In the meantime, I was on the Superb Diamond Range podcast today talking all things financial independence, pensions, and investing in Ireland in general.

It’s a LONG one (surprise, surprise), so skip to the points you’re interested in.

Full range of topics and quick links below:

Background 2:30

Why I started the blog 5:02

What first got me investing 6:50

What got me working towards financial independence 9:41

How easy it is to invest in Ireland 13:48

What ETFs I’m investing in and why 15:40

Why I’m not investing in bonds 20:50

What investment incentives are available in Ireland 23:44

My beef with pensions 26:24

On being non-conformist and a bit more about our move back to Ireland from Canada 33:08

Why I like Ireland 36:51

Tips if you do invest in a pension 42:07

Why we bought a house instead of renting 47:08

Why paying down your mortgage instead of investing can be a quicker path to financial independence 48:50

Thoughts on investing in property in Ireland 53:06

On the best way to invest a lump sum 57:03

On what my friends/family/colleagues thinks about personal finance 1:01:12

My views on consumer debt and should you invest while you have other debts 1:04:52

On refinancing your mortgage or releasing equity 1:07:57

Book recommendation: 1:12:12

Favourite video games: 1:17:16

Top tips for a 20-something thinking of investing 1:20:05

I share these ideas in the hopes that it changes your perspective and help you to start living your best life now rather than pursuing full financial independence in a fury only to get to a possibly anti-climactic end.

So, what was that comment? That they never thought they would have liked living in the countryside after being in the city for so many years, but now they wouldn’t have it any other way. And that you get twice the house for the same price as the city.

My initial reaction was that I grew up in a very remote and rural area (like 40 minute drive to get your groceries) and could not see myself ever living in that setting again (though never say never). I also didn’t want a bigger house, as even the one we have now is too big with probably half of it unused on a regular basis as it is. That said, their house is absolutely sickeningly gorgeous with huge windows and sprawling country views.

Anyway, a few days later a thought occurred to me. “What kind of a house could we buy in the cheapest area of the country?” The cheapest area is currently Longford according to Daft reports. So onto Daft and down the rabbit hole I went.

First I searched for houses under 75,000€ with BER ratings of C or higher in all of Ireland. This is equity we could free up which would allow us to buy in cash and be mortgage free. Believe it or not there are some homes that match that criteria. Each one I found then led to further searches on the distance between them and our friends and family around the country as well as commute distance to nearest cities for professional level jobs.

Then out of curiosity I thought, what if once we reach FI, we sell our place in Cork and move to Longford where we could be mortgage free resulting in requiring a smaller pot of money to sustain us. I say Longford as although it is close to no one we know, it is more central to everyone. It would take under 1h 45 mins to get to Dublin Airport. It’s also under 1h 45min from most of our friends and family ranging from Galway, Mayo, Sligo, Dublin and Wicklow. Though further from our Cork gang.

Unfortunately I found a place that I absolutely love and would like to buy now. Even though it is more than twice the price of other homes in that area. This one is fully furnished, professionally designed and on a marina where you have your own berth (perfect for my kayaks!). That said, I have since managed to convince myself not to proceed with this idea since in 2016 a twister passed through there. I’m really wary of more extreme weather events happening as the climate crisis ramps up so I’d like to stay somewhere a little less exposed to the elements. Not to mention I doubt you’d get flood insurance being that close to the water!

And so on and so forth, you get the idea.

Now I’ll try to summarise the options I analysed. I’ll also include how long it would take for us to get there.

Assumptions/Caveats

I will preface this by saying that most of these timelines are from a starting point of about 25% to full FI. You can have a look and see if some of these options could move your goal posts up a few years. These are also looking at options for a family with one child so you may need to tweak things for a single person or couple without kids. However most of the concepts should still apply and may even take less time to achieve as you won’t have to account for childcare expenses etc.

I’ll also say that unless stated otherwise most of these are looking at half of our assets in tax efficient Canadian investments and the other half in tax heavy Irish domiciled ETFs and shares without the use of a pension. I only looked at the growth phase for now and have not looked at the withdrawal phase in any of these scenarios. I’ve assumed a safe withdrawal rate of 4% but safer in Ireland at 41% tax on gains and dividends would likely be 3.5%.

Traditional paths to FI

My research began with the traditional, both work until we reach FI approach, along with numerous variables thrown in.

Both work to full FI

This includes putting our son into childcare and school once he is school aged. It also includes staying in our current home both, on the path to, and after reaching FI. It also means that we’d have about 100,000€ in equity tied up in our home once we reach FI (not accounting for home price increases or decreases) – which could bring in another 4,000€ in passive income if it was invested elsewhere, but we need to live somewhere and we’d be hard pressed to find somewhere for that price at this standard in Cork if that’s where we end up wanting to stay.

Annual expenses: 50,000€ pre early childcare scheme, 46,500€ post ECCE until school, then 37,000€ once in school

Income to supplement once FI: 37,000€

Years to full FI without a pension: 8.75 years

Years to half FI without a pension where half our expenses are covered and one person can stay off or both work part-time: 3.75 years

Years to full FI WITH a pension: 6 years

Years to half FI WITH a pension where half our expenses are covered and one person can stay off or both work part-time: 2.75 years

A note about pensions: while these are definitely the most tax efficient way to invest in Ireland (once you can keep your management fees to 1% or less and you can self direct the investments to match the performance of non-pension funds) – you can only access them at 50 at the earliest if you have a private pension, meaning for me, even if I could get to my FI number much quicker using a pension, I’d need to have significant investments outside of the pension in order to draw down on those to bridge the gap of 10 to 13 years.

This complicates the draw down a bit too much for me. There are also tax implications which don’t work out for me which I will go into in another post. Not to mention, I’m not a fan of the requirement to withdraw 4% from age 61 and 5% from age 71 (and pay income tax on that sum) regardless of whether you need it or not.

Both work to full FI while renting out our spare room

I also looked at the above option where we rented out our spare room at 140€/week – side-note: It always annoyed me when listings showed weekly rates but I finally figured out why. Some months have 5 weeks so 140€*4 weeks = 560€/month or 6,720€/year but if you take 140€*52 weeks you get 7,280€ which is an additional 4 instalments! – Anyway, renting the spare room only knocked off 6 months at best so we would be sharing our living space for 8.25 years in order to be financially free 6 months sooner. For us that sacrifice is just not worth it and so we have ruled out renting our spare room.

