because if you left an employer, this death in service goes with you and then you have no cover in place. And the payment of this benefit usually goes first to your next of kin, estate or whoever you nominated in a letter of wishes when you joined employment.

So, death in service is a nice extra to have, and in many instances is a feature of your employment benefits package and something you’re getting, without it costing you anything. Whereas your mortgage protection policy, what you referred to as life insurance is something you have to have in place and the cost is borne by you.

Question: Liam, I’m 28 and I want to retire at age 45. I reckon I’ll need about €2,500 per month to fund the lifestyle I’ll want. I currently save €2,000 per month and I have c. €80,000 in savings, the majority of which came from a recent inheritance. Am I on track, and how much do I need, and do I need to increase the amount I save each year?

Answer: The amount you’ll need is about €750,000 and I’m arriving at this figure using the monthly 300 rule, which assumes the amount you’ll need to accumulate is 300 times your monthly spend. This figure is underpinned by an assumption that you’ll withdraw 4% from the value of your fund each year. The calculation is a fairly easy one now that we know where you end point is i.e. €750,000.

First, we need to work out what you’ll end up with in 17 years’ when we combine the amount, you’re saving each month with the amount you have accumulated to date.

And when I do, using an annual return of 4% and accounting for inflation at a rate of 1% per annum, I get €631,022.

Which is €118,978 short of what you need, so you’re not on track with your current plan.

But you can bridge this deficit by either (a) increasing your monthly savings to €2,476 or (b) if you can’t increase your monthly savings by €476, you’ll need to get an annual return on your savings of 5.56%.

If both options are difficult, there are other ways you can bridge that deficit at 45, and the first is by earning a, monthly income of €397 because that’s the deficit that will exist from your existing plan and what you’ll need or defer retiring until you’re 48 because you’ll have enough then.

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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