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Wealth Plan

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craft said:
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
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Perfect.
The skew maybe very different as time goes by.
 
kid hustlr said:
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?
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I can’t really answer your question very well, I haven’t had life insurance for quite a while, but didn’t want the question to go ignored.

I’m guessing you’re not asking whether Life Insurance is worthwhile – that obviously depends on personal circumstances and judgements.

But more asking if you are going to have it anyway is it worthwhile purchasing through Superannuation.

If you are part of a large super fund they should have better buying power than you could get yourself either personally or through a SMSF and if it’s an industry fund you should get those purchasing power benefits passed through to you. Probably worth getting some comparable quotes to be sure what the best value is.

My vague understanding is that purchasing it through Super the premium will be deductable but policy payouts will be a taxable component. Purchasing it privately the situation is reversed. Somebody like Junior who I think is a financial planner and is active in the Superannuation cash cow thread might be able to give you a heads up on the pro’s and con’s of taxation outcomes.
 

I better clarify this point as I did not explain this correctly. After the GFC I continued with the investing process although not very happy to see the capital go down. After another 3 years of this I knew there had to be a better way in regards to the share markets and thought that I want to be prepared should another crisis happen in the future.
Between 2011 and 2014 I completed courses about trading and investing to be able to take control myself.
Only after gaining this knowledge and confidence in my ability to do better than was currently, did I change over to the SMSF and started to take full control myself.

Currently the portfolio consists of:

30% Property/rents
30% Corporate Bonds...investment grade and non-investment grade
30% Shares
10% Cash

I have been able to generate enough passive income from the property rents, bonds and cash to sustain my lifestyle and to throw off extra cash to continue growing into the future.
 
Triathlete said:
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
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Looking forward to seeing what numbers shake come out of this.

The numbers being thrown around atm are a bit worrying. 33 with only limited money in super. Put this down to a miss spent youth (some may say) of partying, travelling and running up huge HECS bill + some other debt (finally approaching cleared).

Lucky enough things have kind of worked out I now earn over $100k. However with the kids on the horizon, a $450k mortgage the idea of putting 20% away in to super is not going to happen. Putting away 20% for savings outside of super is not always easy.

Plenty of people my age who have not managed to get a decent paying job who also had a bit too much fun in their 20s.

But like I said looking forward to see what number shake out
 
I've just spent some more time going through some numbers, using a different criteria to the NAB one I used earlier.

This time using AFI, the LIC. Over the last 20 years it has had about 5.5% annual growth and paid between 3-5% in annual dividends, again fully franked. I just used the 9.5% annual growth and a starting figure of a $20k investment, plus another $10k for each of the first 10 years then let compounding do its work..

This time using Craft's 40 years.

Approximate balance at year 40 assuming the 9.5% performance continues, comes to a balance of ~$3.5m in AFI shares assuming full dividend re-investment. This gives a dividend, or passive income of ~$120k pa with franking credits for Harry and Sally ($60k each), so yes all sounds VERY good and plausible!!

But there is a snag I found very disturbing. The 'median' priced property I used earlier from Mulgrave in Melbourne, has also gone up in value at a rate of 9.5% pa (adding yield is higher!!) since 1997.

The problem I have is the future, or next 20 years. During the last 20 years, official CPI inflation has averaged 2.55% pa. For the figures to match, growth in the economy should make up the other ~7% pa. Growth has certainly NOT been that.

It is interest rates that have collapsed in the last 20 years, plus the perception of future interest rates remaining low that has led to asset inflation above the rate of 'CPI inflation and GDP growth'.

This presents a future problem. Interest rates cannot fall like they have over the last 20 years, so for any type of growth approaching 9.5% pa, inflation must rise along with growth.

IMHO starting from today, we should factor in far higher inflation in the next 40 years than we have had for the last 20, OR greatly reduce the rate of growth of the investments.

Using the same criteria as above (AFI having 9.5% pa growth over 40 years etc) the income of $120k while looking impressive, is not if inflation averages just 5% pa. In today's dollars, the $120k pa income is equivalent to a bit less than $18k pa for the couple!! ($9k EACH!!) in today's monetary terms.

