# Wealth Plan



## craft

A thread to discuss aspects of designing a plan to reach financial freedom.  

The plans going to need some starting points and objectives.

If you are interested in working through a planning process perhaps you could nominate some criteria:

Starting Age;
Desired financial freedom age;
Desired passive income;


I’m no licenced financial planner so this will all just be a theoretical exercise. Hopefully though anybody that gets involved can self-educate a bit, probably largely through correcting my misguided logic.  Or at least you will have the chance to learn from people coming along to tell us how we are going about it all wrong.

Any interest?


----------



## tech/a

Limited to trading,investing?

Perhaps a definition of financial freedom/independence.


----------



## craft

tech/a said:


> Limited to trading,investing?



not really, picking the right assets to use will be part of the thinking.



tech/a said:


> Perhaps a definition of financial freedom/independence.




That's what I'm asking for input on.

I'm thinking something like a passive $100,000 income per year in today's dollars without consuming the asset that produces the income.  Built over a 35- 40 year span.

Some might see this as too little, some might think it unrealistically high as there would very few couples retiring today on $200K passive without drawing down the capital.

I'm open to suggestions - so that we can set the objective and timeframe relevant to people that might be interested.


----------



## tech/a

Ok I'm interested.

The $100k today will be many times more in 30-40 yrs.


----------



## jloong

Following 

A planner suggested a way of quantifying those terms that I quite liked:
• Financial independence: passive income > your projected expenses
• Financial freedom: passive income > a multiple of expenses (a buffer for lifestyle, unforeseen events - essentially greater peace of mind)

Agree with the base criteria craft. I think thats what planners start with. The also consider risk profile/appetite too but in trying to keep it simple we could allow that to be influenced by the timeframe/desired financial freedom age assuming we're looking for the "safest"/most reliable path/strategy to get there (maybe another definition needed here?).

Don't want to complicate it, but it could be interesting to look at 2 scenarios: achieiving it in a short timeframe (e.g. 10 years) & at a more leisurely pace long term (30 years?).

Also is it an exercise to grow a one off asset base (e.g. $100k) ? As peoples circumstances and ability to inject cash are all different at different times in their life. Could see it becoming complicated but like the idea of trying to keep its as simple as possible... some sort of lay persons wealth plan


----------



## craft

jloong said:


> Following
> 
> A planner suggested a way of quantifying those terms that I quite liked:
> • Financial independence: passive income > your projected expenses
> • Financial freedom: passive income > a multiple of expenses (a buffer for lifestyle, unforeseen events - essentially greater peace of mind)
> 
> Agree with the base criteria craft. I think thats what planners start with. The also consider risk profile/appetite too but in trying to keep it simple we could allow that to be influenced by the timeframe/desired financial freedom age assuming we're looking for the "safest"/most reliable path/strategy to get there (maybe another definition needed here?).
> 
> Don't want to complicate it, but it could be interesting to look at 2 scenarios: achieiving it in a short timeframe (e.g. 10 years) & at a more leisurely pace long term (30 years?).
> 
> Also is it an exercise to grow a one off asset base (e.g. $100k) ? As peoples circumstances and ability to inject cash are all different at different times in their life. Could see it becoming complicated but like the idea of trying to keep its as simple as possible... some sort of lay persons wealth plan




I was envisaging the  slow path - something with-in reach of everybody with a bit of dicipline and determination.

By all means have a get rich plan also but that wasn't what I had in mind here. Theres plenty of discussion already on achieving high return to shorten the time frame - how realistic that discussion is????  I'm thinking this thread should be about the back-up plan.

Thinking
Start 25
Target $100k passive income p.a without capital drawdown by 60.

or something similarish, if anybody wants to see it targeted slightly different.  100K might be too high - the higer you set the goal the more you have to sacrifice (from living standards when young, risk capital for other fast plans, real estate purchase etc)


----------



## craft

craft said:


> Start 25




Unfortunately - not everybody is 25 anymore. But hopefully before we have finished here people of different ages should be able to see where they should be at different ages to be on track to meet the target and how to do the math if they need to vary the contributions to get back on target.

Unfortunately though If you're 55 and only have a few hundred K at that stage - the math is going to be totally against you and this thread won't be able to help.

ps
A few 100K and the pension is not the end of the world - better than just the pension if you lose your few hundred K trying to improve the situation unrealistically, so the get rich quick threads might not help you either.


----------



## Ves

craft said:


> Thinking
> Start 25
> Target $100k passive income p.a without capital drawdown by 60.



This sort of thing interests me a lot. Especially the 'go slow' part. Realistic,  achievable,  low skill floor and not time consuming.

However the 60 thing doesn't sit well with me.

What about start age 25,  target income say $40-50k by age 45?  (without need for capital drawdown, if possible). What's the maths break down on that? How important is sequence of returns?  That sort of thing enables you to be very flexible with what you want to do with the 15-20-25 years before you retire.  Call it 'barista financial independence.'  (You only need a small wage to support yourself, if that).


----------



## brty

This is a good idea for a thread and something I tried to do 30 years ago. 
Tech/a is correct in his question of $100k in today's dollars or in 'future' dollars, as there is a huge difference.

30 years ago, many assumptions I made including $ needed per annum, interest rates, inflation etc were all proven to be incorrect over time. Likewise for stock valuations. The sort of numbers I used were $30k for income, which was well above median incomes for the time, plus with inflation and interest rates high, and had been high for well over a decade, I used totally inadequate assumptions, but somehow have adapted over the years.

Personally, adaptation to changing conditions over time I feel is as important as any initial plan, as change in underlying conditions is the one certainty we have in the future.


----------



## kid hustlr

Ves said:


> This sort of thing interests me a lot. Especially the 'go slow' part. Realistic,  achievable,  low skill floor and not time consuming.
> 
> *However the 60 thing doesn't sit well with me.*
> 
> What about start age 25,  target income say $40-50k by age 45?  (without need for capital drawdown, if possible). What's the maths break down on that? How important is sequence of returns?  That sort of thing enables you to be very flexible with what you want to do with the 15-20-25 years before you retire.  Call it 'barista financial independence.'  (You only need a small wage to support yourself, if that).




Hi,

I echo the above I'd rather think 'part way there' at 45 rather than total way there at 65. As a 30 year old right now, 40k passive @ 40 seems to have a nice ring to it.

I'm going to jump in here - not sure if this is the goal of the thread but happy to be used as an example.

Situation:
Gone from DINKS to 1.5 incomes and a child recently. Savings rate has subsequently slowed but still confident I'll be well in front of the ledger for the foreseeable future. Live within our means, inherently happy (I hope!).

Equities Position:
150k split roughly 50/50 between buy and hold ETF's (VGS/VTS/AUI/VHY) and 2 Radge funds. Buy and Hold have been solid, Radge has been slow but am committed to the cause for the next several years as I can appreciate the benefit of avoiding huge drawdowns, not to mention I am looking for out performance. 

Wife and I also have super balances exposed to equities, just letting them do their thing.

Plan:
1. Continue to push savings into the above at a 50/50 split. Save hard and also remove as much 'timing' as possible. I have a number in my head that every 6 months I must deposit into the market, regardless of the markets performance in that time. This keeps my savings honest and my plan steady.
2. At some stage combine super funds and start an smsf to invest in ETF's. *Unsure what Super balance is required to justify this move*

Other Factors/Considerations:
- Will need to upgrade residence at some stage, may push horizon out.
- Also trading short term futures which I consider outside this scope, at the point where I cover costs barely, if I can get this really going as a second income this brings my time horizon in substantially.
- Random events, both in life or work space which can't be controlled
- Future stock market returns - will the next 40 be as strong as the last 40, I'm not sure.


----------



## craft

brty said:


> This is a good idea for a thread and something I tried to do 30 years ago.
> Tech/a is correct in his question of $100k in today's dollars or in 'future' dollars, as there is a huge difference.
> 
> 30 years ago, many assumptions I made including $ needed per annum, interest rates, inflation etc were all proven to be incorrect over time. Likewise for stock valuations. The sort of numbers I used were $30k for income, which was well above median incomes for the time, plus with inflation and interest rates high, and had been high for well over a decade, I used totally inadequate assumptions, but somehow have adapted over the years.
> 
> Personally, adaptation to changing conditions over time I feel is as important as any initial plan, as change in underlying conditions is the one certainty we have in the future.




I think I have posted and definitely mean the objective should be framed in today’s dollars. My whole investment bent is about maintaining purchasing power over the long term.   


Putting it another way the object will be to have an income in the future equivalent to 100K(or whatever we decide as a target) of purchasing power today.


Adaption is very important – I also have some ideas that I would like to discuss eventually on how we peg assumptions to automatically adjust to variables like inflation and make realistic assumptions about expected returns etc.


----------



## craft

Ves said:


> This sort of thing interests me a lot. Especially the 'go slow' part. Realistic,  achievable,  low skill floor and not time consuming.
> 
> However the 60 thing doesn't sit well with me.
> 
> What about start age 25,  target income say $40-50k by age 45?  (without need for capital drawdown, if possible). What's the maths break down on that? How important is sequence of returns?  That sort of thing enables you to be very flexible with what you want to do with the 15-20-25 years before you retire.  Call it 'barista financial independence.'  (You only need a small wage to support yourself, if that).



So good to have you turn up VES - if you keep posting I know this will become a useful thread for many others.

Happy to go shorter time frame and smaller target if thats what most want.  Hopefully what ever we do will just be a sample/education that peole can adapt for their own goals.


----------



## Ves

kid hustlr said:


> Hi,
> 
> I echo the above I'd rather think 'part way there' at 45 rather than total way there at 65. As a 30 year old right now, 40k passive @ 40 seems to have a nice ring to it.
> 
> I'm going to jump in here - not sure if this is the goal of the thread but happy to be used as an example.
> 
> Situation:
> Gone from DINKS to 1.5 incomes and a child recently. Savings rate has subsequently slowed but still confident I'll be well in front of the ledger for the foreseeable future. Live within our means, inherently happy (I hope!).
> 
> Equities Position:
> 150k split roughly 50/50 between buy and hold ETF's (VGS/VTS/AUI/VHY) and 2 Radge funds. Buy and Hold have been solid, Radge has been slow but am committed to the cause for the next several years as I can appreciate the benefit of avoiding huge drawdowns, not to mention I am looking for out performance.
> 
> Wife and I also have super balances exposed to equities, just letting them do their thing.



I'm in a pretty similar situation.  Same age,  except no kids,  but the wife hasn't been working the last few years. I also try to invest an amount every six months or so. Wife might work again one day,  but it isn't included in my plan,  more of a *bonus*.  I'm pretty passive these days,   ETFs  split between VGS and VAS  (About 65/35 at the moment,  but VAS might end up slightly higher in my end scenario because of franking credits) plus still have about 8 stock positions,  but haven't added any new ones in quite a while.  Generally at this wealth level can rebalance the using thenew capital without having to sell anything. Will add some bond / interest exposure one day,  but still have a small mortgage floating around on our PPOR.


----------



## craft

Just using really rough numbers for the objective phase.


If the plan was starting at 25 to have 100K of today’s purchasing power at 60.


The run rate required at 45 for that goal would be approx. 800K which could potentially give you scope for a ~40K no capital consumption income starting at 45.


However things to be mindful of – that 800K would need to be outside of super to draw at 45 and that sees us giving up a lot of tax tailwind during accumulation and the 40K itself would be taxable.


40K at 45 starting at 25 without super benefits will be a harder target than 100K at 60 using some super benefits.


Also if you want to avoid capital consumption in a major meltdown you may have to accept a few years of reduced dividends. Dropping 25% of Taxable 40K has different living consequence impacts than dropping 25% of 100K tax free. Other hand you can still have active earning capacity up your sleeve at 45.


----------



## brty

Thanks Craft. I agree with the younger ones here at looking at a shorter timeframe, like 45-50 years old from mid 20's. When you are young 50 seems to be old, yet a few of us would love to be 50 again.

We went from DINKS, to one income with kids, to breadline because of a purchased business, to an income with investments, to having more returned in investments than any income and super distributions.
I personally think that any investment in a broad range fund is exactly the wrong move, as it will never get the long term performance necessary to get to a $100k passive income in today's dollars, that might be $200k in a decade.

Going for a few WELL CONSIDERED long shots, definitely not just one or 2, when young is an appropriate strategy. Of course this is totally the opposite most thinking. 

To get any outsized gains, which is what we are talking about, over a relatively short timeframe (2 decades), there is risk involved. Low/no risk will not achieve the gains necessary.

It is going to take me a while, but I will go through some real world numbers to work out where an average performance over the last 2 decades could have led someone. I'll post later, but my suspicion is nowhere near a $100k pa passive income today. I'll include some 'good' timing.


----------



## craft

kid hustlr said:


> Hi,
> 
> I echo the above I'd rather think 'part way there' at 45 rather than total way there at 65. As a 30 year old right now, 40k passive @ 40 seems to have a nice ring to it.
> 
> I'm going to jump in here - not sure if this is the goal of the thread but happy to be used as an example.
> 
> Situation:
> Gone from DINKS to 1.5 incomes and a child recently. Savings rate has subsequently slowed but still confident I'll be well in front of the ledger for the foreseeable future. Live within our means, inherently happy (I hope!).
> 
> Equities Position:
> 150k split roughly 50/50 between buy and hold ETF's (VGS/VTS/AUI/VHY) and 2 Radge funds. Buy and Hold have been solid, Radge has been slow but am committed to the cause for the next several years as I can appreciate the benefit of avoiding huge drawdowns, not to mention I am looking for out performance.
> 
> Wife and I also have super balances exposed to equities, just letting them do their thing.
> 
> Plan:
> 1. Continue to push savings into the above at a 50/50 split. Save hard and also remove as much 'timing' as possible. I have a number in my head that every 6 months I must deposit into the market, regardless of the markets performance in that time. This keeps my savings honest and my plan steady.
> 2. At some stage combine super funds and start an smsf to invest in ETF's. *Unsure what Super balance is required to justify this move*
> 
> Other Factors/Considerations:
> - Will need to upgrade residence at some stage, may push horizon out.
> - Also trading short term futures which I consider outside this scope, at the point where I cover costs barely, if I can get this really going as a second income this brings my time horizon in substantially.
> - Random events, both in life or work space which can't be controlled
> - Future stock market returns - will the next 40 be as strong as the last 40, I'm not sure.




Good to hear from you Kid Hustler. 

I won’t refer to your situation exactly - a bit too close to advice for comfort. Hopefully some stuff will be useful anyway and you can keep us informed how you apply things for yourself. You are already doing lots of what I suspect we will come up with.


----------



## brty

Hi Craft, just on your super assumptions, I don't have any confidence in using current rules for the next 20 years. 
They have changed so much in the last 20 years, that I don't think we should use any assumption for gaining access to super at 60 in a couple of decades time. It might be 70 by the time people can access super, the way governments are tending to think and act.
Outside super has always been my choice, as I have access to my funds. I actually made some correct assumptions about govts changing rules for access to super over 20 years ago. This has helped a lot in freedom of investment choice, while giving up tax advantages.

Rule changes are outside an investors control, something we need to be adaptable towards. Being stuck in a system, where choice can be limited, is a nono IMHO.


----------



## craft

brty said:


> Thanks Craft. I agree with the younger ones here at looking at a shorter timeframe, like 45-50 years old from mid 20's. When you are young 50 seems to be old, yet a few of us would love to be 50 again.
> 
> We went from DINKS, to one income with kids, to breadline because of a purchased business, to an income with investments, to having more returned in investments than any income and super distributions.
> I personally think that any investment in a broad range fund is exactly the wrong move, as it will never get the long term performance necessary to get to a $100k passive income in today's dollars, that might be $200k in a decade.
> 
> Going for a few WELL CONSIDERED long shots, definitely not just one or 2, when young is an appropriate strategy. Of course this is totally the opposite most thinking.
> 
> To get any outsized gains, which is what we are talking about, over a relatively short timeframe (2 decades), there is risk involved. Low/no risk will not achieve the gains necessary.
> 
> It is going to take me a while, but I will go through some real world numbers to work out where an average performance over the last 2 decades could have led someone. I'll post later, but my suspicion is nowhere near a $100k pa passive income today. I'll include some 'good' timing.




Great to have your along brty - we have different views on the potential of broad based ETF approach. Though I don't for a moment say its the only avenue - Just the safest most predictable and should be the default whilst you try and increase your active income. The main reason it doesn't work is because people don't start early enough, don't stay consistent enough and don't know at what level to fund it.


----------



## kid hustlr

craft said:


> However things to be mindful of – that 800K would need to be outside of super to draw at 45 and that sees us giving up a lot of tax tailwind during accumulation and the 40K itself would be taxable.




Craft,

If one is investing in ETF's for buy and hold, then am I correct in saying there is no capital gain taxation issues (if we never sell?) At some stage well down the line when transfer of ownership occurs then there will be a tax event, but if I'm buying something to never sell, do I really need to be weary of CGT?


----------



## craft

brty said:


> Hi Craft, just on your super assumptions, I don't have any confidence in using current rules for the next 20 years.
> They have changed so much in the last 20 years, that I don't think we should use any assumption for gaining access to super at 60 in a couple of decades time. It might be 70 by the time people can access super, the way governments are tending to think and act.
> Outside super has always been my choice, as I have access to my funds. I actually made some correct assumptions about govts changing rules for access to super over 20 years ago. This has helped a lot in freedom of investment choice, while giving up tax advantages.
> 
> Rule changes are outside an investors control, something we need to be adaptable towards. Being stuck in a system, where choice can be limited, is a nono IMHO.



Preservation age is definitely a big risk but the tax advantages for taking that risk are substantial. I think a mix of some in, some out is desirable to balance accumulation efficiency and freedom to draw earlier. Though if you want full access at 45 that means nearly everything needs to be outside.


----------



## craft

kid hustlr said:


> Craft,
> 
> If one is investing in ETF's for buy and hold, then am I correct in saying there is no capital gain taxation issues (if we never sell?) At some stage well down the line when transfer of ownership occurs then there will be a tax event, but if I'm buying something to never sell, do I really need to be weary of CGT?




No personal capital gain consequences if you don't sell. One of the reasons we want to get our balance high enough to support our desired income without having to draw down the capital. Not being taxed on unrealised profits should be one of the least likely place the government changes the rules. Death taxes and capital gains consequences at the stage of bequest though are much more susceptable to change.  We have differing taxation already in some circumstances depending on where the asset is held at time of death.


----------



## tech/a

Has anyone on this forum achieved Financial Freedom.

If so

What's your story?

How did you do it
How are you doing it now.
Your advice to those who are 25/35/45/55/65 etc.


----------



## craft

tech/a said:


> Has anyone on this forum achieved Financial Freedom.
> 
> If so
> 
> What's your story?
> 
> How did you do it
> How are you doing it now.



Yeh Me - I'm 47 made a bucket load picking equities on the ASX and holding them for as long as the business kept performing. Still doing it - though the focus now is more investing for our PAF.



tech/a said:


> Your advice to those who are 25/35/45/55/65 etc.



Trying to put some of it down in this thread. Though I won't be recommending what I do here.


----------



## tech/a

*Craft
*
Wouldn't expect that you'd recommend but telling the story may help others
investigate similar.

With Financial Planners I know 3.
Most are just licensees from dealer principals who are someone like Zurich
who have a range of managed funds. These guys (The Planners--so called)
are in many cases aspiring financially to get to a position that their clients
now enjoy. They can only recommend a fund within the umbrella of the 
dealer principal. (One is successful in his own right!).

I'm like you but 63 Could have retired at your age but think Ill be more like Rupert
Murdoch and hang around to annoy everyone.

My contribution here *if anyone* is interested will be from a grass roots level at
the coal face. No holes barred as it is from my view point.
I often see lots of theory and Duck all in application. Ill give you that---I've done it and
still doing it. I've already posted a book of posts over this site on the topic.

Don't need the money but accept the challenge everyday and the rest (money) is a by
product. Sure you have to plan implement and manage but once you have methods
and systems in place *YOU* can *TAKE CARE of YOURSELF*.

Those methods and systems I'm happy to disclose---
How people use the info is entirely up to them.
You wont get that from a F/P.

*Im hoping others including you do similar.*


----------



## Wysiwyg

kid hustlr said:


> I'm going to jump in here - not sure if this is the goal of the thread but happy to be used as an example.
> Equities Position:
> 150k split roughly 50/50 between buy and hold ETF's (VGS/VTS/AUI/VHY) and 2 Radge funds.
> 
> 2. At some stage combine super funds and start an smsf to invest in ETF's. *Unsure what Super balance is required to justify this move. *



Some Super Funds allow you to invest directly in ASX300 stocks & ETF's. Wider investment base without the fees and documents of a SMSF.  


> Other Factors/Considerations:
> - Will need to upgrade residence at some stage, may push horizon out.



Interested to know if you own your PPOR because you mentioned holding a sizable amount in equities. I believe paying down (unclaimable) debt is a priority for wealth creation. One can't see the loan balance reduction as an investment but it is. Happy to see your thoughts on that.


----------



## craft

tech/a said:


> *Craft
> *
> Wouldn't expect that you'd recommend but telling the story may help others
> investigate similar.
> 
> With Financial Planners I know 3.
> Most are just licensees from dealer principals who are someone like Zurich
> who have a range of managed funds. These guys (The Planners--so called)
> are in many cases aspiring financially to get to a position that their clients
> now enjoy. They can only recommend a fund within the umbrella of the
> dealer principal. (One is successful in his own right!).
> 
> I'm like you but 63 Could have retired at your age but think Ill be more like Rupert
> Murdoch and hang around to annoy everyone.
> 
> My contribution here *if anyone* is interested will be from a grass roots level at
> the coal face. No holes barred as it is from my view point.
> I often see lots of theory and Duck all in application. Ill give you that---I've done it and
> still doing it. I've already posted a book of posts over this site on the topic.
> 
> Don't need the money but accept the challenge everyday and the rest (money) is a by
> product. Sure you have to plan implement and manage but once you have methods
> and systems in place *YOU* can *TAKE CARE of YOURSELF*.
> 
> Those methods and systems I'm happy to disclose---
> How people use the info is entirely up to them.
> You wont get that from a F/P.
> 
> *Im hoping others including you do similar.*



Well you know 3 more financial planners than I do.

There's no use me talking about what I do in this thread - there's plenty of other posts on that already. I think the standard plan should be based on market returns from passive investing, as that doesn't require a unique skillset. That's going to mean contributions are required, source those contributions from income from utilising an active skill set elsewhere but don't incoporate excess return requirement assumptions into the plan or its bound to fail.


----------



## tech/a

Craft----OK.

Firstly unfortunately Money Makes Money.
Without it your severely limited even to the point of long term failure.

With it you can and should use it in endeavours that are scalable.
Use compounding and leverage.

With it you'll be able to seek and secure money from institutions who
only want an interest rate serviced. That is amazing!!!!
If you borrow at 5-8% and can return 10-40% PA just rinse and repeat!
I have been doing this for 30 yrs and at one time with solid 7 figures.
( Late 90s to 2010 ish.)

The return on MY money was stratospheric.
Not as high these days but still fantastic.

You wont get that from an F/P.


----------



## craft

I think a couple can get about 40K in pensions and income at deeming rates before the assets test will cut them out of the pension. (needs confirming)

This is what AFSA produce as there recommended requirements in retirement.



I purpose that we set our ‘individual’ target at *75% of average weekly earnings*. That is, we want gross income of 75% of whatever the weekly wage is at any time. Its an easily accessable measure that automatically ratchets to maintain our purchasing power.




http://www.abs.gov.au/


So currently the target stands at approx. $60,000.  Pretty close to the after-tax result of a wage earner on average earnings. – we would hope to get better taxation outcomes in older age then the poor wage earner.