Years to full FI without pension: 8.25

Years to full FI WITH pension: 5.75

Years to half FI WITH a pension where half our expenses are covered and one person can stay off or both work part-time: 2.5

Both work to full FI but splitting where we live to reduce expenses, not renting our home

I then looked at the idea of how long it would take to get to full FI if, once we got to a certain point, we could live for 6 months in our current home and live the remaining 6 months (winter) somewhere warmer and cheaper and preferably with better tax advantages like Portugals 10 year tax free foreign income option (for as long as that lasts). Anyway that would bring our annual expenses down from 37,000€ to 30,000€ (37k/2 = 18.5k for 6 months in Ireland, 20k/2 = 10k for 6 months abroad, 1,700€ extra for annual expenses like insurance policies which can’t be split into 6 month periods – so 18.5+10+1.7 = 30k).

This does not take into account any income we could get for renting out our current home while we were away as we wanted to first see what it would take to do that without needing to rely on rental income and being a landlord while we were away.

This would allow us to cut off a few years.

Income to supplement once FI: 30,000€

Years to full FI without pension: 7 years

Years to full FI with pension: 5 years

Both work to full FI but splitting where we live to reduce expenses AND renting our home

Then adding in the rental of our current home which we expect we could get 4,100€ for the 6 month period after tax (if rented for the full time without any vacancies or major repairs). This would bring our annual required expenses down to 26,000€.

Income to supplement once FI: 26,000€

Years to full FI without pension: 5.75 years

Years to full FI with pension: 4.25 years

This adds an additional risk variable to our income sources as it would require the income from the rental of our home, which we would need to do every 6 months months for the remainder of our early retirement. Maybe that would be doable if we were doing nothing else but it’s not a variable we personally would be comfortable with and so even though it shaves a few years off our goal, we would rather work that bit longer to not have the stress and if we did manage to rent it out that would be additional income we do not require but could use how we see fit as an added bonus.

Sell all assets and pay off existing mortgage, stay in Cork once FI

We currently have almost enough in other assets that we could pay off our mortgage in full bar one more year of savings with both of us working. I was curious to see if this option sped up or slowed down our time to FI.

This would bring our current expenses down by almost 10k so means we’d need to save 250,000€ less to cover those expenses (10,000€ times 25). It also means we could stay in our current home once we are FI.

Annual expenses with mortgage paid off: 25,000€

Income to supplement: as above

Years to full FI without renting spare room: 8.25

Years to full FI with renting spare room: 8

Sell all assets and pay off existing mortgage, move somewhere cheaper when nearing FI

If we freed up our equity once we were nearing FI and moved somewhere where we could buy a house for 80,000€ (say Longford) when we would no longer need to commute and remoteness wouldn’t matter then it shaves a few years off again.

Annual expenses with mortgage paid off: 25,000€

Income to supplement: as above

Years to full FI: 6.25

Shortcuts to financial independence

And now onto some of the less conventional options as potential shortcuts to financial independence. I typically entertain all ideas, even if the option isn’t something we’d consider at first, they often lead to other options that are somewhat related but I wouldn’t have thought of it if I hadn’t entertained the previous option. Hopefully some of these will get you thinking and if you have any other scenarios I may not have included, please do let me know!

Sell current home, buy house somewhere cheaper, one person works full-time

In my searches on Daft I managed to find a 3 bed 2 bath townhouse in an estate in the Tipperary countryside with a C2 rating for 55,000€, another house in the same estate has since popped up for 58,000€. They are nothing special but they could be made homey with minimal designer touches.

Here is one that has been done up and is on the market for 167,000€

We could sell our current home, buy one of the cheaper ones in cash and be mortgage free with added money to reinvest. This would reduce our living expenses to 25,000€/year.

This option would enable us to have one person stay home while the other could continue working a professional role full time in Limerick (a 40 minute commute) and continue working towards full FI for both of us while at the same time, reducing our current expenses and simplifying our lifestyle as one person would be home with our son and able to mind the house and cook etc.

It also means that once we are FI, we can stay in Ireland full time if we wish or spend extended periods abroad while potentially renting out our house (or leaving it vacant if we wish).

Annual expenses: 27,000€ (25k + 2k for additional commute)

Income to supplement: as above

Years to full FI: 7

Both work full time, sell home when nearing FI and move somewhere cheaper

As I didn’t overly like the idea of commuting 40 minutes or more for the next 7 years, I thought I’d look at the moving to the countryside option in another way. What if we both worked full-time and stayed in our current home, put our son in childcare and only once we were nearing FI, then free up the equity in our current home and move to the countryside then when commuting would no longer be required, but also would reduce our living expenses and time to FI.

Annual expenses once FI: 25,000€

Income to supplement: as above

Years to full FI if we buy an 80,000€ home: 5.5

Years to full FI if we buy an 60,000€ home: 5.25

Buy mobile home within commuting distance, both work and rent out our current home during the summer

I recently came across a news article where a local designer bought a mobile home to put on her parents land while she saved for a down payment. This sent me off into another research and number crunching rabbit hole.

Here is what I found.

If you’ve got a serviced site where you can put a mobile home and you don’t mind living in a small space (though some are just as big as a decent apartment, have a look at some of these modern luxury ones) – then this might be a cheaper immediate option. The added bonus with your own site is that you can get internet and laundry installed which you can’t do in a caravan holiday park.

If you don’t have a serviced site, then it probably would cost too much to buy one and get it serviced to justify this option but you could buy one in a serviced holiday park however these are only open 7 months of the year (usually Apr-Nov) and the major downside (and ultimately what has ruled this out for us) is that you can’t get internet and there are no laundry facilities in the mobile homes or at the site (at least the ones I looked at).

You can buy a 3 bed for about 20,000€ and a two bed for slightly less (though I’m not sure the quality would be like those above for that price). The annual service fees are about 2,500€.

Taking all this into consideration, I looked at the option of saving less this year and buying one of these now, both of us returning to work including the increased cost of childcare, renting out our current home while we could be at the caravan park and moving back to our home in the off-season. There is a caravan park that would be 25 minutes from my workplace and 40 minutes from my husbands.

