How to make sure you earn your human capital

Following on from our recent blog, ‘What’s your number’, this is a further exploration of the idea – namely, how do you get there, and more pertinently, what happens if something goes wrong?

For most people in their 30’s, 40’s and even 50’s, human capital dominates their wealth, but this is not usually well understood. For someone aged 35 earning €100,000 a year for 25 years (to age 60) the future value of their human capital is circa €2,500,000 (this assumes discount rates and wage inflation are the same). Assuming they spend less than they make and save prudently they can likely achieve financial success, which is your money outlasting you and not the other way around.

There are a few things an individual can do to make sure they have the best chance possible of earning that human capital over the course of their working life:

Have a protective reserve. This could be 6 – 12 months living expenses in a cash deposit or money market fund. This can afford you time if you lose your job to find another one, without having to sell/ liquidate assets.
Where you haven’t been able to accumulate sufficient protective reserves, you should consider taking out specified illness cover up to a level of 6 months or 12 months living expenses (add any short term loans to this). Specified Illness cover pays out a lump sum if you are diagnosed with an illness such as heart attack, cancer, stroke, Parkinson’s disease, etc.
Have income protection in place to protect your income if you cannot work due to illness, injury, or disability. The maximum level you can cover is usually 75% of your salary. This can be paid personally, attracting tax relief of 40%, or in some cases paid via a corporate with no BIK implications. Income protection can form a very important part of your structure. Statistics from Aviva for 2023 show that the average Income Protection claimant is out of work for seven and a half years, which speaks to the need, and the exposure without this. Incidentally, the longest claimant on Aviva’s records has been in payment for 32 years – and the claimant was only aged 29 when the claim commenced.
Have sufficient life cover and align it to a personalised financial structure. Life companies have launched products such as Monthly Income on Death that can be a cost-effective way to mitigate this risk. Life Cover is so important within an overall structure, and in particular when you have a young family and / or debt. Irish Life statistics for 2023 show a total of €239.5m was paid out in death benefits, with the volume of death claims up 14% compared to 2022.
Insure your loans against your premature death using Mortgage Life Cover for example.
Review the level of cover periodically as life happens.

We don’t know what the future holds, but we can make sure we are protected against potential risks.

As we get nearer retirement our human capital is less valuable and that hopefully aligns with a time when our financial assets – pensions, cash, investments, etc., are at a sufficient level to ensure we can retire comfortably and stay comfortably retired. In some circumstances it is not always possible by retirement to get your financial assets to the required level.

In the next blog in the series we will look at lifetime mortgages as a tool to realise cash to supplement retirement income from financial assets.