For a young DINKS couple with an average of one HECs debt, rent or mortgage payments, health care etc, putting aside an initial $20k followed by $10k each year for the next 10, is clearly not enough, nowhere near enough, yet very onerous on a young couple that will probably have kids in the first 10 years, and need to move to larger premises than the original one.

Please someone find fault with the numbers and logic above!!! Otherwise I can only come to the same conclusion that James Montier seems to have reached...
https://www.gmo.com/docs/default-so...possible-things-before-breakfast.pdf?sfvrsn=4
 

Yes inflation assumption will have a huge impact on any model. Here's a useful tool from the RBA inflation calculator.
http://www.rba.gov.au/calculator/annualDecimal.html

If you punch the numbers in, you will find that $1000 in 1976 (40 years ago) is equal to ~$6,000 in 2006 (4.6% average per year). So in your example, if Harry and Sally was able to put away $20k starting 40 years ago, that would be the equivalent of $120k in today's dollar, which is not the kind of money that every 20 year old couple has to start out with. The $10k they put in each year is also equivalent to $60k in today's dollar... again, it would be difficult to find a young couple who has the ability to save that amount per year. If the saving rate was assumed to be 20%, then the couple would be earning some $300k equivalent between them. So Harry and Sally were not Average Joes.

Now the last 40 years included a period of very high inflation, and correspondingly high interest rate periods... it's anyone's guess what the next 40 year will hold, and what the further 25 years in retirement will turn out. But it's hard to make the numbers stack up in the last 40 years for an Average Joe.
 
So clearly it's important to have a passive income which is able to keep up with inflation

My 92 year old dad
Would have been better off buying 10 house with his 400 k
Than putting it in his AMP super
It that's hindsight and that's what Craft is trying to avoid
 
brty said:
The 'median' priced property I used earlier from Mulgrave in Melbourne, has also gone up in value at a rate of 9.5% pa (adding yield is higher!!) since 1997.
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Did that 9.5% include:
- Stamp duty on purchase
- Conveyancing fees
- Buyers agent fees
- Management fees
- Insurance
- Strata
- Repairs
- Rates
- Agents fees on sale
- Conveyancing on sale
- Tenant disputes
- Tenant litigation
- Land tax
- Stamp duty on transfer
etc
 
To be honest I do not see why the average couple should aim for $100,000 (inflation adjusted) of passive income. For people that are disciplined savers, start very early and invest wisely they could possibly get to that level by age 65, but who the hell really wants to work until 65?? Sure some people enjoy working, but the majority do not.

If a couple has enough assets to give passive income of say $40,000 per year they could just go to a cheaper country and retire. In a country like Panama or Thailand that is plenty of money for a couple to live on.

That way you can start enjoying life much earlier. In fact with the right right savings discipline and investment strategy and the use of some debt/leverage a childless couple could achieve that in their early 40s or even late 30s.

Personally as a single guy I am aiming for after tax passive income (from dividends) of around $25,000 (inflation adjusted) in my early 30s. I will then go and retire and live as a nomad moving between various cheap countries (for example spending 6 or 12 months in each country). Sure I could bust my ass for additional 10 years and work into my early 40s and double or triple my passive income, but why bother? Life is too short. I dislike working and that would be another 10 years of my life I will never get back.

Besides living overseas I could also work short stints teaching English or as a tour guide, etc to supplement income if I need some extra spending/holiday money. Or come back to Australia and stay with my parents work for a year or two in some crappy job and save money to supplement my passive income and then go and live/relax overseas for another 5 or 6 years.
 
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Anyway that is what suits me in my situation. Everybody has different goals and aspirations so a plan that is suitable for one person would be unsuitable for another.

Whatever the passive income goal is I think people need to have a backup plan for when times are tough and income falls (e.g. declining rent or dividends or term deposit rates, etc). I think eating into the principle in lean years is a bad strategy. I think in lean years people could either cut some fat out of their expenses (e.g. fewer restaurants and fewer/cheaper overseas holidays) or take up some sort of part-time job (hell even working at a supermarket part-time can make a noticeable difference to income).

