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

[Belli]

Again how many retirees in Australia can afford to eat lunch out every day?

At least one that I know of i.e. me.

I don't think there is complete data set of retirement income as pensions and lump sum withdrawals don't have to be reported in tax returns. Probably an unfortunate gap.

However, some data is available.

Retirement and Retirement Intentions, Australia, 2020-21 financial year

Retiree statistics and the retirement plans of people aged 45 years and over

www.abs.gov.au

 

[Value Collector]

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?

He deals with all those ideas in the book, so it’s best to read the book rather than predict what he says from the title.

In regards to inheritance, he has strategies based on helping your kids out while you are alive, so that they are young enough to benefit and you get to enjoy seeing the fruits, as I said in another post waiting till you are 95 and the kids are 70 isn’t ideal.

His plan for spending is not about trying to predict the day you die and actually have zero, it’s about using your money affectively over your whole life, with the goal to be eliminating your pile of capital over your end years, and getting the most out of it.

 

[Value Collector]

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.

My grandmother died a bit over a year ago, leaving about $150,000 in her investment accounts, but she was always worried about using the heater or air conditioner I wish she blasted that heater on cold nights rather than leave so much money.

 

[Value Collector]

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?

Yeah, that’s understandable. If you are 45 continuing to accumulate capital is wise because you have a lot of potential years ahead of you, but at some stage the accumulation phase ends and you should begin to focus on drawing down.

One other thing to remember is that if you $1 Million is invested in shares, particularly if it’s in a broad based index, you can spend 100% of your dividends and still be accumulating capital via the retained earnings of the underlying companies. So you are still technically saving even if you spend 100% of your income.

I now put 75% of my after tax income into my spending money fund, and reinvest 25%. It used to be 50/50 and before that 100% reinvested, eventually 100% will be put into my spending money fund.

(My “spending my fund” is basically a system I have where the cash is held in short term investments and paid out to me as a wage over 5 years)

 

[investtrader]

I have always been driven by my desire to look after my family - wife, kids, grandkids. I worked my ass off but I don't look at that as a bad thing. It gave me purpose and a vision to work for and I was lucky to enjoy the business I owned. I have helped the kids buy houses, cars holidays etc but have also , for the last 20 years at least, taken a minimum 12 weeks holidays per year and one or two overseas trips per year.
I think you need a huge buffer though above just your basic income needs. If you or partner gets something nasty, the costs of care are really high. I mean care with dignity. Most nursing homes are truly aweful. And we have a grandson with special needs. You don't want to be selling your house to meet these needs.
My kids are extremely successful and work hard but I want to also leave a legacy for the reasons I have outlined.
The thought of retiring and living in poverty scared the hell out of me, which was always are motivation for me.

 

[Value Collector]

Another interesting way to think about it (especially for those working in jobs they hate), is that if you are earned $75,000 per year in your job, but worked till you were 65 and ended up dying 15 years later at 80 with 600,000 of assets. Then basically you worked 8 years longer than you had to in a job you hated, when you could have retired earlier.

It’s interesting to think of the money you die with in terms of weeks you worked when you didn’t have to.

 

[Belli]

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.

Proof, as if it's needed, different people have different attitudes. You can develop as many retirement income rules as you want and, although they may be sound in reasoning, they will not be followed by everyone.

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

That lifted my heart. My neighbour across the road is into propagating bonsai plants. Has heaps of them. Also has an extensive native garden. However, he has another interest which drives his lovely wife totally mental. Hoarding.

Early Saturday morning will load up the trailer and take all gardening cuttings and branches, including any I put out, to the recycling centre to be turned into mulch. He will then go to the recycling shed and return with two broken bicycles, four vacuum cleaners and an industrial angle grinder with a diamond cutting blade. Look, all for less than $100! Has three full sets of four-wheel drive tyres and wheels in the garage. No space for much else though.

 

[sptrawler]

I'm always a person who ers onto the conservative side, as most of my wealth was hard earned, but what is flashing warning lights to me ATM.
Is how the Govt is going to stop this huge real estate ponzi wealth, being transfered to the next generation, the money especially on the East Coast is huge, so the unintended consequences are just as huge.
If I can see it, you can bet your ar$e the Govt can.

 

[sptrawler]

Another interesting way to think about it (especially for those working in jobs they hate), is that if you are earned $75,000 per year in your job, but worked till you were 65 and ended up dying 15 years later at 80 with 600,000 of assets. Then basically you worked 8 years longer than you had to in a job you hated, when you could have retired earlier.

It’s interesting to think of the money you die with in terms of weeks you worked when you didn’t have to.

