Wealth Plan

[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]

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]

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

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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]

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]

...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]

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 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]

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]

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]

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]

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.

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.

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.

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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.