What's your retirement asset allocation percentages?

[Sir Burr]

For those who already have a foreign connection, it can be a no brainer. My only concern, personally, would be for medical costs.

Yes, zero tax on capital gains is a benefit but the medical is a big one with expensive expat health insurance. Also, something related as sptrawler mentioned:

Not only can you lose 50% of your capital, as was shown last election, you can lose 30% of your income. The really scary part was, many were cheering it on.

The government is looking at updates to the residency rules: https://cdn.tspace.gov.au/uploads/sites/70/2018/09/BoT-Residency-Consulation-Guide-FINAL.pdf

Who knows what that will bring.

 

[Sharkman]

That is absolutely the right question to be asking. It comes down to how much you start with. If you go in "fat", then a 50% drop means you don't go on a cruise that year, or you delay buying that new car for a bit. If you retire "lean", then a 50% drop means you eat rice and beans until the market recovers. Two very different outcomes. I'm not close enough to retirement to predict which way I'll end up

I see the older workers at Bunnings. And good on Bunnings for hiring them. And when I previously rented, the guy they sent around for repairs looked about 80, and he had been forced back into work. But as you say, that's highly undesireable or even impossible for many people.

to my understanding, the terms "fat" and "lean" refer to how extravagant your planned lifestyle is, rather than how badly you would be affected by a market crash. but there probably aren't any official definitions, it can be whatever you want it to mean i guess. i do think there are 2 separate factors to consider here though, rather than a single fat <--> lean spectrum: how extravagant your lifestyle is, and what margin of safety you have to maintain that lifestyle.

to me, fat means travelling a lot, eating out a lot, frequently buying new gadgets and forms of entertainment etc. lean means mostly or even entirely avoiding consumerism, maybe even growing your own vegetables, DIY fixes, and partaking in forms of recreation that don't cost much (or anything at all).

you can be lean yet still keep the same lifestyle even if the market drops eg. your yearly expenses are 25K and you retire with 1 million for a 2.5% drawdown. or you can be fat but have to compromise your lifestyle in the event of a downturn eg. your yearly expenses are 100K but you retire with 2 million for a 5% drawdown.

but if you are lean with a low margin of safety/high drawdown, then a market crash could result in your portfolio being unable to sustain even a minimalist lifestyle, and you have to return to the workforce. if that happens after you've been retired a few years, your knowledge will have become outdated and your skills will have decayed, making this a difficult ask unless, as you say, there's an employer like Bunnings willing to give you a go.

this is a horrifying proposition in my eyes, i'm petrified of this happening to me when i get old, and it's that fear that helps me find the willpower to suffer thru a few more years of the corporate treadmill in pursuit of the ideal combination - fat FIRE plus a high margin of safety.

funny that you should mention rice and beans. i grew up in a lower income household, and that is literally what we often had for dinner until i was in my early teens - rice, beans (or some other vegetable) with a bit of oyster/fish/soy (whatever was on sale at the time) sauce thrown in for a modicum of flavour. that's it. sometimes we had meat if that was on special, sometimes we didn't.

i have no desire to return to a diet like that ever again, so i guess that's also a factor which nudged me towards chasing fat FIRE with a 2.5% drawdown. i figure if there is a GFC-esque 40-50% drop, that 2.5% becomes 4% temporarily, and i can wait it out, continuing to eat well until the recovery.

 

[sptrawler]

funny that you should mention rice and beans. i grew up in a lower income household, and that is literally what we often had for dinner until i was in my early teens - rice, beans (or some other vegetable) with a bit of oyster/fish/soy (whatever was on sale at the time) sauce thrown in for a modicum of flavour. that's it. sometimes we had meat if that was on special, sometimes we didn't.

i have no desire to return to a diet like that ever again, so i guess that's also a factor which nudged me towards chasing fat FIRE with a 2.5% drawdown. i figure if there is a GFC-esque 40-50% drop, that 2.5% becomes 4% temporarily, and i can wait it out, continuing to eat well until the recovery.

It is amazing how good a motivator childhood experience is, I as you lived in a very poor house hold and as you say it drives you to ensure history never repeats.

 

[Zaxon]

to my understanding, the terms "fat" and "lean" refer to how extravagant your planned lifestyle is, rather than how badly you would be affected by a market crash.

"Fat fire" could be defined as having a high cost of living lifestyle that you need to fund, or it could mean that you've retired with enough money to have that lifestyle, but you've chosen not to use it. Some people would consider a retiree that withdraws 2% instead of 4%, as having fat FIRED. Others could see that as lean FIRE, with a safety net.

In the high cost of living version of fat, you're screwed if the market drops. In the latter, your previous paranoia has finally saved you.

but there probably aren't any official definitions, it can be whatever you want it to mean i guess.

