How to invest in Ireland

A while back I did a post on all I’d learned to date on investing in Canada. This post will summarise how to invest in Ireland.

Investing your hard earned money can be scary! I read up on investing extensively for 2 years before I took the plunge.

I suffered from something called analysis paralysis. The more I read the more I was unsure how and where to start.

By hesitating I lost out on 2 years of having my money work for me. Instead I lost money to inflation in my account.

My hopes for this guide will be to help people get off the fence and start investing.

Warning: This is a LONG post but I wanted it to be a one stop shop. You can check back and re-read all in one place, as you need to, instead of keeping track of multiple links.

To help you skip around, here is a table of contents

Preamble

This post covers a high level summary of investing concepts. A lot of the concepts could have full blog posts of their own. If you want to know more about any of them, you can research further. However, this post should give you the overall concept at a high level.

There are tons of resources out there for US folk but very few in Ireland. This guide will focus what I’ve learned on investing in Ireland to date. That said, aside from the tax specifics and investing platforms, a lot of what I talk about here is applicable anywhere.

This guide includes references to reaching financial independence. This is where your portfolio is large enough (25 times your annual expenses) to cover your annual expenses by withdrawing only 4% per year. While this may not be your goal, this guide applies to everyone who wants to start investing.

Start by paying off existing debt

If you have existing debts, it’s best to focus on those first as they typically have higher interest rates than you will achieve in an investment account. For example: If you have 100€ and you pay down your credit card you will save 21€ of interest (at 21%). If you invest that 100€ instead you may only make 7€ (at 7% real rate of return after inflation). So that same 100€ is making you 14% more by paying down your credit card.

Focus on the debt with the highest interest rate first – typically in this order

• credit cards
• car loans
• student loans

Mortgages are usually lower than what you can get in an investment account. This means that mortgages can be an exception to this rule. A good rule of thumb is if your mortgage rate is over 4% you would be better paying it down before investing.

See if you can consolidate your debt into products with lower rates. There are a lot of credit cards that offer 0% interest for the first 6 months. Or get a line of credit with a lower rate (say 5%) to pay off credit cards with a higher rate (say 21%).

Remember the power of compounding is working against you when you have existing debt. Using the rule of 72 (a calculation used to figure out how many years it will take for your money (or debt in this case) to double), a typical credit card of 21% left unpaid will double every 3.4 years or quadruple every 6.8 years!

What to invest in and why

Why traditional investments aren’t great

A lot of people (including me before I found a better way) think of their home as their retirement plan or invest in products sold to them by the bank or their employer. There are major downsides to this approach.

Your home can certainly go up in value over time but it can also go down. There are also plenty of costs associated with owning a home that you wouldn’t have while renting. I’m not going to go into the rent vs. own debate here as that warrants a post in itself but banking on your home as an investment puts all your eggs into one basket which is very risky. It’s also very illiquid and doesn’t give you many options should you need to free up equity.

Your home also doesn’t generate passive income. Unless you avail of the rent-a-room scheme which allows you to generate 14,000€/year tax free. By far the most tax efficient “investment” option in Ireland at the moment.

Bank and employer investment products are usually products that work out best for the bank or employer rather than for you. They typically have much higher fees or lower returns than you could get on your own using something called index investing.

Fees are often brushed over but they become very important when compounding over time. For every 0.25% of a fee you lose out on 5% of your overall portfolio’s value. So if you pay the average 2.18% for an Irish pension fund (as per a 2012 report which has since been archived), your portfolio will be worth almost 43.6% less than it would be if you had invested in a fund with lower fees! This means the fund manager is taking almost half of your profits regardless if they have made you any money.

A common misconception is that management fees are charged as a percentage of your profits. This is not the case. They are charged as a percentage on your total portfolio whether you make any money or not. So in a year where the markets are down and you lose 5%, the fund manager still takes their 2.18%. This means that you are down 7.18% that year instead of 5%.

What is index investing and why is is better?

Index investing is a way for you to essentially bet on the whole stock market.

