Exit strategies for retirement

I'm interested to hear different 'exit'/'income' strategies people are considering/are using when 'retire' to have income

eg
1. pay down loan so low LVR and live off net rental income
2. sell 1 or more IP if needed to pay off other IPs so can have net rental income
3. sell IP and buy a higher yield property later to get income stream?

Other ideas/ways?

 

I am old fashioned and most on PC will probably disagree with my thoughts below.

On one's journey to financial independence/retirement, I believe one should start with the end in mind.

Imagine heading off for one's Christmas holidays or the holiday-of-a-lifetime but one has no idea when they are planning to go.

It doesn't make sense and one just wouldn't do it.

I don't understand why everyone wouldn't do it for their financial independence journey. Even just simple goals like minimum income-after-tax and minimum net worth.

IMHO, to achieve these goals, one needs to develop a strategy. Mine is:

1. Property is great for capital growth but crap for after-tax-income. To maximise one's growth, I use leverage (I only have I/O loans to minimise the drag on my cashflow) and it offers tax benefits such as negative gearing, especially beneficial in accumulation phase. I don't like paying any more tax than one has to - so negative gearing reduces one's tax on income and, if one never sell, one never has to pay CGT.
2. Shares are great for income but volatile/unreliable for growth. Due to this volatility, I only use cash to buy shares and hold them in our SMSF as their income can be totally tax-free; also one can use dividend imputation to boost one's income returns. If one never sell, one never has to pay CGT. Also, in retirement, one can use some of one's tax-free pension payments to support the negative gearing on one's property portfolio.
3. Finally, one needs to determine one's cash requirements. This has to be closely monitored/managed as the cash requirements will vary over time. In Super, I like to keep 2 to 3 years pension payments in cash. Outside Super, I am a big fan of Offset accounts.

To maximise my net worth generation, compounding is my friend. The longer one keeps a growth asset, be it property or shares, the faster and faster the compounding clock runs. IMHO, when one sells, not only is one transferring some of one's net worth to someone else, one is also re-starting/resetting the compounding clock.

That is the way I see it. Others see things differently and that's fine. I am not out to convince them otherwise. I know what has worked for me over the last 45 years and is still working for me now.

My net worth has increased far faster in the 10+ years of my retirement (even in a global pandemic) than when I was in accumulation phase because the compounding clock is running faster now than back then.

 

The most important thing is your plan is working for you. That's success.

 

and who said we would never agree. This is precisely what most people don't do, when it's precisely what they should do.ie Decide what you want . Work backwards from there. If you want 100K NET per annum, put a strategy in place to get there. If you want 150K NET, put a strategy in place to get there ... so on and so forth...

time and compound are potent - but don't forget to work within a borrowing capacity plan that ensures you get to play the time and compound game with enough assets to get to your goal. Gone are the rules of old. Many are unable to play the game with more than 1 or 2 assets these days as borrowing capacity runs dry and later on, holding costs ain't what they used to be either . Got to actively manage that stuff far more than you used to. Borrowing and holding capacity are equally important now. Buy and hold and harvest really needs to be amended to buy and hold and pay down debt in order to harvest.

 

My strategy was to sell down a property about once every 5 years, Sold down 3 in last 6 years. Trouble is I bought 3 more ! Low interest, rates improved cash flow rare oportunities on stock markets was a game changer. As well as now co-operative banks. Decided to sell one 2 weeks ago partly to reduce land tax, but will have to pay too much CGT. So went to the bank asked if I could increase my borrowing to my surprise got a 30% increase in availabe funds and could have got more by jumping through hoops. Was hoping for bridging finance, But got a whole new loan after knock back by 3 other brokers. . Apparently KICKING YOUR KIDS OUT DOES WONDERS for you borrowing capacity. So bought another and looking at some more. Property gives better income. than shares. Share are better for Capital growth. The income from property is much more valuable because it gives you more leverage. The growth from shares enables faster acquisition of income producing security to leverage off and can really boost income.

 

Ok, I’m the Dumbo here.

I simply figured that the more money/assets we accumulated before retirement, the better. Never actually put a dollar amount on it, or a specific plan in place.

Worked spectacularly well for us - we have ended up (not quite sure how) with more than we ever could have dreamed possible.

 

I think what Euro is mentioning and what you ended up doing aren't mutually exclusive! For most people starting out (or earlier in their journey), having a vivid end in mind is very important and you can then trace/ track/review/ modify the plans as you go. Without that, it kind of becomes a listless ship, where it is easier to cut corners.

I started with an end in mind but reached the end very quickly and then kept on updating the 'end' however stopped doing that and I am now in your category - just keep on building wealth and don't have an end in mind anymore- What we have is so much more than what we would ever need, means that we don't have to follow a plan anymore but building wealth is fun so we keep on doing that!

 

Do you think with hindsight, you shouldn't have sold those 3 and had remain invested?

 

There is a saying 'Man proposes and God disposes' never imagined my husband would need Home Care and eventually have to be moved into Nursing Home for over 3 years. Fees for first year $1,800 per month and $2,600 per month when he passed away. He deserved the best of care and got it but it had consequences for me.

