The correct term is mortgage neutral, meaning we now have more in liquid investments (non-retirement accounts) than we have left on our mortgage.

I feel incredibly blessed and thankful to be in this position. Looking back at the 9 stages of wealth we are now somewhere between stage 5 (net worth positive) and 6 (security where passive income covers basic expenses).

As the path to full financial independence is a long one, I think it’s important to stop and notice the milestones along the way as a way to keep motivated. Also, to look back at all that we did to get here.

Firstly, I think it’s important to say that luck definitely plays a part in where we are today in as far as

• where we were born
• the families we were born into
• being born white and all the privilege that comes with that
• the housing and job market where we have lived
• being introverted and able to stick to long-term goals and spend less money
• being part of a long-term couple which lowers expenses
• and so on

There is a really interesting scientific read on the impacts of luck on the path to success here which I think is important to keep in mind – especially when comparing your own journey to others.

Secondly, we did not get here by mistake or overnight. We’ve been on this journey since I was 22, although being mortgage-free was not always the main goal, living within our means was always at the root.

At a high level, I think the major factors that contributed to getting here have been:

1. Tracking expenses in detail, taking stock at least once a year and assessing if there were trends we could change
2. Saving and paying for big expenses in cash (cars, wedding, renovations, maternity leave)
3. Never financing a car
4. Carefully choosing where we live to ensure that we would only need 1 car between us to get to work
5. Avoiding credit card debt
6. Educating ourselves on investing
7. Educating ourselves on doing our own taxes
8. Not inflating our lifestyle as incomes increased

Each of these actions have easily saved 10s of thousands over the last decade.

Our own journey looks something like this:

• 2005: Met at age 19 and 24 (those eyebrows were a choice?)

• 2006/07: Travelled and amassed almost 15,000$ in debt

• 2008: I lived with my grandma for 3 months and walked to work while Mr. MHs visa was being processed and he had to stay in Ireland. Mr. MH moved to Canada and went a few months without work. Consolidated debt to lower interest line-of-credit and paid off in full within the year. Shared a 3-bed apartment with a friend and my sister. Public transport was sufficient for commute, no car needed. Ottawa was fairly insulated from the economic crash and we maintained our jobs (insert luck here)
• 2009: Moved to the suburbs with younger sister and brother in a house bought by my Mum. Mr. MH, myself and my Mum split all expenses including mortgage as a way to “invest” (again insert luck into the equation here). Commute on public transport was brutal for me so bought 10-year-old Toyota for 4,200$. Started earning more than I needed to cover expenses. Started reading about investing and started contributing to workplace pension matching scheme.
• 2010: Renovated house to add value – paid in cash, bought furniture, saved towards down-payment

• 2011: Bought first apartment on our own at 26 and 30 with 20% down-payment

• 2012/13: Enjoyed life in the city, travelled, ate in restaurants. Paid a number of lump sums off the mortgage. Saved for move back to Ireland.
• 2014: Moved back to Ireland, I went 8 months between paychecks while waiting for visa to come through. Rented out Canadian apartment. Figured out international tax requirements savings at least 5k in accountants fees. We rented a 2 bed apartment in Cork City. Public transport was not great. Bought a 10-year-old manual Toyota for 2,100€ with the hopes I would learn how to drive manual – I didn’t (insert trauma lol). Got back on our feet money-wise, built our emergency fund back up

• 2015: Got engaged! Bought 10-year-old automatic Toyota for 4,500€ (notice a trend?). Started saving towards wedding.

• 2016: Got married! Paid for wedding in cash. Started saving for down-payment for house

• 2017: Bought 2nd house with 20% downpayment. Purposely bought close to Mr. MH’s work so we’d only need 1 car which also happened to be in an area with a reputation of being rough but cheaper as a result – see our full house buying guide here. Got pregnant! Saved for maternity leave
• 2018: Renovated and furnished house. Had our son. Started reading about investing in Ireland. Mr. MH maxed out stock option in work. Spent less on maternity leave than expected and invested in ETFs.

• 2019/20: 18 months maternity leave. Started this blog. Saved for and took mini-retirement in Portugal. Sold Canadian apartment. Figured out taxes, again saving thousands in specialist accountancy fees. Used proceeds to halve mortgage. I went back to work and Mr. MH left work to be stay at home Dad.
• 2021: Saved for and bought a 9-year-old hybrid Honda for 6,500€. Renovated garden. Continued adding to ETF portfolio

• 2022: Irish stock/ETF value exceeds remaining mortgage at age 36 and 40!

In terms of accessibility, while we have certainly had lucky events that propelled us forward, we have still lived fairly traditional lives with a number of intentional financial set-backs.

Setbacks: Over the last 14 years, we have lived off 1 income for about 4 of those due to moving countries twice, having our son and not being able to find childcare at the start of the pandemic. We also had a number of large costs like moving country, a wedding and renovations and still managed to progress on our path to financial wellbeing by following the key factors outlined above.

In terms of income, over the last 7 years, our take-home income has averaged less than 100,000€ gross combined so while this is high it is not like we’re both earning 6-figure incomes.

In addition to the key factors of tracking expenses, living within (or even under) means, staying out of debt and self-education on financial matters, the other 2 key factors are consistency and time (like with all long-term goals).

No matter where you are on your journey, keep it up and make sure to celebrate your successes along the way, big or small.

Of note:

• I submitted my citizenship application!
• we finished off our back garden renovations which involved a bit more work by us than we had planned
• I ripped up some old carpet and prepped, sanded and stained the floor boards
• we got a “new” car which required a good bit of research
• we took a week off to visit family and have been spending a bit more time catching up with friends now that we are vaccinated

I have plans to write up a bit more on our renos and the car research but this weekend I started researching the security of my investments in terms of where they are held and I wanted to document it so I don’t forget. Hopefully, it’s of use for you too as a consideration for your own long term due diligence. Caveat: I’m in no way an expert and my findings should be taken with a grain of salt and I’m happy to be corrected if my understandings are inaccurate.

Lesson 1: Securities lending

When signing up for a Degiro account you are given the choice of a Basic account or a Custody account. The main difference is that the basic account allows Degiro to lend out your shares which lowers your fees.

But what does this really mean and why do they do it?

This sent me down a rabbit hole.

What is securities lending?

Lending out shares is also known as securities lending. This is where stocks, commodities or other securities are loaned out to other investors or firms.

Benefits of securities lending for the lender (you)

The benefit to the lender (you) is that the borrower is charged interest on what they borrowed. This results in an extra income stream for the fund/investment firm on top of capital gains and fund fees which is usually passed onto you. In the case of a Degiro Basic account, this results in lower fees than the Custody account where securities lending is not done.

Benefits of securities lending for the borrower

The borrower typically borrows securities in order to short stocks. Ultimately they believe that they can make more money by shorting stocks than the cost of the interest from borrowing the stocks.

Risks of securities lending

This practice has different regulations depending on where the investment firm is located. I believe the location of the investment firm determines the regulations rather than the location or domicile of the funds themselves but I’m happy to be corrected. For investment firms regulated within the EU, I believe borrowers need to secure the loan with non-cash collateral of equal value to what they are borrowing. In the US, there is slightly more risk as cash can also be used as collateral which can be easily spent but they also need to put up 102% of the value being borrowed as collateral. The collateral regulation reduces the risk to the lender (you).

Another thing I learned is that most low free brokers operate with something called an omnibus account. What this means is that individual stocks/shares that you purchase are not technically in your name, instead a type of ledger is used to keep track of who owns what but the share remains in the brokers name so that they can loan them out for securities lending. I’m not 100% sure on the true risk here but have seen on reddit forums that some people have had very long delays getting money out of some of these brokers which I can only assume are somewhat related to securities lending through this omnibus structure.

Who does securities lending?

Most low fee brokers do securities lending. Even exchange-traded funds (ETF’s) do securities lending.

Stocks, commodities and other securities

Degiro Basic account, Trading 212, Bux Zero all likely do securities lending.

ETFs

No matter who you buy ETFs through, my understanding is that the firm themselves cannot lend out the underlying funds but the ETF fund manager can and usually does. You can see the level of securities lending done by each fund on their annual report.

From what I can tell, Vanguard do LESS securities lending than other funds like iShares. Additional reading on securities lending in ETFs in the EU here.

As an example: The Vanguard 2020 Annual report here, shows that for the Vanguard S&P 500 there are 24 trillion in net assets and 7.1 million lent out for securities lending. This means that only 0.029% of the net assets are lent for securities lending. On page 557 you can see that of the 7.1 million lent out, there is 7.5 million in collateral held against that mostly in AA and AAA bonds (less volatile). On page 585 you can see that across all the Vanguard funds, only 6-9% (14,000) of the securities lending income (146,000) goes to the lending agent with the rest going into the fund. Only 0.009% of the income for the year came from lending securities (146k of 1.6 trillion).

Who doesn’t do securities lending?

Interactive brokers, Degiro Custody account (for non-ETF securities like stocks and commodities)

Take away

As I’m investing mostly in ETFs through Vanguard, I’m happy to leave my account in a low fee broker as the securities lending is managed and regulated through Vanguard rather than the investment company and I’m comfortable with the level of risk as the level of securities lending done by Vanguard is relatively low.