An example of an index fund is the S&P500. This is an active index where the value of the 500 largest US publicly traded companies is calculated and tracked. Over 15 year time periods, the S&P500 has never lost money, and has had a median return of 12.2%.

There are many passive funds with lower management fees which try to mimic and track these underlying active funds. There are also many other funds which track other sections of the market. You can pick and choose a diversification you are comfortable with.

Since the inception of the stock market, it has always recovered from every downturn given enough time. If you have time to leave your investments grow, you don’t need to overly worry about market downturns. You do need to have the confidence to leave your money invested, especially in a downturn. That said, there are ways to mitigate losses which I will cover below.

Main selling points of index funds are:

• lower fees
• they outperform actively managed funds by 85%
• they allow for passive investing, in that you can invest and forget. Aside from re-investing dividends and rebalancing once a year
• you can access them as needed without penalty

Figuring out your comfort with risk

The two main elements of a balanced portfolio are stocks (equities) and bonds (fixed income).

• Stocks are shares in a specific company usually with higher risk and higher gains
• Bonds are essentially loans where the investor (you), loans governments or corporations money and they agree to pay you back in fixed income by a certain date. These are lower risk but also lower return. Bonds are used to balance out the risk of a stock heavy portfolio. They are one of the ways to mitigate against stock market crashes.

A typical investment rule of thumb is to keep bonds in the percentage of your age. So if you are 30 years old you should have a portfolio with 70% stocks and 30% bonds. This reduces your risk as you near retirement but keeps your portfolio growing with higher percentages in higher performing stocks.

I have read mixed reviews of this for early retirees with some maintaining 100% stock portfolios to achieve maximum gains. Even in early retirement they maintain higher risk knowing they will keep working and therefore do not need a mitigation strategy.

Others are more risk averse and even though they are retired in their 30s, maintain a 60% stock/40% bond split for the first 5 years of retirement. Even after 5 years they will only go as high as an 80% stock/20% split even though they are continuing to make money from passion projects.

At the end of the day you need to figure out which split works for your own risk tolerance.

You can see my portfolio, which indexes I have invested in and why here. Summary below (though stay tune in coming months as I plan to start shifting this to more accumulating funds):

Description	ID	Allocation	MER (%)	Last 5 Yr Return
FTSE All-World High Dividend Yield UCITS ETF	VHYL	33%	0.29%	6.35%
FTSE Developed Europe UCITS ETF	VEUR	33%	0.12%	7.13%
S&P 500 UCITS ETF	VUSA	16%	0.07%	15.50%
FTSE Emerging Markets UCITS ETF	VFEM	18%	0.25%	5.42%
Total/ Weighted MER and Estimated Return (before exit tax)		100%	0.19%	7.79%

I currently have no bonds but think I will up this percentage to at least 10% after reading how useful it is to weather any stock market crashes. More on that below.

Words of warning against 100% stock portfolio

It’s not all a sure thing and like any investments you need to be ok living without the money you’ve invested. As quoted from Your Money or Your Life here are some stats and recovery times on historical market crashes:

• Great Depression: Down 86 percent, 27 years to recover
• Mid 1970s: Down 46 percent, almost a decade to recover
• Late 1987: Down 32 percent in just 3 months, 4 years to recover
• Great Recession, 2007–09: Down 50 percent, 6 years to recover (or 14 years if you count from the matching dot-com peak in 1999, which had just been regained in 2007)

The two events within the lifetime of young investors, the dot-com crash and the 2007–09 crisis, were exceptions in that they took less than a decade to recover—but that doesn’t mean the cyclical nature of the market has been suspended. By contrast, bond funds are far less volatile, losing only a few percentage points when they falter.

How to Invest

Setup a brokerage account

In order to invest yourself you need to setup an online brokerage account. I use Degiro. There is also Interactive Brokers which you can check out.

Degiro offer free commission trades on some ETFs. Vanguard S&P 500 is one and Vanguard All World is another.