I propose a* target age of 55*.  Means we will have to deal with a component outside super. Gets a bit closer to the desired 40-45 mentioned above. But those aspirations might be a little beyond a realistic passive plan’s reach. Not to say they shouldn’t have an active plan and an aspiration for that running alongside – but if we discuss everybody’s active plan then we will bite off too much in one thread.  


I propose a *starting age of 23*. Time to get Uni, apprenticeship etc out of the way  but the burdens young people face with HECS and housing costs etc are going to make the job hard – so the more time the better.


----------



## craft

tech/a said:


> Craft----OK.
> 
> Firstly unfortunately Money Makes Money.
> Without it your severely limited even to the point of long term failure.
> 
> With it you can and should use it in endeavours that are scalable.
> Use compounding and leverage.
> 
> With it you'll be able to seek and secure money from institutions who
> only want an interest rate serviced. That is amazing!!!!
> If you borrow at 5-8% and can return 10-40% PA just rinse and repeat!
> I have been doing this for 30 yrs and at one time with solid 7 figures.
> ( Late 90s to 2010 ish.)
> 
> The return on MY money was stratospheric.
> Not as high these days but still fantastic.
> 
> You wont get that from an F/P.




So go start a thread and tell them again how good you are, Its about as useful as Ritchie Port telling me I can make $6m a year like he does from riding a bike.


----------



## Ves

craft said:


> So currently the target stands at approx. $60,000.  Pretty close to the after-tax result of a wage earner on average earnings. – we would hope to get better taxation outcomes in older age then the poor wage earner.
> 
> 
> I propose a* target age of 55*.  Means we will have to deal with a component outside super. Gets a bit closer to the desired 40-45 mentioned above. But those aspirations might be a little beyond a realistic passive plan’s reach. Not to say they shouldn’t have an active plan and an aspiration for that running alongside – but if we discuss everybody’s active plan then we will bite off too much in one thread.
> 
> 
> I propose a *starting age of 23*. Time to get Uni, apprenticeship etc out of the way  but the burdens young people face with HECS and housing costs etc are going to make the job hard – so the more time the better.



No arguments from me.   I don't think either of those ages or the target income figure is unreasonable.   In fact,  if anything the more realistic / conservative the end goal is,  the more chance there is of undershooting it and being disappointed.


----------



## tech/a

So that's all well and good but if your going to live for another 30 yrs
and your chewing into whatever nest egg you have ---

30 yrs ago the average wage was about $18000
So over 30 yrs about a 300% rise in what you need.






Your $60K now will need to increase dramatically overtime and
*You need to be able to do this without a job and preserving what you DO have.*

My Father---still alive at 92 actually retired at 54. When he retired the Average wage was $11,800
His retirement after the first 10 yrs has been nothing more that a chore!!!

He retired on $400,000. He now lives as a struggling pensioner with all the dramas every pensioner
has to cope with.

*Don't under estimate what you'll need.*
I think your very conservative.


----------



## tech/a

craft said:


> So go start a thread and tell them again how good you are, Its about as useful as Ritchie Port telling me I can make $6m a year like he does from riding a bike.




Ok if you think so.


----------



## craft

tech/a said:


> So that's all well and good but if your going to live for another 30 yrs
> and your chewing into whatever nest egg you have ---
> 
> 30 yrs ago the average wage was about $18000
> So over 30 yrs about a 300% rise in what you need.
> 
> 
> View attachment 72014
> 
> 
> 
> Your $60K now will need to increase dramatically overtime and
> *You need to be able to do this without a job and preserving what you DO have.*
> 
> My Father---still alive at 92 actually retired at 54. When he retired the Average wage was $11,800
> His retirement after the first 10 yrs has been nothing more that a chore!!!
> 
> He retired on $400,000. He now lives as a struggling pensioner with all the dramas every pensioner
> has to cope with.
> 
> *Don't under estimate what you'll need.*
> I think your very conservative.




I'm well aware the 60K is going to have to grow (potentially a lot) over retirement to maintain purchasing power and its all about not chewing into the capital asset that creates the income flow. Do I not write what I'm thinking or do you not read it?

Your example is exactly why I'm doing this thread.

Plenty of people who have made good active income soon find themselves in poverty in retirement because they have no idea of how to passively invest their capital appropriately. The best way to learn is to get experience accumulating some of it passively.


----------



## systematic

Only time enough to post for encouragement - love the idea you've started in this thread, craft.

I've said before (usually when answering a question inthe beginner's forum) that a stock market forum tends to get replies like, 'oh, you should learn short-term trading' etc. and misses the point.

I read a book years ago (wish I'd paid more attention!) where the author emphasised several times that, 'you only have to do average to get a wonderful result' - that's a misquote, but essentially, the basics of saving lots, not going into debt, playing it safe (not stupidly safe, but you know what I mean) and being consistent and persistent...you really don't need a fancy trading system etc if you're in it for the long haul.

On the scenario you've painted originally (it's changed now, but I only just started reading this thread a few minutes ago):
If the 25yo after uni or whatever starts out on $50k with no savings (being that conservative because I believe we're wanting to be inclusive of as many as possible) starts salary sacrificing 30% per year...and goes through to 65 (I know, not 60...it's old for some but not for those that are approaching it!)...and their wage (and salary sacrifice) increases with inflation (which is actually pessimistic.  It's often forgotten in simulations that people usually go up the ladder at least somewhat - or it's not difficult to do at least a little - which changes things - for the better - again).  Anyway.

If they can hit 10% returns (which some might take issue with projecting this for the next few decades, but I note that some of the super funds are using around 8.5% for the 'shares' option, however I wouldn't have a problem with someone arguing that this is where my scenario breaks down for average Joe) then I think they can hit the $100k a year.

But yeah, it's good to see the latest posts in the thread are already changing this around a little - as it's hopefully going to be an encouraging exercise.

Just for the discussion point (and because I often can't help but see the other side of things) I'd like to suggest the opposite of those suggesting an earlier age.  Especially as a _standard_ (which I think this thread is kind of angling at).  When I was younger, I thought exactly like that.  But now I see that people work or run businesses and stay productive until way past 45,55 or even 65.  I'd rather see scenarios that don't assume a pension, as opposed to hitting the goal much younger.

A more sure / guaranteed path in that light is to make sure you are in (or transition to) a career or business that you enjoy.  That's doable for Average Joe.

Anyway - just thoughts.  Back to work (not retired yet!)


----------



## skc

craft said:


> Yeh Me - I'm 47 made a bucket load picking equities on the ASX and holding them for as long as the business kept performing.




No you don't count for the purpose of this thread because of what you said below.



craft said:


> I think the standard plan should be based on market returns from passive investing, as that doesn't require a * unique skillset. *




Neither does Liam Neeson. 

I look forward to seeing your post on this exercise.



systematic said:


> A more sure / guaranteed path in that light is to make sure you are in (or transition to) a career or business that you enjoy.  That's doable for Average Joe.




The key here is really the notion of "average Joe". I would say that, for most people who are on (or capable to be on) $100k passive income today they most likely gained the asset base through "unique skillset". Or in simpler words - having enjoyed high income through the working age, and have the ability to grow that income throughout the working life.

If the Average Joe only earns a wage that grows with inflation, it would be a very difficult proposition to achieve $100k/year passive income without some luck.


----------



## craft

systematic said:


> Only time enough to post for encouragement - love the idea you've started in this thread, craft.
> 
> I've said before (usually when answering a question inthe beginner's forum) that a stock market forum tends to get replies like, 'oh, you should learn short-term trading' etc. and misses the point.
> 
> I read a book years ago (wish I'd paid more attention!) where the author emphasised several times that, 'you only have to do average to get a wonderful result' - that's a misquote, but essentially, the basics of saving lots, not going into debt, playing it safe (not stupidly safe, but you know what I mean) and being consistent and persistent...you really don't need a fancy trading system etc if you're in it for the long haul.
> 
> On the scenario you've painted originally (it's changed now, but I only just started reading this thread a few minutes ago):
> If the 25yo after uni or whatever starts out on $50k with no savings (being that conservative because I believe we're wanting to be inclusive of as many as possible) starts salary sacrificing 30% per year...and goes through to 65 (I know, not 60...it's old for some but not for those that are approaching it!)...and their wage (and salary sacrifice) increases with inflation (which is actually pessimistic.  It's often forgotten in simulations that people usually go up the ladder at least somewhat - or it's not difficult to do at least a little - which changes things - for the better - again).  Anyway.
> 
> If they can hit 10% returns (which some might take issue with projecting this for the next few decades, but I note that some of the super funds are using around 8.5% for the 'shares' option, however I wouldn't have a problem with someone arguing that this is where my scenario breaks down for average Joe) then I think they can hit the $100k a year.
> 
> But yeah, it's good to see the latest posts in the thread are already changing this around a little - as it's hopefully going to be an encouraging exercise.
> 
> Just for the discussion point (and because I often can't help but see the other side of things) I'd like to suggest the opposite of those suggesting an earlier age.  Especially as a _standard_ (which I think this thread is kind of angling at).  When I was younger, I thought exactly like that.  But now I see that people work or run businesses and stay productive until way past 45,55 or even 65.  I'd rather see scenarios that don't assume a pension, as opposed to hitting the goal much younger.
> 
> A more sure / guaranteed path in that light is to make sure you are in (or transition to) a career or business that you enjoy.  That's doable for Average Joe.
> 
> Anyway - just thoughts.  Back to work (not retired yet!)



I find Systematics case for upping the age very compelling.

Allows us to utilise super to its full efficiency.

Tech/a and brty can talk about active plans outside super– they really should be part of the overall picture with the payoff goal being the possability of earlier financial freedom if thats what you want.


But I think I’m more passionate about exploring the backup plan doable by nearly everyone and exploring the passive skillset so that you can still have in place an income no matter how you physically and mentally progress in retirement.

Now thinking target age of 60 or 65. It doesn't really matter what we come up with for this exercise but the objective in your personal plans need a lot of thought. Gad it is getting some discussion

I'll think about it for a while and see if we get any other comments/suggestions


----------



## kid hustlr

I feel like this thread has already become skewed.

Craft is trying to outline a steady, passive plan to build wealth over the long term.

Tech is saying:
- you need more than you think
- explore better ways of earning income faster (short term trading/small business/whatever)

The two aren't mutually exclusive and everyone should be doing both, investing for the long term and exploring ways for quick(er) wealth.

If one builds a business or a trading programs earning 40% a year, of course put everything you have into that but it 'aint that easy and in the mean time, average Joe should be listening to Craft.

Edit: the recent posts cover the above, well said Craft & systematic


----------



## systematic

skc said:


> If the Average Joe only earns a wage that grows with inflation, it would be a very difficult proposition to achieve $100k/year passive income without some luck.




Please note that my example was someone starting out with a commitment to save about 30% of income. Something similar to a couple who decide to live on one income (people have done that).

I'll admit, this takes a unique _behavioural_ approach...but it's not luck, good fortune or a high salary.

When you've got time on your side (40 years is a lot better than the 20 years many typically have)...it all adds up: your starting amount (in my example zero, but not always the case) and your early contributions being as large as possible outweigh starting later with an extra couple percent returns and/or larger contributions.  The 25yo really does have the thing that the richest man in the world can't buy.  Best thing the 21-25yo graduate can do (in my opinion) from a financial point of view is to keep living like a uni student for the most part.  Travel, but travel cheap.  Get married, but don't let that change your lifestyle for now.  Save (and invest) like crazy before the kids come!  Focus on a getting into a job / career / business that you enjoy and plays to your strengths.  Go up the ladder a little or a lot.

Typically, whilst the young have time on their side, most just don't realise it (in the right way).  Instead their mind goes to, 'I'll get to that later...'  

Getting that behaviour to change would be a miracle, but I think parents can instill a lot that puts the odds in favour.

Side note: The 100k was only from the initial example, anyway.  If someone was earning (today's dollars) $80k at retirement after starting out at $50k (today's dollars) - because they've been diligent and gone up the ladder a little - and they are used to saving 30% anyway...will they really feel a need for $100k?  They only nett about 45k now after that kind of savings rate (which they won't need to do).  Which makes the example, what?  Even more achievable? 
Of course - some might want even more dollars in retirement than during working years - that's another often overlooked consideration in scenarios.  A fin planner would probably say it's unusual - but it's a possibility.


----------



## tech/a

The average Joe will have a house and a few kids in that 25 yr plus bracket
With a wife at best working over a 10 year period of having 2 - 3 kids part time.

So for average Joe to sacrifice 30% on going to 65 is un realistic in my view.
People are having trouble surviving with 100% of income if we are talking Joe Average.

How does a 25 yr old average guy start with an amount that's enough to start.
$20-100k
They have some decisions to make.
What if they want to get into business.
Buy an investment property or their own property ---- good bye long term nest egg for passive long long term investment in stock.

Long term investment stock/property/business all are the keys to financial freedom.
And one can be enough.

But I'd suggest that with only 3-5 % being self sufficient in retirement
There are very few Joe Averages.

It's not as clear cut as compounding 30% of a wage over 40 yrs at 10%.
In reality that is about .5% of the superhuman race Joe Average never gets there.


----------



## Quant

tech/a said:


> But I'd suggest that with only 3-5 % being self sufficient in retirement
> There are very few Joe Averages.
> 
> It's not as clear cut as compounding 30% of a wage over 40 yrs at 10%.
> In reality that is about .5% of the superhuman race.



Exactly especially in this low interest rate live now pay later world we now live in . If you relying on average super returns you will be living a pretty dull retirement imo . Your wealth plan needs to be dynamic with the bar set high . Now saving 10% on a 30% return is a start  . Id be investing in skillset if i was young . Amazing how people put so much time into social media and  such little time into retirement planning .

10k start point .. save 20% on 10% return vs save 10% on 20% return using 60k av net wage


----------



## notting

I know a guy who bought 125,000K of CBA when it was floated.
He was still working so just reinvested the dividends for about 20 years.
He's as average as anyone I've met. 
Lives a nice tax free life these days!


----------



## Quant

notting said:


> I know a guy who bought 125,000K of CBA when it was floated.
> He was still working so just reinvested the dividends for about 20 years.
> He's as average as anyone I've met.
> Lives a nice tax free life these days!



Anecdotes are evidence of nothing  and whats the next CBA


----------



## craft

Quant said:


> Exactly especially in this low interest rate live now pay later world we now live in . If you relying on average super returns you will be living a pretty dull retirement imo . Your wealth plan needs to be dynamic with the bar set high . Now saving 10% on a 30% return is a start  . Id be investing in skillset if i was young . Amazing how people put so much time into social media and  such little time into retirement planning .
> 
> 10k start point .. save 20% on 10% return vs save 10% on 20% return using 60k av net wage
> 
> View attachment 72022
> 
> 
> 
> View attachment 72023



Pumping way above market returns into a calculator of what you "think" your skillset will produce is not a robust plan - fail to be as good in reality as you think you are and its soup for you in retirement. Plan for average and if investing in your skillset as second avenue turns out to be valuable, it’s all upside.

You don’t have to plan for just the long shot return.

Why is it a certain type has such a problem with the concept. They prefer; I’m going to be so good that I can rely on way above average returns and I’m so confident I don’t have to take any precautions.  Dumb Dumb Dumb plan.


----------



## systematic

tech/a said:


> It's not as clear cut as compounding 30% of a wage over 40 yrs at 10%.
> In reality that is about .5% of the superhuman race Joe Average never gets there.




The superhuman part is the Average Joe needs to overcome their own behaviour, so most don't get there.
The maths is not superhuman.
I've heard plenty of inspiring stories of couples (especially) where they just decided early on, to only live on one wage and save / invest the other.  Maybe they didn't retire at 60yo on $100k...but still did very well.  Some people seem to be naturally frugal / savers - but many of those invest TOO conservatively.  Like, cash.  
I agree that it's rare to have someone be a frugal, natural saver AND willing to invest in the scary sharemarket for 40 years, but it does happen.

The point I'm trying to make:  it's behaviourally difficult (impossible?) for some.
But it _is _possible.  If someone wants it / was brought up the right way (or whatever it takes)...it _is_ possible.

Things like, 'trade a 30% pa system' aren't available to the Average Joe.  

So; I'm not saying the Average Joe *will* do it, and I'm not saying they *do*, do it (they don't, just as you said).  But they *can* do it.  And some do.


----------



## systematic

Quant said:


> ...save 10% on 20% return using 60k av net wage




...So, you're going to suggest to a young person who is keen on doing well financially, is willing to sacrifice and work hard and save and invest...but is concentrated on their career, family, hobbies etc (i.e. is not about to learn trading)...you're going to what:
a) Tell them to shoot for a 20% return via trading, anyway?
or
b) Tell them that despite their good intentions, they won't do very well?

Edit:  what craft said


----------



## tech/a

If this is about creating wealth then the subject should be broad ranging.

Out of the square example.
It costs me around $3000 a month (60 mth contract) for an excavator.
It returns me month in and month out $170 an hr for 140 hrs 
Of that I pocket before tax 12-18 % 
Equating to $42000  or 120% return 
I have 8 of them (clever Duck ).

I'm just putting something different out there.
And it's long term so far 20 yrs with 4-8 of them 

To me I think you need to find a way to make the most disposable
Income over and above what you need to live comfortably.

Excess not limiting even more your basic income.
30 % or more --- great.

THEN look at other investments such as Stock and Excavators!


----------



## craft

Moving along.

I will not be assuming an above market expectation for the return used in this wealth plan.

Working out exactly what the passive rate of return is likley to be will require some work and judgement and that discussion is yet to come. It’s a pivotal assumption – I suggest we will be erring on the side of conservatism.

From our objectives and the assumed return, we will be able to calculate year by year the contribution required to achieve our goals.


I don’t disagree with Quant that we should invest in our skillset.  But at least initially do both.  The time to utilise your active skillset if it is of any value add is in earning the contribution required for this passive plan and living a good life.

One day if your sufficiently experienced to guarantee your active skillset outcome you could move your entire funds over to be managed by that active skillset but chances are by then there won't be a need financially and keeping the passive income as a back stop in case you lose your skills (through health or passion etc) will most probably also seem like a clever idea.


----------



## brty

Just getting back to the average Harry and Sally in their early/mid 20's in the late 90's...

They were very average and saved to buy a house in a median priced suburb of Melbourne, using Mulgrave at $139k as the example in 1997.

By the year 2000, the house had gone up to $180k and they had paid off $20k+ of the loan. This allowed them to borrow against the equity of their house about $40k, which they fortuitously bought NAB shares at $20/sh, right near the low.
They continued to pay off their house loan, plus were able to add $4k per annum, plus all dividends back into more shares.
By 2009, after paying off their house loan, they borrowed $300k in equity against their house (worth approx $480k), plus added another $4k pa for more shares.
While doing this, from 2009 to now they have also paid off the full house loan.

The above scenario is no mean feat at all considering children/holidays etc along the way.

I worked out the above scenario for 2 reasons, one we are talking about AVERAGE people that had heard from all investment savvy financial journalists about how great an investment in the big 4 banks were, so they just followed the example, as Harry and Sally Average would do...

Secondly, upon retirement at mid 40's, there is no need to trigger a tax event by selling the shares, as they provide a good ff dividend.

Thirdly, I worked out the result 2 ways, one just taking an annual 8.5% increase pa, and secondly, actually doing the calculation manually for the last 8 years. Both numbers were remarkably similar, so the 8.5% has worked over this 17 year period. The full 20 years is taken up with paying down the house loan for 3 years..

The result? Harry and Sally have around 34,500 shares in NAB and a fully paid off house. The income this will produce, based on last years dividend will be $68,310, or $34,155 each, plus they get the benefit of the fully franked tax, less any tax paid. This assumes retirement.

They also have an added benefit of their employer contributing 9% into their super scheme over the last 20 years, so there is another form of income/possible lump sum, coming when they get to 55-65 yo. This leaves the possibility of eating into a bit of their capital if so desired.

My initial thoughts of this not being possible, have changed by doing this exercise. Somewhere around $75-80k pa for the couple, with a further boost in 10-20 years time, and no debt, leaves them to have a very comfortable existence, but not nearly the $100k each as per Craft's first post, but the time frame is shorter as well. 

Given another 20 years of a similar performance and it does get there!!
Anyone have a crystal ball???


----------



## skc

brty said:


> By the year 2000, the house had gone up to $180k and they had paid off $20k+ of the loan. This allowed them to borrow against the equity of their house about $40k, which they fortuitously bought NAB shares at $20/sh, right near the low.
> They continued to pay off their house loan, plus were able to add $4k per annum, plus all dividends back into more shares.
> By 2009, after paying off their house loan, they borrowed $300k in equity against their house (worth approx $480k), plus added another $4k pa for more shares.
> While doing this, from 2009 to now they have also paid off the full house loan.






brty said:


> The result? Harry and Sally have around 34,500 shares in NAB and a fully paid off house.




Are you sure the maths is correct?

They started with $40k to buy NAB shares @ $20/share gives them a starting total of 2,000 shares. I made simple assumption that dividend is 6.5% and every additional investments bought shares @ $20... I can only get to <15,000 shares at the end of 20 years.


----------



## brty

Hi SKC, you have not added the $300k they borrowed in 2009 and bought another 15,000 shares at $20/sh plus the EXTRA $4,000 pa for the last 8 years. Most of the gain is in borrowing the $300k and buying in 2009.
Yes the example is cherry picked by selecting the bottom of property prices and 2 major lows in NAB shares, but interested Harry's and Sally's would probably learn along the way and diversify somewhat.

The original calculator I used for the initial buy in the year 2000, only had a value of ~8900 shares by 2017. It is the paying off all the loans and allowing them to borrow another $300k in 2009 that gives the other ~24,500 shares.
So the assumption includes paying off the mortgage, paying off the first equity loan, then also paying off the second larger equity loan.

As I mentioned this is no mean feat for Mr & Mrs Average, as they had to do it all out of wages.

Yield in 2007 was 4% and in 2009 only 5.5%, current yield is fairly good compared to the last decade or so..

Sorry if I was not clear enough earlier.

A bit more reflection tells me the next 20 years would not turn out as well, because I do not expect anywhere near the same type of growth from property. Starting in '96/'97 was at the bottom of a long bear market for property from the 1990 highs in Melbourne. IMO we are more likely to suffer flat or deflationary prices in property over the next few years as median property compared to median wages is in terrible overshoot for Melbourne and Sydney.
Given this factor, Harry and Sally would take much longer, plus banks might not be such a good investment when there is a property downturn.


----------



## brty

I just wanted to add the performance of the top 10 super funds over the last 10 years. It very much puts a dent in early retirement/comfortable retirement plans with these type of performances.
As these are the best, then average is not going anywhere near as well. Money inside super does not allow leverage, like outside super, so for me another nail in the coffin of using the tax advantages of super as an investment strategy.
If you add the fees of a SMSF and had your money in these funds, then the overall return would look pitiful for 20 somethings investing via this method IMHO.
*
Ranking* *Super fund and investment option* *10 years (% each year)*
1 REST Core 6.2%
2 QSuper Balanced 6.0%
2 CareSuper Balanced 6.0%
4 UniSuper Balanced 5.8%
4 Hostplus Balanced 5.8%
6 Cbus Growth (Cbus MySuper) 5.6%
6 Commonwealth Bank Group Super Balanced 5.6%
6 AustralianSuper Balanced 5.6%
9 BUSSQ Balanced Growth 5.5%
9 Catholic Super Balanced (MySuper) 5.5%

source     
https://www.superguide.com.au/boost...016-2017-financial-year-and-for-past-10-years


----------



## Triathlete

skc said:


> *The key here is really the notion of "average Joe". I would say that, for most people who are on (or capable to be on) $100k passive income today they most likely gained the asset base through "unique skillset". Or in simpler words - having enjoyed high income through the working age, and have the ability to grow that income throughout the working life.
> 
> If the Average Joe only earns a wage that grows with inflation, it would be a very difficult proposition to achieve $100k/year passive income without some luck.*




I think you are on the money SKC.......when I finished my apprenticeship I was on $450 a week bought my first place with my brother at $72k 6 months before the 1987 stock market crash in the following 2 years was only able to cover my mortgage repayment and payoff about $3k of the principle.

