The Lotto jackpot might have hit €10 million but that’s the kind of money that only appears in our dreams…and even comes with its own set of pitfalls.
For most of us lucky enough to enjoy any kind of windfall, the sums involved tend to be a great deal more modest, perhaps €20,000 or €30,000 net after selling a little piece of land or receiving a small inheritance. Middle-income earners in the public or private sectors with annual salaries of say, €60,000 and with 40 years of service can expect lump sums of €90,000 or 1.5 their final salary at retirement.
There’s an enormous gap between €10 million and €20,000, but the decisions that have to be made are very similar: where do I get the safest, best return for this money? What are the tax implications of this sudden wealth? How much risk am I willing to take?
The lucky person who wins a €10 million Lotto draw (or the Californian who won last week’s US $1.5 billion Powerball win) is going to have access to the best (and most costly) investment advice.
The person with the modest windfall will have to search a little harder for assistance. For both, the first step is to stick their money into a bank…but which bank?
Here in Ireland just €100,000 is secure against a single institutional loss or closure under the Deposit Guarantee Scheme, so you need to deal with the safest savings bank. Here, the Dutch owned RaboDirect would certainly top the list.
The next dilemma is what kind of interest you can expect. Deposit returns are so low right now that even large tax-free lump sums will produce just a fraction of interest after 41% DIRT tax and your personal rate of inflation is taken into account.
It may not bother you too much if you had a €10 million windfall: after all, a mere 0.5% net yield (which is what most of us will get from an account that pays interest of just over 1%) will still pay annual interest of €50,000.
But getting just €100 interest over 12 months on a €20,000 savings account balance is a bit of a kick in the financial teeth. (It’s only €450 a year on a €90,000 balance!)
So the biggest dilemma for everyone with savings – at the very least – is how to get the right mixture of safe, accessible returns that beat the impact of taxes and inflation. It’s certainly the perennial question that I receive from readers and the one that every financial adviser will face constantly in 2016.
Whatever strategy a good adviser comes up with is likely to consider some or all of the following. (This list might be worth taking with you if you do engage one.)
First, they’ll probably suggest that you consider paying off your expensive debt, like credit and store cards or personal loans. For retirees this could also include a mortgage, unless it is a super-low tracker.
Next, they suggest you keep a certain amount of cash in a demand deposit account, especially if you don’t already have an emergency or contingency savings fund worth 3-6 months worth of net household expenses. Check out RaboDirect’s 90 and 30 day gross notice accounts (1.45% and 1.25% annual interest.)
You need to be clear about what you want from your windfall: do you need this money to help supplement existing income? Is it earmarked for an expensive purchase, like third level education for your children, a new car, or home. Will you need it to boost your retirement income, or to provide a legacy for your grandchildren? This choice can determine the level of risk you will need to achieve the needed return, especially after fees, charges and taxes are taken into account.
This is where it starts getting tricky. Historically, deposit accounts and bonds produce the lowest, least risky returns and stocks and shares, followed by property, the highest.
For example, last year, Irish Life’s Irish Property Fund returned 20% and their popular new mid-range, MAPS 4 balanced investment fund (which includes a wide mix of assets), a 9% gross return.
Can the company repeat this performance in 2016? They hope so, but no one can predict the future. There is plenty of evidence however, to show that the best returns of all are produced by widely diversified funds with the lowest costs.
If you don’t have that luxury of time, you need to take even greater care – in both choosing the right destination(s) for your money… and the right adviser. We live in volatile times and it will pay to get them both right.
Do you have a personal finance question for Jill? Write to her c/o this newspaper or directly at jill@jillkerby.ie Her latest TAB Guide to Money Pensions & Tax 2016 is now in all good bookshops.
