Putting aside the credit risk and duration risk of the higher cash flow return on the bonds in your example. How does the face value of the debt grow to maintain perpetual purchasing power?
Wealth Plan
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Sorry - no idea what point you are trying to make.
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Aside my previous comment about how laws in regards to accessing superannuation will become less favorable over time, personally if I had to even wait until 63 (let alone 75) to retire I would rather put a bullet in my head long before then. Any life where I have to work until age 63 is not worth living for me. Fortunately I will not have to work until 63 though.
tech/a
No Ordinary Duck
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That's ok
tech/a
No Ordinary Duck
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Everyone is different
I could have retired 12 yrs ago but as I
Don't have to retire and I actually enjoy what I do.
I'm happy to be like Murdoch,Gates at 63 happens to be my actual age ( people everyone knows not comparing myself )
And do what we want when we want. When I'm not doing that I'm at the coal face.
Triathlete
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If you continue to live on 60K then you have an extra $34k to invest which is another 58% in cash flow and if we have 80% in investment grade you would have a 26% increase in cash flow.....I think the charts that you have put up are for government bonds I was talking about corporate bonds a different asset class....
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Triathlete I am not sure what corporate bond yields will be in the future but they are pretty low today. In Australia currently the corporate bonds of sound companies with low default risk are no higher than 5 or 6% and in most cases considerably lower. As craft pointed out the grossed up dividend yield of the share market is around 5.5% currently.
So you will get around the same income if you are lucky but assuming you hold the corporate bonds until maturity and they are fixed rate, then you will not get the income growth or capital gains that you would get with shares.
So you will get around the same income if you are lucky but assuming you hold the corporate bonds until maturity and they are fixed rate, then you will not get the income growth or capital gains that you would get with shares.
Corporate bonds have a higher return to compensate for higher risk, the duration part of the return has the same dynamics.
Your riskiest option providing 34k for re-investment is still not enough on $1.1Million to maintain purchasing power. (even if you miraculously manage to avoid any credit and duration capital losses)
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Awesome, I'm looking forward to seeing your plan, assumptions and the flight plan broken down into yearly milestones. High achievers always seem to have great plans.
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I thinking this thread flys in the face of standard thinking where advisors recommend a higher allocation of bonds as one gets older. This is (in theory) to avoid large capital loss
It seems like craft's view is if you have the income stream then suck it up and accept the volatility. Again, I kind of like it. Long term it's the rational decision.
Craft, a couple of examples:
What if one had used this method in Japan in the late 80's early 90's. I imagine this model would be toast?
In a similar vein to what tech/a was getting at (I think). The last 10 years the all red has been hopeless. How does that impact the model for a 35 year old or a 65 year old?
It seems like craft's view is if you have the income stream then suck it up and accept the volatility. Again, I kind of like it. Long term it's the rational decision.
Craft, a couple of examples:
What if one had used this method in Japan in the late 80's early 90's. I imagine this model would be toast?
In a similar vein to what tech/a was getting at (I think). The last 10 years the all red has been hopeless. How does that impact the model for a 35 year old or a 65 year old?
tech/a
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Interestingly the plan took shape as opportunities un folded
Right place,right time,knew what to do and why to do it and
DID IT
There never was and isn't going forward a formal wealth plan.
Don't and didn't need it.
If I look back and put everything together chronologically it sure
Looks like a plan in hindsite.
But I had no idea I'd have a decent sized business that makes
More in a year than I could imagine.---- 40 yrs ago
Nor did I know that an exercise that was designed to see if a dumb arse
Builder could develop a profitable trading system would then catch a
7 yr bull run and produce enough to pay cash for 2 homes which I traded.
Or that my wife and I would be in the position to buy over 15 properties
Through 1995 to 2000 and sell all from 2010 to 2014 free holding many
Over the longest and strongest property boom in living memory.
Or in 1998 starting property development which still runs to this day
Utilising my infrastructure,contacts during one of the strongest demand
Periods for apartment development in living memory.
See I'm no genius in fact when it comes to the world of finance as you know it
I'll admit I'm as dumb as Duck shite.
But luck has found me often enough.
Life will pan out and not as you plan it.
If you think you can plan 40 yrs going forward go ahead
You'll see what I mean in 40 yrs maybe even 20.