Then my life changed I left my job after 10years and went into construction and shutdown work in the oil and gas field.
My earning capacity then went to $1500 - $2000 a week although 6/7 days a week and 12 hour days which was about 3-4 times the average wage at the time.....it was  not much fun but I was definitely getting ahead fast . Looking back it was a tough slog but happy to be where I am now.
Unless people have a high paying job or an extra income from somewhere they will struggle no doubt about it....... To get ahead you need to make sacrifices.


----------



## skc

brty said:


> Hi SKC, you have not added the $300k they borrowed in 2009 and bought another 15,000 shares at $20/sh plus the EXTRA $4,000 pa for the last 8 years. Most of the gain is in borrowing the $300k and buying in 2009.
> Yes the example is cherry picked by selecting the bottom of property prices and 2 major lows in NAB shares, but interested Harry's and Sally's would probably learn along the way and diversify somewhat.
> 
> The original calculator I used for the initial buy in the year 2000, only had a value of ~8900 shares by 2017. It is the paying off all the loans and allowing them to borrow another $300k in 2009 that gives the other ~24,500 shares.




OK. Thanks for the clarification. Yes you have cherry picked 2 major lows so the story is more "achievable with luck" than "achievable".

Also worth noting is that the $300k borrowed would attract interest costs which is about equivalent to the dividend stream from the NAB shares. So this money has to come out of somewhere which will further change (reduce) how quickly additional shares were accumulated.


----------



## tech/a

While there are things we can do to take advantage of opportunities *luck plays a massive part*

In my case 3 very lucky* time and place* scenarios altered life financially dramatically
Without them results would have been drastically different.

*Business*---was the first in our field and remain so.

*Property*---Started developing in 1994 and buy and hold 1996-2012 (Now hold free hold only) Actually identified Rent more than holding costs for this period
the luck is the amazing price increases.

*Trading*---techtrader 2003-2009 Bull run Compounded and leveraged through that period. Didn't see it coming but did see it ending---and got out completely 7 mths before the GFC Draw down was from a high of $459K to $368K when I closed the system and the live thread down. Started with $30K leveraged 2:1
with BT margin.


----------



## kid hustlr

Again without getting specific, can anyone provide some insight with regards to the cost of insurance held in their superannuation?

And whether it's worth having at all?


----------



## Faramir

Hi All
If I have the least to contribute: so be it. Maybe I represent what not to do?

First here is a link to an article (thank you Craft), some of you will like this article, some of you should jump straight to Page 23 and read the 2nd last Paragraph.
https://poseidon01.ssrn.com/deliver...1010096096122027015018124003119116123&EXT=pdf

_How will Mrs. Jones, who has two kids and works at WalMart, know how or when to do this? If she or her employer have selected the Fidelity group, she will find equity and bond funds in over 200 different flavors. For many of them she’s not eligible, but how is she to know? Obviously, she requires a financial adviser, courtesy of her local bank or brokerage firm, who in turn needs to look useful by doing lots of switches. Don’t ask; the all-in costs are huge._​
How do we teach Mrs Jones a simple investment method when she sounds like she is struggling with day to day life. Someone here (this is why I admire Craft), have managed to overcome this.

My girlfriend is your Mrs Jones. She is very uninterested in Financial Management and has lots of trouble with money. She is currently unemployed. After surviving Breast Cancer last year, she is just happy being alive.

I can't comment on Property because I never have been able to put a deposit together. I know nothing about Property. Plus helping my mum (and dad when he was alive) sort of limits my work time.

1): If you want to run a business, make sure you have good people skills. Everyone thinks that they have good people skills. I now know I don't, no wonder I really struggled for the first 5-8 years. Maybe I'm an aspy?? Oh well, I still managed. The art of reading people, some may pick this up easily but I realised that I had to work hard at it. Be prepared for big sacrifices in the early (& later) years.

During good times, save money. Lean times always appear and those savings will help you advertise, etc. Expect competition to appear - desperate opposition may do desperate things. I was nearly assaulted by my main rival. Even the Police had troubles containing him. He has since shut down but now a more competent opposition has replaced him.

I guess I will leave it here as Tech/a can always add much more. There are many skills in running a business that I believe some people will not 'get' for various reasons. Some do it for money, I was one of those who wanted more "freedom" time.

2): Don't get a Financial Planner/Advisor. Don't engaged in Financial Small Talk with the bank teller, accountant, etc. I was trapped this way. Everyone has to 'sell' an appointment with  I remember handing over $5,000 in mid-2008 to my MLC advisor. Just before the GFC. What a mess. I think I did nothing for 4 years before taking my money out. Made a minor lost.

3): Understand Super, regardless of what decision you make. The decision I made, many would disagree here but it is my decision.
This sounds dumb but I didn't know difference between a Retail Fund, Industry fund and SMSF until my early 40s. Don't be dumb like me, learn it now, not at my dumb age. I know most of you favour SMSF but I am not at that stage (yet). Currently, I am using an Industry fund (rightly or wrongly), a big proportion of that Super is in shares.

4): Be thankful that you are starting to think about financial stuff. I didn't think about until very recently (basically when I joined this Forum). Much of my life, I struggled with unemployment, etc. I guess an awareness is better than having no idea like many people I know.

5): Be healthy. Eat healthy. (If you can - at least do your best, life is full of accidents or bad luck.)

This thread for all of its best intentions may have a very small chance of being seen as a "First World Problem". (Luckily those people won't be reading this thread, let alone this forum.) I am definitely well off compared to most people in the world. I am also an active volunteer lifesaver and that means more to me than my past financial mistakes/bad luck.

If Money makes more money, then my first tiny steps maybe too late?? Look at me and feel sorry if you like but at least I took my first step away from ignorance.


----------



## Triathlete

craft said:


> I find Systematics case for upping the age very compelling.
> 
> Allows us to utilise super to its full efficiency.
> 
> Tech/a and brty can talk about active plans outside super– they really should be part of the overall picture with the payoff goal being the possability of earlier financial freedom if thats what you want.
> 
> 
> But I think I’m more passionate about exploring the backup plan doable by nearly everyone and exploring the passive skillset so that you can still have in place an income no matter how you physically and mentally progress in retirement.
> 
> Now thinking target age of 60 or 65. It doesn't really matter what we come up with for this exercise but the objective in your personal plans need a lot of thought. Gad it is getting some discussion
> 
> I'll think about it for a while and see if we get any other comments/suggestions



There is no doubt that taking a long term view to investing will get you to the goal...If we take a passive investment view that delivers say 8% over the next 32 years and provided you can save between 15%-20% of your earnings each and every year the goal is obtainable.

 The thought of locking your money away in super does not appeal to most people especially when you are in your 20s,but as you have said it should be part of the overall plan.

The question would be how do young people starting out,...... save this amount if they are also trying to buy a first home or have a young family that they need to send to school etc,etc and their income is only average $60K....I would think that if they were able to survive on the 60K they would need a second income to use for this investing to attain the goal.
In my situation I always put in the minimum amounts into super when I was younger and had the extra income to invest in property ,which set me on my way.

After taking a hit in the retail super fund during the GFC is when I decided to take a more active approach with super and this is when I decided to Start up my own SMSF and learnt how to trade for extra income.

This is what I believe people should be looking at ....how to produce a second income as part of there overall strategy.


----------



## tech/a

Yes agree.
Locking money in Super where 10 % year on year is terribly rare
Leaves you without funds to take up investment opportunities outside of super
When they appear.

In theory compounding low % compounding returns over very long periods 
From a very low starting base may or may not get you there.
Putting it in practice and sticking to it is even harder in my view than achieving a good compounding return.

That ad " Compare the Pair " shows even the best return over around 25-30 yrs around 350-500 k
Seriously in 30 years time how long will that last in. 25 yr retirement?

Agree totally with passive income but to get there you need $ and or borrowing power.
Not to mention knowledge.
How does Joe Average get that?


----------



## craft

Triathlete said:


> There is no doubt that taking a long term view to investing will get you to the goal...If we take a passive investment view that delivers say 8% over the next 32 years and provided you can save between 15%-20% of your earnings each and every year the goal is obtainable.



This is the approach I'm going to flesh out - finding out exactly what the numbers are and the goal posts you should be at each year along the way.



Triathlete said:


> After taking a hit in the retail super fund during the GFC is when I decided to take a more active approach with super and this is when I decided to Start up my own SMSF and learnt how to trade for extra income..




This seems completely wrong to me - Instead of staying the course you chose to start using your retirement equity to play a less than zero sum game - with how much experience?

Even if you eventually end up in that small posative part of outperformance in what is a very skewed distribution from the game - It was a mistake - just one you got away with.



Triathlete said:


> This is what I believe people should be looking at ....how to produce a second income as part of there overall strategy.



 I agree with this as long as you don't put your primary objective capital at risk.


----------



## craft

*Objective*.

By the age of 63 accumulate enough capital to provide an ongoing gross income of 75% of the Australian Average Weekly Earnings, from passive investment without having to consume the capital base.

 ------------------------------------------------------------------------------



I’m going to work on an accumulation period of 40 years which means the starting age for this plan will be 23.  Once we have our plan in place we will know the targets for every age along the path.

As systematic said in one of his very good posts, the sooner you start and the harder you go early the more flexibility you will have latter. Starting a year or two earlier or making a bit of extra contributions early could allow for extended contribution breaks later when DINK’s (Double income no Kids) become SITCOM’s (Single income, two children, oppressive mortgage)

The aim is to obtain our objective as efficiently as possible, therefore we will be using a superannuation structure. Yes, the risk of government changes is real. But the risk of government change is just as real outside super. Net result of all the fiddling around, Superannuation is likely to forever remain a tax advantaged means for accumulating moderate wealth to support retirement and that is what we are trying to achieve.

The investment approach to accumulation will be the same as when we are drawing the income. *Passive*.  That will make this plan accessible for everybody, so long as they can find the contributions.


I would encourage everybody to also pursue an active approach to investing if they have the desire. Like the core and satalite approaches that Ves and Kid Hustler have detailed. But Never at the potential cost or with the capital from their primary passive plan. I won’t be discussing it in this thread, but if I was to incorporate an active component to a wealth plan its objectives would be firstly to provide the contributions to the primary plan and secondly to build capital outside of the super system to enable retirement before preservation age – or to just buy toys or give it away or whatever secondary objective you might want it to serve.


I’m going to potter along in this thread developing the details of the plan above. But this is a generically titled thread and plenty of differing opinions. It would be great to see some of those other opinions and ideas also turned into detailed workable plans as well.


----------



## tech/a

craft said:


> but if I was to incorporate an active component to a wealth plan its objectives would be firstly to *provide the contributions to the primary plan and secondly to build capital outside of the super system* to enable retirement before preservation age




Perfect.
The skew maybe very different as time goes by.


----------



## craft

kid hustlr said:


> Again without getting specific, can anyone provide some insight with regards to the cost of insurance held in their superannuation?
> 
> And whether it's worth having at all?



I can’t really answer your question very well, I haven’t had life insurance for quite a while, but didn’t want the question to go ignored.

I’m guessing you’re not asking whether Life Insurance is worthwhile – that obviously depends on personal circumstances and judgements.

But more asking if you are going to have it anyway is it worthwhile purchasing through Superannuation.

If you are part of a large super fund they should have better buying power than you could get yourself either personally or through a SMSF and if it’s an industry fund you should get those purchasing power benefits passed through to you. Probably worth getting some comparable quotes to be sure what the best value is.

My vague understanding is that purchasing it through Super the premium will be deductable but policy payouts will be a taxable component. Purchasing it privately the situation is reversed. Somebody like Junior who I think is a financial planner and is active in the Superannuation cash cow thread might be able to give you a heads up on the pro’s and con’s of taxation outcomes.


----------



## Triathlete

craft said:


> *This seems completely wrong to me - Instead of staying the course you chose to start using your retirement equity to play a less than zero sum game - with how much experience?
> 
> Even if you eventually end up in that small posative part of outperformance in what is a very skewed distribution from the game - It was a mistake - just one you got away with*.




I better clarify this point as I did not explain this correctly.  After the GFC I continued with the investing process although not very happy to see the capital go down. After another 3 years of this I knew there had to be a better way in regards to the share markets and thought that I want to be prepared should another crisis happen in the future.
Between 2011 and 2014 I completed  courses about trading and investing to be able to take control myself.
Only after gaining this knowledge and confidence in my ability to do better than was currently, did I  change over to the SMSF and started to take full control myself.

Currently the portfolio consists of:

30% Property/rents
30% Corporate Bonds...investment grade and non-investment grade
30% Shares
10% Cash

I have been able to generate enough passive income from the property rents, bonds and cash to sustain my lifestyle and to throw off extra cash to continue growing into the future.


----------



## fiftyeight

Triathlete said:


> If we take a passive investment view that delivers say 8% over the next 32 years and provided you can save between 15%-20% of your earnings each and




Looking forward to seeing what numbers shake come out of this. 

The numbers being thrown around atm are a bit worrying. 33 with only limited money in super. Put this down to a miss spent youth (some may say) of partying, travelling and running up huge HECS bill + some other debt (finally approaching cleared). 

Lucky enough things have kind of worked out I now earn over $100k. However with the kids on the horizon, a $450k mortgage the idea of putting 20% away in to super is not going to happen. Putting away 20% for savings outside of super is not always easy.

Plenty of people my age who have not managed to get a decent paying job who also had a bit too much fun in their 20s.

But like I said looking forward to see what number shake out


----------



## brty

I've just spent some more time going through some numbers, using a different criteria to the NAB one I used earlier.

This time using AFI, the LIC. Over the last 20 years it has had about 5.5% annual growth and paid between 3-5% in annual dividends, again fully franked. I just used the 9.5% annual growth and a starting figure of a $20k investment, plus another $10k for each of the first 10 years then let compounding do its work..

This time using Craft's 40 years.

Approximate balance at year 40 assuming the 9.5% performance continues, comes to a balance of ~$3.5m in AFI shares assuming full dividend re-investment. This gives a dividend, or passive income of ~$120k pa with franking credits for Harry and Sally ($60k each), so yes all sounds VERY good and plausible!!

But there is a snag I found very disturbing. The 'median' priced property I used earlier from Mulgrave in Melbourne, has also gone up in value at a rate of 9.5% pa (adding yield is higher!!) since 1997.

The problem I have is the future, or next 20 years. During the last 20 years, official CPI inflation has averaged 2.55% pa. For the figures to match, growth in the economy should make up the other ~7% pa. Growth has certainly NOT been that.

It is interest rates that have collapsed in the last 20 years, plus the perception of future interest rates remaining low that has led to asset inflation above the rate of 'CPI inflation and GDP growth'.

This presents a future problem. Interest rates cannot fall like they have over the last 20 years, so for any type of growth approaching 9.5% pa, inflation must rise along with growth.

IMHO starting from today, we should factor in far higher inflation in the next 40 years than we have had for the last 20, OR greatly reduce the rate of growth of the investments.

Using the same criteria as above (AFI having 9.5% pa growth over 40 years etc) the income of $120k while looking impressive, is not if inflation averages just 5% pa. In today's dollars, the $120k pa income is equivalent to a bit less than $18k pa for the couple!! ($9k EACH!!) in today's monetary terms.

For a young DINKS couple with an average of one HECs debt, rent or mortgage payments, health care etc, putting aside an initial $20k followed by $10k each year for the next 10, is clearly not enough, nowhere near enough, yet very onerous on a young couple that will probably have kids in the first 10 years, and need to move to larger premises than the original one.

Please someone find fault with the numbers and logic above!!! Otherwise I can only come to the same conclusion that James Montier seems to have reached...
https://www.gmo.com/docs/default-so...possible-things-before-breakfast.pdf?sfvrsn=4


----------



## skc

brty said:


> Using the same criteria as above (AFI having 9.5% pa growth over 40 years etc) the income of $120k while looking impressive, is not if inflation averages just 5% pa. In today's dollars, the $120k pa income is equivalent to a bit less than $18k pa for the couple!! ($9k EACH!!) in today's monetary terms.




Yes inflation assumption will have a huge impact on any model. Here's a useful tool from the RBA inflation calculator.
http://www.rba.gov.au/calculator/annualDecimal.html

If you punch the numbers in, you will find that $1000 in 1976 (40 years ago) is equal to ~$6,000 in 2006 (4.6% average per year). So in your example, if Harry and Sally was able to put away $20k starting 40 years ago, that would be the equivalent of $120k in today's dollar, which is not the kind of money that every 20 year old couple has to start out with. The $10k they put in each year is also equivalent to $60k in today's dollar... again, it would be difficult to find a young couple who has the ability to save that amount per year. If the saving rate was assumed to be 20%, then the couple would be earning some $300k equivalent between them. So Harry and Sally were not Average Joes.

Now the last 40 years included a period of very high inflation, and correspondingly high interest rate periods... it's anyone's guess what the next 40 year will hold, and what the further 25 years in retirement will turn out. But it's hard to make the numbers stack up in the last 40 years for an Average Joe.


----------



## tech/a

So clearly it's important to have a passive income which is able to keep up with inflation 

My 92 year  old dad 
Would have been better off buying 10 house with his 400 k
Than putting it in his AMP super
 It that's hindsight and that's what Craft is trying to avoid


----------



## Sir Burr

brty said:


> The 'median' priced property I used earlier from Mulgrave in Melbourne, has also gone up in value at a rate of 9.5% pa (adding yield is higher!!) since 1997.




Did that 9.5% include:
- Stamp duty on purchase
- Conveyancing fees
- Buyers agent fees
- Management fees
- Insurance
- Strata
- Repairs
- Rates
- Agents fees on sale
- Conveyancing on sale
- Tenant disputes
- Tenant litigation
- Land tax
- Stamp duty on transfer
etc


----------



## Value Hunter

To be honest I do not see why the average couple should aim for $100,000 (inflation adjusted) of passive income. For people that are disciplined savers, start very early and invest wisely they could possibly get to that level by age 65, but who the hell really wants to work until 65?? Sure some people enjoy working, but the majority do not.

If a couple has enough assets to give passive income of say $40,000 per year they could just go to a cheaper country and retire. In a country like Panama or Thailand that is plenty of money for a couple to live on.

That way you can start enjoying life much earlier. In fact with the right right savings discipline and investment strategy and the use of some debt/leverage a childless couple could achieve that in their early 40s or even late 30s.

Personally as a single guy I am aiming for after tax passive income (from dividends) of around $25,000 (inflation adjusted) in my early 30s. I will then go and retire and live as a nomad moving between various cheap countries (for example spending 6 or 12 months in each country). Sure I could bust my ass for additional 10 years and work into my early 40s and double or triple my passive income, but why bother? Life is too short. I dislike working and that would be another 10 years of my life I will never get back. 

Besides living overseas I could also work short stints teaching English or as a tour guide, etc to supplement income if I need some extra spending/holiday money. Or come back to Australia and stay with my parents work for a year or two in some crappy job and save money to supplement my passive income and then go and live/relax overseas for another 5 or 6 years.


----------



## Value Hunter

Anyway that is what suits me in my situation. Everybody has different goals and aspirations so a plan that is suitable for one person would be unsuitable for another.

Whatever the passive income goal is I think people need to have a backup plan for when times are tough and income falls (e.g. declining rent or dividends or term deposit rates, etc). I think eating into the principle in lean years is a bad strategy. I think in lean years people could either cut some fat out of their expenses (e.g. fewer restaurants and fewer/cheaper overseas holidays) or take up some sort of part-time job (hell even working at a supermarket part-time can make a noticeable difference to income). 

The other option is to have a cash buffer that you don't normally touch that is there for a combination of emergencies and lean years to supplement your normal passive income. For example your investment portfolio might be $1 million or $1.5 million in dividend paying shares and $60,000 in cash. In a lean year or two where dividends are down/low you could spend say $10,000 or $15,000 a year of the $60,000 in cash and then a few years down the track replenish it when you are receiving more in dividends than you need to live off. Typically in a situation like 2008/2009 when dividends are dropping sharply share prices will also be down and the last thing you want to do is sell shares at depressed prices to pay your living expenses.


----------



## brty

Hi Sir Burr, I EXCLUDED yield for the 9.5% in property. That is just straight Cap gain over 20 years, the yield would more than take care of the rest. It could basically be a block of land with a knock down house and be worth over $800k in that area now..

Value Hunter, I am just trying to find out how an "average couple of DINKS" could do it. As soon as we start to add, "For people that are disciplined savers, start very early and invest wisely", I don't think we are talking about Harry and Sally Average anymore.

I fully agree with your thoughts when applied to the last 30 years, perhaps even 40, but I'm rapidly coming to the conclusion that the next 20-40 years is going to be very different investment wise. We are already so far out of proportion to the affordability of housing compared to wage growth, that unless something changes drastically soon, we are headed to a Japan 1989 situation shortly.  

The whole point of this exercise is to work out what it would take, yet many seem to want to discuss the semantics of what should be the target.

I agree with you on the target as I was the same at early 20's, 45-50 seemed like really old. However after 60 plus posts, it is about time we started to look at the numbers involved, instead of just saying the target should be lower and fairly simple. 
Can you please do some numbers to show your thoughts??


----------



## Value Hunter

Personally I think rather than aim for a high passive income people should learn to live a modest lifestyle. Blogs like early retirement extreme talk about this. Low cost of living is very powerful because it does a few things simultaneously. A low cost of living increases your savings rate while also reducing the passive income requirements for retirement. 

For example person A earns $60,000 per year after tax and manages to save $30,000 per year after tax, and therefore is capable of living on $30,000 per year. Whereas person B earning $60,000 after tax (i.e. likely around $75,000 to $80,000 pre-tax salary) and is only saving $20,000 per year. Person A has a passive income goal of $30,000 (inflation adjusted) per annum to replace their current lifestyle and is saving $30,000 per year to get there. Person B needs a passive income (inflation adjusted) of $40,000 to maintain their lifestyle and is only saving $20,000 a year to get there. You can see how a relatively modest difference in spending habits makes a huge difference to the final outcome.


----------



## Value Hunter

brty to answer your question the reality is that "average couple of DINKS" cannot retire early in this day and age (last generation it was easier to achieve, but its harder now).

To retire early you have to live extremely frugal, live with your parents until a later age, work 2 jobs, learn a lot about investing (and be a market beating investor) and be "active" (index fund investors will likely not be retiring in their 40s) and use some leverage as well. Without all of those ingredients it just is not likely to happen. Average dinks will think doing all of the above is too much effort and too hard. The reason all the things I mentioned are necessary is that the job market for younger people is extremely competitive, university is expensive and housing is very un-affordable.


----------



## Value Hunter

I think for the average young person growing up today the blue print for early retirement would look something like this:

1) Start working part-time (while still at school) at 15 at whatever job you can get even if its McDonalds. Save at least 70-80% of your after-tax income. Parents should encourage saving by offering an incentive e.g. whatever money you save the parents will add 25% to it at the end of each year. Start reading books about investing (parents need to encourage this by giving them books, etc)

2) When you finish high school either go to work full time, go to university/TAFE or take up an apprenticeship. If at University/TAFE you should still work part-time. Try and live with your parents for as long as possible, hopefully most parents will support you if they see you are working hard and saving and investing the majority of your income. Live frugally i.e. no overseas holidays or smashed avocado on toast at the local cafe. Continue learning and reading about investing while you invest your savings. If you go straight to full-time work after high school get a second job also.

