$200k cash + 15 year plan: what do you do?

So clear @Terry_w ! Thank you.

I assume this works best on PPOR as it's non-deductible debt, as against equity from an IP?
Or could you turbo charge by using equity from both?

So the major issues are:
- have to have some equity to begin with (doh!)
- have to have a bank that permits splitting and redraw (most do?)
- have to manage cashflow as need to pay interest regularly but only get dividends once or twice a year

 

Generally I would say they will be positively geared if you include the franking credits. Something to be aware of is that distributions are generally paid quarterly or annually, whereas interest payments are monthly. So there is a bit of a cashflow mismatch that you will need to manage. This may mean keeping back a buffer in an offset account, which you probably should do anyway because dividend payments can be a bit variable.

 

If you are getting 5% and paying 4% in interest you should be positive geared

 

For the conservative would tipping an extra $10k or $20k of cash in be wise? I see this as a way to boost dividends above the interest payments.

 

Not if you have non-deductible debt.

 

Brilliant thread and a a lot of info to digest!
Was thinking , if we alter @Al1979's scenario a little bit such as below, would it still be the same outcome?

mortgage of $500k:
Loan A: 400K with 100% offset facility containing 100k
Loan B( Line of credit): 100K so can close this of with offset money

So instead of taking a loan against the house using equity, would it make sense to repay the Loan B (line of credit) and then use that to buy shares and so on or still better to take equity out?

 

I would put the offset account on the smaller loan split.
Save up in offset and then put out the smaller split
Reborrow to invest
Immediately move offset to larger split.

I also think $100k is too big.

I have set up something like this for clients using $25k splits.

Tax Tip 13: Simple Loan Structuring Strategy https://propertychat.com.au/community/threads/tax-tip-13-simple-loan-structuring-strategy.2601/

 

Thanks very much @Terry_w.
I thought that having the offset on the larger loan would save on paying interest since the sum is larger, i'd be paying less interest but this is were the smaller splits makes sense. Pay it of quickly and be ready to invest quicker and as you mention above immediately move offset to larger split.

 

There would be interest savings differences whether you put hte offset on the big or small. (unlesss or course you cash is more than the loan amount.)

 

Would the same concept work on say a small business instead of shares or the fact that a business is more commercial makes any difference?

 

It could depending on a few things.

 

I got advice from Daryl well over 30 years ago. I personally wouldn't use Dixon Advisory nowadays. They're very different to what they used to be. Don't appeal to me at all anymore.

Not advice.

 

Ok I appreciate everyone's incredible input on this. After researching for a few weeks, talking to financial advisors and reading everything I possibly can here is what I'm planning on doing:

1. $60k into ARG
2. $60k into BKI
3. $60k into MLT
4. $25k in high interest cash account as a buffer/emergency expenses/new buying opportunities

All of the shares will be bought under my wife's name as she's a stay at home mum, so we won't pay any tax on first $18k of dividends per year meaning fully franked yields will be grossed up.

Instead of DRP we will take dividends as cash and re-invest according to NTAs across either the 3 LICs above or WHF depending on what's good value at the time.

I've sorted out a tight family budget and will also top up our LIC holdings an extra $400 per week (probably done every 2 months to avoid excess brokerage costs).

I'm planning on doing this for a minimum of 40 years (retire at 68).

I thought about dollar cost averaging vs investing such lump sums but more than anything I want to fully commit to this now, and I have then end in mind.

I'm sure I could wait for slightly better value but each of the 3 LICs above are trading at a discount and are at mid-points in their 52 week range so it's fair value. I'm holding off on WHF as its at a 52 week high.

I'm planning on rolling this out over the next few days so would love final thoughts, critiques, input from all of you amazing people

 

Are you not thinking of a Family Trust and then just distribute all dividends to your wife? Wouldn't that kinda end up the same as above. Except in the long run - when she is working and you retire early - then you can distribute to you (some or all) to better take advantage of lower income.

And - wouldn't a family trust make it easier to distribute dividends to your kids when they are 18 and not working (attend Uni for example) thus saving you a crap load in tax at that time?

Also - what about your will? If/when your wife passes - is it easy to transfer the shares to your name (or if/when you and your wife pass - is it easy to transfer the shares to your kids) without CGT? I don't actually know the answer to this question. I don't know how asset transfers on death work. Do they attract taxes? With a family trust - is it easier/less cost to transfer assets without the tax?

 

Incredible post from sharon! Tax advice and planning just as important as figuring out what to buy.

A bit of work upfront could save you a lot of headaches down the track.

 

Great point @sharon. A discretionary trust can be suitable for a family with single high income earner. Distributions can go to family member over 18 with lower income.

Do your research first but seek professional advice. Your knowledge will make the most of the time with your chosen tax professional.

E.g. if your wife goes into a high paying job in the future she would be paying tax on LIC dividends at her tax rate.

The trust gives you flexibility but it is not free. Getting it right up front will ensure you don't have to incur avoidable costs later on such as CGT and brokerage.

Not advice.

 

Curious as to why you have picked 68 as the age to retire. I am in this investing bandwagon to make sure we retire (much) earlier than the normal retirement age (60). No right or wrong. Just curious as to why you want to work until 68.

Also, if you are working till 68, you might want to pay closer attention to Super as it will most likely come into play by the age you intend to retire.

I often think about what Steve McKnight once said about investing. He, in my opinion, rightly said that investing is a race. Not because you need to outdo anybody else but simply because you die. So I am front-loading all my investing efforts into a decade or two of hard work now so that I can be free from wage slavery to enjoy a 40+ year retirement .

Not advice.

 

All really good points, thanks @sharon. I guess I just want to get started. Our child is only 10 months old so we have a bit of time until he's 18. I don't see my wife working until our kids are in school which is minimum 4 years away. Not sure of the costs and time associated with setting up a trust and how much more value we would have doing this. Surely we could transition to this type of structure in the future if we saw the benefits outweigh the efforts to do so? Thanks.

 

Hmm I'm not sure. I know the power that time + income have on compounding and I actually love what I do for work. I work in business strategy / internet industry so it's not physical work and I enjoy it.

I guess I plucked 40 years out of the air. Maybe it will be 30 and i'll pull the pin at 58. Need a crystal ball.

 

I had an email chat to Terry_W recently.

To consult for 2 hours with him about all things financial, plus setup a Trust and
setup a bucket company that works with the Trust is all less then 3k. You may or may not
need the bucket company depending on the consult.

It's not much considering the long term benefits. And I have no idea about the ongoing costs.

Problem - Terry is away for the next 3 weeks. If there are other accountant/lawyer types here that can do this - please let us know.