Too late
I'll leave you to it and return after you have completed you forward plan
I'm sure it will be very good but as has been pointed out by those who
Don't advocate following a trading system, those with the plan are the
Biggest threat to it!
I'll do the very same for a wealth plan.
Right place,right time,knew what to do and why to do it and
DID IT
There never was and isn't going forward a formal wealth plan.
Don't and didn't need it.
If I look back and put everything together chronologically it sure
Looks like a plan in hindsite.
But I had no idea I'd have a decent sized business that makes
More in a year than I could imagine.---- 40 yrs ago
Nor did I know that an exercise that was designed to see if a dumb arse
Builder could develop a profitable trading system would then catch a
7 yr bull run and produce enough to pay cash for 2 homes which I traded.
Or that my wife and I would be in the position to buy over 15 properties
Through 1995 to 2000 and sell all from 2010 to 2014 free holding many
Over the longest and strongest property boom in living memory.
Or in 1998 starting property development which still runs to this day
Utilising my infrastructure,contacts during one of the strongest demand
Periods for apartment development in living memory.
See I'm no genius in fact when it comes to the world of finance as you know it
I'll admit I'm as dumb as Duck shite.
But luck has found me often enough.
Life will pan out and not as you plan it.
If you think you can plan 40 yrs going forward go ahead
You'll see what I mean in 40 yrs maybe even 20.
Too late
I'll leave you to it and return after you have completed you forward plan
I'm sure it will be very good but as has been pointed out by those who
Don't advocate following a trading system, those with the plan are the
Biggest threat to it!
I'll do the very same for a wealth plan.
Japan, you would have been dollar cost averaging in accumulation all along the run up and the bust - model it yourself, you would be suprised. Its not as though you had just put in a lump sum just prior to the bust. The run up was not in line with history, so you shouldn't have been causght basing your assumption based soley on the run up period. That would be like using bond data for the last 30 years instead of the last 100+ and ignoring fundamental drivers of sustainable return.
So no plan required!
Sadly too many people will believe you.
Its a far easier and less complex story to sell.
Like father like son, I suspect.
tech/a
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Hmm possibly
My father finished with a wad of cash. I've learnt
From his errors.
Dad has only said one thing with regard to money
I agree with.
" Son you have no respect for money "
He is right.
I've managed to add a few more strings to my bow dad
Never had.
I don't think I have to convince people.
Life itself has a way of doing that!
You don't NEED a plan
You do need to know how to recognise opportunity
(And be in a position to take advantage of it)
You need to know HOW to take advantage of it
Then you need to DO IT!
My father finished with a wad of cash. I've learnt
From his errors.
Dad has only said one thing with regard to money
I agree with.
" Son you have no respect for money "
He is right.
I've managed to add a few more strings to my bow dad
Never had.
I don't think I have to convince people.
Life itself has a way of doing that!
You don't NEED a plan
You do need to know how to recognise opportunity
(And be in a position to take advantage of it)
You need to know HOW to take advantage of it
Then you need to DO IT!
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Craft in my case I never had a formalized plan as such just continuous action coupled with back of the envelope calculations and projections. So far, so good.
As for my "plan" going forward I currently have some investment properties (note: none of the properties are in Sydney or Melbourne) and some direct shares. Both the shares and properties have loans against them.
I will work another 2 to 6 years to add marginally to my share portfolio from savings but my existing assets will do most of the work. If property prices continue to do well for another 2 or 3 years I can sell out of my properties and repay all my loans. This would leave me with an unencumbered share portfolio (my existing portfolio plus some minor additions which will come from new savings over the next 2 or 3 years) producing after tax dividends of $25,000 to $30,000 per annum. I am in my late 20s now so in 2 to 6 years I would be early to mid thirties by this time. The six year time-frame is in case property prices are less co-operative.
The dividend stream will be enough for me to live nomadically (say 6 to 12 months at a time in each country) in cheaper countries. Some examples of such cheaper countries would be Thailand, Cambodia, Philippines, Vietnam, Ukraine, Russia, Georgia, Panama, Ecuador, Colombia, Nicaragua, etc. In countries like the ones listed $25,000 to $30,000 AUD is plenty to live a comfortable but modest lifestyle for a single person.
