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]

Limited to trading,investing?

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

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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.