The other option is to have a cash buffer that you don't normally touch that is there for a combination of emergencies and lean years to supplement your normal passive income. For example your investment portfolio might be $1 million or $1.5 million in dividend paying shares and $60,000 in cash. In a lean year or two where dividends are down/low you could spend say $10,000 or $15,000 a year of the $60,000 in cash and then a few years down the track replenish it when you are receiving more in dividends than you need to live off. Typically in a situation like 2008/2009 when dividends are dropping sharply share prices will also be down and the last thing you want to do is sell shares at depressed prices to pay your living expenses.
 
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Hi Sir Burr, I EXCLUDED yield for the 9.5% in property. That is just straight Cap gain over 20 years, the yield would more than take care of the rest. It could basically be a block of land with a knock down house and be worth over $800k in that area now..

Value Hunter, I am just trying to find out how an "average couple of DINKS" could do it. As soon as we start to add, "For people that are disciplined savers, start very early and invest wisely", I don't think we are talking about Harry and Sally Average anymore.

I fully agree with your thoughts when applied to the last 30 years, perhaps even 40, but I'm rapidly coming to the conclusion that the next 20-40 years is going to be very different investment wise. We are already so far out of proportion to the affordability of housing compared to wage growth, that unless something changes drastically soon, we are headed to a Japan 1989 situation shortly.

The whole point of this exercise is to work out what it would take, yet many seem to want to discuss the semantics of what should be the target.

I agree with you on the target as I was the same at early 20's, 45-50 seemed like really old. However after 60 plus posts, it is about time we started to look at the numbers involved, instead of just saying the target should be lower and fairly simple.
Can you please do some numbers to show your thoughts??
 
Personally I think rather than aim for a high passive income people should learn to live a modest lifestyle. Blogs like early retirement extreme talk about this. Low cost of living is very powerful because it does a few things simultaneously. A low cost of living increases your savings rate while also reducing the passive income requirements for retirement.

For example person A earns $60,000 per year after tax and manages to save $30,000 per year after tax, and therefore is capable of living on $30,000 per year. Whereas person B earning $60,000 after tax (i.e. likely around $75,000 to $80,000 pre-tax salary) and is only saving $20,000 per year. Person A has a passive income goal of $30,000 (inflation adjusted) per annum to replace their current lifestyle and is saving $30,000 per year to get there. Person B needs a passive income (inflation adjusted) of $40,000 to maintain their lifestyle and is only saving $20,000 a year to get there. You can see how a relatively modest difference in spending habits makes a huge difference to the final outcome.
 
brty to answer your question the reality is that "average couple of DINKS" cannot retire early in this day and age (last generation it was easier to achieve, but its harder now).

To retire early you have to live extremely frugal, live with your parents until a later age, work 2 jobs, learn a lot about investing (and be a market beating investor) and be "active" (index fund investors will likely not be retiring in their 40s) and use some leverage as well. Without all of those ingredients it just is not likely to happen. Average dinks will think doing all of the above is too much effort and too hard. The reason all the things I mentioned are necessary is that the job market for younger people is extremely competitive, university is expensive and housing is very un-affordable.
 
I think for the average young person growing up today the blue print for early retirement would look something like this:

1) Start working part-time (while still at school) at 15 at whatever job you can get even if its McDonalds. Save at least 70-80% of your after-tax income. Parents should encourage saving by offering an incentive e.g. whatever money you save the parents will add 25% to it at the end of each year. Start reading books about investing (parents need to encourage this by giving them books, etc)

2) When you finish high school either go to work full time, go to university/TAFE or take up an apprenticeship. If at University/TAFE you should still work part-time. Try and live with your parents for as long as possible, hopefully most parents will support you if they see you are working hard and saving and investing the majority of your income. Live frugally i.e. no overseas holidays or smashed avocado on toast at the local cafe. Continue learning and reading about investing while you invest your savings. If you go straight to full-time work after high school get a second job also.

3) After finish Uni/apprenticeship get a full time job and after 6-12 months of working try and get a second part-time job or get paid overtime hours at your full-time job. Or if you went straight to work after school continue working two jobs. Still continue to live frugal and continue to invest your money "actively" while continuing to read about investing. Try to live with your parents for as long as possible. If you show you are building your future hopefully they will be impressed and try to help you along. By this stage hopefully you can borrow some money from somewhere to turbocharge your investments.

