Financial Independence (Home Ownership, Super, Long Retirement) not possible for wage earners: What do we need and how do we get it?

[qldfrog]

BTW, thank you to the thread creator and the multiple contributors even if I might differ slightly with some views:
It is most valuable to see the different paths achieved to reach various levels of financial..comfort.
So thanks all even the people usually on my ignore list

 

[Value Hunter]

How much you need to retire unsurprisingly depends on two things.

1, how much income you need.

2, what annual return on capital you can make.

Some one with a $60,000 life style good probably get away with as little as $600,000 of invested capital if they can earn 10%.

Others that can rely on earning only 5% would need $1,200,000 to earn $60,000.

How long you expect to live is also a big factor, because the shorter life expectancy you have the more you can dig into you capital base drawing it down to fund life style, and you may also qualify for pensions and reverse mortgages etc.

—————
If you invest well, and use compounding you can earn your retirement in a short period.

$10,000 invested in BHP in 2000 and all dividends reinvested back into BHP shares would be worth about $600,000 today.

That one investment along with an owned home and some super would fund many years of modest retirement, if you had purchased similar amounts of CBA, Woolies or just the index you would be sitting even prettier.

While there is some truth to what you are saying its oversimplified. If you need $60,000 of income and you have $600,000 earning a 10% return firstly there is sequence of return risk which I am sure you are familiar with. Most people will have losing years even if the CAGR is 10% over a long time frame. That will affect things. I can elaborate further on this if you wish but I think you understand what I am getting at. So investing a pool of capital to build up a retirement nest egg is very different to actually having to draw down on it

Next nobody can predict what their future returns will be. For example just because you have averaged say 15% per annum in the past do you really want to assume that you can generate 10% CAGR going forward? Better to be conservative.

Also inflation is a factor. If you have $600,000 of capital generating 10% return and you need $60,000 to live if you keep spending the $60,000 of return and not reinvesting it lets say after ten years due to inflation that $60,000 of annual income only gives you $40,000 of purchasing power, you no longer have enough to live comfortably.

The well known "4% rule" of retirement, I would actually make it the 3% rule.

3% is comfortable and in most scenarios will even let you pass on a sizeable nest egg. Its comfortable because for most profitable ASX companies the dividend yield is higher than 3% fully franked and on many residential rental properties net yields are around 3% (although blue chip parts of Sydney and Melbourne are lower). This means you can have an income which will hopefully at least grow in line with inflation over time and not have to draw down your capital thus shielding you from sequence of return risk and from inflation risk and from prematurely depleting your retirement funds if you live to 105.


Of course the downside to that is that to build up the required capital to follow the 3% would mean more years spent working. However if you want to implement the 3% rule without having to work until old age the life hack is Geo-arbitrage i.e. move to a lower cost of living country for retirement.

 

[Value Collector]

While there is some truth to what you are saying its oversimplified. If you need $60,000 of income and you have $600,000 earning a 10% return firstly there is sequence of return risk which I am sure you are familiar with. Most people will have losing years even if the CAGR is 10% over a long time frame. That will affect things. I can elaborate further on this if you wish but I think you understand what I am getting at. So investing a pool of capital to build up a retirement nest egg is very different to actually having to draw down on it

Next nobody can predict what their future returns will be. For example just because you have averaged say 15% per annum in the past do you really want to assume that you can generate 10% CAGR going forward? Better to be conservative.

Also inflation is a factor. If you have $600,000 of capital generating 10% return and you need $60,000 to live if you keep spending the $60,000 of return and not reinvesting it lets say after ten years due to inflation that $60,000 of annual income only gives you $40,000 of purchasing power, you no longer have enough to live comfortably.

The well known "4% rule" of retirement, I would actually make it the 3% rule.

3% is comfortable and in most scenarios will even let you pass on a sizeable nest egg. Its comfortable because for most profitable ASX companies the dividend yield is higher than 3% fully franked and on many residential rental properties net yields are around 3% (although blue chip parts of Sydney and Melbourne are lower). This means you can have an income which will hopefully at least grow in line with inflation over time and not have to draw down your capital thus shielding you from sequence of return risk and from prematurely depleting your retirement funds if you live to 105.


Of course the downside to that is that to build up the required capital to follow the 3% would mean more years spent working. However if you want to implement the 3% rule without having to work until old age the life hack is Geo-arbitrage i.e. move to a lower cost of living country for retirement.

Yes there is a fee nit picking technicalities but the example was just simplified, you can protect yourself with other little buffers, or tighten your belt in bad years etc

Also, you can draw down capital, and when old enough draw the age pension to supplement.

But either way, my example was just showing there is no fixed number, it all depends on yours needs, and what investments you choose.

There is some people that retire at 18 with $0, they are called dole bludgers.