3) After finish Uni/apprenticeship get a full time job and after 6-12 months of working try and get a second part-time job or get paid overtime hours at your full-time job. Or if you went straight to work after school continue working two jobs. Still continue to live frugal and continue to invest your money "actively" while continuing to read about investing. Try to live with your parents for as long as possible. If you show you are building your future hopefully they will be impressed and try to help you along. By this stage hopefully you can borrow some money from somewhere to turbocharge your investments.

4) Retire in your 30s or 40s living off your passive income in a cheaper country.

I think the above is a good basic blueprint for young people today. Bust your ass early in life and make sacrifices early in life because the nature of compounding means that sacrifice today is financially equivalent to 2, or 3 or 4 times the amount of sacrifice when you are older.


----------



## brty

Value Hunter, I agree it does not look possible now, so some extraordinary steps will be needed, something that an average person will not take.

As soon as we start with something like this.... "For example person A earns $60,000 per year after tax", we are talking about an above average wage earner. (Around $64k from which tax is deducted of $13,560 + medicare levy).
However "average" income or above is only earned by about 40% of income earners, so median incomes more represents an average person.
http://www.abs.gov.au/ausstats/abs@.nsf/0/27641437D6780D1FCA2568A9001393DF?Opendocument

"More female employees were employed part-time (54.3%) than full-time (45.7%). Average weekly total cash earnings was $1,456.90 for full-time females and $633.60 for part-time females."
Even my concept of DINKS is clearly above average, as the second income for a household is likely to be part-time according to ABS, on average..

I'll be very interested to see Craft's take on the situation of how an average couple can retire on a good level of passive income in 40 years time. My personal view is that taking some assumptions that have worked for the last 30 odd years will not work over the next 30, so will throw out many calculations.


----------



## Value Hunter

One point I will add is that its a waste of time for young people to make voluntary super contributions. By the time they get old the government will have likely increased the retirement age (who the hell wants to wait until 75 to spend their money?) and increased the taxes on superannuation. That is assuming that the even worse scenario of partial confiscation or large one off wealth tax on super does not happen.

brty like I said a young person these days needs a lot of things to go right if they are to retire early.

I think an alternative way to get wealthy is to learn as much as you can about investing by reading and practicing by cutting your teeth investing small/modest sums of money into stocks and keep a high cash balance. Then when we get one of those rare market crashes like 1987 or 2008 you can scoop up once in a lifetime bargains and get rich within 5-10 years.

For those who knew what to look for in early 2009 there were stocks that had gotten so cheap they subsequently became 10, 20, 50 or even 100 baggers. If you are cashed up and doing your research during a crash catching one or two or three of these stocks and betting big is enough to make you wealthy. For example anybody who invested say $100,000 into a combination of a few companies like McMillan Shakespeare, Seek, Dominoes Pizza, Credit Corp, RHG, Magellan Financial Group, etc during the late 2008 or early 2009 is likely sitting on a very decent sized portfolio now.

Of course the downside of this strategy is that you could potentially be waiting decades for a market crash of that type because they are rare. Also, picking out the big winners is not easy.


----------



## brty

Value Hunter, yes we are on the same page here. I was typing my post before I saw your second one.

What do you suggest the young ones invest in if they did all the things you just stated?? What are your expected returns over the next 10-20 years for those investments? Do you think luck will pay a part in retiring early for 20 somethings starting now? I do!


----------



## Value Hunter

brty its very hard to make return assumptions going 10-20 years out. I am just giving some possible plans which maximize the odds of success but certainly do not guarantee success. And yes luck does play a big part!

I think young people should either invest in direct shares or residential property (probably not in Sydney or Melbourne though) or a combination of both depending on what they are comfortable with and their income (higher income guys can more easily invest in quality properties), savings and skills (e.g. a tradie might be able to buy run down properties and fix them up). I think direct shares and property are easier to grasp and easier to profit from for most people than say derivatives or precious metals or commercial property, etc.


----------



## Sir Burr

Value Hunter said:


> If a couple has enough assets to give passive income of say $40,000 per year they could just go to a cheaper country and retire.




Yes, exploit geographic arbitrage.
That is part of our wealth plan 

Unplanned but DINKS another.


----------



## tech/a

Sir Burr said:


> Yes, exploit geographic arbitrage.
> That is part of our wealth plan
> 
> Unplanned but DINKS another.




Again a narrow solution

Your not thinking of families
Kids
Grand kids
Friends 
Social integration where you now live
Vastly different where your going
Think of Health care in these cheaper places to live.

If you don't have family or friends fine


----------



## Sir Burr

tech/a said:


> Your not thinking




Narrow and thinking of ourselves only. As mentioned dinks here and been going there 20+ years so has been years in the making. Have family and friends there too.

All those points are spot on but are covered _for us_. The only thing is healthcare, it is good but not cheap. Saying that, the amount we are paying for private hospital in Australia is not an insignificant amount either


----------



## craft

I was thinking about working through each of the variable estimates required in detail prior to putting up any model outcome, however somehow, I think I may have lost the interest of a lot who have already concluded the task was going to be too far out of reach if I went that avenue.  So, I have made preliminary estimates for the variable required. I think they are realistic and defensible estimates and this is the flight plan outcome of modelling those estimates.




The average wage multiple is fixed – the Capital and Dividend Stream targets will ratchet up as average wage increases. This table is based on current average weekly earnings @ $1533.10

For the average wage earner, the modelled plan requires a salary sacrificed *7.2%* of gross wage contribution every year to meet the target. (plus your standard 9.5% Employer superannuation guarantee amount)

For each age in the above table, there is a capital and dividend stream amount. Because Price/Dividend ratios fluctuate over time, In assessing your current situation against the plan you would need to have both stock(capital) and flow(dividend) above their respective target amounts before you could think about reducing the 7.2% contribution rate and still achieve the targeted outcome. If you are below these amounts you will need higher than 7.2% contributions going forward to catch up.


The 75% target would be tax free and in disposable income terms (currently $59,955) would be slightly more than the disposable pre-retirement income of $57,059.80.


Gross Salary                        $79,940.21
Less Salary Sacrifice             $(5,731.36)
Taxable                               $74,208.85
Less Tax                              $(15,664.88)
Less Medicare                      $(1,484.18)
Disposable                          $57,059.80

If you are on less than average wage then achiving 75% of average wage requires a lot higher % of your income. Howere that same consistent ~7.2% sacrifice of your actual gross wage will stiil produce around the equivalent disposable retirement income as your pre-retirement disposabe wage.


The variable assumptions made:

*Real* rate of return:  4.25%
Nominal yield: 5.25% (including franking)

Asset class:
100% Equities.

Tax structure:
Superannuation.

Investment vehicle:
Broad, Low Coast, Non-synthetic Exchange Traded Equity Fund.

Key Consideration:
Volatility risk: Dividend flow has some volatility around the 5.25% average return assumed. Can the income needs be flexed (vary living expenses or have other back-up reserves) during below average yields to ensure capital does not need to be drawn down?  If not 100% equity allocation close to and during retirement is not appropriate due to sequence risk and this plan is not appropriate.

If people are interested in this sort of wealth plan we can work through validating the assumptions and strategy choices, the model workings etc to ensure the plan is realistic which will fortify people’s belief systems to stay the course in times of market duress. Because at the end of the day none of this is too hard with a few right choices and some consistent application – Its more an issue of understanding than anything else.


----------



## fiftyeight

So just to clarify for my simple brain.

With the assumptions you have made above at, 33 if I have $137k in super and sal sac 7.2% I will achieve a dividend stream of $60k after tax at the age of 63?


----------



## tech/a

i don't see that you've allowed for an increase in wage and contribution through out the 40 yrs ? Obviously the buying power at the end of the 40 yr period will not be as it is now. I think I saw somewhere that on average it will be about 1/3 over a 40 yr period so in 40 yrs like 330 k now 

Getting there but not enough in my view.


----------



## craft

fiftyeight said:


> So just to clarify for my simple brain.
> 
> With the assumptions you have made above at, 33 if I have $137k in super and sal sac 7.2% I will achieve a dividend stream of $60k after tax at the age of 63?




Yes - If you sacrifice 7.2% of the avegage wage figure. (Each time it increases you need to increase you sacrifce amount so it stays at = 7.2%.)

A purchasing power equivalent of 60K in todays terms - the actual amount you will be retiring on is likely be substantially higher.

You shouldn't have to draw down the capital asset - so you could leave the perpetual income to your kids. (if the government doesn't introduce death taxes) 

It all hinges in staying 100% exposed to equities at all times - If you can hack that psychologically.


----------



## tech/a

Craft.

How do you feel about the all eggs in one basket argument.
A severe event could leave a period of much lower growth than 
Indicated. That period could impact massively on those at retirement 
And those with a plan like yours.
Imagine a 10 yr period of no growth or even negative!


----------



## craft

tech/a said:


> i don't see that you've allowed for an increase in wage and contribution through out the 40 yrs ? Obviously the buying power at the end of the 40 yr period will not be as it is now. I think I saw somewhere that on average it will be about 1/3 over a 40 yr period so in 40 yrs like 330 k now
> 
> Getting there but not enough in my view.




I absolutly have. Every bone in my invstment body is about maintaing purchasing power.

Over time I can explain the model. Some finacial savy will be required to understand it.

The model is using a *REAL* interest rate [a rate achieved *after* covering tax, investment expenses and wage increases(my inflation proxy)] 

Contributions need to stay a fixed 7.2% of the ever changing average wage.


----------



## craft

tech/a said:


> Craft.
> 
> How do you feel about the all eggs in one basket argument.
> A severe event could leave a period of much lower growth than
> Indicated. That period could impact massively on those at retirement
> And those with a plan like yours.
> Imagine a 10 yr period of no growth or even negative!




A good question. Personally, for a 40 year accumulation then perpetual income stream plan, I wouldn't dream of any other allocation - but I have a wealth of historical data and understanding of first principle economic components that drive *future* real returns that alleviate many concerns that others may hold.

It's the fear that stops people achiving solid results and causes them to hold far inferior long term assets and adopt far inferior strategies.

Your type of questions are the sort of questions that need to be discussed in depth to stress test the assumptions and get comfortable with the plan. But I'm not going to answer it with justice today. I'll come back to it and maybe in the meantime you might get some others people's thoughts as well.


----------



## tech/a

All eyes willing to learn


----------



## Wysiwyg

Drillingt down to what is actual, the weekly average *in the hand $1000*. How do these figures stack up as average living costs per week for one person -

Rent = $250
Car Loan = $100
Food/Household items (including snacks, takeaways and things for the home) = $200
Utilities (averaged including qrtly. bills) = $70
Fuel = $30
Sport = $30
Recreation = $50

= $730 leaving $270 per week left over. 
In the event this person remains at home for most of the non work time, does not have any medical needs, does not have any replacement costs and remains sane, after 1 year of saving they should have over $14000 saved.


----------



## Value Hunter

Craft I think the elephant in the room in regards to your table is that assumption that a young person today will have access to their super at age 63.

I think with the way things are heading in regards to legislation that someone in their 20s now by the time they reach old age the goalposts will have been moved and they will likely have to be 75 or older to access their super. The reality is for most people the utility of money is way less at 75 than it was at 65. How many people can hike up a mountain when they go on an overseas holiday at age 75?

Also your assumed dividend return of 5.25% is that grossed up yield or after tax yield?


----------



## brty

Thank you Craft for putting up your spreadsheet.
I have a great issue with the starting salary of $1553.1 pw or $79, 940 gross for an "average" 23 -24 year old. Way too high IMHO.

I base this on a professional son in law and a daughter of mine, both with exceptional marks at uni in fields where they easily found employment in their fields. Neither are (or were in my daughter's case, the 2 not a couple), had or have salaries anywhere near your starting one. Both are very above average!!

Average full time weekly earnings is skewed towards higher incomes, and most importantly later in life, so the effect of long term compounding, does not work as well, when people do climb the ladder of success later in life, but have less time for compounding to work.

The statistics themselves are skewed....
*"4 *All wage and salary earners who received pay for the reference period are represented in the AWE survey, except:


members of the Australian permanent defence forces;
employees of enterprises primarily engaged in agriculture, forestry and fishing;
employees of private households;
employees of overseas embassies, consulates, etc.;
employees based outside Australia; and
employees on workers' compensation who are not paid through the payroll.

*5 *Also excluded are the following persons who are not regarded as employees for the purposes of this survey:

casual employees who did not receive pay during the reference period;
employees on leave without pay who did not receive pay during the reference period;
employees on strike, or stood down, who did not receive pay during the reference period;
directors who are not paid a salary;
proprietors/partners of unincorporated businesses;
self-employed persons such as subcontractors, owner/drivers, consultants;
persons paid solely by commission without a retainer; and
employees paid under the Australian Government's Paid Parental Leave Scheme."
From here...    http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6302.0Explanatory Notes1Nov 2016?OpenDocument

Excluding a lot of lower paid workers (agriculture, forestry and fishing), and making the series "full-time", when 54% of females working are in part-time or casual employment, really skews the term "average".

An average person in this country certainly does not start at 23-24 on $80k. Nor does the average person have a degree, with only 48% of 25-35yo having a higher than secondary education (2015) well up on the 33% for 55-65yo people, but still less than 50%. 

Unfortunately, starting with a number way too high will skew the overall result, making it look 'easy'.


----------



## craft

Wysiwyg said:


> Drillingt down to what is actual, the weekly average *in the hand $1000*. How do these figures stack up as average living costs per week for one person -
> 
> Rent = $250
> Car Loan = $100
> Food/Household items (including snacks, takeaways and things for the home) = $200
> Utilities (averaged including qrtly. bills) = $70
> Fuel = $30
> Sport = $30
> Recreation = $50
> 
> = $730 leaving $270 per week left over.
> In the event this person remains at home for most of the non work time, does not have any medical needs, does not have any replacement costs and remains sane, after 1 year of saving they should have over $14000 saved.




The plan I have outlined using salary sacrificing of 7.2% means an in hand reduction of only $3,754.04 per year on current figures. 

You've identified a potential $14,000 - looking forward to seeing you plan with that amount of contribution available the result could be monumental!


----------



## craft

brty said:


> Thank you Craft for putting up your spreadsheet.
> I have a great issue with the starting salary of $1553.1 pw or $79, 940 gross for an "average" 23 -24 year old. Way too high IMHO.




Making a good point brty.

I could stage the wage over life, less early on and more later on to average out the same and the model would produce a different runway of yearly targets.

I mentioned that if you never achieved average wages then making 75% of average would require a higher % of your wage - but the 7.2% of what ever you do earn would give you approximately the equivalent of what you are used too.

Could muck around with a different wage progression rate in due course - but in the mean time I would be interested to know real life experiences compared to this flight path for the constantly at average wage over life assumption.

Are you any where near targets?

Do you generally have a higher saving capacity because of less comitment when young despite the lower wages?

The plan assumes no savings at all at age 23 - how valid is this? do people generally have some savings by then?

These two points are potentially big mitigating factors if you are not achieving average wages early in your career.


----------



## kid hustlr

Craft this is excellent.

Tech/A - The inflation thing caught me off guard as well and it took me a coffee to realise that the table is not reflecting future returns, the table is to be used to compare ourselves to where we are at right now.

Craft, I have questions:

- Am I correct that you have noted that income paid out of your superannuation fund is tax free? I was not aware of this and further highlights the importance of having the funds in your super fund as opposed to personal name. I will continue to research this as this has a huge impact on how one should plan. It also gets me thinking about inheritance and a whole bunch of other issues directly or indirectly related to where long term investments should be kept.

- Can you expand on the real rate of return of assumption? Does that 4.25% include 5.25% in dividends (in which case it feels a fraction low) or not include dividends (in which case it feels a fraction high)

Other comments:
- The income required is going to vary depending on life situations. The retired married couple who own their own home and don't travel past the coast as a holiday destination couldn't spend 120k a year if they tried. Alternatively a renter living by themselves with health issues will need every bit of 60k

- I think this model goes in the face of the 'typical' Australian path and I love it. For so long the theme has been, buy the house, pay off the house whilst super builds, down size the home as a CGT free event and live off the balance + super. For me I think 25 year olds should be far more exposed to equities in Australia as I believe the next 25 years offers far more potential in this space.

- The assumption of never needing to drawdown on capital is a big one. This is my goal but if others in their old age are happy to drawdown over time it most likely reduces the total value needed (although admittedly impacts how the funds should be invested also I would argue)

In answer to your questions, I'll use my wife as I'm a unique case:

- My wife is smack bang on those superannuation targets, has a degree, is switched on, has worked hard in the public health care system. Earns an above average but not significantly so. Has never salary sacrificed and is money conscious (but not as frugal as me )

- Absolutely we have a higher savings ability. I think a key issue here is the 22-25 year old grouping who are living at home should be saving 10-25k a year and simply dont.

- Most don't have savings at 23 but I would argue this distribution is wide. Some don't have savings because they've had to lease a car or pay for a lot of things themselves since they were 16, others don't have savings because they spend 250 at the pub each Friday & Saturday.


----------



## craft

kid hustlr said:


> Craft, I have questions:
> 
> - Can you expand on the real rate of return of assumption? Does that 4.25% include 5.25% in dividends (in which case it feels a fraction low) or not include dividends (in which case it feels a fraction high)




The long run (100+ year) nominal return (not including franking) for the ASX is 10.6%.

The approx. split is 6% capital growth and 4.6% dividend (not including franking) return.


The 5.25% yield is a *nominal* yield. It is what the capital actually yields in today’s terms.

My rational for choosing 5.25% was to look at historical and future economic drivers and ease it back a tad to be conservative.

It is made up of a 4% dividend return and a 1.25% imputation credit (assuming 75% franking)

This is lower than historical (if franking is included), lower than the approx. 5.5% grossed up currently available and we are currently slightly below where regressed dividend yield to economic drivers would place it on average.


I’ll try explaining the *Real* yield using the historical numbers.

The long-term rate as explained above is 4.6% dividend + 6% capital. = total 10.6% (before franking)

We are now in a franking regime world and market wide dividends are on average franked about 75% which would add about 1.5% in franking credit value not captured in the calculation of the 10.6% So a total gross nominal return of approx. 12.1%


We want to adjust this 12.1% downward to take account of:

Tax: our dividends 4.6%+1.5% franking credit are taxed at 15% in the super account this eliminates (4.6%+1.5%) x 15% = 0.9% of our nominal return.


Expenses: expenses come out of our nominal returns – subtract 0.5% of our nominal return for expenses.


Maintaining purchasing power: we have to maintain or purchasing power out of our nominal return. The long-term inflation rate has been 3.8% and productivity improvements about 1.6%. Given wages over the long term compensate for inflation and share productivity gains with capital. I estimate long term wage growth has been about (50% x 1.6%) + 3.8% = 4.6%. (luckily we are going to buy and hold, so we don't have to wory about funding tax obligations on this growth)


So real return historically = 12.1% - 0.9%(tax) -0.5%(expenses) -4.6%(wage growth) = ~ 6%.


I have chosen 4.25% to be conservative and because some of the economic drivers going forward like population growth and productivity might be weaker than history.  Being invested 100% in equities for the long hall, Inflation if it spikes back up isn’t really that big problem for us because ‘long run’ (although with a nasty lag) inflation will roughly increase the nominal return by a similar rate that we have to deduct to maintain purchasing power. On the other hand, increasing inflation from this low point will destroy cash and bonds over the long term - forget the housing bubble, its only one symptom of the bond bubble.

So there you go – rate assumptions should be clear as mud now.


----------



## Triathlete

craft said:


> I was thinking about working through each of the variable estimates required in detail prior to putting up any model outcome, however somehow, I think I may have lost the interest of a lot who have already concluded the task was going to be too far out of reach if I went that avenue.  So, I have made preliminary estimates for the variable required. I think they are realistic and defensible estimates and this is the flight plan outcome of modelling those estimates.
> 
> View attachment 72067
> 
> 
> The average wage multiple is fixed – the Capital and Dividend Stream targets will ratchet up as average wage increases. This table is based on current average weekly earnings @ $1533.10
> 
> For the average wage earner, the modelled plan requires a salary sacrificed *7.2%* of gross wage contribution every year to meet the target. (plus your standard 9.5% Employer superannuation guarantee amount)
> 
> For each age in the above table, there is a capital and dividend stream amount. Because Price/Dividend ratios fluctuate over time, In assessing your current situation against the plan you would need to have both stock(capital) and flow(dividend) above their respective target amounts before you could think about reducing the 7.2% contribution rate and still achieve the targeted outcome. If you are below these amounts you will need higher than 7.2% contributions going forward to catch up.
> 
> 
> The 75% target would be tax free and in disposable income terms (currently $59,955) would be slightly more than the disposable pre-retirement income of $57,059.80.
> 
> 
> Gross Salary                        $79,940.21
> Less Salary Sacrifice             $(5,731.36)
> Taxable                               $74,208.85
> Less Tax                              $(15,664.88)
> Less Medicare                      $(1,484.18)
> Disposable                          $57,059.80
> 
> If you are on less than average wage then achiving 75% of average wage requires a lot higher % of your income. Howere that same consistent ~7.2% sacrifice of your actual gross wage will stiil produce around the equivalent disposable retirement income as your pre-retirement disposabe wage.
> 
> 
> The variable assumptions made:
> 
> *Real* rate of return:  4.25%
> Nominal yield: 5.25% (including franking)
> 
> Asset class:
> 100% Equities.
> 
> Tax structure:
> Superannuation.
> 
> Investment vehicle:
> Broad, Low Coast, Non-synthetic Exchange Traded Equity Fund.
> 
> Key Consideration:
> Volatility risk: Dividend flow has some volatility around the 5.25% average return assumed. Can the income needs be flexed (vary living expenses or have other back-up reserves) during below average yields to ensure capital does not need to be drawn down?  If not 100% equity allocation close to and during retirement is not appropriate due to sequence risk and this plan is not appropriate.
> 
> If people are interested in this sort of wealth plan we can work through validating the assumptions and strategy choices, the model workings etc to ensure the plan is realistic which will fortify people’s belief systems to stay the course in times of market duress. Because at the end of the day none of this is too hard with a few right choices and some consistent application – Its more an issue of understanding than anything else.



Nice work Craft......Just to add another perspective in regards to cash flow taking a look at corporate bonds senior debt and depending on how much risk people are willing to take having a combination of 55% investment grade and 45% non rated it is possible with a combination across Floating rate notes, Fixed coupon bonds and index annuities to increase the final capital of $1,142,003 to produce a cash flow of $94,786.00 or $7899 a month just something to think about in regards to another asset class.

Obviously in retirement you would in all likely hood have 80% in investment grade bonds but having more of the investment grade annuities could help with the extra cash flow when changing your percentages in the portfolio..


----------



## craft

Triathlete said:


> Nice work Craft......Just to add another perspective in regards to cash flow taking a look at corporate bonds senior debt and depending on how much risk people are willing to take having a combination of 55% investment grade and 45% non rated it is possible with a combination across Floating rate notes, Fixed coupon bonds and index annuities to increase the final capital of $1,142,003 to produce a cash flow of $94,786.00 or $7899 a month just something to think about in regards to another asset class.
> 
> Obviously in retirement you would in all likely hood have 80% in investment grade bonds but having more of the investment grade annuities could help with the extra cash flow when changing your percentages in the portfolio..



I wouldn't touch bonds - or any currency based fixed long duration asset for that matter (no matter what the credit quality) with a barge pole, especially now unless I had some real  liquidity needs above the dividend stream I can accumulate and then I would be looking at very short durations only - ie cash or near cash.


