Feedback on retirement plan

Feedback on retirement plan appreciated. We started our current investment journey 3 years ago. 54y.o. These forums have been invaluable in directing, informing, educating and warning us.

Situation:

• 2 IPs - Sunshine Coast - $370k mortgage on each, current value approx $575k (total equity $410k) about to refinance to 2.29% fixed for 2 years
• no PPOR
• $850k in SMSF split 40% VAS; 40% VGS; 15% other ETFS (ACDC; NDQ); 5% speculative (e.g. RAC; DUB; CXO)
• $300k ETFs and direct (e.g. FMG, WES) in personal name
• Over $300k in franked dividends to claim from business

Strategy:

• Adding $50k allowable max. to SMSF p.a. + $300k over next 3 years in allowable "bring forward rule"
• Continue to allocate to as per above
• Continue to DCA into personal
• Access additional equity in properties when they each get to $100k to add to ETF direct balance

Goal:

• Would be great to retire by 60 (6 years). Current household income (business and personal) over $300k p.a.
• How much do we want in retirement? $100k p.a. in today's $, allowed for inflation at 5% in 6 years, maybe $130k p.a.?

Concern:

• At current 4.5% dividend yield from ETFs, $1.2m will provide $54k p.a.
• Is any balance we want meant to come from drawing down equity?
• I hear 4% p.a. draw down means equity will last 25 years, but doesn't that then reduce dividend and therefore total indexed living allowance keeps decreasing every year as you get older because there's less equity for dividends to come from or am I missing something?
• Is it better to draw on less equity in early retirement year (e.g. 3%), and increase as you get older?
• Is there something I'm missing in the strategy that is limiting our net equity and cashflow (no crypto suggestions please )

Thanks

 

Sorry what’s the question?

 

? Financial advisor .

that’s what you’re asking for .

everyone is going to have their own path to retirement , goals , risk tolerance , preferences so hard to advise .

cliff

 

Thanks Cliff, think you're right

 

Thanks for replying codeninja. It's the questions at the end of the post:

• Is any balance we want meant to come from drawing down equity?
• I hear 4% p.a. draw down means equity will last 25 years, but doesn't that then reduce dividend and therefore total indexed living allowance keeps decreasing every year as you get older because there's less equity for dividends to come from or am I missing something?
• Is it better to draw on less equity in early retirement year (e.g. 3%), and increase as you get older?
• Is there something I'm missing in the strategy that is limiting our net equity and cashflow (no crypto suggestions please )

 

I think you should probably think about a PPOR. Wether that is where you live now ior somewhere else doesn't matter. If you own your PPOR outright your living expenses are lower than if you rent, generally speaking.

 

A few comments:
* Super Contributions, confirm that you have used up your $25k each, since 1/7/2018 as you might be able to bring these forward and contribute a bit extra - Catch Up Contributions (check eligibility, super balance must be <$500k as well to qualify)

Contribution caps increase on 1/7 to $27,500 and $110,000 (bring forward $330k)

* Cash & Defensive assets - if you head into retirement with 100% of your assets in sharemarkets & property, this is high risk IMO. Next time we have a real 'crash', i.e. 2008/09 GFC or worse, you will see a big hit to dividends and income. Ideally through a crash you will draw down on Cash and other Defensive assets and re-invest Divs for a period of time. Of course, finding defensive assets which generate a decent yield is a huge challenge at present.

* the 4% rule has long been considered a general guide, as to how much you can draw down and still have the capital last a very long time. It's not hard & fast, and given how low interest rates are now it might be a little outdated in my view....might be closer to 3% if you are retiring young & in good health.

* in terms of how retirees tend to draw down, it really depends on your lifestyle and what you want to do with your time. The reality is that most retirees spend a lot in the first few years as they get some travel out of their system, buy a Landcruiser & caravan & do some home reno's, then spend less for a number of years, and then sometimes ramp back up again if they require aged care or medical treatment later in life. It's a matter of monitoring and reviewing each year, and of course sharemarket performance is a big factor in what is possible.

* As has been mentioned by others, for more 'Self Funded' retirees owning a PPOR is important. You have somewhere to live long term & security, and if you ever need Centrelink support, or Aged Care you'll get much better treatment compared to a tenant.

 

I got that. I wouldnt ask those questions in forums if i have 2 mil

 

My understanding is the 4% rule allows you to preserve capital, and it should grow with CPI / stock market over time.

e.g. In a couple of years you will have about $2.5M in investable assets x 4% = about $100k pa passive income depending on taxes, imputation credits etc.

And that should grow over time so no need to worry about CPI etc.

One of your issues is you don't have a PPOR, which is fine if you can live off the 100k including rent. Or perhaps you might move into one of your IPs later.

There is plenty of info online about all this with the FIRE (Financial Independence Retire Early) movement. MMM (Mr Money Moustache) is one of the originals - US based though.

 

Thanks @Junior, we have been thinking about a PPOR in Sunshine Cast where we want to retire.

 

Thanks @chindonly , I'll look up MMM

 

That is the concept, but the reality of whether or not this strategy will actually work over the long term is really dependent on the performance of sharemarkets, and where interest rates and bond yields are at. 4% is a general rule which may or may not preserve your capital, depending on market conditions.

As an example...the Aussie sharemarket fell 55% from peak to trough during the GFC 2008/2009. Under the 4% rule, would you keep drawing the same $$ monthly income, or would you re-calculate 4% based on your reduce asset value? If it's the latter then your income is going to be very unreliable, if it's the former then you really are reliant on a strong recovery in prices, and performance to support your strategy.

 

The whole point of investing is to grow earnings . Shouldnt be investing in companies that dont. you should be able to increase your capital if you only take out 4%. For example HACK was $5 with 5% yield of 25c 5 years ago, the price now is $9.00 with a 10% yeild of 92c, but it is a 400% increase in dividends in 5 years. You could sell down 5% of growth for income too and be increasing capital. Can also invest in companies that have indexed increases such as RFF which has reliable income the 4.5% yeild has increases built into the 10 year leases. so you should have compounding yeild increases, while having good CG. An ETF that gives good yield is UMAX @ 6.5% might not have huge growth but earning could be use to add to growth. You should also but some money in the better managed funds that can way out perform ETF's such as Maven and Lakehouse. Companies like DDR, KGN, JIN, SOL, WES, SIQ, PPE, AMC, bought now should give strong growing dividends and CG in a few years may even enable you to grow a property portfolio and get leverage.

 

Yes - the 4% rule is very general, but apparently they have run a lot of statistical scenarios (maths geeks much better at it than me) and they can actually calculate a probability of your capital lasting for you if you input specific parameters.

GFC was certainly a huge impact, but in the US if you could just hold your stocks (assuming they didn't disappear!), the market is now about 3 x the value of the pre-GFC level, and I assume divs would have also increased significantly. ASX has only just reached pre-GFC levels.

Peter Thornhill has some interesting graphs on what has happened with Divs and Value over the last 35 years or so.

 

Agree with all this, it's all statistics & probability.

What may change in future is where we are in the interest rate cycle. We have seen falling interest rates for the better part of 30 years now, it will be interesting to see how we go if we start to see hikes.

 

This thread talks about the 4% rule with some reasonable links etc.
https://www.reddit.com/r/fiaustralia/comments/e8xz9d/how_does_the_4_rule_work/

I also found this interesting, about building and selling down an ETF portfolio etc.
Passive Investing Australia