 

[Value Hunter]

Yes there is a fee nit picking technicalities but the example was just simplified, you can protect yourself with other little buffers, or tighten your belt in bad years etc

Also, you can draw down capital, and when old enough draw the age pension to supplement.

But either way, my example was just showing there is no fixed number, it all depends on yours needs, and what investments you choose.

There is some people that retire at 18 with $0, they are called dole bludgers.

I agree with your general point and I wasn't nitpicking for the sake of it. My point is I firmly believe the 3% rule is a good conservative rule for most people and also it frees them from having to make as many judgements/guesses about the future.

 

[Belli]

Seems we're starting to touch on the concept of Safe Withdrawal Rate. Look up some of the writings by Wade Pfau concerning retirement income strategies.

Also, industry superannuation funds now have a requirement to apply a Retirement Income Covent for their members.

Implementation of the retirement income covenant | APRA

www.apra.gov.au

SMSF's are likely to be involved as well in this issue. There is a recent Treasury document related to the above link which suggests SMSFs should (read will at some point) be required to develop a retirement income strategy for members. That could be a tricky one to implement for the Trustees.

 

[Value Hunter]

Seems we're starting to touch on the concept of Safe Withdrawal Rate. Look up some of the writings by Wade Pfau concerning retirement income strategies.

Also, industry superannuation funds now have a requirement to apply a Retirement Income Covent for their members.

Implementation of the retirement income covenant | APRA

www.apra.gov.au

SMSF's are likely to be involved as well in this issue. There is a recent Treasury document related to the above link which suggests SMSFs should (read will at some point) be required to develop a retirement income strategy for members. That could be a tricky one to implement for the Trustees.

Indeed safe withdrawal rate is the very meaning/underpinning of this thread/topic. Hence my reference to the commonly cited 4% rule which I have altered to the 3% rule.

 

[sptrawler]

While there is some truth to what you are saying its oversimplified. If you need $60,000 of income and you have $600,000 earning a 10% return firstly there is sequence of return risk

IMO you pretty well nailed it in that post, there is a huge difference in risk tolerance between investing when earning, as opposed to investing in retirement, to invest $600,000 with the expectation of a continuous return of 10% is highly imaginative.
If a person has a diverse portfolio and some residual cash in term deposit the likelihood of making a return of 10% annually over the last 10 years is very remote IMO.
If you have enough invested, that the once in a lifetime event that happens every 10 years doesn't worry you, then you can retire stress free $600,000 doesn't cut it for me.
But as I say everyone is different, so putting a number to what is required is different for everyone, I like to know in the worst case scenario we will have enough to still have a comfortable life.

 

[Belli]

IMO you pretty well nailed it in that post, there is a huge difference in risk tolerance between investing when earning, as opposed to investing in retirement, to invest $600,000 with the expectation of a continuous return of 10% is highly imaginative.
If a person has a diverse portfolio and some residual cash in term deposit the likelihood of making a return of 10% annually over the last 10 years is very remote IMO.
If you have enough invested, that the once in a lifetime event that happens every 10 years doesn't worry you, then you can retire stress free $600,000 doesn't cut it for me.
But as I say everyone is different, so putting a number to what is required is different for everyone, I like to know in the worst case scenario we will have enough to still have a comfortable life.

Until the superannuation industry is fully developed (in reality it is still in its embryonic stage) the numbers involved won't actually be known. It'll be fully developed about 40+ years after the superannuation guarantee reaches 12% which is scheduled to occur in 2025. And I won't be here to find out.

 

[Value Collector]

I agree with your general point and I wasn't nitpicking for the sake of it. My point is I firmly believe the 3% rule is a good conservative rule for most people and also it frees them from having to make as many judgements/guesses about the future.

The biggest problem I have with the 3% rule is it is probably too conservative, and will leave you with to much capital at the end of your life, that you could have used to live your best life.

Your retirement years are broken up into 3 phases.

1, Go-Go years - first third of your retirement when you are still fit enough to travel, play sport etc etc

2, Go slow years - Travelling and activities become a little harder, and you do less.

3, No-go years - Now all you can do is watch TV and maybe once a week have cups of tea with the family or go to the club if some one picks you up.

There is not much point saving up all your money only spending 3% so that you have a large capital base in the No-go years.

In my opinion if there are things you can spend your money on in phase 1 & 2 you should do it, because all you have in phase 3 is your memories (some don’t even have that) and the pension is probably enough to live on in the No-go years.

 

[divs4ever]

Nah, he forgot to calculate the stock splits, so the $15 would have turned into $60 plus all the dividends.