Its generally accepted (just look at travel forums, travel newsletters and travel websites, etc or spend some time living overseas yourself and you will soon confirm it) that for a single person between $1500 USD and $2500 USD per month is what is needed to live comfortably in cheaper countries depending on the country and city and the level of lifestyle you want.
Therefore given my projected income and the above generally accepted budget range I can find somewhere that will work for me.
My backup plan if I need extra cash down the line is that I could supplement it by teaching English overseas or coming back to my parents house in Australia and working for a year and saving most of my salary and then going back overseas again. I think I should most likely be okay with just the dividend stream but its good to have backup plans.
As you can see Craft I am not a high achiever I am merely someone who is able to content myself with a modest lifestyle. I do not plan on getting married and or having kids (and am happy to live in cheaper countries), but in the case I do decide to get married and have kids I have a backup plan for that too which I will not discuss here.
As for my "plan" going forward I currently have some investment properties (note: none of the properties are in Sydney or Melbourne) and some direct shares. Both the shares and properties have loans against them.
I will work another 2 to 6 years to add marginally to my share portfolio from savings but my existing assets will do most of the work. If property prices continue to do well for another 2 or 3 years I can sell out of my properties and repay all my loans. This would leave me with an unencumbered share portfolio (my existing portfolio plus some minor additions which will come from new savings over the next 2 or 3 years) producing after tax dividends of $25,000 to $30,000 per annum. I am in my late 20s now so in 2 to 6 years I would be early to mid thirties by this time. The six year time-frame is in case property prices are less co-operative.
The dividend stream will be enough for me to live nomadically (say 6 to 12 months at a time in each country) in cheaper countries. Some examples of such cheaper countries would be Thailand, Cambodia, Philippines, Vietnam, Ukraine, Russia, Georgia, Panama, Ecuador, Colombia, Nicaragua, etc. In countries like the ones listed $25,000 to $30,000 AUD is plenty to live a comfortable but modest lifestyle for a single person.
Its generally accepted (just look at travel forums, travel newsletters and travel websites, etc or spend some time living overseas yourself and you will soon confirm it) that for a single person between $1500 USD and $2500 USD per month is what is needed to live comfortably in cheaper countries depending on the country and city and the level of lifestyle you want.
Therefore given my projected income and the above generally accepted budget range I can find somewhere that will work for me.
My backup plan if I need extra cash down the line is that I could supplement it by teaching English overseas or coming back to my parents house in Australia and working for a year and saving most of my salary and then going back overseas again. I think I should most likely be okay with just the dividend stream but its good to have backup plans.
As you can see Craft I am not a high achiever I am merely someone who is able to content myself with a modest lifestyle. I do not plan on getting married and or having kids (and am happy to live in cheaper countries), but in the case I do decide to get married and have kids I have a backup plan for that too which I will not discuss here.
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That is amazing how you work that all out in the actual detail and get the answer spot on!
The real return of the Australian stock market (according to Credit Suisse, anyway) since 1900 until end 2016 has been 6.8% (real) - based on 10.6% nominal, also.
I think your 4.25% is both fair enough, and agree that it's conservative.
The global average (compound / real) has been ~5.1% and if you exclude USA (which, as we'd all agree, has been the stellar country of the last century) we STILL get ~4.2% (eerily close to the figure craft proposes) - and that's with Germany in 90% drawdown and the whole gammut of market history. (For those beginner's reading; remember - that's REAL return, after inflation).
Events like 2008 (or 1930's Germany) or whatever...I think they REALLY make a significant impact on the psychology of market participants. I'm virtually never interested in forecasting (unless it's for fun, like in the, 'where will the All Ords be, next year?' - in which case, I think it's incumbent on every decent trader to take a punt), however, I'll go right out on a limb here and say that I do believe we are in an era ripe for market participants to miss the potential of the equity markets to provide as good an inflation adjusted return as the previous century. Again, a large part of that is 2008 (and the dot com bust, for US investors). The 20th century had HEAPS of phases, cycles, disasters, draw downs, unprecedented events, and 'things are different, this time'. Yet the globe (even excluding the best case of USA) returned 4.2% real; via index investing (so this is not smart beta, factor investing, day trading or Warren Buffet like skills).
I know I've gone on.
