Financial retirement planning

DUBLINIRL

Apart from a pension what are the most tax efficient ways to plan for retirement for a married couple with 30 years to retirement and earning at the marginal rate as PAYE employees with no debt other than a mortgage?

dxhound2005

You could consider paying extra on the mortgage. If you search Boards for "Paying off mortgage early" you can find some opinions. You might find a calculator from your lender online, if they allow it.

https://www.ccpc.ie/consumers/money-tools/extra-mortgage-payments-calculator/

DUBLINIRL

Would that make sense from a tax planning perspective?

Also the long term mortgage interest rate should hopefully be less than the long term gain resulting from investing in an EFT that tracks the likes of the S&P500 for example so paying off the mortgage early might actually result in the person ending up with less money depending on what they do with the money they don't use to pay down the mortgage faster.

Peregrinus

From a tax-efficiency point of view, the pension is the best way of retirement saving.

As between paying extra on a mortgage and putting money into a non-pension savings vehicle like an ETF, paying money into the mortgage has two advantages. First, it provides a risk-free return — you are guaranteed a return on your investment equal to the mortgage rate from time to time. The EFT provides no similar guarantee. Of course, everyone's appetite for risk is different, so you may not especially value the risk-free nature of this return. But the other advantage is that the return in investing in mortgage repayments is tax-free. The return you earn on the ETF may be higher, but it will be taxed at 41%.

Buddy Bubs

Nothing comes close to an approved retirement savings plan (pension) to be honest

listermint

https://www.boards.ie/discussion/comment/121489505#Comment_121489505

Question always need to be asked though, can you eat a house? Or are you paying it off early for when you're dead.

Peregrinus

https://www.boards.ie/discussion/comment/121489518#Comment_121489518

Well, you may be paying it off early for when you're retired, and no longer have the income to service a mortgage. Or, you may plan to sell it on retirement, trade down to a smaller or cheaper house, and liberate some capital to supplement your pension.

But you're right. You do need to have an exit strategy here. The OP asks about the most tax-efficient ways of planning for retirement, but tax efficiency can't be the dominant factor. In planning for retirement, the most important question is, what will the OP's needs in retirement be? First and foremost, he needs to choose an investment mechanism which will meet those needs; tax efficiency is very much a secondary consideration to that. So it matters whether he plans to pay off his mortgage out of income before retirement, sell the house and pay off the mortgage that way, or continue to service the mortgage during retirement.

DUBLINIRL

The mortgage will be paid off before retirement. I will then decide at some stage during retirement whether to downsize. I think I can get a long term rate of return on equity investments higher than my mortgage rate so don't see an advantage to paying off the mortgage at an accelerated rate.

I'm asking about tax efficient planning strategies to understand what is available apart from the pension so that I can then incorporate this into an overall strategy.

Peregrinus

The advantage of putting money into your mortgage is that it earns a tax-free rate of return. You might expect a higher return on your equity investments, but that will be taxed. So you need to ask yourself if you expect a return on your equity investments that is so much higher that, even after paying tax, you'll still be ahead.

The other issue, as already pointed out by listermint, is that investing in reducing your mortgage is relatively illiquid; how are you going to realise your investment without selling the house? While you contemplate that you might sell the house at some point, you presumably don't want to have to sell it when you otherwise might not.

Which makes the point that you have a focus on tax efficiency which may not be appropriate. If your sole concern is tax efficiency, then investing in reducing your mortgage is more tax-efficient than investing in, e.g., an ETF. But you might have good reasons for not doing that.

If tax efficiency is your dominant consideration then, as I and others have pointed out, pension funds and the like are easily the most tax-efficient vehicle for retirement saving. But you are looking for something other than pension funds; this seems odd, if you attribute a high value to tax efficiency.

So, it might help if you could tell us why you are averse to using pension funds for the purpose for which they were, after all, devised?

No offence, but while you express a concern about tax efficiency, when faced with actual choices you have twice selected against the more tax efficient option — once when you decide not to invest in pension funds, and once when you decide not to invest in mortgage reduction. In each case that choice must be driven by something that you value more than tax efficiency. You're not telling us what that is, and maybe you're not recognising yourself what it is. So that might be worth unpicking a bit.