 

Good for you @Marg4000. Success might be related to having a reasonable thought of what is 'enough' and being content with that (plus a buffer?).

I think of the heroic generation (most are passed away or very old). My mum told stories of bombing etc. Enough was having the basics and a pulse!! She always said she needed access to a shop a post office and a church, and that was the baseline. Everything else was overs.

 

Strategy and planning are important but I agree they are what they worth on paper. This is not to say not to do it. I would plan for how to achieve happiness and excellent well-being too. My approach is what @Marg4000 mentioned earlier, just accumulate and develop a habit of it. But not to the detriment of happiness and well-being.

 

You should note that I used the word MOST. I used that word instead of ALL because MOST people have not ended up with spectacular results. MANY have done very well equity wise, but MOST have ended up with inadequate income outcomes. And how do we know this? Because if MOST people were achieving great income results we would be seeing a reduction in the budgetary costs for pensions, rather than an increase. We would not be seeing a political debate about the need for increases in compulsory Super contributions, either.

Given how much more important it is to manage borrowing capacity and cash flow these days , than it was for the 30 years before APRA got involved in things, I think its more important than ever that people have some form of plan in mind when they sit down and look at where they want to be in retirement.... It doesnt need to be a rigid plan. But you need to have some idea of where you are going

 

I think plans are important but being able to change the plan is equally important.

We were buy and hold for a long time. Then we started selling older houses and building new, along with some small subdivisions.
Much quicker, better returns than buy and hold.

But we had accumulated the assets to sell. We also realised that older houses require more maintenance and that we don’t like major renos. You still get the old house. Fashions and floor plans have changed so much.

One example is that we had a major fire, demolition and insurance payout. The new house is so much better, and values better, than anything you could have done to the old house.

 

First one has had 125% CG and would be netting 9.5% yeild on sold price, 2nd one identical property sold 20% more 3 years later. But it was for capital concentration, risk aversion and an each way bet as I still have 3 the same. I was worried about interest rates rising from 6% to 8% at the time, couldnt extract equity so put funds in LOC to draw on for living and investing in WAAX stocks PME, ALL, TCH which became APT for $1.30 . Second property some funds went in to LSCF, LCGF for 200% gain in the 3 years. same as the 2nd property. Third property was sold to improve yeild built for 200k with 270 week rent, claimed depreciaton so had a cost base around 170k sold while still in new condition, had no spending on depreciation and sold for 230k. Bought better property in much better location for 250K and rented it for $350 a week , now 400 and property is worth near 400k. So No not sorry

 

How about selling all investment properties, buying fully franked shares and live off the income ?

 

How much do you think you need to generate 100K per annum, for example? 2Million?

 

I'm glad someone started this thread. For me personally, the pandemic has really changed my outlook on life and the value of spending quality time with my family. In short, I never really realised how much I was missing out on before things slowed down with covid. Going back to the original topic, I now think having a plan is important because otherwise how will you know when to stop? Sure many people say "you can never have too much money", but then how much of your precious time is one willing to sacrifice to obtain that extra money? To state the obvious, life is always about tradeoffs and compromises. I'm in my late 30's and before all this happened, I never really thought about an annual income target for retirement since it still seemed so far away. I still remember joking about retiring by 40 when I first started out in the workforce. Thanks to covid (strange thing to say I know), I actually drew up a plan, did the sums and realised that it's not actually out of the question.

 

Our 7 year plan/goal is to own and operate a small cattle property in the Lockyer Valley in SEQ and have an additional independent $100k pa passive income. It will be a large hobby farm rather than a commercial venture.

We live interstate but have bought the cattle property already and leased it out for the next 3 years. We will then aim to move to the property in 3 years time but continue to work our current jobs remotely (work from home). We will sell a couple of investment properties over the next couple of years to increase our offset balance and keep the interest payments under control.

We will "retire" from fulltime work 18 months after our move, with our income comprising casual part time work topped up by the proceeds from a $500k investment (probably ETF's).

When we reach super preservation age we can choose to stop external work all together if we want and only work on the cattle property. The property purchase loan will be fully offset or paid out at this time too.

The early purchase of the property was not financially ideal, but enabled us to lock in a tangible goal. It's also ensured that our plan wasnt put at risk by possible future market price differentials between our current real estate investments and the new property.

It's a bit of a house of cards but that's the goal we are working towards.

 

You would think 5% would be achievable as an average, I haven't researched it yet so not sure what the best way to get exposure is.

 

For us, the exit strategy will be to downgrade the PPOR.

We’ve done a number of things such as

- buy 8, wait for them to double then sell 4 and LOR.
- buy dumps and do major renovations to accelerate things.
- dual occupancy and granny flats to help cash flow.
- large blocks with subdivision and development potential.
- active share investing and salary sacrificing in to SMSF.

All of these have worked out pretty much as planned.

However all their after tax $ returns combined are dwarfed from stretching to buy a PPOR on a premium block 20 years ago.