In some contexts, there can be. Certain influential FIRE books have put out figures which then people run with and quote. Some fat FIRE forums have assumptions about amounts.

Having looked around, these are figures from one source I found, in the US (where the cost of living is much cheaper), and from 2018:

i do think there are 2 separate factors to consider here though, rather than a single fat <--> lean spectrum: how extravagant your lifestyle is, and what margin of safety you have to maintain that lifestyle.

I agree that's a much better definition. So effectively it becomes a $ amount you're withdrawing for your lifestyle, and separately, a % of AUM (or an equivalent)

 

[Iggy_Pop]

An excellent point! Which begs the question, when people on ASF say they only draw dawn 3.5% (etc), that couldn't be based only on super.

Surprisingly, if you retire at the normal age of 65+, you're forced to drawdawn 5%.

View attachment 98487

For everyone who things retirement = stick everything into Super, and then use the 4% SWR, wouldn't actually be allowed to do that (at least not in the first few years). A scary thought.

While the drawdown is 4%, I can reinvest a portion via accumulation account in super, dividend reinvestment on some shares , LICs or ETFs, buying more shares etc.

Iggy

 

[sptrawler]

While the drawdown is 4%, I can reinvest a portion via accumulation account in super, dividend reinvestment on some shares , LICs or ETFs, buying more shares etc.

Iggy

Which is exactly how Im working, a degree of flexibilty is the key IMO
Having evetything in pension phase gives a tax advantage, but a massive flexibility loss, also Im not sure how your funds are treated if they are commuted back from pension to accumulation.

 

[Zaxon]

Interesting! Is there any studies about this method?

Studies you want, then studies you shall have! This comes from the http://www.cfiresim.com/ calculator, a very popular site for calculating safe withdrawals.

4% Rule

• Capital on retirement 1.6 million
• 4% first year withdrawal increased by CPI on subsequent years
• Asset allocation: 60% stocks/40% bonds (that's the typical ratio used)
• Over 30 years

Zaxon's 5% Rule

• Capital on retirement 1.6 million
• 5% of AUM each year
• Asset allocation: 90% stocks/10% bonds (that's my originally stated ratio)
• Over 30 years

Rate of Failure
This means running out of money before 30 years.

4% rule: 5% chance of failure


Zaxon's 5% rule: 0% chance of failure


Withdrawal Analysis
All dollar amounts are inflation adjusted (in today's dollars).

4% rule: $64k each year. OK. That's what we expected.


Zaxon's 5% rule: average of $82k increasing to $111k. Impressive


Total Payout

4% rule: $1.984 million over 30 years


Zaxon's 5% rule: average of $3.127 million over 30 years


Conclusion

• Is Zaxon's 5% rule safe? Yes, your portfolio will never go broke.
  
• Which portfolio gives you the "richest" lifestyle? Zaxon: 3.12 million vs 4% rule: 1.98 million. That's a significant difference.
• What's the drawback of Zaxon's 5% rule? Big swings in yearly payments, from low of $30k up to a high of $295k per year (taken from final third)
• Is Zaxon's 5% rule better? Better for me? Yes. Better for those who want to maximize their return potential? Yes. Better for people who want stability? No. Better for the average man in the street? Probably not.

 

[qldfrog]

@Saxon
In your results above, what do you consider for share returns, bond returns and do you include any tax?

 

[Zaxon]

In your results above, what do you consider for share returns, bond returns and do you include any tax?

The share and bond returns come straight from actual, historical returns, monte carlo simulated. The important thing is that both methods use exactly the same data, making it a fair comparison.



In the original Fama-French "4% rule" studies, it was all assumed to be in a tax free retirement account. The failure rate over 30 years of the 4% rule tax free is 5%. I'd expect that to go up if it were in a taxable account, making it less safe. I'd expect the failure rate of the Zaxon 5% rule (currently 0%) to be unchanged.

I can describe how tax would affect both methods. Essentially, they both start retirement holding share index funds and bond index funds - the same ones. I suspect the calculator rebalances them annually. Neither method trades more than the other. They are both simple buy-and-hold, index strategies. Tax should affect them the same.

 

[qldfrog]

The share and bond returns come straight from actual, historical returns, monte carlo simulated. The important thing is that both methods use exactly the same data, making it a fair comparison.

View attachment 98541

In the original Fama-French "4% rule" studies, it was all assumed to be in a tax free retirement account. The failure rate over 30 years of the 4% rule tax free is 5%. I'd expect that to go up if it were in a taxable account, making it less safe. I'd expect the failure rate of the Zaxon 5% rule (currently 0%) to be unchanged.

