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

[Value Collector]

Somewhat true but also oversimplified in many regards. I think it’s broadly true when talking about commodities or farms or real estate. But it’s 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.

I understand what Buffett says, but he is mainly talking about short term, and that some of the increased revenue goes to replace equipment at the new higher rate. But he would still much rather hold equities than bonds, because he knows they offer more protection.

If you are invested across a broad based index, you are invested in all sorts of businesses who profits rise with inflation over time, you are exposed to inflation in the same way as a cash holder is.

 

[Value Collector]

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.

If my nieces and nephews are smart with money, they won’t need large amounts from me, if they are dumb with money, I don’t want them getting mine. I never got anything from my uncles.

I want to leave them enough that it gives them a bit of a kick start financially or if they want to blow it have a bit of fun. But not enough that they can just do nothing.

It’s basically been my life’s work to build up this portfolio, and I don’t want it just wasted, I want it to do good. If it is a choice between providing vaccines and basic medicine to 1000’s of children or having my nephew blow it on cars, boats and Alcohol I choose the vaccines.

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If they turn out to be quite rational money managers and are charitable people by nature maybe I will change my will in the future, but they are still young the oldest is 17 the youngest is 4, and none of them have expressed any interest in Learning anything about capital management yet.

 

[divs4ever]

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 was how i saw my mission at the start of my investing adventure , but not capital growth at the cost of excessive risk

and after retiring i was planning to avoid draw-downs on the investment assets ( or using them as collateral for leverage )

i knew inflation would be back , how much and for how long , that i did not know

 

[Smurf1976]

Thinking of friends and others who's broad financial circumstances I'm reasonably sure of, there's a common theme among the successful ones.

They've all been poor at some point. Either they grew up with parents really struggling or they've been poor as an adult. One actually did spend a few weeks living on the streets.

They've all worked seriously long hours sometime in their life, 7 days a week, and kept that up for at least a few years. The hard work provided the initial capital to invest, and also opened other doors in terms of business or career opportunities.

Bonus points if they've done work that's dangerous, socially frowned upon or otherwise somewhat miserable.

Just an observation that being poor seems to be a requirement to bring about the mindset of working hard, spending wisely and building wealth.

Personally I'm in that category. Grew up poor and yes I've definitely done the 7 days a week work thing and I've done manual labour work in the past too.

 

[sptrawler]

@Smurf1976 , spot on, I put the trailer on the car and took the kids out collecting cans 30 years ago, not because I had to but because I wanted to show them how much work was required for minimal money.
I also paid a mate to employ the second son during the school holidays, so that he would see what working was like, did it make one iota of difference? No.
As Noel Whittaker said in his book, of 100 people only 5 will make it.
It is very difficult to pass on experience, most of it has to be lived to be learnt.
My oldest son is learning it now.

 

[qldfrog]

Thinking of friends and others who's broad financial circumstances I'm reasonably sure of, there's a common theme among the successful ones.

They've all been poor at some point. Either they grew up with parents really struggling or they've been poor as an adult. One actually did spend a few weeks living on the streets.

They've all worked seriously long hours sometime in their life, 7 days a week, and kept that up for at least a few years. The hard work provided the initial capital to invest, and also opened other doors in terms of business or career opportunities.

Bonus points if they've done work that's dangerous, socially frowned upon or otherwise somewhat miserable.

Just an observation that being poor seems to be a requirement to bring about the mindset of working hard, spending wisely and building wealth.

Personally I'm in that category. Grew up poor and yes I've definitely done the 7 days a week work thing and I've done manual labour work in the past too.

I would disagree: not "all" I have never been poor and come from a middle class family, but was not spoiled
Education and fighting/competitiveness within the education system created the work hard drive
And I do not come from the land of honey, and saw real poverty:
there are many places on earth where being on welfare does not allow you to go surfing all day, just trying not to freeze to death for 6 month of the year or have a meal..
That was in the world before (40y ago) ;-)
The difference coming from a privileged socio economic is that education gave me the stepping stone, started worklife later..not that great.. and I probably stopped the " work harder" phase earlier than I would have if I had lived under direr financial duress
So I did not see as a #1 goal in life to make more and more money

 

[Skate]

# 1. Just an observation that being poor seems to be a requirement to bring about the mindset of working hard, spending wisely and building wealth.

# 2. Grew up poor and yes I've definitely done the 7 days a week.

# 3. Bonus points if they've done work that's dangerous, socially frowned upon.

@Smurf1976, I'm in that category as well, each point fits me like a glove.

Skate.

 

[basilio]

Its a very interesting thread and certainly posters are sharing their experience at creating financial success and independence.

Obviously "we" , those who are posting, are the success stories. Whether it was starting 60-70 years years ago, developing careful habits, creating successful investment strategies and perhaps a dose of good fortune, at this stage we can talk about the financial success of our lives.