The Vanguard All World differs from the high yield world fund I am in so I must weigh up the fees and performance of these and may switch.

Here is the full list of commission free ETFs. You get one free trade per free ETF listed per calendar month (meaning you can make more than one free trade per month as long as it’s one per listed ETF).

If you are trying to copy my portfolio you don’t have to worry about timing it as you could buy the S&P and all world ETFs for free and the rest in my portfolio have commission so they could be bought at any time.

As per the usual disclaimer, do not invest any money you can’t live without. All investments can incur loss of some or all of your money.

I buy the Amsterdam market ETFs as they are in Euro and not subject to currency exchange fluctuations. That said, all of my dividends except VEUR are paid out in USD and converted to EUR. This means you will still have some currency exchange exposure if you want to consideration this for your own portfolio.

Degiro have an app as well which is quite good.

I went with a basic account vs custody. The main difference is that basic has lower fees and the shares in a basic account can be lent out by Degiro to 3rd parties. This can’t happen in a custody account.

Fund your account

You can transfer money to your Degiro account by adding them as a direct debit payee on your online banking, this should avoid any banking fees. Test with a small amount first just to make sure it’s setup correctly.

Buy your ETFs

Once you figure out the ETFs you want to buy and the allocation you want, you’ll need to figure out how many of each you can buy with the money you have to invest. Say you have 1,000€ to start with, I did up a spreadsheet with some basic formulas where I entered the current unit price of each ETF and figured out how many shares of each I would need to buy to make up my desired allocation split. This way each time I have money to invest I just update the unit price and it calculates what I need to buy.

For example: For the All-World ETF I wanted that to be 33% of my portfolio so 33% of 1,000€ = 330€. If the unit price is currently 48.43€ then I can buy 10 shares (330€/48.27$ = 6.81 shares). As you cannot buy portions of shares you need to round down all of your numbers in the last column.

Description	Allocation	Unit Price	$ to Invest	Shares to Buy
FTSE All-World High Dividend Yield UCITS ETF	33%	48.43	330	6
FTSE Developed Europe UCITS ETF	33%	30.35	330	10
S&P 500 UCITS ETF	16%	48.46	160	3
FTSE Emerging Markets UCITS ETF	18%	49.84	180	3
Total	100%		1,000

This actually only buys you 889€ worth of shares leaving you with 111€ to buy say 2 more of the All-World.

To test the waters you can choose to buy 1 or 2 shares and watch it grow for a while to help ease your concerns. In my case, in both my portfolios (Canadian and Irish), I saw a drop in value more or less straight away but over time the market has recovered. You need to be comfortable with your portfolio losing money from time to time and rest assured that the market goes up twice as frequently as it goes down over long periods of time.

Investment options in Ireland

I did a whole post on investment options in Ireland including pros, cons, tax rates, and estimated real rates of return if you want to check that out and see what you think you’d be interested in.

Personally my investment portfolio currently consists of a property in Canada, retirement funds in Canada (invested in self directed ETFs), and self-directed ETFs in Ireland. A good chunk of money is also in our home in Ireland but I’m not counting that as an investment as we plan on staying in the home after retirement and it will not generate passive income.

I am now looking at simplifying our portfolio and selling our Canadian property at some stage in the near future. We think that we will use those funds to pay down our mortgage in Ireland. Even though mathematically it makes more sense to invest it and use the passive income to pay down the mortgage we want to reduce our cost of living so that we have more flexibility and options around staying home with our son should we wish to. It will also hedge against a recession if one of us should lose our jobs, we will be more comfortable having lower expenses.

In the coming years we plan on investing more into ETFs in Ireland.

Taxes on investments

I’ve done a number of posts on taxes on investments in Ireland.

• Investment options in Ireland
• Why taxes in Ireland get too much flack
• Tax loopholes for Irish investors

Unlike Canada and the US, there are very few ways to legally avoid taxes on investments in Ireland. Believe me I’ve scoured the internet trying to find similar withdrawal options.

