The future’s bright if the plan is right

Drawing up a financial strategy can take a lot of unnecessary stress out of life

MONEY worries are one of the biggest sources of stress for Irish workers, according to new research. A survey published earlier this month by benefits consultants Mercer revealed Irish employees are suffering high levels of stress due to concerns about their health and financial wellbeing.

Pension planning was a serious source of stress, with 51% surveyed saying they were worried they were not saving enough for their retirement. Mercer published the research to coincide with the launch of Harmonise, a digital platform for employers and employees that aims to help plan and manage personal finance and health goals.

Not knowing how to plan for your financial future can lead to inaction, say experts. Danny Mansergh, head of member communications at Mercer, said: “Often people just don’t get round to doing anything because they’re not really sure what to do. A lot of the worry is the unknown.”

We give you expert advice on drawing up your financial battle plan.

IDENTIFY GOALS

Research published earlier this year by Irish Life found that more than half of adults worry about financing their future. Of those, 83% do not have a financial plan in place. Identifying financial goals is the first step to designing a plan to help you achieve them, say experts.

“In order to put together a good plan you need to interrogate yourself,” said Mansergh. “When do you want to retire? What protection provision do you want to have in place for you and your family? When do you want your mortgage paid off? These are all questions you should be asking.”

Once you have identified goals, you need to examine if they are achievable given your financial means or, if not, what steps you should take.

Eoin McGee, principal with Prosperous Financial Planning in Kildare, said: “There are four pillars to any financial plan: your assets, liabilities, income and expenditure. Identifying these allows you to project forward where you’re going and inform what action you need to take.”

SAVINGS

You should keep an emergency fund of cash readily available to meet the cost of unforeseen events, say experts.

“The general guideline is to have three times your monthly take-home salary,” said McGee. “If you’re self- employed, I’d recommend six times. If you’re in secure employment, such as a civil servant, then three times is probably appropriate.”

You should keep the cash in the best-paying demand account. For balances of €10,000 KBC’s Smart Move Online Account pays the highest interest of 1.25% AER, according to the price comparison site consumerhelp.ie.

Those building up a rainy-day fund should do so via a regular savings account. Nationwide UK (Ireland) has the best-paying regular savings account, which offers 4% AER on monthly savings of between €100 and €1,000 over a 15-month term.

PENSIONS

People often fail to tackle pensions despite most being worried about how they are going to survive retirement financially, say experts.

Jerry Moriarty, chief executive of the Irish Association of Pension Funds, said: “Pension participation is notoriously poor in Ireland, with just 50% of workers saving for retirement. However, burying your head in the sand and simply committing to work forever can’t replace sensible retirement planning.”

The younger you start your pension the better, as your final pension pot will be bigger. For example, if you start saving €200 a month at the age of 25, your pension pot would be worth about €383,000 by 65, assuming investment growth of 6% a year, after charges.

Wait until you are 45 to start and the pot would be worth just over €91,000 at retirement, assuming the same monthly contribution and investment return.

If your employer has a workplace pension scheme, experts say you should join it. “If your employer matches your pension contributions, you would be crazy not to take advantage of it,” said Mansergh.

INVESTING

If you have time on your side, you are likely to get a better return on your money by investing in the stock market than leaving cash on deposit.

Stock markets return 6%-7% on average a year over the long term, although this hides the extreme highs and lows that come with investing in markets.

McGee said: “The easiest way to dilute the risk is to invest for longer. To be sure of flushing out all the negative returns you’ll probably have to invest for 13 years.”

According to McGee, “euro cost averaging”, where you invest your funds in regular amounts at regular intervals, reduces the risks of stock market investing.

“Euro cost averaging reduces your risk dramatically. If you invest as a regular investor, you would struggle to find a five-year period where you wouldn’t be positive,” he said.

LIFE INSURANCE

Death is a taboo subject. However, having plans in place to deal with the financial impact of unexpected death is vital for anybody with dependent relatives, say experts.

“People find it difficult to think about their death and to go and talk to somebody about it, yet you need to make sure that, if you were to die suddenly, the family would be OK financially,” said McGee.

A survey by Irish Life earlier this year found that more than 500,000 parents with dependent children had no life insurance in place.

Most of those who do have cover are underinsured. The average amount of life cover in place is €152,040 — enough to cover four years’ salary of someone earning the average industrial wage of €36,000, according to Irish Life.

INCOME PROTECTION

The Mercer survey revealed 55% of employees are concerned about providing for their family if affected by death or illness. Income protection pays a replacement income if you are unable to work due to an accident, injury or illness.

This type of insurance is vital for those who work for themselves, say experts. Barry Kerr, founder of Wealthwise Financial Planning, said: “Income protection is a ‘must-have’ product for a large proportion of the working population, particularly those who are self-employed. It should not be deemed a luxury purchase.” The maximum level of cover that you can insure yourself for is 75% of your earned income, excluding any state illness benefit to which you may be entitled.

ESTATE PLANNING

Estate planning is a vital component of a robust financial plan, say experts. Only a third of Irish people have made a will, according to charity group mylegacy.ie.

“Presuming you have family you will want to dictate and sensibly arrange for how your affairs are going to be managed when you die,” said Mansergh. “You don’t want to leave yourself dependent on the laws of intestacy, which are quite blunt and may not distribute your assets as you would like,” he said.

REVIEW REGULARLY

You should try to review your financial plan on an annual basis, or as your personal circumstances change. “In terms of reviewing your financial plan, you should keep a weather eye on it,” said Mansergh.

“Certainly you need to look at redrawing it when circumstances change radically, for example if you have another child or your marital circumstances change. Changes in interest rates or tax are also going to have an effect.”

McGee said he carried out a mini review with clients every six months, followed by a full-year review.

Getting priorities in order

Siobhan and Aonghas Davoren, who are recently married, said their immediate financial goals are to save for a deposit on a house and to get their pensions started.

The couple, pictured left, who are in their early thirties, went to independent adviser, Bluewater Financial Planning in Dublin, for guidance on the financial steps they should take.

Bluewater designed a full financial plan for the couple and advised them how to maximise their chances of getting a mortgage and what steps they needed to take in relation to pensions.

“We came away with a savings plan which is going towards a deposit on a house. We also got good advice about what to do in relation to setting up a pension,” said Siobhan. “Our main aim is to save for a house and then to increase our pension contributions as we get older.”

Bluewater also advised on how to improve the couple’s cash flow as well as recommending protection products including income protection insurance and life assurance.

Siobhan added: “We changed all our direct debits to come out on the same day every month. That gave us greater control over our disposable income.”

Aonghas said there was no shortage of financial information available but that it was worth getting impartial advice.