Plus as you mentioned you would have gotten some south 32 and the steel company (was it bluescope, I can’t remember)

BlueScope it was ( but before my investing adventure ) and i also believe One Steel/Arrium ( before it's demise )

BHP had it's flaws but a sit and hold investor probably didn't regret it long term ( i sure didn't and i only started in 2011 . but i did buy the slides/dips )

but would i buy more at the current price ? NO , later and much cheaper , maybe

 

[divs4ever]

Until the superannuation industry is fully developed (in reality it is still in its embryonic stage) the numbers involved won't actually be known. It'll be fully developed about 40+ years after the superannuation guarantee reaches 12% which is scheduled to occur in 2025. And I won't be here to find out.

oh ? the fee extraction part of Super is very well developed , the capital preservation/accumulation is the part that still needs some development

like @qldfrog my Super went almost nowhere ( including contributions), but being an Employer Super Fund there was distributed documentation so i could watch the cards being shuffled

after i left it was transferred to AMP ( funds ) and from there i triggered a liquidation clause and put the proceeds into AMP shares ,where i was finally making a profit ( and franking )

2018 arrived where i read a broker analysis and sold out ( just before the Hayne Royal Commission ) , crystallizing that profit


but sure tip more cash into a dumpster fire , that should work ( meanwhile 'struggle street is battling to pay indexed government charges )

 

[Value Collector]

Indeed safe withdrawal rate is the very meaning/underpinning of this thread/topic. Hence my reference to the commonly cited 4% rule which I have altered to the 3% rule.

I recommend a book called “Die with zero” by it kinda changes my outlook on things, heaps of great points in it.

 

[Value Hunter]

The problem with the die with zero mentality is nobody knows how long they will live and nobody can predict future returns. So I would rather have too much leftover (sizeable inheritance) than to run out of money a long time before I die. Besides if I had kids I would feel a moral obligation to leave them a good inheritance. You ideally want each generation to do better than the last. Or would you rather each generation in your family start from scratch and endure unnecessary hardship?

 

[Value Hunter]

I ge

The biggest problem I have with the 3% rule is it is probably too conservative, and will leave you with to much capital at the end of your life, that you could have used to live your best life.

Your retirement years are broken up into 3 phases.

1, Go-Go years - first third of your retirement when you are still fit enough to travel, play sport etc etc

2, Go slow years - Travelling and activities become a little harder, and you do less.

3, No-go years - Now all you can do is watch TV and maybe once a week have cups of tea with the family or go to the club if some one picks you up.

There is not much point saving up all your money only spending 3% so that you have a large capital base in the No-go years.

In my opinion if there are things you can spend your money on in phase 1 & 2 you should do it, because all you have in phase 3 is your memories (some don’t even have that) and the pension is probably enough to live on in the No-go years.

I get what you are saying but even with the 3% rule that’s still $30,000 on a million dollars of investment capital if you live in a cheap country that is enough to live comfortably. And remember if you invest wisely that’s that 3% of a growing capital base so over time you income even after adjusting for inflation would be higher than the initial $30,000 which means a rising standard of living.

And most people don’t have to get to old age before they can have $1 million dollars if they planned well. Also if they don’t have a million dollar portfolio but own a house outright, rent out the house and go live in a cheaper country.

If for example you have a modest but paid off home in Sydney that could rent for $1000 per week (say $700 after expenses including tax) rent your house out and go live in Thailand or Ecuador with the money.

 

[sptrawler]

I was always PAYG wage earner, 3 kids by 25, 4 by 30, my plan was go hard and go early.
First house was a restumped heap, worked hard for two years fixing it up, then sold it for triple my cost.
Moved to better house in the city and every spare dollar was invested in shares and property, all holidays were car and camping across Aust on the cheap.
Retired at 55 now 68, don't expect to qualify for the pension, but never say never. I no longer have investment property and concentrate on dividends.
As has already been said, most people run out of time before they run out money and people in their late 80's usually save on the pension.

Your health and mobility is far more important than your money, when it comes to an enjoyable retirement, enjoy your money while you have your health is my tip.

We are currently spending what we are earning on investments, but as we age I expect that to change.

This line should read:

We are currently spending what we are earning from(not on) investments, but as we age I expect that to change.

What I was meaning is we spend all we earn at the moment on travelling and getting the house set up for when mobility and or financial constraints, force us to economise.
One doesn't like to think about the time, when everyday tasks become difficult, but most of us are likely to find out.

 

[Belli]

This line should read:

We are currently spending what we are earning from(not on) investments, but as we age I expect that to change.

What I was meaning is we spend all we earn at the moment on travelling and getting the house set up for when mobility and or financial constraints, force us to economise.
One doesn't like to think about the time, when everyday tasks become difficult, but most of us are likely to find out.

Yes, there is more to retirement planing than how much you have to spend each week. I don't know how many go that one step further as you have done @sptrawler.

There is also a hybrid situation where you have a retirement pension and also investment income separate to that. If that investment income stream is sufficient to meet your annual expenditure requirements without touching any capital, applying a SWR is probably superfluous.