Annual expenses: 50,000€ pre early childcare scheme, 46,500€ post ECCE until school, then 40,000€ once in school (estimated 3,000€ extra/year for additional commute costs)

Income to supplement: as above

Years to full FI: 5.5

Considerations: Though the years to full FI are short, there are a lot of moving parts, we’d need to rent our home for 6 months every year for the next 5.5 years and move between 2 homes every 6 months while both working and having our son in childcare and school. We’d also need to sacrifice having internet for 6 months and have to do our laundry at a laundromat for 6 months for the next 5 years. There is also added commute time and costs for my husband. This is not something we are prepared to sacrifice in order to shave a few years off of our goal. It would make our lives more complicated rather than simplifying which is the ultimate goal, not necessarily to be financially free as quickly as possible, though it may work for some of you which is why I included it.

Both work until nearing FI then sell home, buy mobile home in Ireland and live abroad in off-season

These headings are becoming paragraphs! Ok so while looking at the option of the caravan parks in Cork, I also considered doing the same where we stay in our current home, both of us work, put our son in childcare and continue working towards full FI but once we are nearing that goal, sell our current home and at that point buy the mobile home in Cork (or elsewhere in the country as commute would no longer be an issue). During the off season then, as we would no longer have our home in Cork, we could live abroad somewhere warmer during the winters which also reduces our living expenses and time to FI.

Annual expenses: 50,000€ pre early childcare scheme, 46,500€ post ECCE until school, then 37,000€ once in school

Income to supplement once FI: 23,000€ (10k for 6 months abroad, 13k (half of 26k) for remaining mortgage free months in Ireland

Years to full FI: 4.5

Considerations: This significantly reduces the effort while saving towards FI as we get to stay in our current home, but the offset is we put our son into childcare. It also means once we are FI, we’d be living in 2 places and moving every 6-7 months as the caravan park would only be open for 7 months. This would mean we would need to homeschool our son, but if we were both off work this is something we are considering anyway.

Both work to FI then move to caravan park in Spain year round

We personally would like to stay in Ireland for part of the year but for curiosity’s sake I looked into what you could get in Spain in terms of caravan parks. This is by no means extensive research but as an example you could get a pretty decent modern 3 bedroom caravan for 50,000€, annual site fees of 3,600€.

This particular site is 25 mins from Malaga airport which you can get to quite cheaply (as low as 50€) with direct flights (around 3 hours) from Dublin and Cork (for easy visits with friends/family) – that’s less time and less expensive for one person than it is to drive to Dublin from Cork! The site is open year round and has it’s own pool and bar/restaurant, there is a nearby village as well with standard shops you would require. This site does come with internet, though not sure about the speed. I don’t see anything about laundry either in the mobile home nor on site so that would be a tricky thing unless you could have one installed.

This option seems to be the quickest in terms of reaching full FI at a whopping 3 years at our current savings rate, at which point we’d need to sell our home and invest the rest.

Annual expenses: 18,000€ (no mortgage or rent and low cost of living in Spain)

Income to supplement: as above

Years to full FI: 3

Ways to live semi-retired now

If none of those are quick enough, here are a few options to consider by living a semi-retired life now.

Pause savings towards FI and move to caravan park in Spain where one person works part-time

Hinging off the moving to Spain option above, we could technically do that now (or within a year once we get everything organised) as we could sell our current home, buy the mobile home outright and have some to spare for re-investment. If we drew down on our existing assets we’d only need to make around 10,000€ more per year to live there year round. One or both of us could work part-time in the local village to bridge this gap while alternating who stays home with our son, or just one of us could work.

Annual expenses: 18,000€

Income to supplement: 10,000€ net

Years to full FI: Indefinitely on hold

Pause saving towards FI and live off one income until baby is in school

If you have a partner and you’ve managed to get up to a joint 50% savings rate or more then the option of living off one income (while still saving, albeit smaller amounts) could be available to you, keeping in mind that you could take home more from your partner’s income once they have use of your tax credits (if they are in the higher tax bracket) and you use the home carer credit (if you are minding a child).

For example: a married couple with one person working and the other staying home to mind a child where the person earning makes 50,000€ or more would take home about 2,600€ more than when that person was assessed as an individual or when both were working and jointly assessed. If they are in the lower tax bracket like say 40,000 or below the additional take home will be less (1,740€ additional take home for 40,000€ joint assessment).

We are lucky enough to be in a position to do that and so one option we are considering is for one of us to stay off work with our son until he is school aged, at which point we both return to work and continue saving towards FI at that point.

Our current assets would remain untouched (unless we needed to access for an emergency) and would continue compounding even though we wouldn’t be pursuing FI as aggressively.

We would stay in our current home but have also included the option of selling our home once we are nearing FI and buying somewhere cheaper (as commuting would no longer be necessary) which would lower our living expenses. This shaves 3.5 years off the end goal!

Annual expenses: 37,000€

Income to supplement: 37,000€ net (42,500€ gross)

Years to full FI staying in our current home: 10 years

Years to full FI selling our current home and buying a home in cash somewhere cheaper once nearing FI: 7.5 years

Stop saving towards full FI, one person stays off, the other works part-time

As we currently have existing assets we could draw from, we could stay in our current home, begin drawing from our existing assets and have enough to get by on one part-time income (3 days a week) or by taking on short term contracts. This means we would stop working towards full FI potentially indefinitely if this is the lifestyle we choose to pursue OR until circumstances change and we wish to return to full time work, potentially once baby is in school.

This would reduce the compounding effect of our existing assets and would take longer to reach full FI should we want to resume that but means we can take a step back now while our son is small and have an easier life with both of us being home 4 days of the week (and one full time). That being said, it might be hard to find part time work at the same level of income OR as most people will attest that do part-time, you actually still end up doing 5 days work in 3 and are only being paid for 3 so that might not be the best / most sustainable option for attaining a slower paced, less stressful life.

Annual expenses: 37,000€

Income to supplement: 30,000€ net (33,000€ gross)

Years to full FI: Unknown depending on when we’d chose to return to full time work.

Stop saving towards full FI, sell current home, buy house somewhere cheaper, one person works part-time

Hinging off the Tipperary option where we sell our current home and buy one in cash with the equity, reducing our living expenses to 25,000€ and if we both worked for one more year and saved our current savings rate, we’d have enough in assets to draw down 10,000€ in passive income. This would leave 15,000€ to supplement our current lifestyle (15,800€ gross).

