Money times - June 3, 2014

Posted by Jill Kerby on June 03 2014 @ 09:00




Last week, after chairing an investment seminar that RaboDirect Bank was hosting for over 100 of its customers in Cork, I spoke to a number of people in their 50’s and 60’s who told me that they were there in order to look for ways to “beef up their retirement funds”.

It’s an expression I heard a lot, back in the mid-2000’s, when purchasing a buy-to-let property (or two or three) was the way this age group (and even people in their 40s) intended to fund their retirement. 

They didn’t see it as ‘heart attack” investing – which it was – because they genuinely believed that property prices could only keep going up and by the time they were ready to retire – early 60s for most of them – they could sell either sell the property (or properties) and live partly off the inevitable gain, or sell one, pay off the capital on the other and live off the rental profits.

So much for those plans.

No one I spoke to in Cork had buy-to-let properties, but a few still wondered if now was a good time to buy one.

The best time to buy property, or stocks and shares, or any other asset, is when they are cheap. In the case of Irish property, they hit their lows in 2012, though some property values in undesirable areas of the country continue to drop.

Stocks and shares were cheapest in mid-late 2009 after global markets crashed in late 2008.

Today, some shares and markets (like the US) are very expensive and so is Dublin property. Residential property in most Irish cities have gone up over the past year.

But back to pension plans.

The RaboDirect customers I spoke to had good reason to be worried. They hadn’t put enough into their pensions over the years, or their employers had not. They were now very worried that by the time they retired in five, ten or 15 years and the state pension was perhaps not be as generous as it is now and taxes and state services were even more expensive, they would see a serious fall in their incomes and lifestyles.

The Irish Association of Pension Funds represents fund managers and occupational pension scheme operators, and it agrees that there is plenty to worry about. 

A survey they’ve recently conducted shows that, on average, a total of just 11% of annual salary is being invested by workers and their employer’s into their defined contribution retirement schemes and that people who retire on salaries of €50,000 per annum will end up with an annual retirement income of just €8,500.
If they also have sufficient PRSI contributions, the state pension will boost this income by another c€12,000 (or its equivalent value in the future.)
Unfortunately only about half the working population has an occupational or self-employed pension; the other half will either have to keep working after age 66, live off their state pension only or off a state pension and any private savings. The most desperate may have to rent/sell assets (like their homes).
Few of the older people I met in Cork looked like they could live comfortably on €12,000 or even €20,500, which is why they attended the seminar. They were interested in possibly invest savings or surplus income, which is currently subject to very low deposit account yields and up to 41%-44% DIRT tax.
Unfortunately, there is no magic bullet solution to late retirement planning.
RaboDirect provides a big on-line platform of international fund managers and provides a huge amount of information about individual funds, such as the underlying companies or commodities, bonds, etc under investment, current and past performance, risk profiles and annual fund charges.  (RaboDirect itself charges 0.75 entry and exit fees.)
It’s a good place to start to familiarise yourself with fund options, but it is an execution only service. At the seminar, the case for active or passively managed funds was made by one of RaboDirect’s listed fund providers – Blackrock, the biggest investment manager in the world. Many in the audience came down on the side of low cost passive funds.

That said, there is always a place for good, impartial advice before you invest. The cost, effort and the risks that need to be taken in your 50s to secure a pension is much greater than in your 20s or 30s and an experienced adviser – especially if you’ve done some research yourself – can help you choose the most suitable, diverse, ideally low cost investments.

Proper investing is the opposite of short term speculating. – whether in a single, buy-to-let property with a too low annual net yield or penny bank shares that the buyer hopes will double in value so they can then sell for a huge, instant profit.

It’s also known as “heart attack” investing… for good reason.


If you have a personal finance question you would like answered, please write to Jill at jill@jillkerby.ie



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