DUBLINIRL

The reason I said "apart from a pension" is because a pension is clearly the most tax efficient method of investing for retirement and I was hoping the thread wouldn't be solely focused on pensions and would discuss other less obvious options.

The J Stands for Jay

https://www.boards.ie/discussion/comment/121497518#Comment_121497518

The only other options involve investing in undiversified investments. There's usually some scheme or other for film or student accomodation investments.

3DataModem

As above, the pension is almost always the best investment in your situation. While people complain about tax loopholes in Ireland, there really aren't that many for individuals or companies... other than a pension.

But bear in mind a pension isn't magic. You get tax relief on what you put in, but you pay tax on most of what you take out.

Jim2007

https://www.boards.ie/discussion/comment/121497518#Comment_121497518

First of you should start with a financial plan for your retirement and then take advantage of the appropriate tax breaks not the other way because what the government wants to encourage people to do and what is right for you are two different things.

For instance in this country there this warped idea that property is a good investment when in fact the statistics show it to be a high risk, low return, illiquid asset and to invest in such an asset people are required to borrow heavily and give up on diversifying the risk involved. People got burned the last time around with BTLs etc, not because of the government, the banks or any of the other usual excuses, but because they choose to do something incredible stupid from a financial point of view. And they are setting themselves up to repeat those mistakes once again. Finance is a place for cold calculated decisions not hunches, group think and the collective knowledge of the internet.

So as I said start with a plan to accumulate wealth, pick the appropriate financial products and then take advantage of the tax breaks on offer.

The J Stands for Jay

https://www.boards.ie/discussion/comment/121503012#Comment_121503012

Finance is a place for cold calculated decisions

For so many questions raised here and on similar sites, the real answer is always: run the numbers and you'll see your answer. Sometimes it's easy, other times it needs expertise, but it so often shows the answer

DUBLINIRL

I will be able to run the numbers.

So far;

Pension - Yes

Diversify Investments (unstated) - Yes

Pick appropriate financial products (unstated) - Yes

Property - No

dxhound2005

Have you run the numbers on paying extra on your mortgage?

Jim2007

https://www.boards.ie/discussion/comment/121503032#Comment_121503032

Running the numbers is always the easy part, but having the mental disposition to executed it is the challenge and the place where people fall down. And that includes the professionals, among my own cohort, the personal annualised returns were a couple of percent below the money under management. It is always different when you are playing with your own money.

Jim2007

https://www.boards.ie/discussion/comment/121503894#Comment_121503894

The take away is not "No Property", it's that you need to start with a proper financial plan. As Gary Brinson has pointed out, a well diversified portfolio will most like deliver the best return over the long run. And that does include a small percentage in property & commodities. But this is usually done in small portfolios (< €3m) with the use of REITs and ETFs to diversify the risk.

DUBLINIRL

Why is any sort of property investment, including REITS, needed in any portfolio?

I don't think it should be included just because it is a different asset class and therefore increases diversification.

The like of Hibernia REIT haven't been providing great returns for a number of years. Private landlords are not seeming much return for a long while.

Have you a different experience with property related investments?

Jim2007

https://www.boards.ie/discussion/comment/121504724#Comment_121504724

Hibernia REIT is basically a penny stock, it has no place in the portfolio of the vast majority of investors, as are many of the stocks listed on the Irish exchange. Portfolio construction is a very big area of research, maybe read some of the stuff written by Gary Brinson, if you are interested.

DUBLINIRL

Portfolio theory is not at all the topic of the thread.

Schemes like the EIIS would be.

I appreciate your contribution to this section of Boards Jim but in this case you're derailing the topic.

Jim2007

https://www.boards.ie/discussion/comment/121505765#Comment_121505765

And this exactly why I'm telling your that you need a financial plan based on professional advice. Such schemes are not therd to help individuals build wealth for retirement, they are there to encourage people to provide equity for businesses. And it also illustrates the point I already made about not using tax incentives to drive retirement savings decisions.