This would give us options to either both work part-time locally, only one person work part-time in a professional role with a commute or even full-time in a minimum wage role locally if that suited which would bring home almost 18,000€/year (potentially with less stress and responsibility than current roles). Mr. MH often jokes that his dream job would be to stack shelves in Dunnes as he did in college so who am I to stop him following his dreams!

We also looked at the option of doing this and moving abroad for 6 months of the year where we could live more cheaply. However it only reduced expenses by another 2,000€ per year so might not be worth the hassle of trying to find jobs for 6 months at a time.

As with the previous option, this stops all savings towards full FI but allows us to live a simpler life for the moment. We could play it by ear and always have the option to return to work and continue savings should we wish to do so.

The particular location is handy as it’s closer to some family and friends and fairly close to both Cork and Limerick.

Annual expenses: 25,000€

Income to supplement: 15,000€ net (15,800€ gross)

Years to full FI: Unknown depending on when we’d chose to return to full time work.

Stop saving towards full FI, rent out current home and rent somewhere cheaper while one person works

I worked out that renting out our current home could net us 10,600€/year after an income tax rate of 6% (since only one of us would be working and only making enough to cover our expenses). If we drew down on our existing assets to further supplement our income and could find somewhere to rent for 600€/month elsewhere in the country (Longford/Sligo/Donegal seems to be the main areas where you could get a decent place for a family for this) then we’d only need to supplement our income by 26,900€ (down from 37,000€). If one of us could find a job in those areas earning 50,000€ then we could afford to work 3 days a week, or full time in a job earning 30,000€ gross and the other could stay home with our son.

The downside to this would be that we would need to be landlords from a distance. In addition, any vacant months or bigger repairs would cause us to dip further into our assets to cover the gap.

Again this is stopping our journey to FI for the moment, but doesn’t mean we couldn’t start savings towards it again once our son is in school or we choose to both return to full time work.

Annual expenses: 26,900€

Income to supplement: as above (30,000€ gross)

Years to full FI: Unknown depending on when we’d chose to return to full time work.

Summary table

And to sum that all up, here is a handy table with the years to full FI for each scenario.

And here is a summary of the semi-retirement options. They have varying levels of income that would need to be supplemented.

And that’s all I’ve come up with so far. Hopefully that has given some food for thought. Do let me know if you have any other scenarios you’d like me to run through.

This post documents all of my findings so far on the different investment options in Ireland along with the pros, cons, tax rates, and estimated real rates of return after inflation, fees and taxes. It may not be a complete list but I will add to it over time as I discover more.

Something to keep in mind that whatever you invest in, will result in needing to file a tax return each year, even if you are not making any money.

Also do not invest any money that you are relying on. Do your own research and get professional advice before investing any large amounts of money.

Property

Real estate

Pros:

• Potential to make large capital gains
• Most expenses are tax deductible

Cons:

• Potential to make large capital losses (just ask all those still in negative equity)
• Effort to be a landlord
• Ongoing costs usually result in negative cash flow annually and gains only realised once you sell. An example of the negative cashflow per year can be seen here.
• Potential large maintenance costs to wipe out multiple years of gains
• Higher downpayments required for investments (30%)
• Higher mortgage rates for investments (~4.75%)
• Lack of diversification
• Rent caps in place could make it difficult to cover costs
• Illiquid as it takes a lot of time, money and effort to sell and free up equity

Tax rate:

• Tax on gains: 33%
• Tax on rental income: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

Too many variables to say on this one. Each house will be different depending on length of time held, amount of downpayment paid, amount of expenses incurred, amount of rent received etc.

Rent-a-room scheme

What it is:

Under the Irish government’s Rent-a-room scheme you can rent out a spare room in your house, tax free, if the income does not exceed €14,000 per annum or €1,166 per month. The room must be attached to your house and granny flats in the back garden do not count. Check out revenue.ie for more details.

Pros:

• You can earn 14,000€ tax free!

Cons:

• If you charge 1 cent more than 14,000€ including utilities, you will pay regular income tax on the FULL amount
• You need to live with someone else
• Only applicable to long term lets

Tax rate:

• 0% up to 14,000€
• Personal income tax rate + PRSI + USC on full amount if income exceeds 14,000€

Real rate of return:

100% of the income you receive is yours to keep tax free unless you receive more than 14,000€

Short-term rentals

What it is:

You can rent out your entire house or investment property on sites like Air B&B BUT there are a few things to be aware of:

• recent legislation has been brought in for rent pressure zones limiting short term rentals. Short term lets for investment properties in rent pressure zones are no longer allowed by law. There are even rules around renting your primary residence out while you are away on holidays (you need to register for change of use with the local council and you are limited to 2 week stays up to 90 days per year). You can still rent a room or rooms in your house without limitations so that may be an option if you wanted to rent while away on longer holidays.
• insurance may not cover you in the event of an accident or damage if you have not upped the cover with them in advance

Pros:

• Potential higher returns than longer term lets

Cons:

• More maintenance to clean between guests, meet for keys, handling deposits etc. There are companies that manage short term lets but they are in high demand and may not take on your property. They also take 15-25% of your profits so you need to decide if it’s worth that vs. you managing the property yourself.

Tax rate:

• Profits after expenses: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

Similar to the property rates of return this one has too many variables and will depend on your expenses vs the return you receive.

Pensions

There are a lot of things to consider when looking at a pension depending on your personal circumstances. You can read a comparison in this post but at a high level most companies offer a pension matching scheme and if not they must, by law, provide you with an option to contribute to a pension yourself.