I’ve now come to terms with the fact that if I want to retire in Ireland, I need to accept the limitations of where I am and suck it up. I will pay higher taxes on my investments in order to retire where I love to live. My investments will still generate enough income to cover my expenses. I will just need to work a few extra years to get there.

The other benefit of this approach is that if, later in life, we choose to move somewhere cheaper with better tax options, we will already have the most tax inefficient portfolio and larger portfolio and will have more freedom to move around.

Tax efficient options in Ireland

Rent-a-room scheme

The most tax efficient option is the rent-a-room scheme as mentioned above.

Pensions

Next to that, pensions are currently the most tax efficient, though like anything, depends on a number of factors.

Tax deferral

Pensions are a tax deferral tool which means you pay reduced taxes now in your (typically) higher earning years and pay lower taxes on the withdrawals later in your lower earning years (in retirement).

Limited tax savings

If you are already in the lower tax band and will continue to be on the same band when you retire then pensions, while savings you taxes now, only kicks the can down the road as you will pay that same tax amount back when you withdraw.

Similarly if you are already in a higher tax band say earning 50,000€ and will continue to be in a higher tax band in retirement and withdrawing 50,000€ then same concept applies. You save now but pay later.

For example:

If you earn 50,000€ and don’t contribute to a pension you effectively pay 26.4% in income tax (13,213€).

If you contribute the max 20% for someone aged 35 (10,000€) to your pension that brings your tax rate down to 18.4% (9.213€).

A savings of 8% now.

Then when you retire you withdraw 50,000€/year, and you pay 26.4% then.

Which shows that your 8% savings has just been deferred to when you retire. Albeit after age 66 you no longer pay PRSI which would reduce your taxes so it depends when you plan to retire.

In both cases though, your investments do still grow tax free until you withdraw so that is a bonus.

Some tax savings

If you are earning the higher tax band, you do save in taxes now, but Revenue have rules that ensure you are paying higher taxes on pensions withdrawals after a certain age and when your pension goes above a certain amount whether you need the income or not.

Even if you only need to withdraw an inflation adjusted 40,000€/year for a couple you will still end up paying an average of 15% or so over 40 years. This is still a savings of 25% but worth keeping in mind. If you plan on living off more than 40,000€/year and plan on using your 200,000 tax free lump sum for anything other than more investments, the savings are even less.

My case against pensions

Even though pensions are the most tax efficient, I’m still not convinced for a number of reasons.

Lack of control

Depending on your pension type, you typically don’t get a say in what it’s invested in nor can you negotiate fees or government levies.

This can have a major impact on your end portfolio.

Looking at Irish pension trends from 2007-2017, the average pension growth was -4.82% after fees and inflation based on historical average, though the report only has data from 2007 (-7.3%), 2008 (-35.7%), 2015 (4.5%), 2016 (8.1%) and 2017 (6.3%).

Even if you take out the crash in ’08 it’s still only 2.9% (or 6.98% if you add back in the 2.18% in fees/levies and 1.9% in inflation instead of 10% in the stock market).

In which case investing in an ETF portfolio, even with 41% exit taxes and deemed disposals every 8 years would have fared far better.

Your pension needs to be earning a real rate of return of 5.95% or more in order to outweigh the higher taxes of a self directed ETF portfolio. This is based on a number of assumptions fully detailed in this post.

A real rate of return is the difference between your annual return (performance) minus your management fees and inflation.

The last 30 year average inflation for Ireland has been 1.9%.

In the last recession the government also implemented a levy on pensions to get access to some of that money themselves which further reduces your growth potential. This has since been removed but would worry about it being added back again if/when the next recession hits.

Limited contributions

Depending on your pension type, you are also limited to the contributions you can make per year. The limitations are as per below:

Age	Percentage limit
Under 30	15%
30-39	20%
40-49	25%
50-54	30%
55-59	35%
60 or over	40%

Early retirement issues

If early retirement is your goal, pensions present 2 problems:

• You likely need to be investing more than your limited amount per year in order to reach your goal
• You can only access a pension at age 50 at the earliest (again depending on the pension type)

If you are self-employed you have quite a few more pension options in that you can contribute much more but still limited to access at age 50.