If I was investing more heavily in individual stocks, I would probably move to an Interactive Brokers tiered account which seems to have lower fees for an account that does NOT do securities lending according to this analysis by the Poor Swiss.

Lesson 2: Delayed withdrawals

In addition to lending shares, most low fee brokers operate in the Stock Exchange with Chi-X (known as Chi square), which allows significant cost savings. As Chi-X’s market share is small, they have less liquidity and volume compared to others, which usually results in delays for both buying and selling as far as I can tell, so it can take longer for you to access your money if you need to sell but I’m not sure how long these delays can take. Degiro’s site for example says it takes 2-5 business days to process withdrawals. I can confirm that I have withdrawn large sums in this time frame with no problems but something else to consider in due diligence for the longer term.

Lesson 3: Security of investment firm

The second rabbit hole I went down was the security of the investment firm themselves. As I eventually plan on having a large portfolio that will fund our livelihood I want to be comfortable that my money is secure in the off chance the broker/investment firm goes into liquidation/bankruptcy or mishandles my money.

While some people may say the chances of this are very slim, it has happened three times in Ireland alone since 1999 with Money Market International, W&R Morrogh stockbrokers and Custom House Capital Limited.

In the W&R Morrogh case, some investors lost between 50,000£ and 500,000£.

Firms that provide investment services are under a statutory obligation to segregate their own capital from their customers’ investment assets. This ensures that such assets are kept safe if anything should go wrong. However, if a failing firm has not sufficiently segregated these assets, it runs the risk of taking investors’ assets down with it. 

If for example, the investment firm owes more in debt than it has in assets and it goes into liquidation its existing assets go towards paying its creditors which include investors (you), but in some cases, there are not enough assets left to repay everyone.

In 1998, the Investor Compensation Scheme was brought into existence. This is an insurance scheme that investment firms pay into in the case they or other firms go into liquidation. If after the creditors are paid, you are still at a loss, you can claim 90% of your net loss up to a maximum of 20,000€ from this compensation scheme.

The ICS only pays you compensation when:

• A firm is put into liquidation by the High Court or
• The Central Bank determines that the firm is unable to meet the claims of clients

The ICS doesn’t pay compensation if:

• You incur losses due to receiving bad investment advice
• Your investment is poorly managed or
• Your investment performs poorly due to market conditions or other economic forces.

Each EU country has its own scheme regulated by its central bank equivalent. I believe Degiro falls under the German scheme, while Bux 0 falls under the Dutch scheme while Interactive Brokers Ireland falls under the Irish scheme. In the UK, their scheme covers up to 85,000£ per person per firm though I’m not sure if as an Irish resident you can open an investment account in the UK?

In Ireland, the scheme is run by the Investor Compensation Company Limited and regulated by the Central Bank of Ireland. I can only assume there is a similar structure in other EU countries. The success of this scheme relies on the successful running of the holding company as well as the contribution into the fund by the investment firms themselves. You can see if your investment firm is covered here. At the moment this seems to be going well per the 2020 annual report, but that may not always be the case and cannot be taken as a given.

Additional CPCC guidance here.

Although I could not confirm this for Ireland, it seems the ICS scheme in other EU countries is per person per firm including if you hold a joint account.

The investment compensation scheme is separate from the Guaranteed Deposit Scheme which covers up to 100,000€ per person per institution in uninvested cash held in bank accounts.

Take away

No matter what you invest in there will be risks, both with the investment themselves but also with who you invest through. To help hedge our risks on the investment firm front, I think both myself and Mr. MH will each hold our own investment accounts or at least hold a joint account in multiple investment firms preferably covered by multiple counties’ investor compensation schemes. This will not only hedge the risk of all of our funds being managed by one company but also the risk of all of our funds being subject to the successful operation of one ICS company.

If we each have our names on 3 different accounts in 3 different investment firms covered by investment compensation schemes in multiple countries we are reducing the overall risk of any one of those companies going into liquidation including the investment compensation scheme operator themselves. We also increase our maximum compensation from 40,000€ (20k each) to 120k (60k each).

The downside to this is managing 3-6 different accounts both in terms of asset allocation and tax reporting but that is a price I am willing to pay for more security on our livelihood longer term.

This approach also hedges our risks of there being delays in withdrawing money if one firm has delays as we will have access to money in a different firm if needed.

Did I miss anything?

Financial independence in the context of this post refers to building a portfolio large enough that you can withdraw 4% per year to cover your annual living expenses meaning you no longer need to work for money.

I should also start by saying that the maths behind deciding whether to rent or buy is only one part of the equation. Owning your own home is a very personal choice and allows for much higher levels of customisation and control but what I want to demonstrate in this post is that owning your home is not a requirement to achieve financial independence.

Also to note that if you are not great at saving then a mortgage can nearly be a forced way for you to grow your net worth and reduce your cost of living over the long term. If you are good at saving though then the rent vs buy debate can start to be more comparable which I will demonstrate below.

General Assumptions:

• Jointly assessed couple earning 100,000€ combined (68,609€ take home)
• Couple is 36 and 37 with kids
• Annual living expenses without accommodation: 36,840€ including childcare averaged at 900€/month for the full time to FI, this is averaged out over the long term to include multiple kids in creche, school and college over the years.

Buy assumptions:

• Purchase costs
  • An average house price of 400,000€ – the average between North and South Dublin prices as per Daft’s latest house price trend.
  • First time home buyer scheme with 10% downpayment of 40,000€
  • Other purchase costs including stamp duty, legal fees, valuation, engineer estimated 8,600€
  • Furniture costs: 10,000€
  • Total outlays: 58,600€
• Ongoing costs:
  • Monthly mortgage payments: 1,341€ (16,088€/year)
  • Mortgage rate: 2.75% over 36-year term
  • Estimated annual homeownership costs: 4,750€ including home insurance, refuse, mortgage/life insurance, local property tax and repairs/maintenance/upgrades (estimated on average at 3,500€/year)

Total annual expenses: 57,678€

Total annual savings: 10,931€ post-tax or 15,304€ pre-tax in a pension

Couple decides to max pension contributions and saves 15,034€/year towards financial independence

• Pension details:
  • 100% allocation rate
  • 1% annual management fee
  • 0.20% annual fund mgmt fee
  • 10% annual growth
  • 1.9% inflation
• Note that to get this kind of pension performance and fees is not typical, it would require a very hands-on approach to ensuring the underlying funds are high performing and that the fees are low and the allocation rate is high. Not included are any commissions, bid/spread offers or monthly administrative charges which can also be charged.

Rent assumptions:

• An average rental price of 2,166€/month (or 25,992€/year) – the average between North and South Dublin prices as per Daft’s latest rental trend report.
• Invest the money they would have put to a downpayment into an ETF portfolio: 58,600€
• ETF portfolio earns 8% per year and 2% in dividends which are reinvested, 0.19% management fees, and 1.9% inflation
• To maximise their savings the couple decide to invest the rest in a pension with the same performance and fees as the “buy” scenario

Total annual expenses: 62,832€

Total annual savings: 5,777€ post-tax or 8,087€ pre-tax in a pension

Time to Financial Independence: Buy

Using my FIRE calculator (which you can access on my paid member’s area), let’s see how the buy scenario plays out.

As they will not be overpaying their mortgage and maximising their pension instead, the annual expenses they will require to be fully financially independent will need to include their mortgage costs as they reach FI before their mortgage is paid off. They will no longer have childcare as their kids will be grown.

Annual expenses for FI: 57,678€ minus childcare 10,800€ = 46,878€

Time to FI if buying and investing: 29 years

So this option will take the couple 29 years to reach financial independence. 7 years after that their mortgage will be paid and they’re portfolio will be larger than they require, so they can reduce their withdrawal rate which will even further increase the chances of their portfolio not running out. This option leaves them with a higher net worth in the long run which could result in a better estate for their kids.

Time to Financial Independence: Rent

Again using the calculator, let’s see how this scenario plays out.

Keeping in mind their annual living expenses once financially independent will no longer include childcare so their 62,832€/year will go down to 52,032€/year.

Time to FI if renting and investing: 32 years

So renting and investing compared to buying and investing with these assumptions only makes a difference of 3 years.

Considerations

Neither scenario looks at the option of renting out a room in their home for additional income/savings to put towards investments. If they didn’t have kids or even once their kids are moved out they may want to bring on a lodger then OR even downsize and reduce their time to FI even further.

Once they get closer to FI and no longer need to work for money, they could decide to sell their home or rent/buy elsewhere in the country for cheaper and reach FI sooner.

Another option I didn’t look at in the buy scenario is to pay off the remainder of their mortgage with the tax free lump sum from their pension once they reach the access age, which MAY speed up their time to FI as their annual expenses would be reduced at that time.

I did not take into account any capital growth of the property as that is hard to estimate over a 30-year term and could go either way, though generally over that time frame it would go up potentially giving the opportunity to sell at a higher price and use that money to buy elsewhere in the country for cheaper and either reinvest the gains or buy a holiday home if that’s what they wished.