Pros:

• Pension matching is free money but again you need to understand your real rate of return after fees to compare against investing outside of a pension – see some examples of when this isn’t as profitable as investing outside a pension here
• This is a tax deferral tool in that you lower your taxable income now and pay lower taxes when you withdraw in retirement once you are no longer earning an income

Cons:

• Potential high fees and lower returns than self directed or other investment vehicles
• Lack of control over what it’s invested in
• Illiquid as you can only access at pre-defined age (depends on your company)

Tax rate:

• Capital gains and dividends: 0%
• Tax on withdrawal on whole amount withdrawn: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
    32% if you earn between 16,501€ and 35,300€
    52% if you earn over 35,300€

Real rate of return: Depends on your pension but a recent study showed the average 10 year real rate of return of pensions in Ireland has only been 2.9% per year after fees and inflation (though the report only has data from 2007 (-7.3%), 2008 (-35.7%), 2015 (4.5%), 2016 (8.1%) and 2017 (6.3%). The 2.9% average excludes the 2008 figure as that was due to the crash which is hopefully an anomaly. So depending on your income at time of withdrawal, the real rate of return could be:

• 2.75% if you earn less than 16,500€/year
• 1.97% if you earn between 16,501€ and 35,300€
• 1.39% if you earn over 35,300€

Employer Share Options

What it is: A lot of the big American tech and pharmaceutical companies are now in Ireland. Some of these companies offer bonuses of shares in the company or options to purchase additional shares at a discount.

Pros:

• A way to buy highly valued stocks at a discount (or free if you are given as a bonus)
• Can sell shares with gains of 1,270€ each year tax free
• Capital losses can be claimed 3 years in arrears or carried forward indefinitely
• Partially liquid as some companies require a three year vesting period before you can sell, once vested you can sell anytime

Cons:

• If you buy too many you are not very diversified
• If you eventually have a value in shares of more than 60,000$US and you have not structured your account effectively through the use of a non-US company, partnership, or trust and/or invocation of treaty benefits, you will be subject to US estate taxes (currently 40% of fair market value at time of death)
• Depending on the type of employee stock (RSUs), you may need to file a tax return EVERY time the shares are PURCHASED as well as when they are sold – I will elaborate on this in a future post

Tax rate:

• Capital gains: 33%
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return: Depends on the company’s stock value

Bank Savings

Pros:

• Secure
• Liquid

Cons: Loses money to inflation every year

Tax rate: 0%

Real rate of return: -1.9% annually (average inflation in Ireland over the last 30 years)

An Post/State Savings

What it is: There are a number of savings options here

Pros:

• Secure
• Tax free (no DIRT or capital gains)
• No fees

Cons:

• Rate of return does not keep up with inflation
• Illiquid as some options have conditions that if you remove ANY money before the term is up you forfeit all savings

Tax rate: 0%

Real rate of return: Ranges from -0.4% to -1.9% with the -0.4% being for the highest yielding account (10 year at 1.5% AER) once you account for the 1.9% inflation

Stock Market/Index Funds

Irish and EU domiciled ETFs/Index funds

Pros:

• Low cost management fees compared to active funds
• Passive investing – buy and forget
• Lower tax on dividends/income compared to other domiciles IF you intend to withdraw while you are earning above the 40% tax bracket
• Liquid as you can sell anytime

Cons:

• Higher tax on gains compared to other domiciled ETFs
• Higher tax on dividends/income 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 (TBC)
• 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).

Tax rate:

Exit tax on gains and dividends: 41%

Note 1: Fund managers are actively lobbying the government to reduce this in line with DIRT (which is being reduced from 41% to 33% over the next number of years) but have not been successful to date. The argument has been made that DIRT and exit tax have been aligned with capital gains tax rates for the last 20 years and they are making investors choose funds based on preferential tax treatment rather than on the underlying investment’s merits. They estimate that bringing this in line would only result in an annual loss of 15 million against the exchequer. This MAY go down in future as a result but is staying put for the moment.

Note 2: For the EU domiciled ETFs, according to the Revenue, “it is not possible to give other than a general guidance” on these, although it does say that, as most of these will be similar to non-UCITS Irish domiciled funds, they should also be subject to exit tax at 41%. However, this may not always be the case, and investors can make a case to Revenue as to what tax rate should apply. There may be a case to be made that gains on such a fund could be subject to CGT, which is levied at a lower rate. “It is always open to an investor and his/her tax advisers to take a different view,” the Revenue says.

Real rate of return:

Depends on the fund but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% minus sample fund fees of 0.19 = 7.91% minus the 41% tax on gains/dividends = 4.67%

Examples:

• Ireland UCITS: Anything with UCITS in the description such as:
  • VANGUARD FTSE ALL-WORLD HIGH DIVIDEND YIELD UCITS
  • VANGUARD FTSE ALL-WORLD UCITS
  • VANGUARD FTSE DEVELOPED EUROPE UCITS
  • VANGUARD FTSE EMERGING MARKETS UCITS
  • VANGUARD S&P 500 UCITS ETF
  • iShares Core S&P 500 UCITS ETF
• Ireland non-UCITS: iShares Physical Gold ETC
• EU UCITS: iShares Core DAX UCITS ETF (DE)

US domiciled ETFs/Index Funds

This one is almost not worth going into as they are no longer available to purchase by Irish every day investors but will include for completeness sake.

Pros:

• Lower tax on gains compared to Irish domiciled ETFs
• Income tax on dividends/income is much more beneficial to long term investors who only intend to withdraw when no longer earning other income or earning income below the 41% tax bracket
• Can carry forward capital losses to offset against future gains
• Low cost management fees

Cons:

• As mentioned above these are no longer available to purchase in Ireland as an individual investor due to EU legislation, these MAY be available through professional money managers but the fees would negate the benefits, you may also access if you open a US investment account with a minimum investment of 10,000$ but I have not confirmed this and am not sure about the tax complications
• Only an issue if you die but, for any investments domiciled in the USA with a value of $60,000 or more, an Irish investor will be liable for the punitive US estate tax rate. Local estate taxes may also apply potentially raising the liability above 40%. There are potential avenues to explore that may protect a non resident US investor when using US domiciled products, these include joint tenancy arrangements and / or the establishment of on shore foreign grantor trust. Both these options have complexity and uncertainty attached.
• US withholds 30% withholding tax (15% if you complete a W8-BEN) which you need to claim back on your Irish tax return

Tax rate:

• Tax on gains: Capital gains tax at 33%
• Tax on income: Income tax + PRSI + USC
  • NOTE: if you are not earning any other income and only plan to withdraw the 16,500€/year per person this rate effectively becomes 4.9%

Real rate of return:

Depends on the fund but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% minus sample fund fees of 0.19 = 7.91%

• Real rate of return on gains: 5.29%
• Real rate of return on dividends:
  • 3.79% while you’re earning in the highest tax bracket
  • 5.38% while you’re earning in the lower tax bracket
  • 7.52% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