The question posed by Tech/a is more contemporary.
How would a 20 year old today achieve this financial independence ? The current parameters of life to consider are

1) New Housing costs are 7 times average fulltime weekly earnings. ie 7 x $80k $560 k. (and is that even realistic now ?)
2) Rental costs are $300 PW if shared.
3) Actual wages will be much lower than $80k and probably part time
4) If doing a Tertiary course expect to come out with a $50k debt
5) Parents have a job and house and that's about it. They could help with a few k if absolutely necessary. They might be able to keep you at home - unless another sibling (have 2) is also in trouble.
6) You might get an inheritance in the long term future of around 30% of the house value. That assumes nothing goes pear shaped in the next 40 years

I wouldn't like to be facing that scenario.

 

[moXJO]

If my nieces and nephews are smart with money, they won’t need large amounts from me, if they are dumb with money, I don’t want them getting mine. I never got anything from my uncles.

I want to leave them enough that it gives them a bit of a kick start financially or if they want to blow it have a bit of fun. But not enough that they can just do nothing.

It’s basically been my life’s work to build up this portfolio, and I don’t want it just wasted, I want it to do good. If it is a choice between providing vaccines and basic medicine to 1000’s of children or having my nephew blow it on cars, boats and Alcohol I choose the vaccines.

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If they turn out to be quite rational money managers and are charitable people by nature maybe I will change my will in the future, but they are still young the oldest is 17 the youngest is 4, and none of them have expressed any interest in Learning anything about capital management yet.

Can't you just jam $10k in a fund and let it roll for each of them now. Wasn't that the point of compounding interest.

 

[Value Collector]

Can't you just jam $10k in a fund and let it roll for each of them now. Wasn't that the point of compounding interest.

They are getting a certain percentage of mine and my wife’s entire portfolio, so a portion of my entire portfolio is working for them, I don’t think I need a separate fund for them.

if they ever want to start putting their our investment fund together I will be there to help them, but so far they haven’t been interested.

2 of them do have some shares held I trust that my Mum set aside for them though.

 

[Value Hunter]

I understand what Buffett says, but he is mainly talking about short term, and that some of the increased revenue goes to replace equipment at the new higher rate. But he would still much rather hold equities than bonds, because he knows they offer more protection.

If you are invested across a broad based index, you are invested in all sorts of businesses who profits rise with inflation over time, you are exposed to inflation in the same way as a cash holder is.

I still disagree somewhat with what you saying and I can elaborate on my arguments if you really wish but I will leave it at that for now.

 

[StockyGuy]

If they turn out to be quite rational money managers and are charitable people by nature maybe I will change my will in the future, but they are still young the oldest is 17 the youngest is 4, and none of them have expressed any interest in Learning anything about capital management yet.

Definitely throws up a dilemma - you wanna give it to those who share your values and ideals etc, but if you show outright favouritism in who gets what it can make everyone hate each other.

 

[Value Hunter]

They are getting a certain percentage of mine and my wife’s entire portfolio, so a portion of my entire portfolio is working for them, I don’t think I need a separate fund for them.

if they ever want to start putting their our investment fund together I will be there to help them, but so far they haven’t been interested.

2 of them do have some shares held I trust that my Mum set aside for them though.

Maybe if you provide some incentives it will get them more interested? Set up a fund with $10,000 for each niece and nephew. Then tell them whatever they contribute to the to the investment fund you will match with your own contribution dollar for dollar. Once they have started adding their own hard earned money they might take a more active interest in it.

Or another way is you can set up a fund with your own money for each of them and tell them to do their own research and invest the money themselves (so they can start building up their investment skills) and whatever is in the fund after years they can do with as they wish.

 

[qldfrog]

Maybe if you provide some incentives it will get them more interested? Set up a fund with $10,000 for each niece and nephew. Then tell them whatever they contribute to the to the investment fund you will match with your own contribution dollar for dollar. Once they have started adding their own hard earned money they might take a more active interest in it.

Or another way is you can set up a fund with your own money for each of them and tell them to do their own research and invest the money themselves (so they can start building up their investment skills) and whatever is in the fund after years they can do with as they wish.

Obviously your money but, fundamentally, if you just split your wealth at death time and give them each an equal part, you give absolutely no responsibility, no training or incentive to saving
On the other end, if you give them now a let's say 10k fund, at their control:
They can spend it on cars now, or save it and compound it..up to them..self teaching

 

[qldfrog]

And while we are on the subject of leaving a legacy
After my son was born, we were told the great value of compounding
You know 10k in bhp returning half a million now
So in 2000's not sure exactly when but before 2005 for sure, we put $9k in a special education fund by Australian United Investment Company when our son was 21.
was tax free at redemption..and I think it is/was
So this year, my son cashed it up
Remember $9k very early 2000
Nearly 20y return
The miracle of compounding , a "reliable" investment company and a booming market.
We were not deciding allocation...the managers did.
I give the total amount retrieved after decades in my next post

 

[qldfrog]

Total amount received was $11k
Yes $11k
So for the frog:
7y super and a loss of $2k on nearly $50k invested
And $9k turning into $11k in decades in a tax free fund for children education.
You will now all understand my negative bias vs benefits of compounding, my refusal of any extra contribution to the super system, a serious favouring of self management in financial matters
Luckily, we worked hard, paid debts asap and earned bigger via own company while RE went up and built a bit our savings (even if all our RE gains were usually below par)
So a few caveat in the compounding stories ....