All this to say that if you want to become financially independent and are committed to investing, it doesn’t really matter if you rent or buy. Even in Dublin at current average rental and house prices.

If you work at fine-tuning your expenses to keep them low while not impacting happiness and investing what you can, when you can, you will reach your goal.

Keeping expenses low in the context of buying a house also means not buying a house outside of your means which is another post entirely but you can check out some of my own house buying tips here.

If you want to weigh up your own scenario’s with your own figures, my FIRE calculator is a great tool for comparing various options on your own path to financial independence. I’m always open to feedback and try to incorporate updates once a month to keep providing value.

A little while back I did a guest post on the Wolf of Harcourt Street’s blog on ETF investing. WOHS is an Irish based investor who is building his way to financial independence with growth and value stocks rather than ETFs. This post goes through his:

• Investing strategy
• Tax considerations
• Due diligence when picking stocks
• Tips for someone trying to follow this strategy

As well as how you can follow along his journey and get access to his newsletter.

Thanks WOHS for this insightful post. I hope it gives readers some food for thought on other investment strategies and considerations here in Ireland.

My Investing Strategy

My investing strategy revolves around investing in a combination of growth and value stocks. First off, what is the difference between a growth and value stock?

Growth stocks are companies that come with a significantly higher growth rate compared to the average growth rate in the market. This means that the stock grows at a faster rate than the average stock in the market, consequently generating earnings at a faster rate. Growth stocks have the potential to achieve high earnings growth but have not established a history of strong earnings growth. Growth stocks concentrate on growing their revenue often at the cost of delaying profitability. Examples include Amazon, Facebook, Tesla.

Value stocks are companies that are being traded at a value lower than their intrinsic value. This means that value stocks are being traded at a price lower than their true value and are therefore undervalued. Value stocks are usually larger, more well-known companies that are trading below the price that analysts feel the stock is worth, depending on the financial metrics that it is being compared to. Examples include Coca-Cola, McDonald and Procter & Gamble.

If you are interested in learning more about the difference between growth and value stocks check out Growth vs Value.

Tax Consequences of Investing

My investing strategy is designed to minimise the amount of tax that I pay over the long-term so that I can maximise the effects of compounding. As a result of this, I do not invest in any ETFs and I try to limit my exposure to dividends. Investing related tax can be summarised as follows:

• Individual stocks – CGT of 33% – €1,270 annual exemption
• ETF/Index funds – Exit tax of 41% on gains – no annual exemption
• Dividends – Marginal rate of up to 52% – no annual exemption

I am a full time PAYE employee taxed at the marginal rate of 52% on any additional income I earn such as dividends. As an example, €100 worth of dividends results in only €48 in my pocket. Looking at ETFs, €1,000 worth of gains results in only €590 in my pocket. With ETFs you also have the added headache of calculating the deemed disposal. For comparison, €1,000 worth of capital gains in a tax year results in €1,000 in my pocket based on the current tax rules. If you want to know more about the tax consequences of investing check out the Let’s Tax About Tax Series.

Due Diligence

Investing in individual stocks means that I have committed to spending a lot of time on research and analysis. This strategy is not for everyone. I have chosen the active investing route because I have a passion for studying and researching individual stocks, I am willing to put the time in because I view it as a hobby and I like being in full control of my own finances. Additionally, I can see the tax benefits compared to other strategies. Decide what works best for you. If you are not interested in individual stocks or do not have the time to spend on research then passive investing in ETFs might be more suitable for you.

When performing stock research I follow a Due Diligence Checklist. The idea behind this checklist is to ensure that I do not skip over or miss any important areas of focus. Below is a summary of the items included:

My due diligence process can take days or weeks depending on how familiar I am with the company already and of course balancing a full time job. Check out the most recent investment thesis I published on Square, Inc for an example of this process put into practice.

Implementing a Similar Strategy

Are you someone who is looking to move from a passive investing strategy to an active investing strategy? Establishing your investing goals and an emergency fund are two other really important aspects to investing. This is something every investor should do regardless of whether you invest in ETFs or individual stocks. This 5 Point Framework can help you to get started investing. For current investors, it can also serve a role in validating whether your actions to date are consistent with your long term goals or if changes are required.

Defining your risk tolerance is what ultimately separates growth from value investors. Growth stocks are more volatile than value stocks by their nature. I personally adopt a 70/30 split between growth and value stocks. I am a long-term investor with time on my side so I am prepared to buy and hold quality high growth businesses through volatility in the hope of achieving outsized investing returns. If you would not be comfortable seeing your portfolio decline 10% or 20% in the short term then it might be best gearing more towards value stocks. You can view the current stocks I hold under My Portfolio.

Skin in the game will massively accelerate your learning when it comes to individual stock picking. By having a small amount of money on the table you will pay far more attention to the stock without often without realising. Start small and build your positions up over time as you become more familiar.

Lastly, but most importantly, always do your own due diligence. Advances in modern technology mean that it has never been easier to be a retail investor. The most accurate and up-to-date information is at our fingertips and is just as accessible to you and I as it is to the largest investment bank. There are a lot of really useful websites and accounts that share investing information for free. However, never follow another individual blindly. Every investor is operating under a different set of circumstances and with different goals to you. The only person that is responsible for your investment decisions, is you.

My Newsletter

I write a free weekly newsletter with the mission of making investing knowledge accessible to all. Whilst I am far from an expert, I was inspired to start the newsletter because I found that many people with less financial literacy than myself really struggle to know what to do with their hard earned cash.

By documenting my portfolio insights, stock analysis and learnings I hope to inspire others to start investing and take control of your financial future. I would estimate that I spent about 10 hours a week writing content for the newsletter and twitter account @wolfofharcourt

Sharing information in the public domain can have its drawbacks too. Everyone has got an opinion and that can differ from your own. Ultimately, this is what investing is all about – every time you buy, somebody else is selling and both parties think that they are going to profit from the transaction. I try to be as transparent as I can with my readers. If you like what you have read you can sign up to my free weekly newsletter here.

Moving to Ireland from the US

This post is about a family of 5 that moved to Ireland from the US on a critical worker visa. The couple is technically already financially independent as they are in receipt of 2 early retirement pensions but in order to gain citizenship here in Ireland they need to work for 2 years in the career they applied for on their visa. Once they have citizenship, they may look to move towards a more financially independent lifestyle, working on projects that have meaning or interest to them.

Earnings vs Expenses

The income they are earning here in Ireland is fully funding their living expenses here while their pensions are being paid into their US bank account and are growing to a large sum. They are a bit torn about what to do with this extra income. They think their move to Ireland is permanent but aren’t 100% sure yet as they moved over just before the pandemic hit and have not really gotten a true taste of what life will be like here longer term.

Opening US investment accounts

Before coming to Ireland, they opened various US investments accounts, some for their kids and some for themselves as they had read that the tax treatment and ability to invest in these can get more complicated if they were opened from abroad when they were no longer tax resident.

Shipping goods to Ireland

They also looked to ship over some of their belongings in a container and put the rest in storage in the US while they tested the waters and got settled, only to find out later that they only have 1 year from arrival to ship things before customs and VAT would be applied. This resulted in them buying a shed here and shipping another container over. In hindsight it would have been cheaper to ship everything over in 1 large container but in researching a move to a new country, there will always be these types of things that will be missed.

Personally, it took us 9 months of research and planning to get everything ready to move our lives over back in 2014. There are so many things to consider, there’s no way you’ll get everything right. If that’s the only lesson learned then how bad and hopefully by sharing on here, it will save someone else on their move.

Selling their home

They owned a home in the US and tried renting it out for a while but quickly found it was not worth the headache. Even with a local property manager, they still seemed to be getting calls regarding maintenance and routine inspections on the house. The rent covered most of the costs but the minute anything unexpected cropped up it was additional expense that ate into the small amount of income they were clearing. They decided to sell even though they expect they could have made a bigger profit if they’d held on for a few more years.  

We talked about the trade off of simplicity vs potential future returns. I very much experienced this internal battle when deciding to sell our property in Canada where the property market is on the up. Ultimately, we both prioritise a simpler life with less stress over the potential to make more money.

Buying a home in Ireland

They are not in any rush to buy a home here in Ireland as they are tied to Dublin for the time being due to work commitments. They quite like where they are but are happy renting and not sure where they will be in a few years time. Also in talking to a mortgage broker they were told the income from their pensions would not be considered in determining what they could borrow and so they would likely need to be cash buyers or would only be eligible for a very small mortgage. Not really feasible in Dublin at the moment.

Financial planning

The couple recently met with a financial planner but felt very much pushed towards traditional managed investment vehicles here in Ireland. They were left feeling this was very much a sales pitch rather than a holistic review of their medium and long-term goals, which led them onto reaching out to me for a consult.