Example: SPDR S&P 500 ETF Trust

Individual Stocks

Pros:

• Lower tax on gains compared to Irish/EU domiciled ETFs
• Income tax on dividends/income is much more beneficial to long term investors who only intend to withdraw when no longer earning other income or earning income below the 41% tax bracket
• Can carry forward capital losses to offset against future gains
• Can sell shares with gains of 1,270€ each year tax free
• Liquid in that you can sell anytime

Cons:

• Higher risk
• Less diversification
• More work to watch markets and pick winners
• More fees to buy and sell

Tax rate:

• Tax on gains: Capital gains tax at 33%
• Tax on income: Income tax + PRSI + USC
  • NOTE: if you are not earning any other income and only plan to withdraw the 16,500€/year per person this rate effectively becomes 4.9%

Real rate of return: Depends on the company but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% = 8.1%

• Real rate of return on gains: 5.35%
• Real rate of return on dividends:
  • 3.88% while you’re earning in the highest tax bracket
  • 5.50% while you’re earning in the lower tax bracket
  • 7.70% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

Individual Bonds

What it is: Bonds are basically investments you can buy where governments or corporations borrow money from you the investor and agree to pay them back with interest at a set schedule. These are highly unlikely to default but with lower risk comes lower reward. You can choose bonds with fixed income paid throughout the loan as well as the repayment at the end OR forego the income throughout and earn higher capital gains upon payout. If you choose fixed income throughout and are still earning at the higher tax bracket you will need to pay income tax on those payments. If you are working towards financial independence within the payout time of the loan it might be better to avoid the fixed income bonds to lower your tax bill and increase your returns at a later date.

Pros:

• Safer/more stable than stocks
• There is no capital gains tax payable on Irish government bonds for Irish bondholders

Cons:

• Lower rates of return
• Some have long term lock ins where your money is not available

Tax rate:

• Capital gains: 0% on Irish bonds, 33% on non-Irish bonds
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return: Depends on the bond but the bond market since inception from 1928-2017 when looking at 10 year treasury bonds has averaged 5.21%/year minus inflation of 1.9% = 3.31%

• Real rate of return on gains: 2.18%
• Real rate of return on dividends:
  • 1.58% while you’re earning in the highest tax bracket
  • 2.25% while you’re earning in the lower tax bracket
  • 3.15% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

UK Investment Trusts

What it is:

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.

Pros:

• Can be more tax efficient than ETFs
• Capital losses can be offset 3 years in arrears or indefinitely in the future
• Good diversification
• Potentially higher and more consistent growth in dividend pay outs
• Qualify as shares for taxation purposes so:
  • 8% less tax on gains than ETFs
  • 36.1% less on dividends if earning less than 16,500€
  • 9% less on dividends if earning between 16,501 and 35,300€

Cons:

• Actively managed meaning higher management fees ranging anywhere from 0.37% to 2.7%
• Subject to the same fees for buying and selling as shares
• 11% more tax on dividends than ETFs if dividends are paid out while you are in the highest-earning tax bracket
• Most are based in GBX (Britsh pence), and therefore subject to currency exchange fees and risk which could outweigh any tax benefits
• You are still buying “stocks” in an individual company which comes with more risk. Personally, I’m trying not to hold more than 5% of my portfolio in any one company’s stocks, this will hold true for any investment trusts I buy in future.

Tax rate:

• Capital gains: 33%
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

I couldn’t find a summary for longer historical averages but in a review of the top 14 investment funds in the last 5 years their dividends have averaged 5.54% and their returns have averaged 4.36%, if we assume an average fee of 1.5% and inflation at 1.9% that brings the real rates of return down to:

0.63% for capital gains

and the below for dividends

• 2.04% if you earn less than 16,500€/year
• 1.45% if you earn between 16,501€ and 35,300€
• 1.03% if you earn over 35,300€

Examples:

• BMO Capital and Income Investment Trust PLC (BCI)
• BMO Global Smaller Companies PLC (BGSC)
• BMO Managed Portfolio Trust PLC – Income Share Class (BMPI)
• BMO Managed Portfolio Trust PLC – Growth Share Class (BMPG)
• BMO Private Equity Trust PLC (BPET)
• BMO UK High Income Trust PLC – Ordinary Share Class (BHI)
• BMO UK High Income Trust PLC – B Share Class (BHIB)
• BMO UK High Income Trust PLC – Units (BHIU)
• F&C Investment Trust (FCIT)

Peer to Peer lending/Crowdfunding

What it is: This is something you can do to lend your money to other people or companies through an online match making and collection platform. You choose the loan type and durations you want to buy and the platform loans out the money and pays you back the principal including interest as the loans are paid back. The platform divvies up your money across multiple loans so that you are not loaning to just one person/company which reduces the risk. Loans can default so you can lose portions of your investments.

Pros:

• Higher returns
• Regular fixed income

Cons:

• Not yet regulated though certain platforms are pushing for this
• Higher risk

Tax rate:

Hard to make out exactly but according to this document from Revenue it looks like the interest received on the loans is treated as regular income and subject to your marginal rate of income tax + USC + PRSI

Real rate of return: Loans can get you anywhere from 3-25% depending on the loan type and risk. Take off inflation and that range comes to 1.1% to 23.1%. I’m not sure if there are any management fees to remove as well. I know someone who is getting 1%/month paid into their account (so 12%/year)

If we take the average of 12.1% and remove taxes, your real rate of return will be:

• 11.5% if you earn less than 16,500€/year
• 8.23% if you earn between 16,501€ and 35,300€
• 5.80% if you earn over 35,300€

Note: There may be a way to invest in P2P via a company which would bring your tax rate down but I need to look into that a bit further

Other

There are a few other options I’ve yet to look into including:

• Dividend reinvestment plans (DRIPs) (automatic reinvesting of dividends through a fund)
• Forex trading (buying and selling currencies)
• Employment and Investment Incentive (EIIS) (government scheme with tax relief similar to pensions but accessible after 4-5 years)
• Irish whiskey (quoting 12-18% annual returns)
• Christmas trees (quoting 15% annual returns with locked in capital for 5 years)

Comparison

So if we look at all of the options along with their real rates of return – how much would 100€ be worth in 10 years , 20 years and 30 years time for each?