Complicated withdrawal options

There are also a number of options to consider when you’re ready to withdraw from your pension. You can convert it to an approved retirement fund, purchase an annuity and so on. Each has their own sets of conditions. Some require minimum guaranteed income from other sources. Some “die when you die” meaning that the money remaining in the pot does not go onto your family. And so on. These conditions can change over time.

With ETFs you take out the money when you want, how you want and leave it to who you want. Albeit you may need to look into estate planning either way as there are ways to reduce the capital gains taxes your children will pay.

There is a great podcast on some of your inheritance consideration options here.

Transfer pension to another country

There are options to transfer your pension to another country if you have a bonfide reason to do so (ie: you are from that country and are returning home), though it has to be transferred into that country’s approved retirement fund.

So for example I could contribute to a self-employed pension here and transfer it to Canada when I’m ready to retire. In Canada, you can access your retirement fund (RRSP) at any age as long as you pay the taxes. You will be charged withholding taxes immediately on withdrawal but you get back any overages when you file your annual return. You also lose your contribution room.

But in order to do that I’d need to move back to Canada which is not in my plans. I also haven’t looked into the full ins and outs of it and what fees may apply, but an option to keep in mind should our plans change. It’s also possible the approved fund wouldn’t be an RRSP (which I wouldn’t have enough contribution room to take my full portfolio anyway), it may need to be an annuity or some other form or retirement fund which I really haven’t looked into.

All that said, I’m personally looking at implementing the KISS method and to keep it simple silly. All of these potential loopholes are overly complex and my preference is to go with a simplified portfolio that will have predictable taxes and returns which I have more control over.

How to maintain your investments

Don’t worry about timing the market

When it comes to investing, hindsight is a wonderful thing, if only you could know when the market was going to rise or fall. There are people who spend their days trying to predict this but save yourself some trouble and follow either one of two approaches depending on your comfort with seeing your portfolio drop in value from time to time.

Emotional option: dollar/euro cost averaging

If you are really emotional about seeing your portfolio decrease in value, you can rely on something called dollar cost averaging. The idea is that instead of investing large lump sums on any given day you average it out over time so that you can reduce some of the risk of buying high only for stocks to crash the next day. Instead you buy little and often and you will naturally end up buying some stocks at a high but some at a low and it will average out over time.

Rational option: time IN the market is better than TIMING the market.

If you have gotten to the point where you are comfortable with seeing dips in your portfolio then rely on the fact that time IN the market is better than TIMING the market.

Other interesting stats about the market – based on the Toronto stock exchange: (courtesy of www.retirehappy.ca)

I couldn’t find any Europe specific stats but if you’re investing in world funds then these stats won’t be too far off.

1. Markets go up more often than they go down
2. Not only do markets rise more frequently, but they tend to increase in higher magnitude than the drops.

Over the last 90 years:

• Markets have gone up 73.9% of the time
• Markets have gone down 26.1% of the time
• The market gained more than 20% in 33% of the time
• The market lost more than 20% in 4.5% of the time
• The gains in positive years produce more than double the losses in the negative years

(This data is based on calendar year returns of the TSX from 1920 to 2010).

In addition (courtesy of Rob Carrick of the Globe and Mail),

• In 34 of the 37 corrections of 10%+ since 1950, the stock market was up 12 months later by 26.8% on average.
• Average decline for the 37 market plunges of 10%+ since 1950 is 19.7% or almost one every 20 months.

Either way your money will be working for you so pick the approach that works best for where you are at in your investment journey.

Keep adding to your investments

Buy as much as you can, as often as you can and watch your investments grow.

Try not to look at your portfolio too often as it can be off putting to see market dips.

Reinvest your dividends every quarter

There are some funds and accounts you can get with robo-advisors that will automatically re-invest your dividends but I have yet to delve into those options. For now I’m keeping it simple and manually re-investing my dividends. All of my ETFs pay out quarterly (you can see this on the fact sheet of each ETF), so I check back once a quarter and buy more with the dividends that are paid out.

