Retirement Fund or Put to Mortgage?

Brenster

Hi All, I am after opinions really.
Its progress I am now on this forum instead of Debt Free Wanabee I suppose !!!!
Over the past 18 months I have seriously knuckled down and been very careful with my money, which is now accumulating in my savings / retirement fund.
I have £9.5k saved, which will be £14k by the end of the financial year. This is in an ISA and is earmarked as 'retirement fund' (Quite responsible I think as I am only in my mid thirties), any way the plan is I will continue to contribute to this, until mid sixties which should enable me to have a relatively comfortable amount for retirement.
My dilemma is that we need to increase the size of our house either by moving or extending. I torn between saving a bit longer and using my savings to extend (and start back at £0 retirement fund), or to borrow the money and pay back (either by loan or remortgage). I realise it is an investment and will increase value, but realistically it will be value I can never release as I will always need somewere to live ?

greenglide

The house you live in (IMHO) is only an investment if you are able to realise it - traditionally by down sizing or moving to a cheaper area of the country.

The advantage of a pension as opposed to an ISA is that a pension is a true long term commitment - you cannot rob your future self if you decide that a new house would "be nice".

It needs commitment to a level of pension saving that can be maintained for many years so that you will, ultimately, have a reasonable level of pension income.

Ultimately it is your decision .....

dunstonh

his is in an ISA and is earmarked as 'retirement fund' (Quite responsible I think as I am only in my mid thirties)

Which would suggest it is a stocks & shares ISA as no-one sensible would be using a cash ISA for retirement planning that is 35 or so years away with approx a 60 year investment horizon. Or is it?

I will continue to contribute to this, until mid sixties which should enable me to have a relatively comfortable amount for retirement.

You are in your mid 30s but have just 9.5k. You should ideally be in excess of £35k by now. So, you are behind in your planning.

My dilemma is that we need to increase the size of our house either by moving or extending.

You also need to plan for retirement and at the moment, you have virtually nothing in that area at present.

I realise it is an investment and will increase value, but realistically it will be value I can never release as I will always need somewere to live ?

it is not an investment for you. It is an investment for your children. You shouldnt include your house as an investment unless you happen to live in London and plan to relocate to a significantly cheaper area.

Brenster

Thanks for the replies, I note that circa £10k is not a lot for someone of my age, however this has been saved in only 18 months, my twenties and early thirties were spent repaying debt from an irresposible youth !!! I feel I have really turned a corner now, so given the level of saving, I would hope at retirement age it would be a reasonable sum.


I take your point on its an investment for my children, however the house situation needs to be sorted, its not a 'nice' to have, it is becoming a necessity, the family are outgrowing the house. However I think I am of the opinion that an extension would give us better value than a move.


ISA - I think I need to speak to a financial advisor as to the best options available to maximise my future pension pot. But I cannot help being cautious as my parents were badly affected by the endowment issues, they thought they had a pot of money which was nothing like they had been projected 25 years previously, at least if it is in savings were you can see it, and there is minimal risk.

dunstonh

But I cannot help being cautious as my parents were badly affected by the endowment issues, they thought they had a pot of money which was nothing like they had been projected 25 years previously, at least if it is in savings were you can see it, and there is minimal risk.

Endowments had specific issues which would be different to modern investing. Do not mix those up with investing. And in most cases, even those people who ended up with shortfalls still ended up better off because of the changes.

Savings do not have minimal risk. You are suffering shortfall risk (returns being insufficient to hit required amount) and inflation risk (returns less than inflation mean you are losing money in real terms). Savings are virtually no risk for short term but for long term, the risks increase. The longer the period, the greater the risk.

xylophone

Does your employer provide a pension scheme?

If not, he will soon need to - http://www.workplacepensions.gov.uk/?gclid=CLe34ZWClcoCFamD2wodrBAPpA

Brenster

I am my employer !!!


I am aware of the changes, which will be coming into force over then next year or so with our business.

Playing_with_Fire_2

Well done on saving so much in 18 months!!!!

If you can carry on saving at this rate you will be fine. In time you should look at investing at least part of your savings, to stop them being devalued by inflation.

If the home improvements are genuinely a needed one off, and otherwise you would need to move house, then this might make sense. Compare the interest rates you would pay and the interest/growth you'd expect from savings and make your choice. [IMO, if you would downsize after the kids have left home then the house value can be considered to help with the retirement plan.]