Assumption: I took the rate of return based on income of less than 16,500€ on withdrawal with the exception of the peer to peer as those are paid every month and so I picked the highest tax bracket for that rate of return

I have not taken dividends into account as I couldn’t quite figure out how to account for these simply.

If you wish to see how 10,000€ or 100,000€ would fare over the same time frame simply multiply the below figures by 100 or 1,000.

It’s not surprising to see that the highest risk investments have the highest returns and vice versa. The key with all investments is to have a well diversified portfolio so you can realise some of the higher gains while having some more secure vehicles to offset losses or volatility.

I hope this was of some use and as usual I’ve gone on WAY longer that I thought.

Let me know if I’ve missed anything.

Spreadsheet templates

Want access to Mrs. Money Hacker’s spreadsheet templates?

I launched a member’s area where you can gain access to all the latest spreadsheets which have taken hundreds of hours to create and fine-tune over the last number of years.

Check out this page for more details and a sneak peek of what you’ll get if you sign up.

This post took an awful lot of reading into the eye-glazing territory of pensions and a 300 line spreadsheet of analysis with varying assumptions. With so many investment options available it’s really hard to figure out which option is best to throw your money at. Hopefully this post makes that decision a little simpler.

The options

First let’s look at the main pension options and how they stack up to investing on your own. Pros are in green and cons are in red. If I’ve missed anything do let me know.

The deciding factor

Although pensions appear on the surface to be much more tax efficient than investing in Ireland, it ends up that all of those incentives are wiped out by very convoluted fee structures which decimate your real rate of return and reduce your end investment.

A very detailed report was carried out by the Department of Social Protection in 2012 on the pension charges in Ireland and summarised that there are “a wide range of issues in relation to pension charges and identified a number of serious problems.  It is clear that there are major challenges to be addressed in the two main areas of transparency and reasonableness of charges. The report fully accepts that pension savings cannot be cost free. However, it appears very clear that consumers do not understand that even a modest charge can have a very large impact on the final pension.”

The OECD gave a guideline that for every 0.25% of a fee on your portfolio results in 5% less in your end portfolio amount.  

Again quoted from the above report: “This can be illustrated with the following: If an individual age 35 saves €250 per month for a pension for 30 years, a fund of approximately €200,000 is created which results in a pension of about €10,000 per annum. Apply the average charge (found by the report) of 2.18% per annum to this fund and the final fund is reduced by 31% i.e. the fund is reduced by €62,000, resulting in a lower pension of €6,900 per annum.  This impact would be significantly higher where the maximum charges apply.”

Hidden Fees

You may not even be able to find out the true cost of your fund either as there are often hidden charges not made available to the pension saver.

“Investment managers typically disclose annual investment management charges for the management of a pension investment mandate but this quoted annual management charge may not take into account all expenses incurred by the underlying pension fund. These are not generally reflected in reduction in yield calculations, relate to underlying costs of investment management and are known as implicit costs. These additional costs such as those detailed below, will impact long term pension values to differing degrees and are not typically disclosed to individual pension savers.

• Operational Costs (such as custodian fees, trustee fees, audit fees etc.);
• Trading Costs (typically brokerage commissions payable when an asset of the fund is bought or sold);
• Stamp Duty and other taxes (taxes related to share dealing in certain jurisdictions)

The range of additional implicit costs identified amount to reduction in yields of between 0.1% and 0.3% per annum, resulting in a further overall reduction in final pension fund value of 2% ‐ 4% for occupational pension schemes and individual pension arrangements.  However, costs will depend on the underlying fund structure and can be significantly higher.”

And now for the analysis

My 300 line spreadsheet looks at the “big picture math” to properly weigh up the true impact of all of the pros and cons listed above between a pension and an investment outside of a pension. 

I took the average Irish income and expenses as you may have seen in this post, and applied the full savings to 2 scenarios: saving for retirement using a pension vs investing outside of a pension.

In each case I look at how long it will take to build a retirement fund allowing for a safe withdrawal of 16,500€/year (for one person) as well as how each fund performs over the next 30 years based on a number of assumptions.

The assumptions:

Scenario 1:

Investing in pension – growth phase:

This includes some money into a pension as well as some into an investment account as the assumption is that the saver has more than the max contribution room of their pension to save each month. It doesn’t make sense to put any more than the max contribution room into your pension as you are not reducing your taxable income beyond that point and you are better using the rest of your disposable income in an account with a higher rate of return. Also if you plan on drawing income from your investments before you can access your pension, you will need investments to draw from in a non-pension account until your pension is available.

Summarised:

Detailed:

• Monthly investment (pre-tax) into pension: 716.66€
  • max contribution of 20% of gross income for people aged 30-39. Average salary of 43,000€ was used
• Pension growth: 2.90% real rate of return (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%). I took average excluding 2008 as that was due to the crash which is hopefully an anomaly
• Monthly investment (after-tax) into savings: 653€
  • as the average Irish household spends 40,000€ per household, I assumed an even split and said 20,000€ for one person or 1,667€/month. Take home after 20% pension contribution would be 2,320€/month minus the 1,667€ expenses leaves 653€ to invest into separate self-directed investment account
• Savings growth: 6.75% real rate of return (after fees and inflation)
  • based on historical stock market average return of 9% minus 1.9% inflation and 0.35% fees for ETF portfolio

Investing in pension – withdrawal phase

Summarised:

Detailed:

• 25% of pension taken as tax-free lump sum and re-invested into self-directed investment account
  • on retirement, you can take a tax-free lump sum out of your pension to do with as you wish. The amount is limited to 25% of your fund up to a max of 200,000€. I’ve chosen to re-invest at a higher rate of return
• Pension withdrawals reduced by 4.9% for income tax+PRSI+USC
  • current tax credits allow for 16,500€ salary without incurring any income tax the remaining bands of PRSI and USC for that amount come to 4.9%
• Savings account reduced by 41% deemed disposals on gains every 8 years
  • assuming savings are invested in low cost Irish-domiciled ETFs, these incur 41% tax on income and 41% tax on any gains, even if you don’t sell, the government brought in deemed disposals to get access to your money every 8 years, instead of taking this off the withdrawal, I have reduced the fund value by the deemed disposal amounts. This could be avoided if you purchase shares directly but those come at higher transaction fees and can be tricky/risky to pick the right shares, so may be much of a muchness
• Withdrawal rate: 3.50%
  • there are many articles about the safe withdrawal rate of 4% which essentially states that you can withdraw 4% per year from your portfolio without much chance of your funds running out. However when I tried this figure along with all the other growth assumptions and tax implications specific to Ireland, the portfolio did start losing money after a number of years and so I reduced to a safer rate of 3.5%

