Every year, we conduct hundreds of financial reviews for our clients and prospective clients – and the most common issues we come across focus on savings plans, protection, inheritance, and pensions. In a three-part series, we’ll explore these themes through real-life case studies and present the recommendations we would commonly make in each scenario. In our first case study, we consider the best ways to meet savings goals and the importance of a protection review.
As your life changes, so do your financial needs and goals – and that was true for our clients Fiona and Tom1.
Many of their friends were putting savings plans in place – and with two young children aged six and eight, they too decided it was time to consider proactive savings options for their children’s future education.
Both Fiona and Tom earned good salaries and received the monthly children’s allowance. Even though they felt they should have excess funds in their bank account, they often ended the month with no savings at all. So, they decided to set aside a minimum amount for their children’s future that was previously being absorbed into the family’s day-to-day expenditure.
Start a savings plan, don’t worry about the size
There are plenty of suitable investment products for people in Fiona and Tom’s situation. After completing a financial review, we agreed that Fiona and Tom would like to save €400 every month – a portion of their income along with the monthly children’s allowance – into a diversified savings product.
Most people do not save the children’s allowance from day one – but practically speaking, if you save it for 10 years at 5% returns, it will generate a pot for your intended goal of over €60,000 – that’s not insignificant when you consider the average Irish undergraduate degree costs €40,000.
By establishing a savings plan, Fiona and Tom now had the comfort in knowing that there were structures in place for their children’s future education.
Of course, when it comes to savings plans, we are often asked by clients: what is the minimum amount one should consider for regular savings? And while Fiona and Tom decided to save €400 per month, we often have clients who set up savings plan for as little as €150 per month. Whatever the amount, savings will grow over time – it’s an easy goal to prioritise.
Protection for the future
The future cannot be predicted but it can be protected – and Tom was keen to have suitable protection in place. Tom is highly skilled and highly paid, but his remuneration does not include any other additional benefits. That’s typical for contractors or those who consider going out on their own.
From speaking to Tom, it was clear he had little protection outside of his base salary. Other employers might offer benefits, such as death in service and income protection, but Tom did not have this.
We were mindful not to overburden Tom with lots of complex policies, and so, we focused on the most important thing to him: protecting his family’s financial stability should he lose his income on a temporary or a permanent basis.
Generally, we find that most households are not in a position to sustain their current lifestyle with a loss of salary for more than three months – and this held true for Tom and Fiona too. So, we advised Tom to direct some of his salary towards an income protection policy.
Tom opted to protect himself to the maximum allowable (less any state benefit) of €100,000, or 75% of his salary – and the cost of doing so was approximately €200 per month (or €2,400 per year). Income protection plans can qualify for income tax relief at an individual’s marginal rate and therefore, in Tom’s case, this reduced down his monthly premium on a net basis to €120 per month, or €1,440 per year.
As part of our review of Tom and Fiona’s current protection policies in place, we also identified a clear gap in Tom’s life cover. While they had existing mortgage protection, and Fiona had life cover through her employment package, Tom had no additional cover. That meant the family would be left short should anything happen to Tom.
Having assessed the family’s circumstances as well through discussions which took place, it was decided that it would be in Tom and Fiona’s best interests to put in place life cover for Tom, to the sum of €500,000. Should Tom pass away, the policy would pay out a lump sum of €500,000 to the family – and the cost is approximately €70 per month, or €840 per year.
While protection policies can be complex, we always try to be practical. That’s why we look at what you need today and lay out what you may need in the future. But it’s important to know where you stand – and so, we encourage protection reviews. After all, it will help identify any gaps that you may have.
1 Names have been changed to protect client anonymity.