Their main questions were:

Do we:

1. Add to US investments
2. Save for a house in Ireland
3. Start investing in Ireland
4. Invest in pension?

Basically, what to do with the money considering they don’t know where they want to be longer term

In talking this through together we came to the below conclusions:

Child benefit

One thing the financial planner mentioned what that he did not see the couple was receiving a child benefit payment for their kids. He did advise that they could apply for this so that is one nugget they did get out of their session. You can apply for this once you can prove you are habitually resident in Ireland. You can read more about this here but essentially it would mean another 140€ tax-free per child per month until they are 18.

Leave Irish money in Ireland and US money in the US

• While they are earning an Irish income here, use that money to fund their living expenses here.
• Leave the money that’s in the US there and invest it there.

Consult a cross border tax specialist

• I mentioned it would be good to get in touch with a cross border tax specialist as even if they have tax efficient/tax efficient investments already in the US, like an IRA or ROTH IRA, the growth of these may NOT be tax free in Ireland essentially removing the benefits of those accounts while adding to the tax filing headache of filing in both countries and claiming back tax credits under the double taxation treaty. These accounts MAY only be taxable for a non-Irish domiciled person on remittance to Ireland (transfer to an Irish bank account, spent here on a US credit card) but I haven’t been able to confirm that one way or the other so best to consult a specialist there.
• Depending on the outcome of that consultation it may determine what best to invest their US dollars in within the US. The ROTH IRA has limitations both in what you can contribute per year and around withdrawal before a certain age. If the growth on these will be taxable in Ireland then it may make more sense to invest in a regular post-tax investment account so that it can be accessed at any time.
• I also mentioned they may want to check out Our Rich Journey on YouTube as they recently retired early to Portugual from the US and may have some insights into investing, withdrawing and filing taxes on investments in the US while tax resident in Europe.
• They may not be able to contribute to the ROTH IRA once no longer tax resident. I know for the Canadian equivalent, the TFSA, once you are no longer a tax resident you stop gaining contribution room and you can no longer contribute to the TFSA (outside of reinvestment of dividends of existing funds). If you do contribute more, you may be liable for interest and penalties. This may also be the case for the ROTH IRA.
• Even if they can max out their annual contribution room in the IRA, it would be good to invest outside of that as they will have easier access to that money should they want to use it for a house in Ireland eventually, so that should form part of their decision/strategy.
• As US citizens they will need to file and pay taxes in the US regardless of their tax residency so having investments in one country over another will not simplify their tax requirements so that somewhat removes the consideration for having all investments in one country or the other for simplicity’s sake. While US citizens can revoke their US citizenship to get out of filing US taxes every year, this is not an option for this couple as it would cancel out their pensions and benefits.

Pension loophole

• The couple did consider contributing to the company pension for the job here in Ireland. They took a look at the forms required to sign up and postponed putting it into place. As mentioned, the person earning the income only plans to be in their current job for 2-3 years. I did come across a potential loophole that may be worth looking into.
• If you contribute to a company pension in Ireland but leave before the 2nd anniversary you will be presented with various options. You can leave the money invested, transfer to a buy out bond or have the money paid back out to you, although this payout will incur income tax. If you are in the higher income tax band while you are contributing to the pension, you will have reduced your taxable income by 40% but apparently, when you receive a payout, you are only charged the 20% tax rate. This needs to be confirmed but there is a possibility here to make a 20% return/ year on the 2-year investment into the pension. Of course, it’s important also to be aware of what the pension is invested in and what the fees are as these can quickly erode any tax savings and tax-free growth you may have made. Also as this investment strategy is a short term one, the risk rating of the underlying investments should also be taken into account. Worst case scenario, if after 2 years the market has tanked and they are at a loss, they can choose to leave the funds invested and allow time for them to recover. That said, the money would then be locked into that pension until age 50 at the earliest, so that needs to be taken into account into their strategy.

Saving for a house in Ireland

• My input here was that as they don’t know how long they’ll be here or where in Ireland they may end up, this seems less sound from a monetary perspective for the time being as the cost of buying and selling a home alone usually mean that you may not break even if you plan to own a home for less than 5 years. There is also the risk of a loss of property value in that time frame which could leave them worse off. That said, owning a home is not just a financial decision.
• For us, part of the decision was based on security and the ability to customize a home to our preference. We have friends who were kicked out of their homes as the owner wanted to sell. For one family, as rents had increased in the area, it resulted in them having to move further outside the city and uproot their kids. The house they moved to out of the city also got put up for sale a few years later though luckily at that point they were able to buy that home from their landlord and stay put. This lack of security was a big driver in our decision to buy.
• All that said, the couple is happy renting for the time being and enjoy the flexibility that comes with it. By building up their US income they will have the option to buy in the future should they wish.

Upon retirement

• Once the couple receive citizenship and no longer need to work to satisfy their work visa, the income from their pension and passive income from their other investments in the US can start to be withdrawn as needed and transferred to Ireland to cover their living expenses. As they need to pay taxes in the US regardless of where their investments are it makes sense for them to leave those investments there and withdraw/transfer to Ireland only as needed.
• We talked about withdrawal strategies and I mentioned that some people withdraw and transfer the money they’ll need to live for the next 12 months in one lump sum to give them some comfort around currency fluctuations and market performance throughout the year while others withdraw/transfer a month or so at a time. That will be down to them to decide what works best for them at the time. I did mention the site monito.com to find the best currency exchange rates and to be aware that while the flat fees can seem reasonable they should also check the exchange rate offered against the live rate as banks and currency exchange companies often add the majority of their cut into the exchange rate rather than the flat fee. A difference of 0.01 in an exchange rate essentially means a 1% fee of your entire transfer.
• The income from their pensions are a defined benefit and so are not subject to underlying investment fluctuations so they do not need to worry about a safe withdrawal rate for those. 

Estate planning

• As the income they receive from their pensions more than cover their living expenses here, they don’t have to worry too much about access to their ROTH IRA’s or complicated withdrawal strategies to access those funds before the traditional retirement age. Instead, they will need to focus on estate planning to ensure the tax-efficient treatment of their estate to leave to their kids. There are ways to structure your investments to ensure more goes to your kids and fewer taxes are paid though they will need to consult a specialist in this area to see how best to structure their investments for these in the US.

Final thoughts

Ultimately, I ended with that they are already technically financially independent and no matter what they do with their money in terms of investment strategy, they are still growing their net worth and financial security and freedom. They can always change tack a few years down the road and consolidate investments for ease of maintenance and tax filings etc if that becomes more important to them at that time but to take comfort in the security they’ve already built for themselves.

It was an absolute pleasure talking with such a like-minded person. We were both so enthusiastic about this topic, which is rare to find. Most people I talk to about money get blurry eyed and quickly change the topic. I wish them all the very best on their next chapter and hope they get to enjoy Ireland in it’s proper form once restrictions lift in the coming months.

WOHS is a 28-year-old accountant working in the financial services industry here in Ireland. He started a blog to share his journey towards financial freedom investing mainly in a portfolio of 60% growth stocks and 40% value/dividend growth stocks. His mission is very much aligned with my own which is to make personal finance and investing knowledge accessible to all.

Full post below.

For anyone that’s come across the financial independence retire early (FIRE) movement, you’ve no doubt come across exchange traded funds (ETFs) as one of the preferred investment vehicles for people pursuing this in North America. 

Cross to ocean to Ireland though and the tax landscape on ETF’s can seem prohibitive and unappealing. 

So why am I still planning on building the majority of her passive income in ETFs?

This can be a bit of a long winded answer but essentially for my personal situation the pros still outweighs the cons, though my views of the world can be a bit unorthodox and will not suit everyone.

My current early retirement strategy is to pay off my mortgage as soon as possible and then invest more heavily in ETFs. I’m currently on track to pay off our mortgage in the next 2-3 years and then plan to build up an investment portfolio of 650k in the next 14 years on one-part time income. Our family of 3 in Cork is on track to spend only 30k this year and expect to go down to 26k/year once our mortgage is paid.

I’m a big fan of the keep it simple approach and ultimately keeping it simple and the ability to access my money at any time are the key drivers of ETF investing for me. All the other investment vehicles require more effort than I’m willing to put in.

My main drawbacks with other investment vehicles are:

• Stocks require research into the underlying company performance and valuation on an ongoing basis as well as having increased cost to purchase (stamp duty) and sell compared to ETFs. It also requires more effort to maintain and rebalance a well-diversified portfolio.
• Investment trusts while potentially performing better that ETFs and having better taxation on gains are a bit too risky for me in that you are investing in a company who invests on your behalf. If that company goes bust, your assets aren’t as protected as investing directly in the underlying funds. I wouldn’t be comfortable having a portfolio of over 100k in JUST investment trusts for example. They are also traded in GBX (British pence) and subject to currency exchange fees and fluctuation risk, which could wipe out any outperformance of an ETF portfolio.
• Pensions can be a very good way for people to catch up later in life due to the tax deferral incentives and being able to grow and compound tax-free seem like no brainers but my main issue is the access to the funds, the lack of transparency of fees and under performance. I plan on accessing my retirement funds as early as 45 all going to plan and having them locked in a pension doesn’t work for my personal goals. I know this may mean I will have a lower net worth in the long run but this is not my main goal. My main goal is to have financial freedom and security along the way should bad things happen or should we wish to change direction and put the money towards some other unknown life goal that may come our way.
• Investment property’s are not diversified, way too much effort (sourcing good tenants, keeping up with maintenance, renewing mortgage and insurance regularly etc), too high risk (potential vacancies, potential repairs that wipe out multiple years worth of gains), mostly cash flow negative while the mortgage is being paid down (very hard to find a rent ready property with high rental yields that more than covers the costs and taxes), and taxed highly while you are still earning. This is not to say people can’t retire early with property, it’s just not worth the effort for me personally. I’ve tried it and am so relieved to no longer have a second property to have on the back of my mind all the time.