 

[IFocus]

How much do you need?

Talking to a local investment advisor he said he had clients who couldn't survive on $250k / year and a local bloke living the absolute life on $18k per year.

I guess where you reside and what your plans are are a guide those that engage in the community and those that don't and perhaps travel a lot or just burn cash impulsively.

On another note I hedged heaverly somewhat by buying shares in the Big Green Shed as I seem to spend to much time there.

 

[Value Collector]

I ge

I get what you are saying but even with the 3% rule that’s still $30,000 on a million dollars of investment capital if you live in a cheap country that is enough to live comfortably. And remember if you invest wisely that’s that 3% of a growing capital base so over time you income even after adjusting for inflation would be higher than the initial $30,000 which means a rising standard of living.

And most people don’t have to get to old age before they can have $1 million dollars if they planned well. Also if they don’t have a million dollar portfolio but own a house outright, rent out the house and go live in a cheaper country.

If for example you have a modest but paid off home in Sydney that could rent for $1000 per week (say $700 after expenses including tax) rent your house out and go live in Thailand or Ecuador with the money.

That’s the issue though, you would have a million dollar capital base that’s growing, and only drawing $30,000.

So you hit 90 years old being richer than ever, but probably never took your grandchildren to Disneyland or did all the cruises you could have in your 60’s.

The goal should be to live your best life, not leave a lot of money on the table, even if you want to leave money for your kids, by the time you are in your 90’s they are probably in their 70’s, being more generous earlier would have been better.

All I am saying is draw down bit more than 3%, so you can maximise your go-go years, you will have plenty of time to spend less in your no-go years if you even make it there.

 

[Belli]

That’s the issue though, you would have a million dollar capital base that’s growing, and only drawing $30,000.

So you hit 90 years old being richer than ever, but probably never took your grandchildren to Disneyland or did all the cruises you could have in your 60’s.

The goal should be to live your best life, not leave a lot of money on the table, even if you want to leave money for your kids, by the time you are in your 90’s they are probably in their 70’s, being more generous earlier would have been better.

All I am saying is draw down bit more than 3%, so you can maximise your go-go years, you will have plenty of time to spend less in your no-go years if you even make it there.

And there is no shame in giving yourself a treat either. Go business or first class instead of economy if you can afford it. Want that $6,500 guitar? Buy it. Spending money will not hurt you if you have the funds to spend.

 

[Value Hunter]

That’s the issue though, you would have a million dollar capital base that’s growing, and only drawing $30,000.

So you hit 90 years old being richer than ever, but probably never took your grandchildren to Disneyland or did all the cruises you could have in your 60’s.

The goal should be to live your best life, not leave a lot of money on the table, even if you want to leave money for your kids, by the time you are in your 90’s they are probably in their 70’s, being more generous earlier would have been better.

All I am saying is draw down bit more than 3%, so you can maximise your go-go years, you will have plenty of time to spend less in your no-go years if you even make it there.

That is the thing. If you can get $1 million before 45 and therefore retire early which is very achievable for most people with discipline then you can still have many years to enjoy the growing income. If you retire at age 45 and withdraw $30,000 of income and lets say it increases modestly over time lets say after ten years you are 55 and have $40,000 per annum of inflation adjusted income. At age 65 (still not too old to enjoy) you might have say $55,000 of inflation adjusted annual income. In a developing country that is a very comfortable middle class standard of living without having to work. I basically think the average person has to give up on the idea of first world retirement.

Because note its a 3% rule not a fixed $30,000 withdrawal rule so if your dividends/rent and capital base etc goes up you can withdraw more money. The other rule that can be used similar to the 3% is "only withdraw the income abd don't touch the capital rule" which I wouild onmly recomend if most of your capital is invested in growth assets. If your money is invested in shares and property just spend only the rent and dividends every year and if you are producing good income then you will withdraw more under this rule than the 3% rule because your investment will generate more than a 3% income yield.

Most of the retirees I see in Australia either live boring and financially constrained lives or are super wealthy. If you are retired in Thailand or Ecuador for example you can get regular massages, go to frequent dinners out and take mini vacations to other nearby cities. In Australia with our high cost of living most retirees are only doing the basics unless they have a 6 figure retirement income (which is not many of them).

When I was in Colombia less than a year ago for example spending 1 hour traveling in a taxi cost generally anywhere between $10 AUD and $40 AUD depending on the city and time of day. With the average being around $20 AUD. In Australia realistically which retiree can afford to catch taxis other than on very rare occasions? And over there you could eat a healthy lunch (menu of the day lunch which included soup, maindish, fresh juice and a small dessert) at cheap local restaurants for around $4 AUD. Again how many retirees in Australia can afford to eat lunch out every day?