----------



## Triathlete

craft said:


> I wouldn't touch bonds - or any currency based fixed long duration asset for that matter (no matter what the credit quality) with a barge pole, especially now unless I had some real  liquidity needs above the dividend stream I can accumulate and then I would be looking at very short durations only - ie cash or near cash.



Fair enough...


----------



## tech/a

An extreme example move a year forward and make it the last 9 yrs!

Totally different


----------



## craft

Triathlete said:


> Fair enough...



Putting aside the credit risk and duration risk of the higher cash flow return on the bonds in your example. How does the face value of the debt grow to maintain perpetual purchasing power?


----------



## craft

tech/a said:


> An extreme example move a year forward and make it the last 9 yrs!
> 
> Totally different



Sorry - no idea what point you are trying to make.


----------



## Value Hunter

Aside my previous comment about how laws in regards to accessing superannuation will become less favorable over time, personally if I had to even wait until 63 (let alone 75) to retire I would rather put a bullet in my head long before then. Any life where I have to work until age 63 is not worth living for me. Fortunately I will not have to work until 63 though.


----------



## tech/a

craft said:


> Sorry - no idea what point you are trying to make.




That's ok


----------



## tech/a

Value Hunter said:


> Aside my previous comment about how laws in regards to accessing superannuation will become less favorable over time, personally if I had to even wait until 63 (let alone 75) to retire I would rather put a bullet in my head long before then. Any life where I have to work until age 63 is not worth living for me. Fortunately I will not have to work until 63 though.




Everyone is different
I could have retired 12 yrs ago but as I
Don't have to retire and I actually enjoy what I do.

I'm happy to be like Murdoch,Gates at 63 happens to be my actual age ( people everyone knows not comparing myself )
And do what we want when we want. When I'm not doing that I'm at the coal face.


----------



## craft

These pathetic bonds and Bills (cash) real reurns




Include the gains from the recent golden age of bonds



How likely is that age to repeat again given where rates currently are?




How to run out of purchasing power in retirement 101!


----------



## Triathlete

craft said:


> Putting aside the credit risk and duration risk of the higher cash flow return on the bonds in your example. How does the face value of the debt grow to maintain perpetual purchasing power?



If you continue to live on 60K then you have an extra $34k to invest which is another 58% in cash flow and if we have 80% in investment grade you would have a 26% increase in cash flow.....I think the charts that you have put up are for government bonds I was talking about corporate bonds a different asset class....


----------



## Value Hunter

Triathlete I am not sure what corporate bond yields will be in the future but they are pretty low today. In Australia currently the corporate bonds of sound companies with low default risk are no higher than 5 or 6% and in most cases considerably lower. As craft pointed out the grossed up dividend yield of the share market is around 5.5% currently. 

So you will get around the same income if you are lucky but assuming you hold the corporate bonds until maturity and they are fixed rate, then you will not get the income growth or capital gains that you would get with shares.


----------



## craft

Triathlete said:


> If you continue to live on 60K then you have an extra $34k to invest which is another 58% in cash flow and if we have 80% in investment grade you would have a 26% increase in cash flow.....I think the charts that you have put up are for government bonds I was talking about corporate bonds a different asset class....




Corporate bonds have a higher return to compensate for higher risk, the duration part of the return has the same dynamics.

Your riskiest option providing 34k for re-investment is still not enough on $1.1Million to maintain purchasing power. (even if you miraculously manage to avoid any credit and duration capital losses)


----------



## craft

Value Hunter said:


> Fortunately I will not have to work until 63 though.



Awesome, I'm looking forward to seeing your plan, assumptions and the flight plan broken down into yearly milestones. High achievers always seem to have great plans.


----------



## kid hustlr

I thinking this thread flys in the face of standard thinking where advisors recommend a higher allocation of bonds as one gets older. This is (in theory) to avoid large capital loss

It seems like craft's view is if you have the income stream then suck it up and accept the volatility. Again, I kind of like it. Long term it's the rational decision.

Craft, a couple of examples:

What if one had used this method in Japan in the late 80's early 90's. I imagine this model would be toast?

In a similar vein to what tech/a was getting at (I think). The last 10 years the all red has been hopeless. How does that impact the model for a 35 year old or a 65 year old?


----------



## tech/a

Interestingly the plan took shape as opportunities un folded

Right place,right time,knew what to do and why to do it and

DID IT 

There never was and isn't going forward a formal wealth plan.
Don't and didn't need it.

If I look back and put everything together chronologically it sure 
Looks like a plan in hindsite.

But I had no idea I'd have a decent sized business that makes
More in a year than I could imagine.---- 40 yrs ago

Nor did I know that an exercise that was designed to see if a dumb arse
Builder could develop a profitable trading system would then catch a 
7 yr bull run and produce enough to pay cash for 2 homes which I traded.

Or that my wife and I would be in the position to buy over 15 properties
Through 1995 to 2000 and sell all from 2010 to 2014 free holding many
Over the longest and strongest property boom in living memory.

Or in 1998 starting property development which still runs to this day
Utilising my infrastructure,contacts during one of the strongest demand
Periods for apartment development in living memory.

See I'm no genius in fact when it comes to the world of finance as you know it 
I'll admit I'm as dumb as Duck shite.

But luck has found me often enough.

Life will pan out and not as you plan it.

If you think you can plan 40 yrs going forward go ahead
You'll see what I mean in 40 yrs maybe even 20.

Too late

I'll leave you to it and return after you have completed you forward plan
I'm sure it will be very good but as has been pointed out by those who
Don't advocate following a trading system, those with the plan are the
Biggest threat to it!

I'll do the very same for a wealth plan.


----------



## craft

kid hustlr said:


> Craft, a couple of examples:
> 
> What if one had used this method in Japan in the late 80's early 90's. I imagine this model would be toast?
> 
> In a similar vein to what tech/a was getting at (I think). The last 10 years the all red has been hopeless. How does that impact the model for a 35 year old or a 65 year old?




Japan, you would have been dollar cost averaging in accumulation all along the run up and the bust - model it yourself, you would be suprised. Its not as though you had just put in a lump sum just prior to the bust. The run up was not in line with history, so you shouldn't have been causght basing your assumption based soley on the run up period. That would be like using bond data for the last 30 years instead of the last 100+ and ignoring fundamental drivers of sustainable return.


----------



## craft

tech/a said:


> Interestingly the plan took shape as opportunities un folded
> 
> Right place,right time,knew what to do and why to do it and
> 
> DID IT
> 
> There never was and isn't going forward a formal wealth plan.
> Don't and didn't need it.
> 
> If I look back and put everything together chronologically it sure
> Looks like a plan in hindsite.
> 
> But I had no idea I'd have a decent sized business that makes
> More in a year than I could imagine.---- 40 yrs ago
> 
> Nor did I know that an exercise that was designed to see if a dumb arse
> Builder could develop a profitable trading system would then catch a
> 7 yr bull run and produce enough to pay cash for 2 homes which I traded.
> 
> Or that my wife and I would be in the position to buy over 15 properties
> Through 1995 to 2000 and sell all from 2010 to 2014 free holding many
> Over the longest and strongest property boom in living memory.
> 
> Or in 1998 starting property development which still runs to this day
> Utilising my infrastructure,contacts during one of the strongest demand
> Periods for apartment development in living memory.
> 
> See I'm no genius in fact when it comes to the world of finance as you know it
> I'll admit I'm as dumb as Duck shite.
> 
> But luck has found me often enough.
> 
> Life will pan out and not as you plan it.
> 
> If you think you can plan 40 yrs going forward go ahead
> You'll see what I mean in 40 yrs maybe even 20.
> 
> Too late
> 
> I'll leave you to it and return after you have completed you forward plan
> I'm sure it will be very good but as has been pointed out by those who
> Don't advocate following a trading system, those with the plan are the
> Biggest threat to it!
> 
> I'll do the very same for a wealth plan.




So no plan required!

Sadly too many people will believe you.
Its a far easier and less complex story to sell.

Like father like son, I suspect.


----------



## tech/a

Hmm possibly

My father finished with a wad of cash. I've learnt
From his errors.

Dad has only said one thing with regard to money
I agree with.
" Son you have no respect for money "

He is right.

I've managed to add a few more strings to my bow dad
Never had.
I don't think I have to convince people.

Life itself has a way of doing that!
You don't NEED a plan
You do need to know how to recognise opportunity
(And be in a position to take advantage of it)
You need to know HOW to take advantage of it
Then you need to DO IT!


----------



## Value Hunter

Craft in my case I never had a formalized plan as such just continuous action coupled with back of the envelope calculations and projections. So far, so good.

As for my "plan" going forward I currently have some investment properties (note: none of the properties are in Sydney or Melbourne) and some direct shares. Both the shares and properties have loans against them.

I will work another 2 to 6 years to add marginally to my share portfolio from savings but my existing assets will do most of the work. If property prices continue to do well for another 2 or 3 years I can sell out of my properties and repay all my loans. This would leave me with an unencumbered share portfolio (my existing portfolio plus some minor additions which will come from new savings over the next 2 or 3 years) producing after tax dividends of $25,000 to $30,000 per annum. I am in my late 20s now so in 2 to 6 years I would be early to mid thirties by this time. The six year time-frame is in case property prices are less co-operative.

The dividend stream will be enough for me to live nomadically (say 6 to 12 months at a time in each country) in cheaper countries. Some examples of such cheaper countries would be Thailand, Cambodia, Philippines, Vietnam, Ukraine, Russia, Georgia, Panama, Ecuador, Colombia, Nicaragua, etc. In countries like the ones listed $25,000 to $30,000 AUD is plenty to live a comfortable but modest lifestyle for a single person.

Its generally accepted (just look at travel forums, travel newsletters and travel websites, etc or spend some time living overseas yourself and you will soon confirm it) that for a single person between $1500 USD and $2500 USD per month is what is needed to live comfortably in cheaper countries depending on the country and city and the level of lifestyle you want.

Therefore given my projected income and the above generally accepted budget range I can find somewhere that will work for me.

My backup plan if I need extra cash down the line is that I could supplement it by teaching English overseas or coming back to my parents house in Australia and working for a year and saving most of my salary and then going back overseas again. I think I should most likely be okay with just the dividend stream but its good to have backup plans.

As you can see Craft I am not a high achiever I am merely someone who is able to content myself with a modest lifestyle. I do not plan on getting married and or having kids (and am happy to live in cheaper countries), but in the case I do decide to get married and have kids I have a backup plan for that too which I will not discuss here.


----------



## systematic

craft said:


> The long run (100+ year) nominal return (not including franking) for the ASX is 10.6%........
> 
> So real return historically = 12.1% - 0.9%(tax) -0.5%(expenses) -4.6%(wage growth) = ~ 6%.




That is amazing how you work that all out in the actual detail and get the answer spot on!

The real return of the Australian stock market (according to Credit Suisse, anyway) since 1900 until end 2016 has been 6.8% (real) - based on 10.6% nominal, also.

I think your 4.25% is both fair enough, and agree that it's conservative.

The global average (compound / real) has been ~5.1% and if you exclude USA (which, as we'd all agree, has been the stellar country of the last century) we STILL get ~4.2% (eerily close to the figure craft proposes) - and that's with Germany in 90% drawdown and the whole gammut of market history.  (For those beginner's reading; remember - that's REAL return, after inflation).

Events like 2008 (or 1930's Germany) or whatever...I think they REALLY make a significant impact on the psychology of market participants.  I'm virtually never interested in forecasting (unless it's for fun, like in the, 'where will the All Ords be, next year?' - in which case, I think it's incumbent on every decent trader to take a punt), however, I'll go right out on a limb here and say that I do believe we are in an era ripe for market participants to miss the potential of the equity markets to provide as good an inflation adjusted return as the previous century.  Again, a large part of that is 2008 (and the dot com bust, for US investors).  The 20th century had HEAPS of phases, cycles, disasters, draw downs, unprecedented events, and 'things are different, this time'.  Yet the globe (even excluding the best case of USA) returned 4.2% real; via index investing (so this is not smart beta, factor investing, day trading or Warren Buffet like skills).

I know I've gone on.

But, certain pieces of craft's posts in this thread have reminded me of David Dreman who influenced me so heavily, a lot of years ago, and reminded me of why the equity markets ARE so great, and provide the absolute, best opportunity for our hero of this thread (Joe Average) to retire well.

*Short version of this reply*:  Hey craft, I think your 4.25% real going forward is about right and nicely on the conservative side.


----------



## Value Hunter

I seriously think the average Joe needs to read websites like Early Retirement Extreme and Mr. Money Moustache because for most people working for a living is just surviving its not living.

Most people dislike their jobs and would not turn up for work if they did not need the paycheck. Given that is the case then working until age 63 and wasting the best years of your life is an insane concept. Sure some people enjoy work but they are the minority. That is why most people need to radically evaluate their lifestyle, spending habits, savings habits and investment strategy. Just crawling along at snails pace with a classic put 10-20% of your income in an index fund is not going to lead to a happy life.


----------



## skc

craft said:


> If people are interested in this sort of wealth plan we can work through validating the assumptions and strategy choices, the model workings etc to ensure the plan is realistic which will fortify people’s belief systems to stay the course in times of market duress. Because at the end of the day none of this is too hard with a few right choices and some consistent application – Its more an issue of understanding than anything else.




Thanks Craft for the numbers. I have sense checked a few key rates assumptions and I can't really flaw any of them. It doesn't mean the next 40 years will turn out the same, but it is a robust basis to believe that the assumptions aren't pies in the sky. 

The only thing I have some reservations about is the capital contribution profile. The starting salary for a 23 year old appears too high, as pointed out by Brty. Note the $80k gross salary is before super which implies a total package of ~$87.5k. While ABS statistics suggests that salary income of under 24 years is a lot lower than the average. Sure the % of capital contribution profile can change accordingly but there is a limit to how much that can be done. The other thing of note is whether the numbers (given the lower income of the average 23 year old) allow for the purchase of the PPOR outside super some time down the track. Again, especially the early years when you need to save a deposit, on a lower income, while contributing to the super following this approach. Will it become unworkable?

A quick sensitivity check... if we reduce the contribution in the first 7 years (so up to age 30) by 50%, my model (which is a clone of yours) suggests that the passive income would be closer to $50k than $60k. So even allowing for this, the growth in the numbers are pretty amazing and doesn't really detract the finding of this exercise. The assumptions made are not that heroic... 4.6% inflation is not small, while 0.5% expense is probably on the high side. I didn't think it was doable because I didn't think the nominal return would be 12% (in fact 10.25% is what was used due to your conservatism) and I used a lower salary as a starting point.

Everyone is free to find their own value and utility of money. If you believe spending $2k at age 23 gives you more happiness than $15k (in real terms, not nominal terms) at age 63, then by all means spend that $2k. Just don't complain at age 63 that you wish you knew about the power of compounding over 40 years time. In actual fact, the correct comparison should be whether the happiness of spending $2k at age 23 outweighs the potential struggles you might experience at age 63 without that $15k. My guess is that, if you spent that $2k on smashed avocados at 23, but can't afford to heat your home at 63, there may be some regrets.


----------



## craft

brty said:


> Thank you Craft for putting up your spreadsheet.
> I have a great issue with the starting salary of $1553.1 pw or $79, 940 gross for an "average" 23 -24 year old. Way too high IMHO.
> 
> I base this on a professional son in law and a daughter of mine, both with exceptional marks at uni in fields where they easily found employment in their fields. Neither are (or were in my daughter's case, the 2 not a couple), had or have salaries anywhere near your starting one. Both are very above average!!
> 
> Average full time weekly earnings is skewed towards higher incomes, and most importantly later in life, so the effect of long term compounding, does not work as well, when people do climb the ladder of success later in life, but have less time for compounding to work.
> 
> The statistics themselves are skewed....
> *"4 *All wage and salary earners who received pay for the reference period are represented in the AWE survey, except:
> 
> 
> members of the Australian permanent defence forces;
> employees of enterprises primarily engaged in agriculture, forestry and fishing;
> employees of private households;
> employees of overseas embassies, consulates, etc.;
> employees based outside Australia; and
> employees on workers' compensation who are not paid through the payroll.
> 
> *5 *Also excluded are the following persons who are not regarded as employees for the purposes of this survey:
> 
> casual employees who did not receive pay during the reference period;
> employees on leave without pay who did not receive pay during the reference period;
> employees on strike, or stood down, who did not receive pay during the reference period;
> directors who are not paid a salary;
> proprietors/partners of unincorporated businesses;
> self-employed persons such as subcontractors, owner/drivers, consultants;
> persons paid solely by commission without a retainer; and
> employees paid under the Australian Government's Paid Parental Leave Scheme."
> From here...    http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6302.0Explanatory Notes1Nov 2016?OpenDocument
> 
> Excluding a lot of lower paid workers (agriculture, forestry and fishing), and making the series "full-time", when 54% of females working are in part-time or casual employment, really skews the term "average".
> 
> An average person in this country certainly does not start at 23-24 on $80k. Nor does the average person have a degree, with only 48% of 25-35yo having a higher than secondary education (2015) well up on the 33% for 55-65yo people, but still less than 50%.
> 
> Unfortunately, starting with a number way too high will skew the overall result, making it look 'easy'.



Brty


I was thinking of adjusting the model to start with a lower wage at a younger age to create a slower start to the flight path. But I’ve sort of lost my enthusiasm.  Besides everybody is going to have a different story so that sort of detail is probably more applicable to an individual plan.


For this example. The end target was 75% of average weekly wages, with purchasing power perpetually preserved.  Saying that required 7.2% salary sacrifice by an average wage earner was to put it in perspective of size of commitment required.

The most important number is that at the current average wage level a deductable contribution of $13,325 is required.

If you are on a wage of 50K as a 23-year-old, $4,750 will come from Superannuation guarantee levy, leaving 8,575.68 to be sacrificed which will reduce your take home pay by 13.6% for that year.

Maybe that’s the best way for a young person to think about it – do their circumstances allow for them to make the contribution required above the SG levy to meet the objective we arbitrarily picked.

The objective was more about designing a plan than picking the right objective and salary level at every stage for everybody.

Ideally though everybody would be able to design their own specific, goals and adjust assumptions like wage and growth of that wage to their circumstances.  Hopefully I’ve added a little to help along that path.


----------



## craft

skc said:


> Thanks Craft for the numbers. I have sense checked a few key rates assumptions and I can't really flaw any of them. It doesn't mean the next 40 years will turn out the same, but it is a robust basis to believe that the assumptions aren't pies in the sky.
> 
> The only thing I have some reservations about is the capital contribution profile. The starting salary for a 23 year old appears too high, as pointed out by Brty. Note the $80k gross salary is before super which implies a total package of ~$87.5k. While ABS statistics suggests that salary income of under 24 years is a lot lower than the average. Sure the % of capital contribution profile can change accordingly but there is a limit to how much that can be done. The other thing of note is whether the numbers (given the lower income of the average 23 year old) allow for the purchase of the PPOR outside super some time down the track. Again, especially the early years when you need to save a deposit, on a lower income, while contributing to the super following this approach. Will it become unworkable?
> 
> A quick sensitivity check... if we reduce the contribution in the first 7 years (so up to age 30) by 50%, my model (which is a clone of yours) suggests that the passive income would be closer to $50k than $60k. So even allowing for this, the growth in the numbers are pretty amazing and doesn't really detract the finding of this exercise. The assumptions made are not that heroic... 4.6% inflation is not small, while 0.5% expense is probably on the high side. I didn't think it was doable because I didn't think the nominal return would be 12% (in fact 10.25% is what was used due to your conservatism) and I used a lower salary as a starting point.
> 
> Everyone is free to find their own value and utility of money. If you believe spending $2k at age 23 gives you more happiness than $15k (in real terms, not nominal terms) at age 63, then by all means spend that $2k. Just don't complain at age 63 that you wish you knew about the power of compounding over 40 years time. In actual fact, the correct comparison should be whether the happiness of spending $2k at age 23 outweighs the potential struggles you might experience at age 63 without that $15k. My guess is that, if you spent that $2k on smashed avocados at 23, but can't afford to heat your home at 63, there may be some regrets.



looks like we crossed on this post and my last response to brty about the starting wage.

I agree.


----------



## brty

Hi Craft, thanks for the better explanation. I had no difficulty with the growth rates of equities, just the starting amount, so went and found some numbers. I agree wholeheartedly about staying away from bonds though, unless interest rates hit 18-20% in 40 years time, then think again.
I will not be around in 40 years though.

Tech/A's comment...
"You do need to know how to recognise opportunity
(And be in a position to take advantage of it)
You need to know HOW to take advantage of it
Then you need to DO IT!"

This is how I have done things, and I have been studying and investing in markets for over 40 years, so being educated was part of the solution. Also we purchased our first home and paid it off over 6 years, both working full time, but average salaries, just not much spent elsewhere during that time. Our interest rates were 14.5% the entire time. 
This put us in the position to take opportunities, some good some bad/poor, but taking opportunities is a plan. Being ready for them is a plan, so yes Tech/A I believe you had a plan, just didn't realise it. 

You are not average, neither is anyone else reading this thread. Average Joes and Harrys are not on this forum, they are on FB.


----------



## brty

Just need to add some numbers to my previous post.
My wife started as a teacher in 1980, at $12,500 pa, we still have her first pay advice slip in the files. A starting salary for a teacher today in NSW according to Uni NSW, is $62,282 (2015) but near enough. 

Over the 35 years, the wage has inflated at 4.4% pa while official CPI from the RBA has been 4.2% over the same period.
The All Ords started as an index in 1980, at 500 points. At today's level of 5755, it has had an average performance of 6.8% pa, so real gain has only been 2.4% pa for the last 37 years.

It get's worse, over the last 20 years, CPI has been 2.5% pa and All Ords growth from ~2700 to 5755 is about 3.8% pa, only 1.3% pa above inflation.
http://www.marketindex.com.au/statistics

The above page has some very interesting graphs. The divided yield of the All Ords has fallen from 1980 to about 1994, if you take out the 87 bubble and subsequent crash. This was during a period of high inflation and interest rates, with interest rates falling in the early 90's. Since then the dividend yield has been sloping upwards, again if you average out the GFC crash.

Adding the yield to the real growth rate, gives a real accumulation rate of 5%+ over long periods, even allowing for the poor performance of the last 20 years, and before we add franking credits.
Either history is bunk, or we return to a faster growing market over the next 20 years, to keep up with the longer term averages. Every other time the All Ords (or it's reconstructed equivalent) has had a negative return over 10 years or a flatish return over 20 years, the market has had a huge run up in the following decade or 2. This goes back to 1875.

No reason why people should not choose the best of both worlds. 9.5% is compulsory super, put it into a long term industry super fund. The 7.2% from existing savings should also be put into a LIC like AFI or ARG for the Harry and Sally Average, as it gives them options in their 40's and 50's outside super, but will not be enough to retire on by itself, unless only 5 years or so before 'official' retirement age, whatever that might be in 30-40 years time.


----------



## Triathlete

While I agree on how the model and all assumptions have been put in place which was what was first discussed.....It would be interesting to know how many would be comfortable to leave their total retirement account in 100% equities once they stopped working or stopped contributing to the fund...??


----------



## tech/a

Your of course right brty 
I'm a big picture person.
I employ meticulous people
To take care of the finer details.

I've found long term planners ( so far without exception)
Find it impossible to accept wrong assumptions.
This leads them into making poor decisions.
Even worse those decisions play out over years.

Personally I think one of the best traits you can learn
Is recognising a wrong assumption or decision as fast as you can
And staying wrong for as short a time as possible.
This includes being on the wrong side of a great opportunity.