If you’re up for a bit of number crunching analysis, you can check out these posts where I weigh up ETFs against a stock portfolio, investment trust portfolio, and pensions and see how I still keep coming back to ETFs.

So, if I’ve peaked your interest in ETFs read on to see

• what ETFs are
• the pros and cons
• how they are taxed
• my current portfolio make-up
• things I plan to change
• why I’m not invested in just one high performing ETF
• how to buy them
• my experience with filing and paying taxes on ETFs

What are ETFs?

These are essentially funds that bundle a large number of individual stocks, commodities and / or bonds under one fund. This allows you to easily track the trend of the whole stock market with only a handful of ETFs. This makes it easy for passive/lazy investing over longer terms. ETFs also offer low expense ratios and fewer broker commissions than buying the stocks individually. Historically since the inception of the stock market returns have averaged 9-11%. By having a well diversified range of ETFs you can also achieve these levels of returns with little effort.

What’s good about ETFs

• Low cost management fees compared to active funds
• Low purchase/sale costs (no stamp duty)
• Passive investing for decent returns – buy and forget
• Good diversification
• Lower tax on dividends compared to individual stocks/investment trusts while you are earning above the 40% tax bracket
• Liquid as you can sell anytime

What’s bad about ETFs

• Higher tax on capital gains than individual stocks/investment trusts
• Higher tax on dividends IF you intend to withdraw when earning no other income or earning income below the 40% tax bracket
• Can NOT carry forward capital losses to offset against future gains
• Not eligible for annual capital gains allowance of 1,270€/year
• Have to pay taxes every 8 years whether you sell or not (deemed disposal) – you can pay this out of your fund but significantly reduces the effect of compounding and may cause you to sell assets at a loss (which you cannot carry forward).

What are the taxes?

Capital gains

Firstly some basic terminology:

Definition: The growth you make on your initial investment amount. If you buy for 10€ and in 5 years it’s worth 15€ and you sell up, you’ve made a capital gain of 5€ which you need to pay tax on. Capital gains tax (CGT) is only triggered when you SELL.

Capital gains on ETFs are taxed as “exit tax” which is currently 41%.

This is 8% HIGHER than stocks/investment trusts and you don’t get the 1270€ credit per person per year that you do with stocks and can’t carry forward losses from previous years.

Dividends

Definition: This is fixed income paid out by the fund. Different funds have different dividend payouts. This is expressed as a percentage of your investments in that fund. With stocks/investment trusts, you do not have a choice but to have these paid out from year 1, which triggers a tax event each year.

With ETF’s you can buy accumulating ETFs, which will automatically reinvest the dividends and avoid triggering a tax event until the 8^th year of ownership.

Dividends on ETFs are charged as exit tax as well at 41%.

This is 11% LOWER than stocks and investment trusts while you are still working. While your marginal tax rate may be lower than 52%, your annual tax credits are already used up by your PAYE income and therefore all dividends for stocks are taxed at 52% if you’re in the higher tax bracket compared to only 41% for ETFs.

What I’m invested in

I should start by saying, the below portfolio was my very first attempt at setting up an ETF portfolio. I have since learned more about this setup and will be changing a few things, which I’ll detail below.

In terms of the current setup, I split my ETF portfolio into 4 main funds. This is all equities (stocks) and no bonds, so is high risk and high volatility.

I have an all world ETF, developed Europe ETF, the S&P500, and emerging markets. You can see more about each of these in the fact sheets in the links.

Fact sheets are really useful summaries to help you figure out the performance since inception, the dividend yield and the underlying asset makeup to help you make your decision.

Below are some more details on performance, fees and dividends yield of each.

You will see that the net fees weighted against this allocation are 0.16%. The weighted performance since inception of each fund is 7.14% and dividend yield is 2.32%.

And here is it in graph form:

Things I plan on changing

I didn’t realise when I bought these that there were accumulating versions of each of these funds. What this means is that the dividends are auto reinvested and do not trigger a tax event from year 1. Instead it defers to year 8. By shifting these to accumulating funds I will increase my compounding effect as I will not be paying 41% on the dividends from year 1.

The accumulating ETFs I will be looking at are below. I had a look at the fact sheets and they are exactly the same as the distributing with the exception that one pays out dividends and the other doesn’t. Same stocks, same companies, same allocation, same fees etc.

Here is how they map out:

I will also be shifting from the high dividends all world fund to the regular one as I’m more interested in growth than fixed income (higher dividends). Typically high dividend products will result in lower gains as the companies in that fund have typically plateaued in terms of growth and incentivize shareholders with higher dividends.

You can see this difference in the two all world funds mentioned. The high dividend one has a total of 5.57% growth+dividends where the low dividend all world fund has total growth+dividends of 11.61%.

Why not all S&P500?

Looking at the yields above, why would I not want to put 100% into the S&P 500, which has been earning 16.2% since inception including dividends?

Based on various articles and investment presentations I attended, there is a belief that US markets are overvalued at the moment and unlikely to continue performing at the same rate in the long term.

As I am investing in these ETFs for the long haul, I wanted to hedge my bets by investing in more undervalued areas like Europe and emerging markets, though these are higher risk in the short term.

Why include S&P500 if afraid of overexposure to US markets?

Others have questioned, if I am wanting to reduce exposure to US markets why is the S&P500 still part of my portfolio as the all-world ETF has a lot of overlap.

Investing in JUST the all-world fund exposes me to 50% US markets. While my current portfolio make-up, including the S&P500 brings my exposure down to about 34%. The S&P500 ETF also has lower fees of 0.07% compared to 0.22% or 0.29% for the all world versions. Performance has also been higher for the S&P 500 compared to the all-world so having both gives me the diversification and lower fees and higher performance I am happier with.

How to buy

If you’re interested in adding ETFs to your investment portfolio, you can buy them yourself in online trading platforms like Degiro and Trading 212. Be sure to check the availability of the funds you are interested in as some brokers only carry certain funds.

Degiro also have a number of commission-free ETFs which you can buy one per month. Unfortunately, there is only 1 Vanguard commission-free accumulating ETFs available but you can find a number of others like iShares in this list. The ones that are accumulating usually have Acc at the end of the name. Even if you can’t find the free version of the one you want, rest assured that the savings you will make on deferring your taxes to year 8 on dividends will outweigh any fees you would incur on purchase.

When you search for the ETF you want, you may see multiple versions, some on different exchanges and even different currencies. I try to buy in Euro where possible to reduce administration when filing taxes (the currency is exchanged by the broker and does not need to be tracked by you). In terms of which exchange to buy off of (Italy or Germany), I don’t think it overly matters, the thing you need to consider is which exchange has more interest in your particular ETF, if there is less interest and fewer trades ongoing you could find it hard to find buyers of that ETF when you go to sell. I’m not entirely sure how to check this but this is the only differentiator I have come up with in trying to see which exchange to buy on.

Disclaimer: I am not a qualified investment professional or tax specialist. The views in this post are based on my own experience and should not be construed as advice. All investing comes with a risk of loss.

My experience with taxes

Dividends

So far I’ve only paid taxes on the dividends and that’s been very straightforward. You get annual tax statements from your broker and it tells you the figures you need to plug into the online form 11 on ROS.

The only place I’ve found to input this figure so far is under the foreign income tab, under line 322 a (offshore funds, payable at 41%).

You also need to enter all purchases (acquisitions) throughout the year on your form 11, but this is simply a data entry exercise, as your broker will also list all these details out for you. You also may want to keep this in mind if you are trying to buy 4 different ETFs, instead of buying 4 each month, it might be cheaper and less paperwork if you just buy 1 per month and average it out over the year.

Deemed disposal

In terms of deemed disposals, that gets a bit trickier as I think you need to calculate a first in first out method similar to when you calculate capital gains taxes for a stock portfolio where you have purchased shares on different dates.

I have not confirmed 100% yet but my understanding is that in year 8, you pay 41% on the gains you made on year 1, in year 9 you pay tax on the gains you made in year 2 and so on.

When you actually sell the ETFs, the taxes you paid in deemed disposals act as a tax credit against taxes owed on sale.

I’m working out a spreadsheet formula for this, which I will be sharing on my paid member’s area if you’d like to check that out and keep an eye on when that is added.

I’m continually adding and updating worksheets there including a time to financial independence calculator in the Irish context where you can compare investments in different vehicles, a portfolio builder, an expense tracker with auto categorization, an employee share purchase plan and capital gains tax calculator and so on.