For an Irish ETF portfolio you need to pay the 41% exit tax on your dividends on the year you receive them.

You can also get accumulating funds which means your dividends are automatically re-invested and do not incur the 41% exit tax until the 8th year. See this post for more information on what deemed disposals are.

Rebalance once a year

Throughout the year your stocks will likely outperform your bonds or certain ETFs will outperform others and your asset allocation will shift.

Say you started out with a 70% stock 30% bond split. Through the year your stocks performed really well and now they make up 80% of your portfolios value and bonds have fallen to 20%.

In order to maintain the asset allocation you are comfortable with you will need to sell some of your high performing stocks and buy some of the low performing bonds to rebalance your portfolio back to the original allocation.

This can be done once a year (I read a really good article on why any more than that actually increased your volatility while reducing your return but can’t for the life of me find it again). Keep an eye on trade commissions and creating tax events from sales.

File taxes once a year

In Ireland most people do not file taxes if you are a PAYE earner.

If you start investing, you will need to file taxes each year whether you make money or not.

If you are purchasing shares through a company share scheme you also need to be filing each year as well as every time you purchase the shares.

I am due to file my own taxes this year on my investments from last year so once I figure it out I will do a future post on both of these scenarios.

Although I’m not including details on how to file in this post, it is something to keep in mind for your own circumstances.

Revenue are extremely helpful if you need a hand you can give them a call. I think you can even book an appointment and they will walk through things with you in person as well.

Weathering a crash

When the market is crashing, it is very hard to leave your money invested but based on the facts, the stock market always recovers so the best thing for you to do is wait, alternatively there are two things you can do to lessen the blow:

Sell bonds at a high and buy stocks “on sale”

If you hold bonds as well as stocks, a crash may be a good time to rebalance as during a crash, money flows out of stocks (risky) and into bonds (safer), this devalues stocks and increases the value of bonds. So if you hold bonds now would be a good time to sell (high) and buy stocks (low) and rebalance your portfolio to your desired split. This means that once the market recovers you will own more stocks which you got “on sale” and will benefit more from the upswing in the market. If you don’t own any bonds you will simply need to wait for the market to recover (usually 2 years) as per recent trends.

This is why it’s important to hold at least some bonds as you will be in a stronger position to benefit from market recovery than if you only held stocks.

Sell at a loss to offset future gains

This is something called capital loss harvesting (or tax loss selling).

This concept is only applicable to certain investments like individual stocks including company shares purchased through benefit schemes and UK investment trusts. Unfortunately you cannot do this with EU domiciled ETFs.

The idea is that you take advantage of the downturn by selling some of your assets which have lost value compared to when you bought them. At the same time you should buy back a similar asset/stock at the lower value so that you maintain your original market exposure to ensure you can take advantage of the future gains when the market does recover. The reason you wouldn’t buy back the same stock is because there is a stipulation where you have to wait 30 days before buying the exact same thing again, or it is dismissed as a “superficial loss (or gain)”.

Capital losses can be applied to your current tax year, 3 years in the past and indefinitely in the future. This means you can basically “buy tax credits” in the down years which you can use to lower your taxable income in future years when your income may be higher.

Capital gains credit

In Ireland you also get a credit of 1,290€/year of capital gains on which you do not need to pay capital gains tax.

Mr. MH gets discounts company shares for the company he works for, we considered selling just enough each year to avail of this credit as if you don’t use it you lose it. However, the potential gains we would be losing out on on these particular stocks would far outweigh the tax savings we would make from the credit.

Again it’s trying to keep your emotions in check around tax avoidance. For me I feel obsessed with trying to get money in or out of things in a way that I pay as little tax as possible but in the bigger picture, if that investment vehicle allows you to make large gains over the long term, even though you are paying taxes on those gains, they are still gains which you would not have made otherwise.

How long to financial independence?