If however, the home improvements will the start of a long list of things you 'need', then this will not work, as you are not saving for retirement, but deferring spending for home improvements (car, holiday, whatever). This is still better than going into debt but not great for providing in retirement.

bowlhead99

dunstonh wrote: »

Savings do not have minimal risk. You are suffering shortfall risk (returns being insufficient to hit required amount) and inflation risk (returns less than inflation mean you are losing money in real terms). Savings are virtually no risk for short term but for long term, the risks increase. The longer the period, the greater the risk.

This is very true. Basically with cash deposited in a savings account you are unlikely to outpace inflation in the long term. This is important to realise because it means the shortfall risk is very high.

Even though you will from time to time have decent 'bursts' of saving (such as 10k in the last year and a half), it sounds like with your current lifestyle goals this is not sustainable because you were only able to quickly put away that amount of money in your 'retirement' pot by neglecting your other needs such as the home improvement pot.

So with that in mind perhaps the amount you can put away, even after trimming down in other areas, might be something like 20% of income. While living on the other 80%.

So, if you put away 20% of your salary for about 30 years while working (from age 30, to 60 or whenever you stop being fit and active and employable), and the money is not invested in something whose returns well exceed the long term rate of inflation, how would you be able to later draw from the savings at a rate of 20% of your old real-terms salary, for the next 30-50 years (age 60 to 90 or even 110)?

And 20% of your lifetime average salary is not likely to be sufficient for your needs and expectations in retirement anyway if you are getting used to living on 80% of your salary. Many people target half or two thirds of their salary, though of course less is possible.

So, if you only put 20% away for 30 years, but you want to take out more than 50%, for 50 years, and the money is just sitting there doing virtually nothing (earning a nominal rate of interest in nice 'safe' savings accounts), you haven't a hope in hell. If you don't think about investing a good chunk of money in a smart way you will not succeed.

Putting away a good chunk of money in an inefficient way is not enough. Neither is putting away a small amount of money in a really smart way. You need both - a good chunk of money, in a smart way.

That means considering putting sizeable amounts of money into pensions and S&S ISAs as you go along to maximise the long term investment returns and various tax efficiencies which are available.

You mention you are your employer which is a positive because you can have a lot of flexibility on how you approach invesmtent and there is potential for your business to have its own tangible value and be sold off at some point down the road. However, you probably don't need me to tell you that running a business and having your wealth and livelihood tied up in it, carries plenty of risks, and it's wise to look at external investments like the ISAs and pensions.

Overall you will have several competing objectives - invest in running your short-term and medium-term day to day family life including keeping a suitable roof over your head ; invest in the potential of your business and your own earning power ; invest in retirement planning for when you inevitably lose your earning power.

If you are not going to USE your £10-£14k to actually INVEST for your future retirement, and are just going to keep it in a cash deposit ISA where it gets nibbled away by inflation over time, then what the heck, you might as well spend the money on home improvements.

But if you are going to properly use it for retirement by making sensibly measured investments in S&S ISAs and pensions for you and your other half, then you should consider this money already spoken for; and not spend it on the home improvements.

If you really really do need some home improvements, then the fact that mortgage and remortgage rates are lower than they have been in pretty much all of history, should allow you to borrow at a competitive rate and pay off over the coming years without your ongoing retirement investments taking much of a hit. The borrowing rates are probably sub 3 or 4 % while the long term investment returns would be expected to be north of that if managed sensibly, especially considering the benefits of tax relief etc.

jimjames

Brenster wrote: »

ISA - I think I need to speak to a financial advisor as to the best options available to maximise my future pension pot. But I cannot help being cautious as my parents were badly affected by the endowment issues, they thought they had a pot of money which was nothing like they had been projected 25 years previously, at least if it is in savings were you can see it, and there is minimal risk.

Unlike endowments, investments in a S&S ISA with fund supermarkets are available to view online, 24 hours a day so you can (if you really wanted) monitor it every day. Probably not a good idea to do so as it might tempt you into making bad decisions but you can certainly know value whenever you want.

Brenster

Fantastic responses, Thanks all. (Bowlhead99, if your not a Financial Advisor, perhaps you should consider a career change, lol !)