If you like this article and would like to support the blog and more content like this, please subscribe to my member’s area for 45€/year as well as my recently launched youtube channel. Hope to see you there.

Firstly, if you’re reading this as a recent grad with money to spare, congrats on graduating and securing your first job! I remember the first time I started making more money than I needed to live and just started wading my way into the world of investments. It can be overwhelming and scary.

I remember first starting to read about stocks and bonds and had the impression that to invest in the stock market required all kinds of time, skill and risk which I felt was beyond me at that time. If only I’d known then what I know now. If you’re here reading this, I hope you can get over the fear that I had and just make a start. The sooner you start investing, the more comfortable you become and the more you learn.

Of course all investing carries risk of loss so don’t invest anything you can’t live without, or can’t afford to leave invested to allow time for the markets to recover.

Now into my tips:

Build an emergency fund

If you don’t have it already, try to first build up enough cash at hand to cover 3-6 months of living expenses. This is a nice peace of mind cushion to have if you lose your job or need to make life changes and have a bit of breathing room.

Don’t JUST invest in a pension if at all

I know this will be a bit controversial but, once you have an emergency fund and are starting to build up more than that, as you are young, my personal preference would be to avoid investing primarily in a pension (if at all) as you will likely want to access larger sums of your investments for early life goals like a wedding, a mortgage or time off for children, if any of that is in your cards.

Currently, in Ireland, the money you put into a pension is only accessible at retirement age. This age can vary depending on the pension but at the moment it’s looking like age 55. While locking money away can be a good thing to protect it from yourself, not having access to it if you need it for other life goals has to be a factor in your decision.

Also putting it in a pension while on a lower tax band only defers your taxes rather than giving you better tax relief once you are in the higher tax bracket as you progress through your career. The way a pension works is that you get a tax break on contributions now but you will pay your marginal tax rate when you withdraw. So this is a tax deferral rather than tax savings. The biggest benefit, if you are in a lower tax band, is the tax-free growth until withdrawal but high fees and low performance can completely negate this benefit if you do not keep an eye on these in your pension.

If your employer offers pension matching, it may be worth your while to take advantage of that but you’ll need to dig into what the pension is invested in and what the fees are. Fees can be hidden under all kinds of names like annual management charge, fund management charge, allocation rate, commission and so on.

My analysis has found that a pension needs to be making a real rate of return of 5.95% in order to outweigh investing on your own outside of a pension. I also have a post here to help you determine if the employer matching is worth it based on the returns after fees and inflation. The real rate of return is the historical performance of your fund minus the fees minus inflation. The historical 30-year inflation rate for Ireland has been 1.9%.

Another thing to note is that you can only invest 15% of your gross salary until age 30 but employer matching does not contribute to this cap. So if you are earning 30k, you can invest 4.5k. If your employer contributes matching on top of that, it does not take you over the contribution limit for tax relief.

If you will be investing more than 15% of your gross salary, you will need another after tax investment solution like an online brokerage, if you’re comfortable investing on your own.

Unfortunately, Ireland does not have the tax-free investment vehicles like Canada’s tax-free-savings account (TFSA) or the UK’s ISA or US ROTH IRA.

Open a brokerage account

That really leaves a brokerage account like Degiro or Trading212, in there you can invest in individual stocks, investment trusts, bonds, or exchange-traded funds (ETFs) as an example. You can read more about each of these investment options in this post.

Determine your asset allocation

In terms of asset allocation, a typical rule of thumb for risk allocation is to carry bonds in the percentage of your age, so for example a 22-year-old would carry 22% bonds and 78% stocks/equity ETFs. The logic behind this is because you have a lot of time to leave your money invested before you need to withdraw.

There are also quizzes you can take to help you decide your own risk tolerance as well such as this one.

Buy 1 stock/ETF/bond

Starting to invest can be really scary. It took me 2 years before I bought just 1 ETF. I suffered from analysis paralysis. I wanted to know everything there was to know before I started. This does not have to be the case. Make a start and buy just 1 stock/ETF or bond. This can get you started for very little money. I first bought 1 ETF for 50€ and watched it for 3 months before I bought anything else. Taking this baby step can be a great way to get started and get you comfortable seeing the value go up and down.

Once you start investing, you will get more and more comfortable with market volatility and the process of investing. If you hadn’t come across this article yet, there are some good details included on how to get started investing.

Also check out this article in particular the point around lifestyle inflation. As you are starting out your career, be aware of the impact of increasing your spending as your salary increases.

Example of growth

Now to see how investing can grow your money over time.

Assumptions:

• Gross salary: 30k
• Net take home: 25.4k
• Annual Expenses: 12k
• After-tax investments: 13.4k
• Invested after purchase fees of 1 purchase/month: 13.02k
• Invest in a simple ETF portfolio with performance of 7.95% (average historical performance of 10% minus 0.15% fees minus 1.9% inflation)
• Dividends of 1% taxed at 21% tax rate (non-accumulating)

Growth after 15 years by the time you are 37.

Your portfolio will have grown to 426k allowing you to withdraw 17k/year to live on indefinitely without touching the principle if you use a safe withdrawal rate of 4%.

This does not take into account any pay rises but also does not take any withdrawals into account should you need it for a house, wedding etc.

If you had invested this in a pension, while the portfolio value might be higher, you would not have access to it for another 18 years.

Detailed calculations below:

Worksheets

If you’d like to play around with more scenarios and assumption you can gain access to my worksheets and calculators in my paid member’s area. These worksheet templates can help you on your financial journey.

It includes an expense tracker which is the very basis of most financial planning, it also includes a portfolio builder and a financial independence calculator where you can input a number of assumptions and see how long it will take for your investments to grow to a level where the passive income will be enough to cover your annual expenses.

I will be working on a youtube series on how to use these tools so stay tuned for that if that would be something of interest. The first one of the series can be found here.

All the best on your journey. If you have any other specific questions that would be of use to postgrads, please do comment below and I will look to update the article.

This analysis was spurred on a comment on a reddit thread that financial independence and early retirement were only attainable for high earners. Challenge accepted.

I wanted to test this theory with my own analysis and have found that early retirement is possible even for low-income families. Of course, this requires some degree of financial literacy on investing and continuously keeping spending in check but this is true for anyone on the path to financial freedom.

Let’s start with a story of the subjects in question.

Let’s call them Mary and John.

Mary and John are the same age. They didn’t go to college and started working full time at a job that paid the living wage at age 20.

“Living Wage is a level of pay recommended by the Living Wage Technical Group. It is not mandatory – just advisory. In 2020 – that advisory body raised its recommended minimum living wage from €11.90 per hour to €12.30. Lidl is one company in Ireland that pays the Living Wage. Someone earning the Living Wage doing 39 hours a week would earn €24,944 gross a year. This would result in take-home pay of €419 a week or 21,788€ a year (After tax, USC and PRSI of €3132 a year)”

Jointly, they take home 43,576€/year. Their joint expenses come to 35,634€. This leaves them 7,942€/year or 18% of their take-home) to invest which they put into a savings account as they have not yet learned about investing.

At age 20, their expenses look something like this. They each rent a room in separate accommodation and pay 400€/month each. They spend a good bit on entertainment and holidays as young single people typically do.

As they are low income earners, they qualify for a medical card and GP visit card, explaining the lack of medical costs in their budget.

At age 20, they each buy a second hand car for cash worth 2,500€ reducing their savings that year.

At age 24, Mary and John meet and fall in love.

At age 25, they jointly have 34,000€ in cash savings and decide to look into how to invest. They discover ETF investing through an online broker. They decide not to put it into a pension at this point as they have plans to use the cash before retirement age for big life events like buying a house.

By age 26, they are living together and have moved to a location which is close one of their workplaces only requiring one car. They decide to scrap their old cars and use their savings to buy one “new” used car to share for 5,000€ cash.

At age 29, they get engaged and have the wedding the following year. At this point, their investments have grown to 110,000€. They withdraw 20k to pay for their wedding.

At age 32, they find a house and make a move to purchase it. At this point their investments have grown to 122,000€, they withdraw 70k to make a 30% downpayment on a 250,000€ house. This brings their monthly payments to 850€/month over a 25-year term at 2.95% interest.

At age 33, their last car needs replacing so they get another “new” car for 5k cash out of their investments.

At age 34, they have a baby and Mary takes 18 months off. As they are sleep deprived, their entertainment budget reduces their overall expenditure by 3,000€ to 32k. Taking the 6,370€ of state maternity cover into consideration along with the 140€/month of child benefit, they only need to withdraw 3,700€ from their investments to cover the time off. Though they stop contributing to their savings for this time as well.

At age 36, they are both back to work full time and have their kid in child care. Their entertainment budget is dramatically reduced and is moved towards child-related costs. As they are low-income workers they are able to avail of government subsidies for childcare. According to this calculator, they are entitled to a subsidy of 118€/week. Their creche costs 850€/month. Taking their subsidy of 6k and child benefit of 1.6k out of the creche costs the child care only adds around 3,000€/year to their costs, which they easily saved by cutting back on their entertainment budget.