If everyone had a use by by date, stamped on their forehead, that would be easy. Lol

 

[Value Hunter]

Yeah, that’s understandable. If you are 45 continuing to accumulate capital is wise because you have a lot of potential years ahead of you, but at some stage the accumulation phase ends and you should begin to focus on drawing down.

One other thing to remember is that if you $1 Million is invested in shares, particularly if it’s in a broad based index, you can spend 100% of your dividends and still be accumulating capital via the retained earnings of the underlying companies. So you are still technically saving even if you spend 100% of your income.

I now put 75% of my after tax income into my spending money fund, and reinvest 25%. It used to be 50/50 and before that 100% reinvested, eventually 100% will be put into my spending money fund.

(My “spending my fund” is basically a system I have where the cash is held in short term investments and paid out to me as a wage over 5 years)

Indeed the retained earnings is the whole point. Otherwise how is your income going to rise to offset inflation? Either you have to invest in a purely income asset e.g. bonds or stocks of companies that have a near 100% payout ratio and manually reinvest some of the interest/earnings or you can buy a "growth" company and its automatically done for you via retained earnings. But either way without reinvestment the purchasing power of your income will erode over time. That is why if you plan to live a long time after retiring your retirement assets must grow rather than shrink (via eating your capital).

 

[sptrawler]

Following on from my last posts, as I think it is probably the most important fiscal problem, at the moment.
Being such a learned group of posters, how does the Govt stop the huge inflation bubble of money in real estate and super, being transferred to the 'entitled' generation? Or do they just let the $1m minimum house value roll over, like a lotto win.
Hopefully it stimulates thought rather than criticism. Lol

 

[Value Hunter]

Yeah, that’s understandable. If you are 45 continuing to accumulate capital is wise because you have a lot of potential years ahead of you, but at some stage the accumulation phase ends and you should begin to focus on drawing down.

One other thing to remember is that if you $1 Million is invested in shares, particularly if it’s in a broad based index, you can spend 100% of your dividends and still be accumulating capital via the retained earnings of the underlying companies. So you are still technically saving even if you spend 100% of your income.

I now put 75% of my after tax income into my spending money fund, and reinvest 25%. It used to be 50/50 and before that 100% reinvested, eventually 100% will be put into my spending money fund.

(My “spending my fund” is basically a system I have where the cash is held in short term investments and paid out to me as a wage over 5 years)

I am curious about your plan because you seem like the frugal type of guy who would not possibly spend that much money unless a big chunk is going to philanthropy. You have your house paid off and you seem like the frugal type. Hypothetically if you have a $10 million portfolio and it produces $200,000 of after tax dividends and you are paying no rent or mortgage I just don't see you being the type of person to spend $200,000. So my guess is your spending money fund just keeps pilling up which kind of defeats the purpose of it.,

 

[Value Hunter]

I'm always a person who ers onto the conservative side, as most of my wealth was hard earned, but what is flashing warning lights to me ATM.
Is how the Govt is going to stop this huge real estate ponzi wealth, being transfered to the next generation, the money especially on the East Coast is huge, so the unintended consequences are just as huge.
If I can see it, you can bet your ar$e the Govt can.

I get where you are coming from but to some extent its just on paper. If somebody for example lives in the eastern suburbs of Sydney and inherits a house there from their parents if they decide to continue to keep living in the house then the house is neither giving them income (unless its air-bnb'd or something) nor is it giving them capital (unless they decide to sell and downsize or move to a cheaper suburb). I contend that a lot of the money will just stay locked up rather being cashed out. Sure if somebody sells their $5 million dollar house in Bondi beach and buys a $2 million dollar house on the Gold-coast they now have a $3 million dollar retirement nest egg. But in most cases those people will stay put and won't cash out.

 

[sptrawler]

Indeed the retained earnings is the whole point. Otherwise how is your income going to rise to offset inflation? Either you have to invest in a purely income asset e.g. bonds or stocks of companies that have a near 100% payout ratio and manually reinvest some of the interest/earnings or you can buy a "growth" company and its automatically done for you via retained earnings. But either way without reinvestment the purchasing power of your income will erode over time. That is why if you plan to live a long time after retiring your retirement assets must grow rather than shrink (via eating your capital).

That's called taking responsibility for your retirement.
One of my kids plan was to wait for an inherritance, we are both healthy, he is struggling to find a rental and don't get me wrong I do have empathy for him.
I help with everything, but cash, he is doing ok on welfare but is living a long way from the bright lights of the city.
When we go, he will get an even share in what's left.