I can describe how tax would affect both methods. Essentially, they both start retirement holding share index funds and bond index funds - the same ones. I suspect the calculator rebalances them annually. Neither method trades more than the other. They are both simple buy-and-hold, index strategies. Tax should affect them the same.

Thanks a lot for the precision, being an early retiree, i am fully taxed so any income is significantly reduced..so the will to more to less taxing countries
Add to this the need to offset some real estate assets gain after offload

 

[Sir Burr]

Big swings in yearly payments

Thanks Zaxon!
One thing, does that site take into account adding/withdrawing from your "safe" portion?
I suspect not and would be good to test that idea if possible as I'd think it would help to smooth the ride

 

[Zaxon]

Thanks Zaxon!
One thing, does that site take into account adding/withdrawing from your "safe" portion?
I suspect not and would be good to test that idea if possible as I'd think it would help to smooth the ride

From the bond smoothing fund? It calculates the return of the bonds, so that aspect is there. But it doesn't account for how the bond fund acts to smooth out returns. Sadly, these calculators are too limited. You can, however, download the raw data from that calculator and do further work.

Here is one sample taken from the calculator's data, with the Bond Smooth Fund brought into use. This uses a 10 year Moving Average.



What we notice is the Spend Amount, which is in today's dollars, is remarkably smooth, and is steadily increasing over time. So job done.

I see the bond fund seems to have grown pretty large. This is because the MA is a lagging average, and the withdrawals are growing over time. In any event, that's a massive safety net should the market crash. For simplicity, the Bond Smoothing Fund was calculated in cash with no earnings. In reality, it would be held in bonds which would grow over time, so the bond balance would even be higher.

 

[Cam019]

100% international equities (index). Why?... because I am in a pooled industry fund, I want something I don't have to monitor, and I want better sector diversification than what the concentrated Australian market can offer. I am also looking for growth.

 

[Zaxon]

100% international equities (index). Why?... because I am in a pooled industry fund, I want something I don't have to monitor, and I want better sector diversification than what the concentrated Australian market can offer. I am also looking for growth.

I'm the same with my super. 100% international. That balances out the exposure to Australian stocks I have in my taxable accounts.

 

[qldfrog]

@Zaxon if I can ask: do you put your PPOR as part of AUM or do you exclude it from all computations
If you do , the return on investment is obviously poorer..but you do not need rent money, it is also very inflexible as I can attest now.
Just to clarify and enlight other readers: I actually really like your 5PC principle, better than my indexed 60k a year

 

[aus_trader]

@Zaxon if I can ask: do you put your PPOR as part of AUM or do you exclude it from all computations
If you do , the return on investment is obviously poorer..but you do not need rent money, it is also very inflexible as I can attest now.
Just to clarify and enlight other readers: I actually really like your 5PC principle, better than my indexed 60k a year

I think Zaxon will answer more thoroughly, just my 2c is it should not be part of AUM as you need it to live in.

 

[qldfrog]

I think Zaxon will answer more thoroughly, just my 2c is it should not be part of AUM as you need it to live in.

I would err that side too but @Zaxon has studied this thoroughly and keen on confirmation
Ppor can be a huge part of one's assets but is indeed usually removed from wealth computation talks

 

[aus_trader]

I would err that side too but @Zaxon has studied this thoroughly and keen on confirmation
Ppor can be a huge part of one's assets but is indeed usually removed from wealth computation talks

Agree it can form a very large part of one's assets indeed. However until the potential of that asset is realised either via turning it into an investment property or sold (e.g. downsizing as done by a few retirees I know of) it shouldn't be part of the AUM strictly speaking IMO.

 

[Zaxon]

@Zaxon if I can ask: do you put your PPOR as part of AUM or do you exclude it from all computations
If you do , the return on investment is obviously poorer..but you do not need rent money, it is also very inflexible as I can attest now.

I think Zaxon will answer more thoroughly, just my 2c is it should not be part of AUM as you need it to live in.

There we go. Asked and answered well. With "net worth", your PPOR would normally be included. With AUM, that's purely measured on investements so I would excluded my PPOR.

 

[Zaxon]

Agree it can form a very large part of one's assets indeed. However until the potential of that asset is realised either via turning it into an investment property or sold (e.g. downsizing as done by a few retirees I know of) it shouldn't be part of the AUM strictly speaking IMO.

Interesting as to the downsizing. Did they move into a unit?

Personally, I'm unlikely to downsize, and if anything, slightly upsize into a really easy to maintain house, very close to public transport, plenty of room for a shed or two, in a quiet area, close to a good hospital. If it's my last house, I'm going to want to love it, since I won't be going anywhere in a hurry.