Also at age 36, as their big early life expenses are out of the way, they decide to start contributing to a pension which increases their 7,942€/year in pre-tax investments to 9,977€/year due to the tax deferral. They both maximise their contributions in the year they are 36 which is capped at 20% of their gross salary between age 30 and 39.

At age 37, Mary has another baby and takes another 18 months off. They withdraw another 3,700€ from their ETF investments to cover the gap in time off and stop contributing to investments until they are both back to work.

Once they have 2 kids their expenses look like this

Due to the government subsidies for child care, the additional child benefit and the fact that the 1st child will almost be in school by the time Mary goes back to work from her second maternity leave, their expenses for childcare do not increase.

From age 39 onwards, they continue investing 9,977€/year into their pension.

At age 40, they withdraw another 5k from their ETF portfolio to replace their last car (essentially they do this every 7 years). And again at age 47 and 54.

By age 49, their childcare costs are halved to 1,500€/year as their 1st born is now 16 and no longer needs after school care. They invest this difference into their ETF portfolio.

At age 52, their 2nd child is 16 and they have no more childcare costs, this increases their savings to an additional 3k/year going into ETFs on top of their pension contributions.

By age, 57, their mortgage is paid off reducing their annual expenses from by 10,200€/year.

At this point, their original 35k per year in expenses has reduced to 22.5k as they no longer have childcare costs or a mortgage. This means they only need an investment portfolio of 562,000€ to cover their remaining expenses using the safe withdrawal rate of 4%.

Assuming a real rate of return of their ETFs of 7.91% and 6.54% of their pension after fees and inflation, their portfolio actually reaches this value at age 56 but as they still have their mortgage payments for another year it would be safer to continue working 1 more year. They technically could have the option to withdraw more than the 4% for their first year but this may be taking an added risk for the sake of working an extra year.

If they decided to support their kids through college, they could have reduced their savings in previous years and could continue working past 57 and investing the savings from their mortgage into their pension which would still have them retiring comfortably by age 60. Still well before the age they can access the state pension (which will just be a bonus and is not something they will require to cover their cost of living).

While I know this could be picked apart on various points, it simply demonstrates the point that if financial literacy is taught in schools or at an earlier age, and people can learn to keep their spending aligned with the things that bring them the most happiness, they can keep their expenses down, while still living a traditional and fulfilled life and still have money left over to work towards financial security without relying on the government state pension.

Detailed calculations

And for those that want to pick apart the numbers here is the portfolio growth:

ETF Growth

Pension Growth

Total Investments

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What are Investment Trusts

Investment trusts are closed-end funds, typically in the UK and Japan. They are publicly listed companies that invest in financial assets or the shares of other companies on behalf of their investors. You can read more about these here.

Diversification

Investment trusts are a great way to get diversification by buying one “stock”.

Looking at some info on F&C Investment Trust as an example: The first-ever investment trust, launched in 1868. A diversified portfolio gives exposure to most of the world markets. Invests in more than 400 companies in 35 countries. Among the largest investment trusts in its sector.

F&C is invested in a mix of stocks and bonds of companies listed publicly on the stock market, a max of 5% in unlisted securities (not traded on an exchange) and a max of 20% in private equity (direct investments into companies rather than via stock holdings).

Derivatives (investment contracts between the Company and counterparties, the values of which are derived from one or more underlying assets) may be used for income enhancement and efficient portfolio management. Borrowings, which may be short or long-term, in sterling or foreign currencies, would normally fall within a range of 0% to 20% of net assets.

Of the publicly listed companies, it’s invested in companies like: Amazon, Microsoft, Google, Facebook, Apple, Paypal, Mastercard, Visa, Alibaba, Netflix and SAP.

This is actively managed fund and results in higher fees. F&C for example charges 1.18%

Performance

The average annual return for the last 5 years of the F&C has been 14.46%. I believe this is before annual management or purchase fees, inflation and taxes.

The FTSE World Index‘s performance for the same period was 12.8%.

If we take 1.18% fees and 1.9% inflation brings it down to 11.38%. This still does not include stamp duty, currency exchange fees and brokerage purchase costs.

The S&P 500s last 5 years average return was 13.88%. No stamp duty applies. Minus 0.07% fees and 1.9% inflation = 11.91%. If you bought this as an accumulating ETF on Degiro the fees would be 2€/transaction plus 0.03% of the total purchase.

Taxation

The main draw to IT’s in Ireland is the taxation. As you are investing in a company, who in turn invests on your behalf, these are treated as individual stocks and NOT as ETFs.

This means you will be charged 33% tax on capital gains and your marginal income tax rate on dividends instead of 41% exit tax on gains and dividends along with the 8 year deemed disposal rule that comes with ETFs outside of a pension.

Investment trusts are also eligible for 1,270€/year in CGT allowance per person. Not the case for ETFs.

You can also carry forward capital losses from current for previous years to be applied against any future capital gains taxes. Also NOT the case for ETFs.

When you die, if your portfolio exceeds £325k (which a retirement pot typically would be) your beneficiaries may be liable double-taxation on inheritance tax.

Comparison

Assumptions:

Accumulating ETF

Performance: 11.91% after fees and inflation.

Dividend yield: 1.6%

Taxes: 41% exit tax on gains and dividends, exit taxes applied to both gains and dividends from year 8 due to deemed disposal rule. Dividends are automatically reinvested in the fund and no exit taxes applied for the first 8 years due to accumulating ETF.

Purchase costs on Degiro: 2€/transaction + 0.03% of purchase

Investment: 3,000€/month, bought monthly for 20 years (2,997.10€/month after fees)

Value after 20 years: 2.242 Million – Assuming all taxes incurred for like for like comparison.

Investment Trust

Performance: 11.38% after fees and inflation.

Dividend yield: 1.6%

Taxes: 33% on gains, 52% on dividends (assuming higher income tax bracket and all tax credits applied to employment income)

Purchase costs on Degiro: 0.5% stamp duty, 4¢/transaction + 0.05% of purchase + 0.1% currency conversion (Degiro’s AutoFX rate) on purchase and the manual rate of 0.02% on sale.

Investment: 3,000/month, bought monthly for 20 years (2,976.50€/month after fees)

Value after 20 years: 2.248 Million (+0.3% more than the ETF portfolio) – Assuming all taxes incurred for like for like comparison.

Other Considerations

General risk

Personally, I don’t fully understand the risks with investment trusts, in that I don’t understand who actually owns the underlying assets. My understanding is that you are buying a stock in a company and that company is investing on your behalf. So if that investment company goes under, your “stock” in that company at risk.

Based on the KID document for the F&C Investment Trust – this seems to be the case:

“The Company’s shares are listed on the London Stock Exchange. Should the Company be liquidated, the amount you receive for your holding will be based on the value of assets available for distribution after all other liabilities, but before shareholders, have been paid. Shareholders in this company do not have the right to make a claim to the Financial Services Compensation Scheme in the event that the Company is unable to pay out.”

If this is the case, a good investment rule of thumb is to only have 5% of your portfolio in any one company’s stock. As I plan to build a sizeable portfolio which will passively cover my living costs, I do not think that a portfolio made entirely of investment trusts is sustainable if even spread across multiple ITs.

Complexity

If you read through the various fact sheets for ITs, you will see mention of discount rates and NAV (Net Asset Value) performance. From what I can make out, you can buy ITs at a discount to the NAV on some days or more than the NAV on other days. The same applies to when you sell.

So if you buy at more than the NAV and sell at less than the NAV, you will realise less value than if you bought at a discount and sold at a higher value.

I’m not going to pretend I know any more about it than that. I haven’t factored any of this into my analysis as I wouldn’t even know where to begin.

Suffice to say, this adds complexity to both accumulation and withdrawal strategies. Something you may know I like to avoid.

Currency exchange risk

Investment trusts are traded in GBX (British pence) which means you are subjecting yourself to currency exchange risk. But what does this actually mean?

If you look at the historical currency exchange between EUR and GBP here are the highs and low:

• In the last 12 months: 0.94 and 0.83 = 11% fluctuation
• In the last 5 years: 0.92 and 0.72 = 16% fluctuation
• Between 1999 and today: 0.96 and 0.59 = 37% fluctuation

So if the bulk of my portfolio is in GBP which I plan to live off of in retirement (converted to EUR) in say 15 years time, I could have marginally more in growth compared to an ETF portfolio but anywhere from 11%-37% less in value at ay given time due to the difference in currency value.

Even within a given year, if I wanted to withdraw my full years expenses at the beginning of the year to reduce risk, I could lose 11% off the bat to currency difference.

As far as I know, currency exchange “losses” cannot be carried forward as capital gains losses can.

Tax changes

While the tax on investment trusts is currently more favourable to ETF exit tax and deemed disposals every 8 years, as far as I know, Revenue haven’t actually confirmed the taxation of investment trusts and therefore is more likely to change.

If you had built your portfolio around taxation benefits, any changes in this area could drastically devalue your portfolio overnight.