 

[Value Hunter]

Following on from my last posts, as I think it is probably the most important fiscal problem, at the moment.
Being such a learned group of posters, how does the Govt stop the huge inflation bubble of money in real estate and super, being transferred to the 'entitled' generation? Or do they just let the $1m minimum house value roll over, like a lotto win.
Hopefully it stimulates thought rather than criticism. Lol

They won't stop it because there are too many vested interests. If property prices fall land tax will drop, stamp duty will drop, the wealth effect will go into reverse, construction activity will slow (why build a house if property prices are falling by the time you finish building the house will be worth less money because property prices dropped in the interim) and bad loans will increase on bank mortgage books, SME lending will slow down as property is a major source of collateral for small business loans. This is aside from the fact that many politicians own multiple investment properties and wish to see them rise in price.

 

[sptrawler]

So my guess is your spending money fund just keeps pilling up which kind of defeats the purpose of it.,

It isn't only poor people or unattractive people who get depressed.
Finding a purpose is the most important thing for humans.
One of my children was severely hurt in an accident and is the most well adjusted of all the children.
like I said, happiness is being happy with what you have, not with what you want.

 

[Value Collector]

Indeed the retained earnings is the whole point. Otherwise how is your income going to rise to offset inflation? Either you have to invest in a purely income asset e.g. bonds or stocks of companies that have a near 100% payout ratio and manually reinvest some of the interest/earnings or you can buy a "growth" company and its automatically done for you via retained earnings. But either way without reinvestment the purchasing power of your income will erode over time. That is why if you plan to live a long time after retiring your retirement assets must grow rather than shrink (via eating your capital).

If you are invested in assets that produce products, their profits should grow with inflation.

Eg as the price of avocados rises, so does the revenue of avocado farms, so if you owned 50 acres of Avocardo trees in 1980 you didn’t have to keep expanding your farm to keep pace with inflation, your farm is a natural hedge.

 

[Value Hunter]

If you are invested in assets that produce products, their profits should grow with inflation.

Eg as the price of avocados rises, so does the revenue of avocado farms, so if you owned 50 acres of Avocardo trees in 1980 you didn’t have to keep expanding your farm to keep pace with inflation, your farm is a natural hedge.

Somewhat true but also oversimplified in many regards. I think its broadly true when talking about commodities or farms or real estate. But its less true when talking about corporations. Just refer to the old article written by Buffett about how inflation swindles the equity investor. Long story short real returns on equities tend to be lower on average in a high inflation environment because many companies do not have sufficient pricing power or have heavy Capex requirements (which will rise with inflation) or both.

 

[Value Collector]

I am curious about your plan because you seem like the frugal type of guy who would not possibly spend that much money unless a big chunk is going to philanthropy. You have your house paid off and you seem like the frugal type. Hypothetically if you have a $10 million portfolio and it produces $200,000 of after tax dividends and you are paying no rent or mortgage I just don't see you being the type of person to spend $200,000. So my guess is your spending money fund just keeps pilling up which kind of defeats the purpose of it.,

I have no kids, just 4 nieces and nephew.

When I die the bulk of my estate is going to charity, and a small percentage is being divided between my nieces and nephew.

———————
At the moment, As I said above 75% of the after tax income goes into a spending money fund, and 25% reinvested long term back into the portfolio.

So far I haven’t been spending the full amount, but last year I spent the most, I went on 6 holidays myself and sent both my parents and my in laws on a holidays Europe. But still only managed to spend $173,000 for the year.

But not all years will be good, so it’s good to have a buffer in my spending money fund, it’s at about 5 years at the moment, with $5000 per week allocated, I I could go 5 years with no income before it’s exhausted.

If I keep earning income at the same rate and don’t find rational ways to spend it on myself I will begin giving the excess away to charity.

But the capital base will stay intact until the wife and I die, at which point as I described it goes to charity and a little bit to the nieces and nephews.

 

[Value Hunter]

I have no kids, just 4 nieces and nephew.

When I die the bulk of my estate is going to charity, and a small percentage is being divided between my nieces and nephew.

———————
At the moment, As I said above 75% of the after tax income goes into a spending money fund, and 25% reinvested long term back into the portfolio.

So far I haven’t been spending the full amount, but last year I spent the most, I went on 6 holidays myself and sent both my parents and my in laws on a holidays Europe. But still only managed to spend $173,000 for the year.

But not all years will be good, so it’s good to have a buffer in my spending money fund, it’s at about 5 years at the moment, with $5000 per week allocated, I I could go 5 years with no income before it’s exhausted.

If I keep earning income at the same rate and don’t find rational ways to spend it on myself I will begin giving the excess away to charity.

But the capital base will stay intact until the wife and I die, at which point as I described it goes to charity and a little bit to the nieces and nephews.

Why only a little bit to nieces and nephews? My guess is by the time you die there will be enough money to buy them each a really nice house. Why is charity more important than their financial security. Not that there is anything bad about your plans but I am just curious as to the thinking of those who priorities charity above their own relatives.