Wednesday 18 September 2019

Your money: Is it too late for me to try to retire extremely early?

Your questions answered

Email your questions to lmcbride@independent.ie or write to 'Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1'.
Email your questions to lmcbride@independent.ie or write to 'Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1'.

David Quinn

Q: I've been reading with interest about what looks like a bit of a new trend in young people earning enough money quickly enough to retire ridiculously early. It's called 'Fire' (financial independence, retire early), and the idea seems to have been floating around for a few years now. But does it really work? I'm in my early 30s, so am I too late to try to achieve this; even semi-retirement? I'm not rich by any means, which some folks think you have to be to stand a chance of doing this.

Richard, Templeogue, Dublin 6W

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The Fire movement has been getting a lot of attention recently. Who wouldn't want to retire early and be financially independent? It sounds very appealing but, in reality, it is quite difficult to achieve. Being financially independent requires discipline across all aspects of your life, and for an extended period. It requires more than just day-to-day budgeting decisions; it requires a shift to a low-cost lifestyle and avoiding spending too much on the three big expenditure items: family home, cars and private education.

The Fire movement exponents offer two main rules of thumb. The first is that you must save 25pc of your income. This is very difficult if you have rent or a mortgage to pay, childcare, etc. Fire movement advocates would respond by saying you must live somewhere that allows you to save this much, and that may mean buying a smaller house than you would like, a smaller car, smaller holidays, public schooling, etc. This is where it becomes hard for most, and where many lose focus.

The other simple rule of thumb they go by is an annual drawdown of 4pc from your savings. While this is a simplistic drawdown rate, it's not a bad start and is seen as being sustainable long-term. So if you need €40,000 per annum to live, you will need a savings pot of €1m.

The best vehicle for this by far is the pension system. It gives tax relief on the contributions, so 25pc of income saved actually only costs 15pc for a top-rate taxpayer. Include an employer pension contribution and it becomes more achievable again. Starting early helps too. And growth is tax-free within a pension.

To answer your question, you are not too late to start. Consider a pension as a key part of your Fire plan, and always consider the long-term consequences of any big capital purchase (house, car, etc), as these are the spending decisions that really affect your ability to reach the Fire outcome. Increase your earned income wherever possible, and keep spending to a realistic minimum.

College funding

Q: We have two young children, nine and 12, and have been putting away their monthly child benefits into a general deposit account for them; a Bank of Ireland one that we opened ages ago when rates were not as low as they are now. But kids grow up so fast and it's really only dawning on us that this fund will most likely be raided for their third-level education, and also that the amount we've saved so far isn't going to be enough. We've looked at switching deposit accounts but, of course, rates are so low and we've so little time to look at other options. What would you recommend?

Nuala, Gorey, Co Wexford

Firstly, it is great you started to save early and hopefully you have the foundation of a good fund in place. As your kids are nine and 12 now, you will most likely need to start drawing from the fund in the next five years. However, you won't be drawing everything down in the first year. Rather, you'll be doing it on a semi-annual basis to pay fees and expenses over a period of seven years, and maybe with only one year with both kids in college at the same time. This leaves some extra time for your savings to grow, and help cover costs.

I would suggest that bank interest rates are going to stay very low for the foreseeable future, so you only have two options. The first is to take some risk with at least a portion of the fund, and future contributions.

With five years to go, you might be better off maintaining a low risk profile for the first two years of cost (say, €15,000?). The balance of your current savings pot and future contributions can then be set aside to cover the subsequent years. Therefore, if there is a slump in markets in the future, you will have time for this portion of the investment to recover.

With inflation outstripping deposit rates, you will need some growth on this savings pot just to protect your current purchasing power. With that in mind, my recommendation would be to set up the lowest-cost regular investment account possible, and invest your monthly savings into an investment portfolio. All of the life assurance companies and banks will offer an investment product like this. Keep it cheap and simple.

Investment choices

Q: I have a large sum invested, some of which is with a stockbroker and some of which is invested in funds through my bank. I don't fully understand where they are invested and I'm concerned about the recent fund performance. Where is the best home for an investment portfolio in Ireland at the moment? I'm 52 and I don't foresee needing these funds for 10 years, when I retire.

Jessica, Clontarf, Co Dublin

Most investors look at absolute returns on their investments, i.e. the actual percentage return over a period. They will also tend to check performance more and worry about the investment in periods of volatility.

I prefer to look at the relative performance of my portfolio. I compare stockbroker or fund performance with a simple low-cost benchmark, and see how it has been performing. Just recently, I had a case where a client was very happy with the performance of a general managed fund. I pointed out that there were a number of equivalent funds with better performance, at half the cost.

Many times, it is actually the cost saving that improves performance, and it is mostly a myth that stockbrokers and fund managers can offer 'outperformance', or give your portfolio an edge over the market.

The best place to start is to establish some goals for the money and your risk profile. Once you have a plan, set out to invest, keeping your costs as low as possible. A very low-cost, execution-only stockbroking account, or 'nil-commission' life assurance firm investment product, will improve your chances of a good return significantly. Then do some research into the best low-cost index-tracking portfolios, or ask a fee-only financial planner to help you.

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