For those of you interested in achieving financial independence, you may be wondering how long it will take using the above investment model of ETFs in Ireland. The chart below shows how many years it will take for you to reach financial independence depending on your current assets and different monthly savings amounts. Financial independence (FI) means your portfolio is large enough to withdraw a safe withdrawal rate of 4% to cover your annual living expenses, in this case we are looking at a portfolio of 412,500€ for an annual cost of living of 16,500€ for 1 person. To apply this chart to a couple simply double the monthly savings amount in the first column to reach FI in the same number of years.

Assumptions:

• Amount of time to grow portfolio to 412,500€
• Safe withdrawal rate of 4%
• Annual living expenses on withdrawal of 16,500€ for one person
• Deemed disposals/exit tax of 41% starting in year 8
• Real rate of return used is 7.91% (average stock market performance over its lifetime has been 9-11% so I took the 10% average minus the average inflation for Ireland over the last 30 years of 1.9% minus MER fees of my sample portfolio of 0.19% = 7.91%)

Monthly investments	Starting from 0	Starting from 50,000	Starting from 100,000
500	29	22	17
1000	19	16	13
1500	15	12	10
2000	12	10	8

So for a single person starting from 0€ in assets and saving 500€/month it will take 29 years to reach financial independence compared to 12 years if you save 2,000€/month.

If you already have 100,000€ in assets and you save 2,000€/month it will take you 8 years to reach financial independence.

This just goes to show how much of an impact your savings rate can have. It can shave years off your journey to FI. Not fast enough? There are a few more options on how to reach FI sooner.

Ways to reach financial independence sooner

There are a few other options if your time to FI is too far away. This is a quick list but you can google more on each bullet point to find many resources on each topic.

You could:

• Make more money with a passion project in order to increase your savings rate and decrease your time to FI. Google side hustles for ideas. Or check out the book Financial Freedom for a great guide on figuring out profitable side hustles. One exercise in the book is to make a list of your hobbies and a list of your skills. Take a step back and see if any side projects appear that make use of a cross between your skills and hobbies.
• Cut expenses to increase your savings rate.
• Do partial FI where you increase your withdrawal rate beyond the safe rate of withdrawal with the caveat that you would need to earn a certain amount through the year. This would no longer require a full time job, offering you and your partner more flexibility. For example: say you and your partner want to live off 40,000€/year. For a safe withdrawal rate of 4% you’d need a portfolio of 1 million. If you decide to take out 6% per year you’d only need a portfolio worth 640,000€. BUT you’d also need to top up your portfolio/investments with another 15,000€ per year to ensure it wouldn’t run out. So you or your partner could work part-time or take on contract work for a few months rather then wait your full time to FI. This approach practically cuts your time to financial independence in half while still achieving the flexibility you may want.
• Take mini-retirements once you’ve reached some degree of passive income/savings and can afford to take prolonged time away from work to pursue other things. Be it travel, time with family, going back to school etc. This is a great option if you want a change sooner than later. It also gives you a chance to try early retirement to see if it’s something you’d like to do full-time.
• If your job allows you to work remotely 100% of the time, consider moving to a place where cost of living is much cheaper. I know someone who contracts for a company in London, earns GBP and lives in Malta where there is no corporate tax. Other stories I have come across are where a couple moved from San Fransisco to Mexico while still earning US dollar from their silicone valley companies and significantly reduced their time to FI that way.

You can also check out my post here where I explored many other options to quicken my path to FI.

There are probably lots of other ways but these are the main ones I’ve come across.

How to withdraw

Once you’ve reached your version of financial independence and you’re ready to start withdrawing from your portfolio there are a few things to consider in order to protect your portfolio from something called sequence of return risk.