4) Retire in your 30s or 40s living off your passive income in a cheaper country.

I think the above is a good basic blueprint for young people today. Bust your ass early in life and make sacrifices early in life because the nature of compounding means that sacrifice today is financially equivalent to 2, or 3 or 4 times the amount of sacrifice when you are older.
 
Value Hunter, I agree it does not look possible now, so some extraordinary steps will be needed, something that an average person will not take.

As soon as we start with something like this.... "For example person A earns $60,000 per year after tax", we are talking about an above average wage earner. (Around $64k from which tax is deducted of $13,560 + medicare levy).
However "average" income or above is only earned by about 40% of income earners, so median incomes more represents an average person.
http://www.abs.gov.au/ausstats/abs@.nsf/0/27641437D6780D1FCA2568A9001393DF?Opendocument

"More female employees were employed part-time (54.3%) than full-time (45.7%). Average weekly total cash earnings was $1,456.90 for full-time females and $633.60 for part-time females."
Even my concept of DINKS is clearly above average, as the second income for a household is likely to be part-time according to ABS, on average..

I'll be very interested to see Craft's take on the situation of how an average couple can retire on a good level of passive income in 40 years time. My personal view is that taking some assumptions that have worked for the last 30 odd years will not work over the next 30, so will throw out many calculations.
 
One point I will add is that its a waste of time for young people to make voluntary super contributions. By the time they get old the government will have likely increased the retirement age (who the hell wants to wait until 75 to spend their money?) and increased the taxes on superannuation. That is assuming that the even worse scenario of partial confiscation or large one off wealth tax on super does not happen.

brty like I said a young person these days needs a lot of things to go right if they are to retire early.

I think an alternative way to get wealthy is to learn as much as you can about investing by reading and practicing by cutting your teeth investing small/modest sums of money into stocks and keep a high cash balance. Then when we get one of those rare market crashes like 1987 or 2008 you can scoop up once in a lifetime bargains and get rich within 5-10 years.

For those who knew what to look for in early 2009 there were stocks that had gotten so cheap they subsequently became 10, 20, 50 or even 100 baggers. If you are cashed up and doing your research during a crash catching one or two or three of these stocks and betting big is enough to make you wealthy. For example anybody who invested say $100,000 into a combination of a few companies like McMillan Shakespeare, Seek, Dominoes Pizza, Credit Corp, RHG, Magellan Financial Group, etc during the late 2008 or early 2009 is likely sitting on a very decent sized portfolio now.

Of course the downside of this strategy is that you could potentially be waiting decades for a market crash of that type because they are rare. Also, picking out the big winners is not easy.
 
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Value Hunter, yes we are on the same page here. I was typing my post before I saw your second one.

What do you suggest the young ones invest in if they did all the things you just stated?? What are your expected returns over the next 10-20 years for those investments? Do you think luck will pay a part in retiring early for 20 somethings starting now? I do!
 
brty its very hard to make return assumptions going 10-20 years out. I am just giving some possible plans which maximize the odds of success but certainly do not guarantee success. And yes luck does play a big part!

I think young people should either invest in direct shares or residential property (probably not in Sydney or Melbourne though) or a combination of both depending on what they are comfortable with and their income (higher income guys can more easily invest in quality properties), savings and skills (e.g. a tradie might be able to buy run down properties and fix them up). I think direct shares and property are easier to grasp and easier to profit from for most people than say derivatives or precious metals or commercial property, etc.
 
Value Hunter said:
If a couple has enough assets to give passive income of say $40,000 per year they could just go to a cheaper country and retire.
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Yes, exploit geographic arbitrage.
That is part of our wealth plan

Unplanned but DINKS another.
 
Sir Burr said:
Yes, exploit geographic arbitrage.
That is part of our wealth plan

Unplanned but DINKS another.
Click to expand...

Again a narrow solution

Your not thinking of families
Kids
Grand kids
Friends
Social integration where you now live
Vastly different where your going
Think of Health care in these cheaper places to live.

If you don't have family or friends fine
 
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