 

[Value Collector]

Definitely throws up a dilemma - you wanna give it to those who share your values and ideals etc, but if you show outright favouritism in who gets what it can make everyone hate each other.

My goal is to give a lot to charity, I don’t really want to spend the rest of my life working on my stuff just to make my nieces and nephews rich, I want to do good with the money. So any one I pass it along to will have to have convinced me they are going to do good with it, not just live like a king.

 

[Value Collector]

Total amount received was $11k
Yes $11k
So for the frog:
7y super and a loss of $2k on nearly $50k invested
And $9k turning into $11k in decades in a tax free fund for children education.
You will now all understand my negative bias vs benefits of compounding, my refusal of any extra contribution to the super system, a serious favouring of self management in financial matters
Luckily, we worked hard, paid debts asap and earned bigger via own company while RE went up and built a bit our savings (even if all our RE gains were usually below par)
So a few caveat in the compounding stories ....

Sounds like you got raped with fees or really poor management, should have just put it in a basic low cost index.

This is definitely not a problem with compounding, it’s a problem of either a bad system you put the money into or managers than simply failed you.

are you sure there wasn’t insurances etc attached that drained the account? Or that it wasn’t invested in something silly like cash.

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when it comes to super, it’s just a low tax environment that you can invest in, what ever you invest in it’s going to perform better in super than it would In your own name.

but again you have to take responsibility to ensure it’s not being eaten by silly insurances and is being invested well.

 

[Value Collector]

And while we are on the subject of leaving a legacy

I am not to interest in leaving a “legacy” it doesn’t really matter how great you are none of your family will remember you in the generation born after you die.

think about it, how many of your great grandparents can you name? you have 8 of them can you name 8? Or can you name your 16 great grand parents?

The generations of your family that come after you are strangers to you and you are a stranger to them, there is no point in trying to build a dynasty In my opinion.

All I really care about is helping the most number of people I can, whether they are related to me or not, it’s hard to justify giving millions to some one just because they were born in my family tree, when there are kids with cancer or dying because they don’t have basic medicine and fresh water. so I believe I will get the most bang for my buck through charity, and I will compound the funds in the mean time.

 

[basilio]

Total amount received was $11k
Yes $11k
So for the frog:
7y super and a loss of $2k on nearly $50k invested
And $9k turning into $11k in decades in a tax free fund for children education.
You will now all understand my negative bias vs benefits of compounding, my refusal of any extra contribution to the super system, a serious favouring of self management in financial matters
Luckily, we worked hard, paid debts asap and earned bigger via own company while RE went up and built a bit our savings (even if all our RE gains were usually below par)
So a few caveat in the compounding stories ....

Very salient story qldfrog. IMV goes to the heart of investing options generally offered to the every day punters.

In the 70's,80's, and 90's in fact all my life I have watched hosts of investment vehicles sold to millions of people as means to watch their money grow simply and painlessly. They were 10 year insurance investment schemes. Education funds for your children. Private Super schemes run by big name companies. I became very interested when I began investigating the charges and outcomes Insurance bonds and Super schemes my friends had been sold. It was clear the only people making big bucks were the sellers not the buyers

The "Financial Planning Industry" was developed in the 1980's as an "independent" advisory organisation ostensibly to help people make good decisions about where to invest their money and "make it grow". Again I saw scores- hundreds of investment opportunities sold to friends and family members as well as the broader community. Pine plantations, Jojoba Farms, Ostrich Investments, Macadamia Plantations. The list is endless. These were the agricultural side. Then there were the multitude of property investment groups promising huge returns on gilt edged mortgages. Scores of investment funds each promising a carefully curated, nimble approach to share-market investment that promised high returns .

It is all BS. Any cursory reading of ASF will throw up scores of examples of how unfit for purpose these financial vehicles have been. They certainly make money. But the money stops with dodgy investment projects sold by "independent" advisors all gaining commissions on the sales. The biggest commissions are offered y the biggest crooks.

VC and others talk of the value of compounding interest and long term investments. I have particular respect for VC and others who analyse businesses with clear eyes and forensic skill and identify quality opportunities. So certainly there are opportunities to invest wisely. But in my experience the success rate is far smaller than we would like to believe.

Share investment promotors endlessly recite the mantra of continualy increasing sharemarket indices to show that investment in shares will almost inevitably create wealth. I believe this is gross misrepresentaion of reality.

Stock Indices only measure successful stocks. All the failures get dropped off the index. Their losses are lost in history. Their place is taken by the next highrising stock. Of course the fact that a share price is $2-5-10-100 is absolutely no indication of actual profitability or long term success. But while that share is selling for $100 it is making the index look good. And a whole industry of buyers and sellers and promotors and grifters take their cut. And then it collapses and folds generally taking the "average" investors money to the grave. The "smart"money of course left years ago to jump onto the next big thing/con.

The smart money starts the company. Gives itself a 50% stake. Promotes and sells the idea. Builds an army of salespeople to sell the vision. It doesn't dirty itself with making the vision actually work or be profitable. The profit is in the sizzle not the steak.