But, certain pieces of craft's posts in this thread have reminded me of David Dreman who influenced me so heavily, a lot of years ago, and reminded me of why the equity markets ARE so great, and provide the absolute, best opportunity for our hero of this thread (Joe Average) to retire well.
Short version of this reply: Hey craft, I think your 4.25% real going forward is about right and nicely on the conservative side.
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I seriously think the average Joe needs to read websites like Early Retirement Extreme and Mr. Money Moustache because for most people working for a living is just surviving its not living.
Most people dislike their jobs and would not turn up for work if they did not need the paycheck. Given that is the case then working until age 63 and wasting the best years of your life is an insane concept. Sure some people enjoy work but they are the minority. That is why most people need to radically evaluate their lifestyle, spending habits, savings habits and investment strategy. Just crawling along at snails pace with a classic put 10-20% of your income in an index fund is not going to lead to a happy life.
Most people dislike their jobs and would not turn up for work if they did not need the paycheck. Given that is the case then working until age 63 and wasting the best years of your life is an insane concept. Sure some people enjoy work but they are the minority. That is why most people need to radically evaluate their lifestyle, spending habits, savings habits and investment strategy. Just crawling along at snails pace with a classic put 10-20% of your income in an index fund is not going to lead to a happy life.
skc
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Thanks Craft for the numbers. I have sense checked a few key rates assumptions and I can't really flaw any of them. It doesn't mean the next 40 years will turn out the same, but it is a robust basis to believe that the assumptions aren't pies in the sky.
The only thing I have some reservations about is the capital contribution profile. The starting salary for a 23 year old appears too high, as pointed out by Brty. Note the $80k gross salary is before super which implies a total package of ~$87.5k. While ABS statistics suggests that salary income of under 24 years is a lot lower than the average. Sure the % of capital contribution profile can change accordingly but there is a limit to how much that can be done. The other thing of note is whether the numbers (given the lower income of the average 23 year old) allow for the purchase of the PPOR outside super some time down the track. Again, especially the early years when you need to save a deposit, on a lower income, while contributing to the super following this approach. Will it become unworkable?
A quick sensitivity check... if we reduce the contribution in the first 7 years (so up to age 30) by 50%, my model (which is a clone of yours) suggests that the passive income would be closer to $50k than $60k. So even allowing for this, the growth in the numbers are pretty amazing and doesn't really detract the finding of this exercise. The assumptions made are not that heroic... 4.6% inflation is not small, while 0.5% expense is probably on the high side. I didn't think it was doable because I didn't think the nominal return would be 12% (in fact 10.25% is what was used due to your conservatism) and I used a lower salary as a starting point.
Everyone is free to find their own value and utility of money. If you believe spending $2k at age 23 gives you more happiness than $15k (in real terms, not nominal terms) at age 63, then by all means spend that $2k. Just don't complain at age 63 that you wish you knew about the power of compounding over 40 years time. In actual fact, the correct comparison should be whether the happiness of spending $2k at age 23 outweighs the potential struggles you might experience at age 63 without that $15k. My guess is that, if you spent that $2k on smashed avocados at 23, but can't afford to heat your home at 63, there may be some regrets.
Brty
I was thinking of adjusting the model to start with a lower wage at a younger age to create a slower start to the flight path. But I’ve sort of lost my enthusiasm. Besides everybody is going to have a different story so that sort of detail is probably more applicable to an individual plan.
For this example. The end target was 75% of average weekly wages, with purchasing power perpetually preserved. Saying that required 7.2% salary sacrifice by an average wage earner was to put it in perspective of size of commitment required.
The most important number is that at the current average wage level a deductable contribution of $13,325 is required.
If you are on a wage of 50K as a 23-year-old, $4,750 will come from Superannuation guarantee levy, leaving 8,575.68 to be sacrificed which will reduce your take home pay by 13.6% for that year.
Maybe that’s the best way for a young person to think about it – do their circumstances allow for them to make the contribution required above the SG levy to meet the objective we arbitrarily picked.
The objective was more about designing a plan than picking the right objective and salary level at every stage for everybody.
Ideally though everybody would be able to design their own specific, goals and adjust assumptions like wage and growth of that wage to their circumstances. Hopefully I’ve added a little to help along that path.
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