----------



## craft

tech/a said:


> Your of course right brty
> I'm a big picture person.
> I employ meticulous people
> To take care of the finer details.
> 
> I've found long term planners ( so far without exception)
> Find it impossible to accept wrong assumptions.
> This leads them into making poor decisions.
> Even worse those decisions play out over years.
> 
> Personally I think one of the best traits you can learn
> Is recognising a wrong assumption or decision as fast as you can
> And staying wrong for as short a time as possible.
> This includes being on the wrong side of a great opportunity.




No problem with your third paragraph. But no reason you shouldn't plan. 

First couple of paragraphs are just  typical tech/a ego driven wank. Hopefully people can see through it otherwise this thread is also futile.


----------



## kid hustlr

Craft,

Don't lose faith - I've walked into work this morning and filled out the form to salary sacrifice 5% of my wage so there's been an immediate effect on me.

Can we talk detail?

Do you have a Super Fund which allows direct ETF exposure you can suggest? I had one suggested to me but there's an admin fee of $400 a year which on smaller balances is quite influential. How bad is it to use an industry super fund which objective is to track to the ASX300 until the balance is large enough to move into a different option?

Secondly, can you explore Triathlete's point about the possible draw down? This is was I was getting at to - I'm picturing Nan & Pop watching there super fall 15% in a month and panicking.


----------



## craft

Triathlete said:


> While I agree on how the model and all assumptions have been put in place which was what was first discussed.....It would be interesting to know how many would be comfortable to leave their total retirement account in 100% equities once they stopped working or stopped contributing to the fund...??



This is an important question.


If your capital is not large enough to fund your income requirements from yield alone then you will have to draw down capital to fund the shortfall. If you have to draw down capital you have volatility risk which means 100% equity is not suitable. The reason being that despite equities having by far the best long run return it also has the greatest volatility which means sequence risk comes into play.  Drawing down capital in large down years, especially early screws everything.


Recognising sequence risk arising from most people having not enough capital and hence subject to volatility risk – the pretty standard solution is to go to bonds/cash – to give you liquidity during equity volatility.  This liquidity position should really be short term to match the near-term requirement for liquidity. Problem is short term cash has a terrible return which hastens the speed you have to draw down capital.


The worst thing that seems to be happening is that people seem to be hearing the advice to have some liquidity when they are short of capital, but then in an attempt to improve the return on that liquidity they push out the credit risk and /or the duration attributes and it’s a really bad time to be doing that -  they are unwittingly opening themselves to capital loses in their supposed secure asset.


If you have got the time and inclination – build your capital to a point where you can sustain the volatility in the cashflow from Equity and staying 100% invested puts you so far in front. Its like a paradigm shift from potential poverty at 90 to intergenerational wealth.


For some reason Australians would be more inclined to see the logic of staying invested in growth assets via residential housing, leaving it to their kids and living off the rent in the meantime.  Yet unlevered housing is a much inferior asset class to equities both in net yield and capital gains.  Meaning you would have to have much more capital for the plan to work, than using equity as the asset.


----------



## craft

kid hustlr said:


> Craft,
> 
> Don't lose faith - I've walked into work this morning and filled out the form to salary sacrifice 5% of my wage so there's been an immediate effect on me.
> 
> Can we talk detail?
> 
> Do you have a Super Fund which allows direct ETF exposure you can suggest? I had one suggested to me but there's an admin fee of $400 a year which on smaller balances is quite influential. How bad is it to use an industry super fund which objective is to track to the ASX300 until the balance is large enough to move into a different option?
> 
> Secondly, can you explore Triathlete's point about the possible draw down? This is was I was getting at to - I'm picturing Nan & Pop watching there super fall 15% in a month and panicking.



I think we crossed again - answering Triathlete as your post come in - if that's not adequate let me know.

The only super fund I'm at all familiar with has an indexed growth option that costs 0.17% as opposed to 0.5%+ for every other option - but it also has a weighting of some indexed bonds in there so its not completely ideal, but better than all the other managed options offered. Whilst at amounts under what makes a SMSF viable where you can access ETF's directly it would be O.K. I'm also aware of some super funds offering direct share options but don't know how much this costs. I will put up my costs shortly on SMSF so a breakeven for viabilty on this option can be explored - maybe others can answer the what is available in superfund question.


----------



## Triathlete

craft said:


> This is an important question.
> 
> 
> If your capital is not large enough to fund your income requirements from yield alone then you will have to draw down capital to fund the shortfall. If you have to draw down capital you have volatility risk which means 100% equity is not suitable. The reason being that despite equities having by far the best long run return it also has the greatest volatility which means sequence risk comes into play.  Drawing down capital in large down years, especially early screws everything.
> 
> 
> Recognising sequence risk arising from most people having not enough capital and hence subject to volatility risk – the pretty standard solution is to go to bonds/cash – to give you liquidity during equity volatility.  This liquidity position should really be short term to match the near-term requirement for liquidity. Problem is short term cash has a terrible return which hastens the speed you have to draw down capital.
> 
> 
> The worst thing that seems to be happening is that people seem to be hearing the advice to have some liquidity when they are short of capital, but then in an attempt to improve the return on that liquidity they push out the credit risk and /or the duration attributes and it’s a really bad time to be doing that -  they are unwittingly opening themselves to capital loses in their supposed secure asset.
> 
> 
> If you have got the time and inclination – build your capital to a point where you can sustain the volatility in the cashflow from Equity and staying 100% invested puts you so far in front. Its like a paradigm shift from potential poverty at 90 to intergenerational wealth.
> 
> 
> For some reason Australians would be more inclined to see the logic of staying invested in growth assets via residential housing, leaving it to their kids and living off the rent in the meantime.  Yet unlevered housing is a much inferior asset class to equities both in net yield and capital gains.  Meaning you would have to have much more capital for the plan to work, than using equity as the asset.



Nice reply Craft.....The other point I was going to make was also about the chances that should their be another financial crises and a person/s is in equities the chances that companies cut their Dividends or in an extreme case suspend for a year or two, but we now know we would need to sell down some holdings to tie them over....I guess we just need to cover these scenarios as well...


----------



## craft

brty said:


> Just need to add some numbers to my previous post.
> My wife started as a teacher in 1980, at $12,500 pa, we still have her first pay advice slip in the files. A starting salary for a teacher today in NSW according to Uni NSW, is $62,282 (2015) but near enough.
> 
> Over the 35 years, the wage has inflated at 4.4% pa while official CPI from the RBA has been 4.2% over the same period.
> The All Ords started as an index in 1980, at 500 points. At today's level of 5755, it has had an average performance of 6.8% pa, so real gain has only been 2.4% pa for the last 37 years.
> 
> It get's worse, over the last 20 years, CPI has been 2.5% pa and All Ords growth from ~2700 to 5755 is about 3.8% pa, only 1.3% pa above inflation.
> http://www.marketindex.com.au/statistics
> 
> The above page has some very interesting graphs. The divided yield of the All Ords has fallen from 1980 to about 1994, if you take out the 87 bubble and subsequent crash. This was during a period of high inflation and interest rates, with interest rates falling in the early 90's. Since then the dividend yield has been sloping upwards, again if you average out the GFC crash.
> 
> Adding the yield to the real growth rate, gives a real accumulation rate of 5%+ over long periods, even allowing for the poor performance of the last 20 years, and before we add franking credits.
> Either history is bunk, or we return to a faster growing market over the next 20 years, to keep up with the longer term averages. Every other time the All Ords (or it's reconstructed equivalent) has had a negative return over 10 years or a flatish return over 20 years, the market has had a huge run up in the following decade or 2. This goes back to 1875.
> 
> No reason why people should not choose the best of both worlds. 9.5% is compulsory super, put it into a long term industry super fund. The 7.2% from existing savings should also be put into a LIC like AFI or ARG for the Harry and Sally Average, as it gives them options in their 40's and 50's outside super, but will not be enough to retire on by itself, unless only 5 years or so before 'official' retirement age, whatever that might be in 30-40 years time.



Thanks for your post.

Capital growth of 1-2% above inflation is about historical norm for equity markets and it makes sense from an economics perspective. Companies retain capital to fund nominal GDP growth which is made up of Inflation, Population growth and productivity. Productivity gains typically get shared with the labour that implement and use the new capital - Labours share wont show up in an increasing market value. Just leaves part productivity and population growth above inflation to produce "real" capital gains and even some of those gains are diminished through issuing more shares rather than internally financing.

I don't have a problem with people not choosing to use super. Just be mindful that you are going to need more contributions or an above market return to get the same outcome because of the tax implications to the real return figure. Salary sacrificing $5,000 into super means you are putting $4,250 to work after contribution tax. That $5,000 taken in hand after marginal tax leaves you only $3,275 to put to work if your income is below 87K, above its lower still. Taxation on the cashflow that you need to re-investment along the way has the same effect - but its even worse because the savings income will be added to your wage and push you into higher marginal brackets.


----------



## craft

Triathlete said:


> Nice reply Craft.....The other point I was going to make was also about the chances that should their be another financial crises and a person/s is in equities the chances that companies cut their Dividends or in an extreme case suspend for a year or two, but we now know we would need to sell down some holdings to tie them over....I guess we just need to cover these scenarios as well...



Yes dividend volatility and whether we can live with it is the absolute key to deciding if 100% equity allocation is appropriate as I see it.

Fortunately we have lived through a recent stress point in 2008  so we have a recent example of an  extreme to study, to see if we can hack the dividend volatility that caused. Maybe even allow for a worse case scenario - but don't skim over the question. you don't want to find out you can't hack it and have to start drawing capital to suplement your income at the market lows


----------



## tech/a

*First couple of paragraphs are just typical tech/a ego driven wank. Hopefully people can see through it otherwise this thread is also futile.
*
Its personal experience.
What?---- its your way or no other?

After you've presented your suggestions Ill present mine.
*People can do what they wish*. Who knows I may take on
board some of your stuff.

Personally I think an integration of the Two once I present my
suggestions would be hugely beneficial.

But I'm talking more about *sustainable* excess cash generation* FIRST*
Without it your going to struggle living let alone saving for a retirement
you *may not even make! *or indeed want!.

Ill wait.


----------



## craft

tech/a said:


> *First couple of paragraphs are just typical tech/a ego driven wank. Hopefully people can see through it otherwise this thread is also futile.
> *
> Its personal experience.
> What?---- its your way or no other?
> 
> After you've presented your suggestions Ill present mine.
> *People can do what they wish*. Who knows I may take on
> board some of your stuff.
> 
> Personally I think an integration of the Two once I present my
> suggestions would be hugely beneficial.
> 
> But I'm talking more about *sustainable* excess cash generation* FIRST*
> Without it your going to struggle living let alone saving for a retirement
> you *may not even make! *or indeed want!.
> 
> Ill wait.



Well get on with it – Nowhere Have I said a long-term plan for wealth should be the exclusive plan considered. Actually, I think I may have said I encourage adding an active string to the bow with even more ambitious goals.

You haven’t shown anything of detail or substance yet, just a lot of how good am I and a lot of      white–anting other plans because you don't seem to understand the power, efficiency and simplicity of the ideas.

If you have got any substance – show it. I’ll consider it. But I’m afraid my consideration of your contribution so far is; No detail ego wank fest.

Actually, I think a lot of what you are saying so far is dangerous and potentially leads to where you said your father ended up. Unless you get lucky. But maybe I'm just misinterpreting your posts.

Happy for you to think of my contributions the same! This thread is not about you or me. It will hopefully be about sharing substance and detail for people to consider.


----------



## Ves

Hi craft, are the calculations purely based on 100% Australian equity exposure? Any idea what the historical pre-tax yield (including foreign tax credits) for international equities is in an ETF like VGS (or vehicle following the same index construction)? From memory it's something like 2.5%-3%.


----------



## craft

Ves said:


> Hi craft, are the calculations purely based on 100% Australian equity exposure? Any idea what the historical pre-tax yield (including foreign tax credits) for international equities is in an ETF like VGS (or vehicle following the same index construction)? From memory it's something like 2.5%-3%.



For the exercise it was Australian numbers only. Costs/Benefits, Pro's/Con's of diversifying internationally(currency hedged or unhedged)  with a passive long term equity approach would be an interesting topic if somebody wanted to persue it.


----------



## McLovin

craft said:


> Yes dividend volatility and whether we can live with it is the absolute key to deciding if 100% equity allocation is appropriate as I see it.
> 
> Fortunately we have lived through a recent stress point in 2008  so we have a recent example of an  extreme to study, to see if we can hack the dividend volatility that caused. Maybe even allow for a worse case scenario - but don't skim over the question. you don't want to find out you can't hack it and have to start drawing capital to suplement your income at the market lows
> 
> View attachment 72074
> 
> 
> View attachment 72075




You got any charts on dividend volatility? I seem to recall in 2009, dividends were cut across the All Ords by about 30%. If my memory is correct, that's a pretty big fall in income for someone targeting an income stream of 75% of the average wage. They wouldn't want any unanticipated expenses rearing their head at that point.


----------



## kermit345

I'm pretty much living this scenario at the moment. I'll explain my position and how that might guide your assumptions etc further.

I did a uni double degree at uni which took 4 years and started full time employment when I was 22 (I'm now 30) on a starting wage of $40,000. Its important to note that I work in country SA and so starting wages or just wages in general are quite different between each state and capital city v country which I'm not sure if thats something you wish to consider in your assumptions. Anyhow from day 1 of employment I started investing into shares however with nobody to really learn from I made the mistake of buying small cap tips quite a bit or buying stocks I thought were undervalued but actually weren't etc. I've made my fair share of mistakes and learnt from them too but wish I'd had the knowledge back then about the simplicity of ETF's or just purchasing larger stocks like the banks. Anyway I don't want to harp on about the stock picking side but lets just say I burnt some capital in the early days but have improved quite a bit since then.

Fortunately over this 8 year period I was able to live at home and save a lot of money - I own my car, I've paid off a block of land (building now) and accumulated capital in equities to the point that I now have $120k of shares with a $30k margin loan. Essentially I'm bang on where craft has said a 30 year old needs to be however i've done it outside of super rather than inside of super.

The issue now becomes paying off my house. Being a single guy essentially all the funds i've directed to equities in the past will now be going towards paying off the house. My salary has only increased to a little about $60k but should grow some more over the next 5 years as I take on clients and more responsibility within the business. However the issue becomes that it becomes increasingly difficult to invest that amount anymore towards the future when repaying a mortgage as well - particularly when you're single.

I'm still planning out how i'll attack the next stage as the property will be finished within the next 8-10 weeks and i'll be living in it. Will take some adjustment to see how much I can still potentially invest (I fear i'll be lucky to do maybe $100-$200 a fortnight which about $70 a fortnight will only cover margin loan interest).

I hope that gives a bit of an overview of a form of the average joe, which is where it becomes difficult for craft with assumptions etc. Couples typically have a greater ability to invest funds but then if kids are involved sometimes they have even less capacity then a single person. Then you get the differing wages between states etc as I mentioned earlier and it becomes a difficult task to measure the average joe.

Fire away if you have any questions that I can maybe help with in terms of my experience. As I said earlier definitely wish I had someone to tell me when I started that I could just progressively invest in a broad market ETF re-investing the dividends and I honestly feel i'd have at least an extra $20-$30k today.


----------



## tech/a

Seriously??

When your finished.

The wank fest you mention is an attempt to
show that someone without a degree in finance or
working in a financial background can achieve extra
ordinary results.

While that is very upsetting for you craft it maybe
very encouraging to others out there without your acumen.


----------



## craft

McLovin said:


> You got any charts on dividend volatility? I seem to recall in 2009, dividends were cut across the All Ords by about 30%. If my memory is correct, that's a pretty big fall in income for someone targeting an income stream of 75% of the average wage. They wouldn't want any unanticipated expenses rearing their head at that point.



Here is a dividend chart back to 1974 - Yes it was a 30% odd fall in 2009




However with a long term view you shouldn't have been relient on 2007ish dividend levels to support your plan as things were obviously extended on a historical basis. In other words the fall occured from elevated levels - not from the level you should have your plan based on. Lots of the falls that scare people are from elevated levels and they seem to forget you would have substantialled squirelled away a lot of nuts in the summer before winter hit.


----------



## craft

tech/a said:


> Seriously??
> 
> When your finished.
> 
> The wank fest you mention is an attempt to
> show that someone without a degree in finance or
> working in a financial background can achieve extra
> ordinary results.
> 
> While that is very upsetting for you craft it maybe
> very encouraging to others out there without your acumen.



What's hard about salary sacrificing into a broad based equity portfolio to secure your future and give you a safety net under the more active risks you may want to take chasing bigger rewards?

Financial risks (wheter you know you are taking them or not) witout safe back-up plans lead to poverty in retirment for the great majority. Just look at the statistics.


----------



## kermit345

To be fair Craft is kind of right, in my view you can do a lot worse then just being in a broad based equity ETF. From what i've seen working in the financial planning industry the vast majority of the population fall into the following two categories:

1) Simply invested in default fund within industry fund - often has an allocation of between 20-50% fixed interest which isn't exactly appropriate for someone who is 25-30 years of age and has 30-40 years of growth to take advantage of in asset classes like equities and property.
2) Don't actually care where or what their superannuation is invested in because they see it as 'free money' that they can just withdraw and use as early as possible with no actual consideration for funding retirement.

Most of the people that fall into these categories get to around age 50 and start to realise oh crap I'm sick of working but how do I actually live when I do stop working and by then its too late, or at least too late to meet their expectations/goals. The community on this forum that actually take an interest in their future and investing are more so the minority then the norm.

I think what craft is getting across is that a equity based ETF approach is at least a simple to administer starting point for basically anyone and for those that want to put in the extra effort there's no problem with being more active - but at least they have a solid foundation starting point.

EDIT: Plus isn't the purpose of this to make some assumptions about getting to a point of passive income in retirement. The actual 'how' of getting there in terms of investment vehicles isn't really important. As long as people achieve the assumed returns or above then thats all that really matters.


----------



## tech/a

*What's hard about salary sacrificing into a broad based equity portfolio to secure your future and give you a safety net under the more active risks you may want to take chasing bigger rewards?
*
The big draw back is not accessing your money until---quite possibly 75.
You may not live that long.

It leaves very little to none to use for ventures outside of PAYE
and "Conventional " Super.
Its not a safety net either as you wont access it and if you do
it defeats the purpose.

I have no problem with what your suggesting.
But I think you should broaden your base *first.*
Adding strings to your bow.

In your plan you just wont be able to.


----------



## kermit345

Have to agree with tech/a in terms of using super as the investment vehicle - try convincing any newly employed 23 year old to put almost 10% of their first full time wage into superannuation that they cant access for 40-50 years and you've got yourself a hard task. Could always go down the path of 50/50, some inside and some outside of super?


----------



## craft

tech/a said:


> *What's hard about salary sacrificing into a broad based equity portfolio to secure your future and give you a safety net under the more active risks you may want to take chasing bigger rewards?
> *
> The big draw back is not accessing your money until---quite possibly 75.
> You may not live that long.
> 
> It leaves very little to none to use for ventures outside of PAYE
> and "Conventional " Super.
> Its not a safety net either as you wont access it and if you do
> it defeats the purpose.
> 
> I have no problem with what your suggesting.
> But I think you should broaden your base *first.*
> Adding strings to your bow.
> 
> In your plan you just wont be able to.



Changes to the current preservation age of 60 or younger for some already close to retirement are a risk but it would be politically hard change to make now. Maybe stopping it being used as alump sum - but we want an income anyway.

Super is just as accessable to self employed, even has some added perks.

It required about 6% reduction in take home pay for an average wage earner to secure their future in the most efficient way possible. The idea of looking to maximum efficiency was to leave as much money as possible for living or other higher risk active strategies.

I don't know, a perpetual purchasing power preserved income stream in retirement sounds like a good safety net too me.

Add strings to your bow all you like but do it from a position of stregth.


----------



## craft

kermit345 said:


> Have to agree with tech/a in terms of using super as the investment vehicle - try convincing any newly employed 23 year old to put almost 10% of their first full time wage into superannuation that they cant access for 40-50 years and you've got yourself a hard task. Could always go down the path of 50/50, some inside and some outside of super?




Are they making the best eductaed desicion? has there been any education of a 23 year old? Has their been adequte education of the population as a whole since Defined Contribution schemes become the norm and the demographics of the baby boomer lump srewed government transfer pension affordability in the very near future. No use getting eductaed about this at 50 - its too late.

How many listen to the fear mongering, take the easy options, fall for the get rich quick options without having the requisite skills because they don’t have a suitable education of financial history and economic realities.


----------



## systematic

a) Save it all outside Super then, and adjust the savings upwards - better than the alternative of not doing it all!  craft; have you run the calc for that option?

b) My limited thoughts on Super:  whilst they allow personal contributions it virtually _has_ to provide _some_ kind of advantage over outside savings, no matter how much they narrow the margin.  Still, it would be nice if they were able to lock down the rules permanently, beyond a party's ability to change them.


----------



## Toyota Lexcen

Keeping it outside of super can impact newstart, disability pension, not just for you but also wife,


----------



## craft

systematic said:


> a) Save it all outside Super then, and adjust the savings upwards - better than the alternative of not doing it all!  craft; have you run the calc for that option?
> 
> b) My limited thoughts on Super:  whilst they allow personal contributions it virtually _has_ to provide _some_ kind of advantage over outside savings, no matter how much they narrow the margin.  Still, it would be nice if they were able to lock down the rules permanently, beyond a party's ability to change them.




a) Not explicitly for a passive approach, but the contributions are going to be far larger than required inside super and the size of the contributions already seems to be a sticking point with the super example. The other option to get the numbers to work at the same level of contribution is to assume an above market return but that is an unrelistic approach for most and must result in a failed plan on average.

This do it outside super and make exceptional returns is the Tech/a and Quant big picture versions. I'm waiting for the detail and numbers to see if they have substance or fluff.


----------



## Sir Burr

kid hustlr said:


> Do you have a Super Fund which allows direct ETF exposure you can suggest?




I'm just researching this at the moment. Have a SMSF but will be non complaint as a non-resident so looking:

I think this is a good spot to start:
https://login.chantwest.com.au/cwAC2Shell.aspx

The two I have shortlisted (so far) is Hostplus and Australian Super. Both have direct share/ETF investing and Hostplus is cheaper for direct shares (similar prices to Comsec) but seems more expensive for their managed funds.


----------



## kermit345

Unlikely a 23 year old getting their first regular wage is going to make the best educated decision about a future passive income when their world has just been opened up to all kinds of possibilities due to the income they are now receiving. Personally I don't think the population as a whole (which I think you're alluding to craft) is educated enough in superannuation, investing or taking care of their finances. However I also think the vast majority don't want to be educated or take any interest/responsibility in this space either, all just my opinion of course. Most people are happy to point the finger at anyone else when there is a price rise on electricity or their mortgage interest rate increases etc etc - Not many actually shop around for the lowest interest rate mortgage or review it annually or review their insurance providers regularly etc etc. Most people like convenience and access when it comes to their finances even if it costs them in the long term, which is an unfortunate attitude to have when your income and how you use it is your number 1 asset through life.

Obviously contributing 7.2% as a salary sacrifice from a young age is the most preferred and efficient way of accumulating to provide a passive income in retirement. All i'm suggesting is that maybe its not a very realistic approach as a small percentage of people would be comfortable doing that without access to the funds and have that kind of foresight.


----------



## craft

kermit345 said:


> Obviously contributing 7.2% as a salary sacrifice from a young age is the most preferred and efficient way of accumulating to provide a passive income in retirement. All i'm suggesting is that maybe its not a very realistic approach as a small percentage of people would be comfortable doing that without access to the funds and have that kind of foresight.




This should be tried (But I'll leave it to smebody else).

Start varying the asumptions - part inside super part out and varying the 'real returns' accordingly to see how much the required contributions go up.

Could also vary other assumptions like 100% equity vs Balanced growth options that contain bond, cash, real estate etc exposure and see how that changes the real return and contributions required to achieve the target.