Protect your portfolio in the first 5 years of retirement

Your retirement portfolio is at most risk of failing in the first five years of retirement. Even if you only withdraw at the safe withdrawal rate of 4% (which has a success rate of 95%) there is a 5% chance it will fail in the long-term and your portfolio will run out of money in 30 years time. This can happen if you retire right when the market crashes and you are forced to withdraw/sell at a loss and even in the upcoming “up” years your portfolio cannot recover and eventually over 30 years you will run out of money (unless you go back to work and top it back up again). This is something called the sequence of return risk. Never fear – there are ways to mitigate this.

1: Least ideal: Go back to work to top up your portfolio

2: Slightly more appealing: Cut expenses or move somewhere cheaper so that you don’t need to withdraw as much to live off of

3: Least impact: Hold a cash cushion of 1-3 years of living expenses that is invested in something outside of the stock market (like a “high” interest savings account). Using this cash cushion for your living expenses in the down years means you do not HAVE to sell at a loss and you can wait for the market to recover keeping in mind that stock market crashes tend not to last more than 2 years of continuous declines.

1-3 years of living expenses can be a lot (say 40,000€ – 120,000€), which would further add to the time to financial independence but there is a way you can reduce the amount needed with something called a yield shield.

The idea is that you temporarily pivot your investments to high yielding (though lower performing) assets for the short term. Things like preferred shares, real estate investment trusts (REITs), corporate bonds and dividend stocks. This can mean that your portfolio goes from returning dividends of something like 2.3% to closer to 3%, which if you have 1 million in your portfolio means the difference between 23,000€ to 30,000€. So if you need 40,000€ to live on you can use the 30,000€ from your dividends and only withdraw 10,000€ from your cash cushion meaning you only need 30,000€ extra as a cash cushion to weather 3 years of a market downturn.

Holding a yield shield means your portfolio is slightly more complicated to maintain as you are invested in a larger number of asset classes but once you have passed your first 5 years in retirement you can pivot your assets back to a simpler spread of ETFs.

Taxes on withdrawal

In an ETF portfolio, as mentioned above, you will need to pay exit tax on dividends every year as well as exit tax on gains every 8 years (whether you have sold or not). Once you do actually sell/withdraw you will get a credit for the deemed disposal rate you paid on the 8th anniversary.

To clarify some terminology:

A dividend is an amount of money a company pays out to its share/stock holders at a set schedule (usually quarterly or annually). Dividends are paid at the set schedule identified in the fact sheet of the fund.

A gain is an increase in value of shares you own compared to when you bought. So if you bought something for 10€ and when you sell it it’s worth 25€ you have a gain of 15€ which you need to pay exit tax on. Typically you only realize a gain or a loss once you sell the share/stock . However in an ETF in Ireland you need to pay the tax on gains as a deemed disposal on the 8th anniversary of owning the stock/ETF.

Deemed disposals

I have not filed deemed disposals yet as I just started investing in ETFs in Ireland less than a year ago.

What I have gathered to date is that Degiro should provide an annual report showing your portfolio holdings, purchases and any gains or losses.

Keep this report until your 8th year of holding the investment. Using this report you could work out your gains for the year on those investments.

You then calculate your 41% on those gains and file and remit it to Revenue.

Repeat this process every year after the 8th year.

I believe it is a laddered approach where in year 8 you pay the exit tax on gains from year 1, in year 9 you pay the exit tax on gains from year 2 and so on.

You can pay the exit tax from your investments if you don’t have the cash to hand outside of the investments, though this will reduce your compounding effect over time.

I am not 100% on this so please correct me if I’m wrong.

Sense checking for the long haul

At the beginning of each year of retirement, it’s a good idea to re-check the chances of success of your current portfolio. There is a handy calculator called FIREcalc which cycles through 119 different scenarios based on criteria you enter and tells you the current rate of success where your portfolio will not run out of money in the next 30 years.

If the rate of success is lower than you’d like, you can always carry out some of the back up plans mentioned above in the “how to withdraw” section.

ANNNDDD that’s a wrap!

Hopefully this will be a post that you read and re-read through your investing journey. I actually learned more myself by writing it so I got something out of it too 

I’d love your feedback. If you found this helpful or if there is something you’d like me to elaborate on, please leave a comment below.

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