JOE GILL: Nest egg vital for your future

There are many aspects to managing wealth and savings as you transition through life.

In early years, an individual should have an appetite to invest in riskier assets as they set out to create year-on-year growth in savings that outpace inflation and create a nest egg.

Later in life, the priorities change. The focus shifts to producing an annual income while protecting capital value as a means of financing the next stage in life. Less work, supporting family and managing health are things that matter, so having a money supply is crucial.

This wealth-management lifecycle is heavily influenced by external factors and the performance of economic and financial markets.

At a time in the past when interest and bond rates were more likely to be 5% than 0%, investors approaching an older age would contemplate transferring wealth into secure bond-like instruments that released sufficient annual income while protecting capital values.

Assuming a savings pot of €200k and government bonds yielding 5%, a saver could transfer their money to gilts, remove any risk and live on income of €10k per year. Currently, this is not an option as yields on risk-free assets are near zero.

Instead of the safety of government-backed bonds, investors must step up their risk if they want to generate €10,000 from a €200k savings fund. That implies more exposure to equities.

It should not be a surprise that older investors are more relaxed about the prospect of quantitative easing unwinding and interest rates rising.

Higher rates would probably drag up government bond yields and provide our sample investor with the chance to transfer money into bonds at yields that deliver annual income.

The tricky bit relates to what the existing pot of €200k is invested in. If it sits in equities, will stock market valuations contract from prevailing highs as quantitative easing unwinds? If so, the €200k savings pot could decline before bond yields reach attractive levels.

This underlines the need to take wealth management seriously. The mention of ‘wealth’ in Ireland is treated as if we operate in some rarified world of millionaires. As defined pension benefit schemes disappear, everyone needs to adopt a wealth-management strategy.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal

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