Change the expenses - see what impact that has.

Change every variable you have CONTROL OVER and see what the impacts are.

People need to educate themselves. Excel and a hand full of time value of money formula's is not rocket science but can be an extreme eye opener - Why it's not taught in school is beyond me.


----------



## kid hustlr

How are more people not excited about that regressed earning chart Craft posted


----------



## Skate

craft said:


> People need to educate themselves. Excel and a hand full of time value of money formula's is not rocket science but can be an extreme eye opener - *Why it's not taught in school is beyond me.*




Here lies the problem...


----------



## Ves

kermit345 said:


> Have to agree with tech/a in terms of using super as the investment vehicle - try convincing any newly employed 23 year old to put almost 10% of their first full time wage into superannuation that they cant access for 40-50 years and you've got yourself a hard task. Could always go down the path of 50/50, some inside and some outside of super?



Could also add some leverage outside of super as a bit of a tax-shield as well.  Not saying it's suitable for everyone,  but at some stages in life it's definitely worth thinking about if it's easily serviceable.


----------



## systematic

I'd love to see a personal contribution become compulsory.  At first that seems impossible, but Super is compulsory, as is voting and paying taxes - I really don't think it would be that impossible.  It'd be a big thing like the GST to bring in, but not impossible.

I've seen government agencies still have personal contributions as a default setting for new employees (they needed to opt out).

Taking SG to 12% sooner rather than later and adding a 5% contribution (either compulsory OR at least opted in by default) could help.

Or what about something similar in spirit to the co-contribution:
where the SG is 9.5%, if you make a 5% contribution, the SG becomes 12%.  And also make that the default.  If you don't contribute (i.e. you deliberately opted out), you get 9.5% and that's it.

Ah the stuff of politics and plans to save the world, ha!


----------



## skc

McLovin said:


> You got any charts on dividend volatility? I seem to recall in 2009, dividends were cut across the All Ords by about 30%. If my memory is correct, that's a pretty big fall in income for someone targeting an income stream of 75% of the average wage. They wouldn't want any unanticipated expenses rearing their head at that point.




It won't be comforting if something extreme like this happens but it shouldn't be a deal breaker either. Remember the dividend stream is worked out based on 5.25% yield. If the dividend stream is reduced by 30% we are talking about drawing down 1.6% of capital to make up for the short fall. Even if you allow for the overall market being down 50% when you needed to make that 1.6% draw on the capital... it is still not a large number. A small change to the rate of return assumption would likely create a larger impact.



kermit345 said:


> Have to agree with tech/a in terms of using super as the investment vehicle - try convincing any newly employed 23 year old to put almost 10% of their first full time wage into superannuation that they cant access for 40-50 years and you've got yourself a hard task. Could always go down the path of 50/50, some inside and some outside of super?




One thing to remember... for a salary earner 9.5% is compulsory within super. The 7.2% salary sacrifice is the additional discretionary. If you do this 7.2% outside super there will be an impact, especially down the line when the dividend stream becomes quite large and goes into the higher tax brackets. Also that, doing so outside Super will need a larger contribution (in terms of percent of gross income) due to the tax shield available with super contribution. If you want to maintain after-tax disposable income, then the contribution would be lower. By my rough calcs the difference in outcome after 40 years is about ~20-30% lower for this discretionary component outside super, or ~10% across the whole strategy. So it's meaningful but perhaps not a deal breaker. It may be considered the price to pay for 40 years of liquidity / being available at call on your money. 



kermit345 said:


> I did a uni double degree at uni which took 4 years and started full time employment when I was 22 (I'm now 30) on a starting wage of $40,000.
> 
> The issue now becomes paying off my house. Being a single guy essentially all the funds i've directed to equities in the past will now be going towards paying off the house. My salary has only increased to a little about $60k but should grow some more over the next 5 years as I take on clients and more responsibility within the business. However the issue becomes that it becomes increasingly difficult to invest that amount anymore towards the future when repaying a mortgage as well - particularly when you're single.




Thanks for sharing your story Kermit. Time to get a partner or may be a tenant? This is yet another consideration... there'd be plenty of 23 year olds entering the workforce with meaningful student debt. Although one could argue that, if such debt was incurred en route to a professional qualification than hopefully the income trajectory would be better than just average wage growth.


----------



## craft

skc said:


> One thing to remember... for a salary earner 9.5% is compulsory within super. The 7.2% salary sacrifice is the additional discretionary. If you do this 7.2% outside super there will be an impact, especially down the line when the dividend stream becomes quite large and goes into the higher tax brackets. Also that, doing so outside Super will need a larger contribution (in terms of percent of gross income) due to the tax shield available with super contribution. If you want to maintain after-tax disposable income, then the contribution would be lower. By my rough calcs the difference in outcome after 40 years is about ~20-30% lower for this discretionary component outside super, or ~10% across the whole strategy. So it's meaningful but perhaps not a deal breaker. It may be considered the price to pay for 40 years of liquidity / being available at call on your money.




Hi skc

Changing nothing but accumulating the 7.2% outside super I get.

Super Guarantee component finishes with a multiple of 8.14

Extra contributions finish with a multiple of 3.54 outside super v's 6.15. inside.
The killer is changes to amount initially invested due to marginal vs contribution tax and changes to the real retuurn because of higher tax on cashflow to be re-invested, marginal vs 15%.

Total equals 14.29 all inside super v's 11.68 mixed. (over $200,000 difference in today's dollars)

As mentioned by Ves you could claw back a bit by strategic leverage - but that has associated risks that you really want to be getting compensated for anyway.

Interestingly if you did use leverage and it blows up - I'm pretty sure your superannuation accumulation is protected from creditors in bankruptcy.


----------



## Value Hunter

Kid Hustlr if you are young I would strongly reconsider voluntary super contributions. Legislative risk here is huge and is being underestimated. 

Decades from now if national finances are bad enough (which they most likely will be), the government could and probably will push out the retirement age until 75. Also if you look at once happened in other countries they could have a large one off wealth tax on super. Or for an entirely new twist they could force super funds to buy a certain amount of government bonds, etc. These scenarios are all aside from the assumption of regular tax increases which are almost certain to occur over time.


----------



## CanOz

Or as in the case of Argentina, they could just confiscate all Superannuation. Another great reason to have a comprehensive wealth plan, including super.

Super makes up less than 5% of our total net worth at this stage and i am not contributing myself to my current super, only my employer is.

Great thread Craft, very interesting topic! Bravo!


----------



## craft

CanOz said:


> Or as in the case of Argentina, they could just confiscate all Superannuation. Another great reason to have a comprehensive wealth plan, including super.
> 
> Super makes up less than 5% of our total net worth at this stage and i am not contributing myself to my current super, only my employer is.
> 
> Great thread Craft, very interesting topic! Bravo!



Thanks

Argentina scenario - gulp. But did they lose their balances or were they just forced to move to the government run scheme, retaining their transfer balance?


----------



## kermit345

Agree with other sentiments, a great thread which is very thought provoking also evidenced by the number of replies the thread has received in just a few days from some of the very best contributors on the forum.

Thanks for posting the figures Craft of the solely inside super vs inside/outside scenario as well. Goes to show the importance of not only investing but also structuring in the most tax-effective manner. Even something as simple as purchasing the investments in a partners name that may only work part time or do home duties could potentially increase the eventual balance substantially especially due to the compounding benefits of any dollar saved in the early years.

Not sure if you've considered this idea also craft or if you have the ability to run the numbers on something like the following:

Utilizing an investment bond which has tax paid internally at the company tax rate (no taxable income for the individual counted), has no capital gains tax implications after the 10 year investment period and still gets the benefits of franking credits. Further to this some investment bonds (1 I know of) offer lending against the bond at competitive rate (i.e. 3% currently) which you could further invest in shares with the dividend essentially covering interest and it being tax effective.

Any thoughts on this approach? I know its a bit of an outside the square idea and not many people would have looked at investment bonds before but could be an option - would just need to meet the criteria/legislation around them in the process.


----------



## craft

Value Hunter said:


> Kid Hustlr if you are young I would strongly reconsider voluntary super contributions. Legislative risk here is huge and is being underestimated.
> 
> Decades from now if national finances are bad enough (which they most likely will be), the government could and probably will push out the retirement age until 75. Also if you look at once happened in other countries they could have a large one off wealth tax on super. Or for an entirely new twist they could force super funds to buy a certain amount of government bonds, etc. These scenarios are all aside from the assumption of regular tax increases which are almost certain to occur over time.



Or maybe none of these fears happen. Maybe India goes through a resource intensive growth phase next and we get another Peter Costello with unbelievable largess towards self funded retirement.


----------



## Value Hunter

Apart from the Aregentina example another good example of what can happen to private "pensions" is Poland in 2013

http://www.zerohedge.com/news/2013-...private-pension-funds-cut-sovereign-debt-load

Here is another link (it discusses examples in addition to Argentina) talking about instances of governments fiddling with pension assets.   https://barnabyisright.com/tag/argentina-pension-funds/

I am assuming by the time I become old (I an late 20s now) the government will have confiscated or taxed away most of my superannuation hence I never voluntarily contribute to it.


----------



## kid hustlr

VH - Your point is fair and agreed.

I'm a unique case for several reasons though. A couple more eggs in this basket is a smart move for me.


----------



## CanOz

craft said:


> Thanks
> 
> Argentina scenario - gulp. But did they lose their balances or were they just forced to move to the government run scheme, retaining their transfer balance?




This is what she planned : http://www.economist.com/node/12474636

I'm finding out from a mate that lives there what they did...but perhaps I'll post it in another thread to avoid side tracking this one too much.


----------



## Ves

craft said:


> Thanks
> 
> Argentina scenario - gulp. But did they lose their balances or were they just forced to move to the government run scheme, retaining their transfer balance?



Both Poland and Argentina's situations involved a nationalisation of some (or whole) of private pension fund assets.  It looks like both governments wanted them on their books so that they had a better credit rating  /  more borrowing capacity.

The retirement benefits in both of those countries are completely different to Australia.  For a start there are very few 'defined benefit' pensions left like there are overseas.

Nothing as far as I can see was confiscated from individual beneficiaries (and that's probably because their system is completely different - the pensions are funded and calculated differently because they are not based on beneficial ownership of assets).

There's obviously a long backstory behind both the Argentina and Poland situations and I'm afraid you won't get it from zerohedge.


----------



## McLovin

I won't derail craft's thread because it is a very interesting one, but back in my uni days pottering around the library I happened upon this book....

https://www.amazon.com/Australia-Argentina-Parallel-Paths-Duncan/dp/0522842690

I actually ended up doing a pretty long essay on the economic decline of Argentina.


----------



## Sir Burr

tech/a said:


> But I think you should broaden your base *first.*




Not sure if anyone has thought of this idea  but as a younger person would it not make financial sense to pour all into that big ticket item first? Paying off a CGT free PPOR and get rid of interest?

Then pump the salary sacrifice into super?


----------



## tech/a

craft said:


> Or maybe none of these fears happen. Maybe India goes through a resource intensive growth phase next and we get another Peter Costello with unbelievable largess towards self funded retirement.




Put yourself in front of opportunity and let it hit you!


----------



## kid hustlr

Craft, 

Obviously returns don't happen in a straight line, have you stress tested the model at various points over the 40 years with periods of -5, -10, -15 type returns, can you provide some insight into the results?

If you were talking to a 20 year old who was tossing up buying a PPOR vs renting for the next 40 years what would your answer be? (classic conundrum)


----------



## tech/a

kid hustlr said:


> Craft,
> 
> If you were talking to a 20 year old who was tossing up buying a PPOR vs renting for the next 40 years what would your answer be? (classic conundrum)




Think the question is a little early for a 20 yr old to be contemplating.
Few would have a deposit even with Home start.

BUT

PPOR would not surprisingly my choice. But Id urge 25-30 yr old to think *outside* of the square.
2 examples

A friend of ours son bought a 3 bed modest home close to Flinders Uni and rents 2
of the rooms out for $250 a week to over seas students.

Another bought a PPOR in the southern beach suburbs and rents 2 rooms Air B&B
$80 a night off peak (Its also 5 K from Mc Claren Vale Wine district.) and $120 a night
in summer.
He has 65% occupancy on average over a year (Been doing it 2 yrs).


----------



## kid hustlr

tech/a said:


> Think the question is a little early for a 20 yr old to be contemplating.
> Few would have a deposit even with Home start.
> 
> BUT
> 
> PPOR would not surprisingly my choice. But Id urge 25-30 yr old to think *outside* of the square.
> 2 examples
> 
> A friend of ours son bought a 3 bed modest home close to Flinders Uni and rents 2
> of the rooms out for $250 a week to over seas students.
> 
> Another bought a PPOR in the southern beach suburbs and rents 2 rooms Air B&B
> $80 a night off peak (Its also 5 K from Mc Claren Vale Wine district.) and $120 a night
> in summer.
> He has 65% occupancy on average over a year (Been doing it 2 yrs).




I like this.

To be honest I read that reply as "don't buy a PPOR, invest the money instead" It just so happens the investment is property in this case


----------



## craft

kid hustlr said:


> Craft,
> 
> Obviously returns don't happen in a straight line, have you stress tested the model at various points over the 40 years with periods of -5, -10, -15 type returns, can you provide some insight into the results?
> (classic conundrum)



If you don't get the geometric return you assumed long-term, then you won’t make plan. If you do get it – it doesn’t matter the path. Though you will be behind the planned flight path for the period of extended weakness – which would be alarming as to whether the assumed long-term rate is correct or not.


----------



## craft

kid hustlr said:


> If you were talking to a 20 year old who was tossing up buying a PPOR vs renting for the next 40 years what would your answer be? (classic conundrum)




Big question and I haven’t thought about it enough from a 20 year old's persepctive to have definite answer.

But I would say watch the Castle to make sure you can distinguish between a house and a home.

If you’ve got a family and you’re pretty settled and you want a *home* then *buy*. I’m not sure a house can become a home if the occupants are financially stressed – so only buy what you can afford- watch the Castle again. 

If it’s just a house- then it’s simply an unemotional buy / lease financial decision. Include implied rent in the house purchase model and compare the outcome to all other investing options. Houses can be a pain and costly to buy and sell if you want flexability to move around.

You mention PPOR which is the capital gains exemption – be aware if you are going to have tenants to help you pay it off, the exemption will not be available for the income producing portion of the house.

If it’s just a financial decision – take the best relative option. I’ve never modelled a non-development house investment opportunity that has come out superior to other opportunities. That’s why I own shares as investments and not houses, but we own our home.


----------



## skc

kid hustlr said:


> Craft,
> 
> Obviously returns don't happen in a straight line, have you stress tested the model at various points over the 40 years with periods of -5, -10, -15 type returns, can you provide some insight into the results?




It doesn't matter. The assumption used was average return over the 40 year period. It's (or should be) derived from the beginning and the end point, not through adding or multiply sequential periodic performance. 

To illustrate.... the relevant index at year 0 was 250 points and at year 40 is 2500. The nominal CAGR would be 5.925%. The actual profile of the index would be completely different. It would certainly include many negative years, but the average growth rate will get you to the same end point. 

The bigger concern is whether a period of major drawdown would throw people out of their long term plan.


----------



## Klogg

craft said:


> Big question and I haven’t thought about it enough from a 20 year old's persepctive to have definite answer.
> 
> But I would say watch the Castle to make sure you can distinguish between a house and a home.
> 
> If you’ve got a family and you’re pretty settled and you want a *home* then *buy*. I’m not sure a house can become a home if the occupants are financially stressed – so only buy what you can afford- watch the Castle again.
> 
> If it’s just a house- then it’s simply an unemotional buy / lease financial decision. Include implied rent in the house purchase model and compare the outcome to all other investing options. Houses can be a pain and costly to buy and sell if you want flexability to move around.
> 
> You mention PPOR which is the capital gains exemption – be aware if you are going to have tenants to help you pay it off, the exemption will not be available for the income producing portion of the house.
> 
> If it’s just a financial decision – *take the best relative option*. I’ve never modelled a non-development house investment opportunity that has come out superior to other opportunities. That’s why I own shares as investments and not houses, but we own our home.




Bolded point is SO important. Opportunity cost is everything.

FWIW - this is the path I've taken. I'm now 30, but I came to this decision at 25. My parents lost sleep over the fact that I chose to rent... they're still not comfortable with it, 5 years on.


I actually drew up a long term plan based on:
 - my daily contracting rate at the time, using a 40 week work year (EDIT: this has been modified to include my wife's income)
 - an estimated CAGR of that contract rate (I used 5% p.a.)
 - a yearly return on assets invested (10% p.a. used)
 - a cash/liquid asset buffer ($100k buffer)

I also have a good idea of my expenses, and add a buffer of 20% on that, and assume I'll bank the rest. So far I've exceeded this target by the buffer plus another 10%... I'm now moving toward 'paying for time' (e.g. cleaner, groceries delivered, etc.), but that's another discussion.

TBH, my mistake was over-estimating my expected return. I put 10% p.a. and although I've managed 17% in that time, it's still not prudent.
I probably also have too large a buffer, but I haven't changed that. It helps me sleep knowing I can fund a whole year's worth of expenses without worrying.

That said, I've reconsidered this option from time to time, especially because I'm starting a family and can likely buy the house I'm after without a mortgage. No decision made just yet.


Another metric worth measuring is the 'passive income to expenses' line.

(I would post it, but there's probably a such thing as TMI when it comes to forums like these)


If anyone does go down this path, expect huge social pressures from family and friends to buy a house. The social short-squeeze is intense, and it's multiplied if you have a partner who sides with them.


----------



## Klogg

craft said:


> If it’s just a house- then it’s simply an unemotional buy / lease financial decision. Include implied rent in the house purchase model and compare the outcome to all other investing options. Houses can be a pain and costly to buy and sell if you want flexability to move around.




The two big variables in the above are the capital appreciation and mortgage rates. 

Some members of my family assume 4% mortgage rates and 7% capital appreciation for eternity, and then wonder how you can go wrong. Change that up and assume 7% mortage rate and 4% capital appreciation... then work in cash flow as a result of renting/costs/NG etc. It's really not that appealing.

It's well and truly worth going through those numbers and playing with various scenarios if you're thinking about investment property/buying for financial reasons.


----------



## tech/a

Klogg in the last 20 yrs in most areas its been Interest rates 5% average and Capital appreciation over that period 10% + /yr.

If you put down 20% the return on your investment is mind boggling.
In your 20s the house/home you buy isn't going to be the last one.

I don't see it as a great deal different than purchasing over the long term
a Blue Chip Share on Margin if its a string to a bow.


----------



## kermit345

I tend to side with craft's view in that unless you're buying property as a home then its not as appealing as the wider public would have you think. People like to spruik about their successes with investment properties but often once you look at the underlying position after all costs it can be very underwhelming.

A brief example - my parents are recently retired and have available capital and were thinking of purchasing a house or unit in their nearby capital city as they live in the country. For the purpose of the example i'll just say they were looking at spending $500,000 and thought it would be a good idea as they can use it whenever they like, can have friends over when they are in the city, or friends could occasionally use it for a small fee. However I said hang on if you purchase a unit or house, you have to pay rates and/or strata fees, furnish it, insurance & bills plus other maintenance costs and you'll feel like you have to go to that city for every holiday so you feel like you're getting use out of it.

Compare that to investing the $500,000 elsewhere and assuming what i'd say is a relatively conservative 5% return per annum you then have $25k on average to use each year to travel anywhere you wish without the additional expenses hanging over your head and the flexibility of having that capital available if needed whenever you wish.

That's a pretty basic example but I've got a pretty firm belief that unless you're lucky enough to pick properties that end up going through substantial growth then all the incidental and underlying costs really make it not worth the hassle particularly with the lack of flexibility and agent fees etc. Property allocations in a portfolio are much easier to come by in other manners plus it means you can get access to not only residential but commercial property as well which is almost impossible on an individual basis.

Property to me is a bit of a status thing for people to say around a bbq, "oh yeh i've got a couple investment properties now" and sound superior. People understand that more then another guy at the same bbq saying "I've got a pretty solid portfolio of ETF's established now".


----------



## tech/a

kermit345 said:


> However I said hang on if you purchase a unit or house, you have to pay rates and/or strata fees, furnish it, insurance & bills plus other maintenance costs and you'll feel like you have to go to that city for every holiday so you feel like you're getting use out of it.




Certainly agree in this case example.


----------



## Klogg

tech/a said:


> Klogg in the last 20 yrs in most areas its been Interest rates 5% average and Capital appreciation over that period 10% + /yr.
> 
> If you put down 20% the return on your investment is mind boggling.
> In your 20s the house/home you buy isn't going to be the last one.




That's very true. Historically, property was the place to be. 

But stagnant wage growth, huge debt burdens, near zero cash rate and narrowing AUDUSD yield spread is not inspiring confidence.
If property can continue at the rate it has historically, then it's a great investment. It's just such an unknown now that one can't really be that comfortable having all their eggs in that one basket.


----------



## Toyota Lexcen

hate to be paying rent at retirement, anybody do it?


----------



## Value Hunter

I have experienced first hand the difficulty of investing in the property market the past few years.

Because the past 2 years in a lot of areas (Looking at city averages which look okay is misleading compared to the types/locations of properties investors tend to buy) rents have been flat or even falling, vacancy rates have been a little too high and investor mortgage interest only rates have risen yet against this backdrop the prices have been rising.

Its like if you owned a stock that was already on a high p.e ratio and the earnings were flat or falling for a few years and yet the stock price kept rising because idiots keep bidding up the p.e. ratio to crazy levels. You start getting an itchy trigger finger and begin to wonder if you should sell the asset. Its very different to when you own a stock with strongly rising earnings and the share price is getting a bit ahead of itself. In the rising earnings and dividends scenario you tend to feel more comfortable to hold your position.

For example in a smaller city around 2 years ago I bought a CBD apartment on a gross rental yield in the mid 4% range. In two years I have not been able to put the rent up and have endured a total of 10 weeks of vacancy over a two year period. Also my interest rate (investor interest only loan) has been creeping up. Meanwhile the price has risen 40-50% and the gross rental yield on current market value is in the low 3% range. If rents stay stagnant for another year or two and prices again rise I might just cash out, especially so given the property is negatively geared.

It must be said that most property buyers are idiots with zero concept of valuation or market history or economic history, etc.

Honestly the main reason I invested in property was due to the borrowing capacity. Its difficult to find another asset where banks lend so heavily against it and at such low interest rates. If you want to borrow via margin loans to buy shares you can borrow much less (percentage wise), have to pay a higher rate and are subject to a margin call. Using options, CFDs or warrants for leverage are all present their own challenges and are not so great either.

Honestly if I could borrow against shares the same way I could against property, I would never even contemplate owning property. The ability to borrow a lot with a modest interest rate is what makes it worthwhile.


----------



## tech/a

Value Hunter said:


> I have experienced first hand the difficulty of investing in the property market the past few years
> 
> For example in a smaller city around 2 years ago I bought a CBD apartment on a gross rental yield in the mid 4% range. In two years I have not been able to put the rent up and have endured a total of 10 weeks of vacancy over a two year period. Also my interest rate (investor interest only loan) has been creeping up. Meanwhile the price has risen 40-50% and the gross rental yield on current market value is in the low 3% range. If rents stay stagnant for another year or two and prices again rise I might just cash out, especially so given the property is negatively geared.
> 
> It must be said that most property buyers are idiots with zero concept of valuation or market history or economic history, etc.
> 
> .




Why did you buy an apartment in the CBD within the last 2 yrs?

Why buy an apartment at all.
Property 101 
Buy with land ---- always.

You have every qualification to be one of your property buying idiots!