Scenario 2:

Investing in self-directed funds – growth phase

Summarised:

Detailed:

• Monthly investment (after-tax) into savings: 1,041.66€
  • as the average Irish household should have 25,000€ to spare after expenses, I assumed an even split and said 12,500€ for one person or 1,041.66€/month
• Savings growth: 6.75% real rate of return (after fees and inflation)
  • based on historical stock market average return of 9% minus 1.9% inflation and 0.35% fees for ETF portfolio

Investing in self-directed funds – withdrawal phase

Summarised:

Detailed:

• Savings account reduced by 41% deemed disposals on gains every 8 years (see above for more details on this)
• Withdrawal rate: 3.50%

Phew! 

The results

If I haven’t lost you, fair play as that’s some pretty eye-glazing stuff but here is how it all played out:

*from year 16, contributions to the savings account were no longer needed to reach the final comparable amount (but still contributing to the pension).

So as you can see, even though there were tax incentives to save towards a pension, it didn’t make much of a difference in the years to retirement as the growth of the pension was much lower than the investment account, even with the 41% deemed disposals taken into account!

And now for some graphs:

Investment growth in blue and pension in orange. Over 30 years the investments outperform the pension.

Similar trend to your withdrawal rate where you can withdraw more year on year from the investments than from the pension.

So based on all of the above assumptions the winner is to invest outside of a pension as long as the rate of return is higher. Plus the major bonus is that you are not subject to all of the rules and regulations with your pension and you can access your money at any age in an investment account.

Like everything else I’ve analysed to date, it all comes down to your rate of return in each scenario, aside from all other assumptions this seems to be the overriding factor of success.

But what if…

For arguments sake, what would happen if the pension account made the average return it has made from 2015 to 2017 of 6.3%?

Well then the pension wins by far and it takes 2 fewer years to reach retirement (16 years). You also end up with 184,000€ more in your portfolio after 30 years compared to the investments and 6,700€ more in annual withdrawals.

And that withdrawal rate?

For illustration purposes, if I put in a withdrawal rate of 4%,, although you reach retirement 2 years sooner in both scenarios, you end up dipping into your principal 15 years after retirement, and while your pension doesn’t get to zero, your annual withdrawals start to reduce by almost 2,000€ less per year at the end of 30 years.

AND that’s a wrap! If you’ve made it this far you deserve a drink

Food for thought

While we’re on the subject of pensions.

The state pension is currently 12,900€/year and only available at 66 years of age which has already been pushed out to 68 by the year 2028 and with the population aging and fewer people contributing I wouldn’t be surprised if other major restrictions are brought into place.

If the current average spending per person is 20,000€ year that’s a 7,100€ gap per year. You’d need 193,500€ saved in order to draw that gap down at a 3.5% withdrawal rate. With the average pension contribution of 4% (1,799€/year or 150€/month) it would take 49 years to save up that amount at a growth of 2.9% or 31.5 years at a rate of 6.75% (if you’re starting from zero).

As we saw above, if you boost your savings to 1,000€/month you could have enough to withdraw 16,500€ in 19 years time. So if you’re 35 now, you could still retire by 54, or at least be financially free to do what you wish with your time, be that reduced work weeks or find a job where you can work remotely from a beach during the winter. That’s still 14 years sooner than you’d have access to the state pension.

What do you think? Leave a comment below if I’ve missed anything or if you’d like to see any more analysis like this.

If you’re lucky enough to have an employer that provides pension or RRSP matching as a benefit, it seems like a no brainer to maximise whatever portion you need to, to get the full match, after all it’s free money or a 100% return on what you put in!

EXCEPT….

There are some scenarios where this doesn’t work out in your best interest. This concept applies in both Canada and Ireland so I will refrain from mentioning specific currencies throughout the post.

Like we saw in the mortgage vs investment posts, it all depends on what management fees the group fund is paying and what growth rate it’s getting compared to what you could get in a self-directed account.

To demonstrate my point I looked at 5 different scenarios.

Assumptions:

• Salary: 55,000
• Growth term: 30 years
• Self-directed fund has MER fees of 0.23%
• Company fund has MER fees of 1% or 3%

MER fees are Management Expense Ratio fees which are charged on the overall value of your fund annually.

Scenarios:

• 100% matching up to 5% of salary where company plan and investment make 9%
• 50% matching up to 3% of salary where company plan and investment make 9%
• 25% matching up to 5% of salary where company plan and investment make 9%
• 100% matching up to 5% of salary where company plan makes 3% less than investment
• 25% matching up to 5% of salary where company plan makes 1% less than investment

Here is what I found where the best option is in green, mid-option in orange and worst option in red:

So generally speaking if the company matches higher percentages and makes the same growth you could get elsewhere then 1% or even 3% MERs still make more than you would elsewhere.

When your company makes smaller contributions or you could make 1-3% more in investment growth elsewhere then it makes sense to invest elsewhere.

So before you go upping your contributions to maximise your employer matching, ask you HR rep for details of the fund they are investing in and use this as a general guide to figure out if you’d be better off foregoing the free money and investing your portion elsewhere.

Questions to ask your rep would be:

• What is the fund invested in?
• What are the MER fees?
• What growth has it seen as a percentage historically?
• Is there a vesting period? – this is a minimum period of time that you need to leave the funds in your company’s group scheme before you move them elsewhere/sell them even if you leave the company
• Are there deferred sales charges (DSC)? – this is an early discharge fee, it can be a sliding scale which reduces by percentage per year the closer you get to the end of the term (think this is Canadian only)

If you do set up your own self directed account, as these are retirement/pension funds with deductions at source you’ll need to make sure you set up the correct investment fund to ensure your company can contribute pre-tax.

Another option you could consider is to make use of the matching and then transfer those funds into your self-directed account once you have access to the matched amount (usually subject to a vesting period).