Also exit taxes were once 23% and fund managers are lobbying to have this reduced in line with at least DIRT and CGT. If this should change, ETFs would quickly become an even stronger winner (though I’m not holding my breath).

Final thoughts

As with all of my analysis to date, I keep coming back to the keep it simple approach.

ETFs still tick a lot of boxes for me:

• easy diversification (hundreds or even thousands of company’s stocks in one ETF)
• less maintenance (no studying individual company reports, valuations etc)
• less effort to rebalance (compared to a larger pool of individual stocks/ITs)
• less currency exchange risk and fees (though still some as underlying assets are in other currencies)
• low fees to purchase, hold and sell
• liquid (I can sell off at any time and access at any age, unlike a pension)

I may sound crazy but my goal for financial independence is the freedom of time and peace of mind. If my the cash flow from my passive assets cover my expenses and I have financial security and peace of mind, I don’t really care if my portfolio is worth 1 million or 10 million. Enough is enough for me.

This is why I keep coming back to the simplicity of ETFs.

Detailed calculations

And for those who want to dig into the numbers:

ETF growth

(*) assumes all remaining exit taxes for the 20 years is applied in the final year for like for like after tax comparison

Investment Trust Growth

(*) assumes all capital gains taxes for the 20 years is applied in the final year for like for like after tax comparison

Time to financial independence

At a high level, it’s because when I crunched the numbers on my quickest path to financial independence, the scenario where I paid off my mortgage before investing was about the same time as the scenario where I paid the mortgage down slowly and invested heavily instead.

The reason the timeline is so comparable is because once you’ve paid off your mortgage you need significantly less passive income from your investments to cover your remaining living expenses.

See the detailed analysis section at the end of this post for a demonstration of this analysis.

Reduced financial risk

While my first objective of the analysis was to find the quickest path to financial independence, the other element is that I’d like reduced financial risk to myself and my family should I lose my job or get sick, especially since we made the decision to go down to one part-time income. This may seem obvious to state but, paying off our mortgage would reduce our minimum expenses by almost 10,000€/year. As our other expenses are already quite low, once the mortgage is paid, we will almost be able to live off one minimum wage job. This reassurance in itself gives us a certain element of financial freedom even before we reach full financial independence.

Guaranteed rate of return

The other thing to consider is rate of return.

A mortgage interest rate will be at least 2-3% for most mortgages in Ireland. Even the newest mortgage provider Avant will only provide 1.95% to very select customers.

Paying down your mortgage is a guaranteed savings of that 2-3%/year.

If that money was in the stock market, you could make 20% in a given year or you could lose 20% in a given year. The average rate of return since inception of the stock market has been 10%. This is PRE tax. If you’re invested in ETFs in Ireland, take off 41% in exit taxes. This leaves 5.9% or 4% after inflation (it’s not that simple as you have compounding and reinvestment of dividends but I’m trying to keep it high level).

In my experience though I have not been so lucky.

I’ve had retirement account investments in Canada since 2013 or so, even in a tax-deferred account (like a pension) I’ve only averaged 3.7%/year or 1.7% if you take out inflation. Though I should say that performance was mostly because I was unaware of the true impact of fees and my provider for most of that time was taking 2.75% of my total investment as their annual fee! Ouch.

In Ireland, I’ve only been investing since May 2019 but so far my initial lump sum is standing at MINUS 4.96%/year after inflation AND I’m still paying taxes on dividends even though I’m at an overall loss since ETFs can’t carry losses forward.

If I’d lumped that money against my mortgage I would have reduced my mortgage payments by almost 100€/month or 1,200/year of post tax money.

Now if I’d started investing at another time where the market performed very well, this could be a very different story but for now this has been my experience and I’m happier focusing our efforts on the mortgage.

Less reliance on market performance in early retirement

The other consideration is for when we reach early retirement. If we still had a mortgage we’d need to withdraw larger amounts from our portfolio to get by. If we no longer have a mortgage, we need to withdraw less from our portfolio and therefore rely less on market performance to fund our lifestyle. This is reassuring as we don’t have to rely on something that’s out of our control to fund a large portion of our living expenses.

Psychological impact of having no mortgage

I recently watched a really interesting interview with Mr. Money Moustache (MMM) and Jesse, the founder of the budgeting software You Need a Budget (YNAB). It’s quite lengthy but has some really great and insightful nuggets in there.

One of which was the topic of paying off your mortgage or not.

MMM said that while mathematically it makes sense to take advantage of lower mortgage interest rates and invest your money in a higher-performing stock market, for him, financial freedom is about building a happy life, not about having the most money. And for him, not having a mortgage makes him feel good and so he doesn’t have a mortgage.

Jesse also made the point that while a lot of people will say “yes it makes more sense to invest than pay down your mortgage”, most people won’t actually invest and so they are neither paying down their mortgage or investing.

The other thing I’d consider here is the psychological willpower it takes to leave money invested in a market that is tanking. While mathematically it makes sense in the long term to invest alongside a low interest mortgage, you need to be really honest with yourself and know that if you saw your portfolio literally halve overnight, would you have the willpower to leave the money invested and allow for it to recover?

You may say so now but until you actually have it happen to you, you will not know how you will react. If you don’t rely on the power of time to recover, and you withdraw your money at a loss then you definitely make a loss AND still have a mortgage to pay off so you are worse off than if you’d put that money against your mortgage from day 1.

Downsides

The only downsides I can think of to this approach are:

We are tying up a lot of our portfolio in an illiquid asset, so if we did fall on hard times, although our expenses would be reduced, we’d also have less access to our money compared to if we had it invested in the stock market. We are reducing this risk by keeping a years worth of living expenses in cash and leaving our existing stocks and ETFs invested as an additional backup.

If the market did outperform our mortgage rate after taxes, we’d potentially have a lower net worth than if we had invested and paid our mortgage off slowly but our main goal is not to have the highest net worth. We are more focused on reducing financial risk and increasing lifestyle options.

As long as we have enough to get by, with a few comforts and even a few luxuries, we are happy. We are also on track to have our mortgage cleared in the next 2-3 years and so that timeframe shouldn’t make a huge impact if we miss out on the market performance during that time.

Detailed analysis

For those of you interested in the analysis comparing time to financial independence by paying off your mortgage first or not. Here it is.

Assumptions:

• 40-year-old married couple with 2 school-aged kids
• Have a mortgage with a few years paid down, 200k remaining
• No other debts and no existing investments
• Earning combined income of 100k (73k after-tax)
• Average of 40k annual expenses (see how our family spent an average of 40k in 2019 and 2020 in Cork)
• Average after tax savings/year = 33k
• Mortgage repayments 1,000/month or 12,000/year
• Mortgage interest rate 2.95% variable (allowing lump sum payments without penalty)
• ETF performance 7.91% after fees and inflation (10% average historical stock market performance, 0.19% fees, 1.9% historical 30-year inflation) – see our ETF portfolio here
• Asset allocation 100% equities/stocks 0% bonds or cash (higher risk and higher volatility but potentially higher rewards)
• Scenario 1: Pay off mortgage as quickly as possible, then invest in ETFs
• Scenario 2: Pay mortgage off slowly and invest in ETFs from day 1

Scenario 1:Pay off mortgage as quickly as possible, then invest in ETFs

Pay existing 12k/year in minimum payments + additional lump sums of 33k/year = 45k/year off 200k mortgage.

Mortgage repayment schedule

ETF investment schedule

Mortgage is paid off in year 5, freeing up 12k in expenses which can be lumped in with the 33k post tax savings for an annual investment of 45k.

Time to FI

Scenario 1 for this couple enables them to reach FI in 15 years (by age 55) starting from 0 investments at age 40. The 706k ETF portfolio allows them to safely withdraw almost 28k/year which is all they need to live as they no longer have the 12k in expenses to pay for their mortgage (40k minus 12k = 28k).

Scenario 2: Pay mortgage off slowly and invest in ETFs from day 1

Mortgage repayment schedule

ETF investment schedule

Time to FI

Scenario 2 for this couple enables them to reach FI in just over 16 years (by age 56) starting from 0 investments at age 40. The 1 million ETF portfolio allows them to safely withdraw 40k/year which is what they need to live as they still have 12k/year in mortgage repayments for an additional 8 years.

Once their mortgage is paid off by age 64, they will still have a larger portfolio and could continue to withdraw 40k/year should they choose but takes them a little over a year more than scenario 1.

Want more of this?

I recently did a presentation on something similar where I showed how a 40-year-old couple with 2 kids starting with no investments, earning a combined income of 100k/year, with a savings rate of 50%, could reach financial independence in 13 years regardless of the approach they took.

The scenarios I looked at were:

• paying off the mortgage and then investing in ETFs
• paying the mortgage slowly, maxing their pension and investing the rest in ETFs, and
• paying off the mortgage, then maxing their pension and investing any remainders in ETFs

If you’re interested in how these options weighed up against each other along with the impacts on each portfolio after 30 years of withdrawals, you can purchase tickets to the pre-recorded event for 20€ here. This gets you access to 4 hours of presentations from other Irish, European and US presenter’s perspectives.