----------



## Value Hunter

Tech/a sometimes when you don't sufficient have capital its a trade off between location and land size. Obviously if you can afford land (e.g. house with a big backyard) in a prime location that is better than buying an apartment or townhouse in a prime location. However if your budget is limited do you buy an apartment in a prime location or a house with a backyard further out in the suburbs? Its not necessarily an easy call to make. I wanted to buy a house in or near the CBD but my budget would not allow it so I bought a CBD apartment.

I am not an idiot I know that buildings depreciate and its the land value that increases over time.

You have to look at land value as opposed to land size/content. A $500,000 apartment that is in an old building might for example have $200,000 of building value and $300,000 of land value. Meanwhile one of those newly built land and home packages on the city fringe for $500,000 might have $350,000 of building value (nice new home) and a $150,000 of land value (land on the fringes is not worth that much). So who is investing more money in land, the inner city apartment buyer or the guy buying the house and land package on the city fringe?

As to why I bought a property 2 years ago I picked a small city whose economy was picking up and yet whose house prices had not boomed yet.


----------



## Klogg

Toyota Lexcen said:


> hate to be paying rent at retirement, anybody do it?




This isn't about paying rent at retirement as such, it's about creating a plan to provide for retirement.

If it so happens that the better option is paying rent over owning, then that gets modeled and worked into the plan.


----------



## tech/a

Making a poor decision based on available capital is still a pour decision.

You should not have made that purchase in the first place

The wanking Duck sold all his property under loan 2 yrs ago.
Keeping only freehold property.


----------



## Value Hunter

Tech/a when you are a young guy on a modest wage with limited capital often the only way you can borrow a lot of money cost effectively is through buying property. You are in a different life situation to somebody like me. I was/am just making the most of the situation. The scenario I outlined was not optimal but it seemed to be the best choice at the time.


----------



## tech/a

Both of us ( all of us ) were born broke and naked.
I too was once 20.

But chose a different path.


----------



## Boggo

Two sides to every story I guess.

Both a mate and a former work colleague bought investment properties to rent out, both taking into account the potential appreciation in land value (one at Northfield and on at Gawler - tech/a will understand the locations).

Both of them have been to court twice each to either get rent owing or to have the tenants evicted.
On both occasions for both of them they have had to do major repairs as well as dumping scrap cars etc.
End result for both of them - never again, one property has been sold and the other will be going on the market soon as there is about three months left on the rental contract.

Inner city apartment or outer suburb land value, all seem to have issues.


----------



## Sir Burr

tech/a said:


> PPOR would not surprisingly *BE *my choice. But Id urge 25-30 yr old to think *outside* of the square.
> 2 examples




One more example "Dividend Recycling". I did similar during that bull market (Techtrader days) and paid our PPOR off:




http://www.retireondividends.com/support-files/peter-thornhill-dividend_recycling.pdf

Edit: no CGT issues with renting rooms out


----------



## Sir Burr

Value Hunter said:


> Honestly if I could borrow against shares the same way I could against property, I would never even contemplate owning property. The ability to borrow a lot with a modest interest rate is what makes it worthwhile.




How about IB's borrowing rate?
https://www.interactivebrokers.com/en/index.php?f=1340


----------



## systematic

tech/a said:


> The wanking Duck...




...the Aussie version of Heston's establishment.  I'll skip dessert...


----------



## xr06t

kid hustlr said:


> Craft,
> 
> Don't lose faith - I've walked into work this morning and filled out the form to salary sacrifice 5% of my wage so there's been an immediate effect on me.
> 
> Can we talk detail?
> 
> Do you have a Super Fund which allows direct ETF exposure you can suggest? I had one suggested to me but there's an admin fee of $400 a year which on smaller balances is quite influential. How bad is it to use an industry super fund which objective is to track to the ASX300 until the balance is large enough to move into a different option?
> 
> Secondly, can you explore Triathlete's point about the possible draw down? This is was I was getting at to - I'm picturing Nan & Pop watching there super fall 15% in a month and panicking.




Few pages back now but the super fund i am with has a direct investment option. See below pdf with details: https://secure.superfacts.com/web/IWfiles/attachments/Form/MST_MercerDirect_MemberGuide.pdf


----------



## Value Hunter

Sir Burr that interest rate from interactive Brokers is low but it still does not address the other problems of margin call risk and lower LVRs (compared to property) that go along with margin loans.


----------



## craft

Sir Burr said:


> Edit: no CGT issues with renting rooms out



 Glad you whispered that, wouldn't want the ato to hear.

https://www.ato.gov.au/General/Property/Your-home/Renting-out-part-or-all-of-your-home/


----------



## tech/a

craft said:


> Glad you whispered that, wouldn't want the ato to hear.
> 
> https://www.ato.gov.au/General/Property/Your-home/Renting-out-part-or-all-of-your-home/




If you make money on anything you'll need to pay tax.
A consideration sure!
Just as a long term holding in stock where tax is on 100 % of it
If it's a room or 2 it's proportional.

The stuff that keeps accountants employed.
You shouldn't limit your effort to become financially secure
For fear of tax


----------



## Sir Burr

Value Hunter said:


> Sir Burr that interest rate from interactive Brokers is low but it still does not address the other problems of margin call risk and lower LVRs (compared to property) that go along with margin loans.




True, overnight 50% so way less than a home loan. Also if you bust margin, they randomly sell at the end of day.


----------



## craft

tech/a said:


> If you make money on anything you'll need to pay tax.
> A consideration sure!
> Just as a long term holding in stock where tax is on 100 % of it
> If it's a room or 2 it's proportional.
> 
> The stuff that keeps accountants employed.
> You shouldn't limit your effort to become financially secure
> For fear of tax



Being informed of the tax consequences of a decision is not being fearful of tax.

No use having your accountant tell you aftwards that your return will not be what you expected. By then you are are already committed to an inferior opportunity.


----------



## craft

kid hustlr said:


> Can we talk detail?
> 
> Do you have a Super Fund which allows direct ETF exposure you can suggest? I had one suggested to me but there's an admin fee of $400 a year which on smaller balances is quite influential. How bad is it to use an industry super fund which objective is to track to the ASX300 until the balance is large enough to move into a different option?




I had a look into the only superfund that I am familiar with.

They charge $65pa + 0.10% assets as an administration fee.
You also pay a management fee based on what investment option you pick.

They have an indexed growth option with a management fee of 0.17%. To me this option is not ideal because it has some weighting to fixed interest duration assets and they neglect to tell you what the duration is.  But I think it’s the best option they have.

They also have a roughly equivalent actively managed growth options with a management fee of 0.69%.

They also have a direct investment option which costs an extra administration fee of $4.75 per week but would allow you to access ASX traded ETF’s.  The brokerage is a bit on the expensive side.


My SMSF costs are:
ATO supervisory levy $259
Audit Fee $300
Administration software annual subscription $198.
Total $757.00

Using VAS MER of 0.14%

Break even to make SMSF viable against Index option = ($757-65)/(.0027-.0014) = $532K

Break even against Active managed option = ($757-65)/(.0079-.0014) = $106K

Break even against Direct Investment option = ($757-65-(52*4.75))/.010 = $445K less difference in variable brokerage fees.


So why the fuss about costs when they are seemingly insignificant?

The plan I put forward which had a 0.50% expense assumption and resulted in a theoretical outcome in today’s purchasing power of $1,142,003.

If I adjust nothing else but that expense assumption down to reflect the index option of 0.027% (I’ll forget about the $65 for simplicity) the result is $1,206,510.

If I adjust it up to reflect the active managed growth option of 0.079% the outcome is $1,066,240.

The seeminlgly small difference in fees results in an outcome difference of $140,269 – almost two years’ worth of wages. Whats easier - having to work another two years when your old and cranky or  changing your superannuation option to the most efficient you can find - maybe half a days digging, thinking and forms.

ps
Thanks, xr06t and Sir Burr for the links you provided on some options for accessing ETF’s in super.


----------



## skc

Back on this topic....

http://www.afr.com/personal-finance...will-lose-money-over-40-years-20170801-gxnhb9


----------



## kermit345

Hopefully craft returns, this thread has some serious merit before it got somewhat derailed. Bit unfortunate the discussion didn't continue to revolve around the assumptions and a plan, instead turning into a bit of a pissing contest or being pretty off topic about making sure divorce isn't part of your plan (not exactly sure how you 'plan' for this?).

Also boggo not all FP's are porsche driving money hungry thieves that fleece their clients with high fees and bad returns. Might come across as bias since I work in the industry but if you search around there are plenty of FP's that truly have a clients interests at heart. Plus FP's should offer much more then just investment advice - whole range of strategies for young and old that should help people long term and product side of things just becomes a means of getting it done. Anyway won't rant any further on that as don't wish to derail the thread any more then it already is.

So did we arrive at a set of assumptions we somewhat agreed on?


----------



## Smurf1976

For most things there is more than one way of doing it. Getting from A to B, cooking food, building wealth, welding metal or just about anything else there's generally more than one possible method. 

There is also usually more than one realistic definition of what constitutes the "best" method since that really depends on what you're aiming to achieve. Maximum profit is not always the best approach if that comes with downsides that an individual finds unacceptable.

I have learned a lot through this forum over the years but the tendency of otherwise excellent threads such as this one to degenerate into personal spats or contests is the reason I don't post details of my trades. I'm just not interested in entering a "mine's bigger than yours" type contest.

That said, ASF would certainly benefit from more threads of the nature of this one, minus the personal attacks, so I'll think about giving something a go....


----------



## PinguPingu

skc said:


> Back on this topic....
> 
> http://www.afr.com/personal-finance...will-lose-money-over-40-years-20170801-gxnhb9




I know at least a few of my tech savvy mates who have terrible savings habits are at least taking up the micro transaction investing apps like Acorns to get into the markets. The biggest risk I see here and with growing any trading/investment portfolio is the life events that force you to dip into or entirely use up the asset, at the worst time.

The biggest life events seem to be:

1) Buying first home - for me personally, this will probably take up my entire trading portfolio
2) Getting married/having a kid- not sure, but probably in the next 5 or so years
3) Medical event that may require expenses above insurance/medicare or destroy income earning potential. - obviously, hopefully never

While 3 is insurable, if it happens, tough luck. 1 and 2 are more personal life choices, but nonetheless will probably happen statistically and  1 is likely eviscerate your investment asset, forcing you to start again. 2 could go either way being dual income or bad break up.

In general, bad luck could mean terrible returns especially if you need to use up your investments during a large drawdown. I don't really know how to protect against this risk.



Value Hunter said:


> Honestly if I could borrow against shares the same way I could against property, I would never even contemplate owning property. The ability to borrow a lot with a modest interest rate is what makes it worthwhile.




Self funding installment warrants allow 50% gearing at rates similar to home loans these days and with no risk of margin calls.  Could be something to look at.


----------



## Faramir

Can I say this and anyone can disagree?
If a Wealth Plan is so simple and obvious, then the majority of our population will be "very" well off. I would not have been so 'ignorant'. The original idea was to design a system that would be simple enough for anyone to follow - actually anyone who is interested? Who is interested? Why should anyone be interested when they want to attend and/or follow more pressing needs of life.

Many people in the world don't have the luxury of thinking about the future, let alone planning for it. They have urgent needs now.

I had a lot hope for this thread but now, should I think it is too late for me?

Maybe there cannot be a Wealth Plan - it is too varied and wide ranging. Be it stocks, property or running a business just to name a few options. It is too individually diverse and each "plan" is different as each person's fingerprint.

Fire away, any disagreements is welcome. I want to be wrong. I want work out a plan, at least one for me. Does it matter if it is wrong for everyone else?


----------



## Smurf1976

Faramir said:


> Many people in the world don't have the luxury of thinking about the future, let alone planning for it. They have urgent needs now.




A wealth plan will necessarily have a long term focus. Well, it will except for the very few who really do win a major lottery prize etc.

For someone caught up in a war or with lack of food or shelter then there's no way they're going to be focusing on future wealth. But if you're living in Australia, have a job and have reasonable health then it's certainly an option to be focusing on your own long term future.

For some, the best way ahead from their present situation will simply be to adjust discretionary spending an focus on getting rid of debt. For others it will be investing in shares and for others their own business.

"One size fits all" is never going to work for the simple reason that we have a diverse society in a very diverse country. Beyond speaking the same language and being part of the same country, there's basically nothing else in common between inner Sydney versus rural SA for example. What works is going to differ hugely between individuals due to their own and surrounding circumstances. 

So I see it as plans not plan. There's more than one way and which way to go really will depend on the individual and their situation.


----------



## willy1111

Doesn't this Barefoot Investor "Scott Pape" that writes in the business/money section of the Herald Sun every Saturday/Sunday have a book out on this concept?

A money guide for the Average Joe.

He is a qualified FP that gives general advice.

I have no affiliation, but he seems to have quite the following of Average Joes. Seems quite clever to write a column for the Herald Sun to attract followers given that would most likely be the paper of choice for Average Joes. 

Anyone on hear read it?


----------



## kermit345

Rather then working towards a set dollar figure for passive income in retirement is it possible to put together a plan based on assumptions that works towards a % of current employment income? I'm sure we could build something pretty easily that shows if you put x% into a broad market aussie shares ETF now at these assumptions you'll have a portfolio at y age that is estimated to produce z amount of dividends.

That way it kind of cuts through the differing wages etc that you'll get between syd, adelaide, perth etc etc. I think craft was working towards this earlier in the thread before it got a bit off track - maybe we can return to that train of thought?


----------



## Ves

kermit345 said:


> Rather then working towards a set dollar figure for passive income in retirement is it possible to put together a plan based on assumptions that works towards a % of current employment income? I'm sure we could build something pretty easily that shows if you put x% into a broad market aussie shares ETF now at these assumptions you'll have a portfolio at y age that is estimated to produce z amount of dividends.
> 
> That way it kind of cuts through the differing wages etc that you'll get between syd, adelaide, perth etc etc. I think craft was working towards this earlier in the thread before it got a bit off track - maybe we can return to that train of thought?



Hi Kermit

You can certainly calculate the number of years to reach a target in Excel fairly simply.

However it is very limited unless you make a more complicated model.  The savings rate would need to be constant in the formula and so would the real return  (adjustments need to be made for tax and inflation at different salary levels). I guess you could break it down into life stages with a bit of effort.

So before you start you'll need to know two things.   The target dividend stream and the savings rate.
Once you've got the target dividend stream you need to divide it by the estimated dividend yield (Craft used 5.25% gross - obviously could be lower if outside of super and adjusting for tax payable in retirement).  The result of this division calculation is the target lump sum (because a real rate of return is used it's in today's dollars).   So in basic terms if you say earn $100,000 and want to replace 75% of it you'll need a dividend stream of $75,000 in retirement.  At a gross dividend yield of 5.25% you need a lump sum of $1,428,571.43 to achieve this.

Then it's just a matter of using the financial formula "Nper"  in Excel. There should be a formulas tab at the top,  and once you find Nper it'll open a dialog box where you can insert the numbers.

Rate is the real rate of return.  Craft used 4.25% I believe. Make it more conservative or aggressive if need be.
Pmt is the yearly savings invested.   This is salary x savings rate.  This needs to be entered as a negative figure.
Pv is the starting capital balance.  If it's from scratch you just put 0. If you already have capital invested enter it as a negative figure.  But obviously you're assuming the same real rate of return applies to it as well.  So be careful if it's invested differently.
Fv is the target lump sum. See above.
Type is 0  This assumes savings invested at end of year and no earnings added. Use 1 if you want earnings added during first year.

So if for example if you think you can achieve a real return of 4.25%  and you earn $100,000 and save $15,000 to invest each year and require a dividend stream of $75,000 it would take 38.89 years to achieve this.

I cannot emphasise enough how many disclaimers are needed here.  This is just really rough numbers and clearly life is not as simple.  But the number the formula spits out is just if I do X for N years then Z will happen as long as my return for N years is Y%.


----------



## kermit345

Hi Ves,

Thanks for the reply, never realised excel had the ability to do these calculations so simply. Did numerious of these calcs on financial calculator at uni for my degrees so totally understand the makeup of them. Been fiddling in excel and its pretty easy to make a spreadsheet with all the moving parts that actually tells you either how many additional years you'd have to be employed for or your shortfall at your desired retirement age based on all the assumptions you mentioned which are also adjustable.

Can post the spreadsheet here once i'm finished if people are interested? Obviously its just for playing around with numbers and as Ves said is by no means advice or a definitive guide, its just to provide general numbers around the idea of a simple plan.

EDIT: Isn't the issue with this is that its assuming a consistent investment (PMT within excel) for the entire time of the investment period. When in actual fact were talking about increasing this payment level as employment income increases?


----------



## Ves

kermit345 said:


> EDIT: Isn't the issue with this is that its assuming a consistent investment (PMT within excel) for the entire time of the investment period. When in actual fact were talking about increasing this payment level as employment income increases?



Yes the PMT is constant. This kind of formula is good for getting a feel for the base numbers.  Which helps come up with further adjustments.

Now to make adjustments you need to start adding more assumptions and this is where it gets harder.  Once you get to that point that there are different stages of savings growth I'd say you'd need to do it line by line rather than coming up with a single formula as there are too many moving parts. That's obviously a problem because you have to find the time period by trial and error.

If you have different 'stages' of savings growth I'm also going to assume that return sequencing becomes more of an issue?


----------



## kermit345

I'm just playing around in excel at the moment, couldn't you work out the present value of future cashflows and use this as the PMT constant? Would only work though for specific time periods I guess which becomes the next moving part issue. I guess at least if the PMT is the only constant it means all the other moving parts give you a pretty good indication of what's required. I'll post what i've put together anyway for those that are interested and might be less excel savvy.

Retirement Calcs


----------



## kid hustlr

skc said:


> Back on this topic....
> 
> http://www.afr.com/personal-finance...will-lose-money-over-40-years-20170801-gxnhb9




SKC,

What happens if the model real rate of return is dropped by 1%?

Am I correct in saying if I multiply the table by 1.046 I get the results of where I need to be at each age respectively 1 year from now (and so on)?


----------



## skc

kid hustlr said:


> SKC,
> 
> What happens if the model real rate of return is dropped by 1%?




If you use a real return of 3.25% instead of 4.25%, the final dividend stream is $47,467 which is ~20% lower. Remember though that the 4.25% has already been reduced by 1.75% relative the actual historical real return of 6%.



craft said:


> I’ll try explaining the *Real* yield using the historical numbers.
> 
> So real return historically = 12.1% - 0.9%(tax) -0.5%(expenses) -4.6%(wage growth) = ~ 6%.
> 
> I have chosen 4.25% to be conservative and because some of the economic drivers going forward like population growth and productivity might be weaker than history.






kid hustlr said:


> Am I correct in saying if I multiply the table by 1.046 I get the results of where I need to be at each age respectively 1 year from now (and so on)?




Craft's table is super easy to reconstruct (is that what you are asking)?

Basically Capital @ Year (n+1) = Capital @ Year (n) x real rate of return + yearly contribution.

So Age 28 = $48,278 (capital @ age 27) x (1+4.25%) + $11,327 (yearly contribution) = $61,657.

The column labelled "dividend stream" doesn't come into the calculation because of the 4.25% used. It is only there to display how much passive income is associated with that capital.


----------



## mcgrath111

As a 24 year old I feel like there is a wealth of knowledge within this post (pun intended).

As someone who is finding less time for markets / time to research, could I essentially put all funds into diversified Vanguard ETFs
Asx200
Real estate 
High interest etc.

Trying to work out the major downsides/can seem to see any.


----------



## mcgrath111

mcgrath111 said:


> As a 24 year old I feel like there is a wealth of knowledge within this post (pun intended).
> 
> As someone who is finding less time for markets / time to research, could I essentially put all funds into diversified Vanguard ETFs
> Asx200
> Real estate
> High interest etc.
> 
> Trying to work out the major downsides/can seem to see any.



Ignore this, it needs a seperate thread and more detail.
Cant seem to delete my post above.


----------



## Belli

I acknowledge I am "late to the party" on this one but I may as well throw in my perspective.

I'm 65 yo. Single.  Income will be from SMSF (5% of assets) plus dividends outside SMSF.  The actual income from each doesn't matter as such but I do think it needs to be recognised that, under current tax laws, there may be a tax refund for the franking credit at a personal level - the $18,200 tax free threshold applies.

By my calculations (subject to an error in calculation of +/- 100%), the refund could be in the order of $7k (fingers crossed).  Not a huge amount but not to be ignored either.


----------



## kid hustlr

craft said:


> The 5.25% yield is a *nominal* yield. It is what the capital actually yields in today’s terms.
> 
> My rational for choosing 5.25% was to look at historical and future economic drivers and ease it back a tad to be conservative.
> 
> It is made up of a 4% dividend return and a 1.25% imputation credit (assuming 75% franking)




Thought I'd poke the bear to see if he's awake.

I can't find any data which supports the current yield on offer. The data I see has the ASX at roughly 4% including franking.


----------



## kid hustlr

craft said:


> I was thinking about working through each of the variable estimates required in detail prior to putting up any model outcome, however somehow, I think I may have lost the interest of a lot who have already concluded the task was going to be too far out of reach if I went that avenue.  So, I have made preliminary estimates for the variable required. I think they are realistic and defensible estimates and this is the flight plan outcome of modelling those estimates.
> 
> View attachment 72067
> 
> 
> The average wage multiple is fixed – the Capital and Dividend Stream targets will ratchet up as average wage increases. This table is based on current average weekly earnings @ $1533.10
> 
> For the average wage earner, the modelled plan requires a salary sacrificed *7.2%* of gross wage contribution every year to meet the target. (plus your standard 9.5% Employer superannuation guarantee amount)
> 
> For each age in the above table, there is a capital and dividend stream amount. Because Price/Dividend ratios fluctuate over time, In assessing your current situation against the plan you would need to have both stock(capital) and flow(dividend) above their respective target amounts before you could think about reducing the 7.2% contribution rate and still achieve the targeted outcome. If you are below these amounts you will need higher than 7.2% contributions going forward to catch up.
> 
> 
> The 75% target would be tax free and in disposable income terms (currently $59,955) would be slightly more than the disposable pre-retirement income of $57,059.80.
> 
> 
> Gross Salary                        $79,940.21
> Less Salary Sacrifice             $(5,731.36)
> Taxable                               $74,208.85
> Less Tax                              $(15,664.88)
> Less Medicare                      $(1,484.18)
> Disposable                          $57,059.80
> 
> If you are on less than average wage then achiving 75% of average wage requires a lot higher % of your income. Howere that same consistent ~7.2% sacrifice of your actual gross wage will stiil produce around the equivalent disposable retirement income as your pre-retirement disposabe wage.
> 
> 
> The variable assumptions made:
> 
> *Real* rate of return:  4.25%
> Nominal yield: 5.25% (including franking)
> 
> Asset class:
> 100% Equities.
> 
> Tax structure:
> Superannuation.
> 
> Investment vehicle:
> Broad, Low Coast, Non-synthetic Exchange Traded Equity Fund.
> 
> Key Consideration:
> Volatility risk: Dividend flow has some volatility around the 5.25% average return assumed. Can the income needs be flexed (vary living expenses or have other back-up reserves) during below average yields to ensure capital does not need to be drawn down?  If not 100% equity allocation close to and during retirement is not appropriate due to sequence risk and this plan is not appropriate.
> 
> If people are interested in this sort of wealth plan we can work through validating the assumptions and strategy choices, the model workings etc to ensure the plan is realistic which will fortify people’s belief systems to stay the course in times of market duress. Because at the end of the day none of this is too hard with a few right choices and some consistent application – Its more an issue of understanding than anything else.




Inspired by a recent Craft sighting, i thought id update this table 2 years on so people can see where they are at.

I think I have done this correctly.

Inflation is a killer.


----------

