FIRE Starters (Financial Independence, Retire Early)

So, let me ask a question.

If you can and want to retire early, faced with these two options, which would you choose:

Option A - sell enough properties to raise $1m in cash, then live off the proceeds till 60.

Pro: less properties need to be sold
Con: the capital/proceeds is being consumed

Option B - sell enough properties to raise $2m in cash, invest that in the stockmarket and live off the dividends

Pro: proceeds from sale of properties invested rather than consumed
Con: more properties need to be sold

Assumption: once you get to 60, you'll have enough money via Super etc to sustain you forever

 

Thanks, that was a refreshing take. I agree wholeheartedly with what she wrote. So much of that financial influencer BS is just that... ****.

 

Why only 2 options?

I am working with a client now who will sell one property but shift the debt over to other properties so as to keep the loans open and then loan recycle into a new property after retirement - which would enable a construction and sell each year without the need to apply for finance yet fully financing it. Using a company structure to smooth out income and save tax.

 

another option is to sell in stages. You don't need $1mil in cash (unless that is the capital gain from a single property perhaps. Sell one property and delay selling the next one for aas long as possible to allow for more growth to kick in and more rent.

 

In my opinion I would invest the 1 mil into shares, perhaps if you can take risks then pull the equity from properties and invest into shares.

But if up to me I would have sold our ips and put all into shares, all I hear every now and then is ‘ting ting’ when the dividends hit the bank account and I get notified, no work.

 

Yes but I was trying to keep it simple.

 

You mean the $2m. Thanks.

 

No I mean the 1 mil so in between option 1 and 2

 

Well, theoretically it prob won't be enough ie investing the $1m and drawing down a little as you go (like you do with Super) won't go the distance.

 

Neither. My goal is, and always has been, own the properties outright and live off the rental income. Keep the properties until I die, or if I get sick of managing them before then, sell and put the cash in shares. Either way, maintain the capital investment and just live off income produced.
Super is just a 'bonus' to be chucked on top when it can be accessed.

 

No problem with that strategy except, unless you sell a few to pay off the others, you may have to wait 25-30 year for the loans to be fully paid off. And living off rent isn't terribly tax effective.

 

You could reach the destination quicker by not paying them off and just offsetting them instead.

Then to speed it up further you could use that offset money to invest in other assets to get a return greater than 3% or what your interest rate is. Imagine if you bought a growth asset instead and that asset had income of say 2% and capital growth of 2% - better return and more capital compounding

 

Super is just a structure not an asset class, although I think for those who are relatively young, due to access restriction they might not want to put extra into super as yet

 

Have hit servicability walls that are unlikely to be resolved before we retire, unless I decide to stop being a SAHM and get paid employment. Banks just don't like lending to large families, with 6 kids all in private school. Lol. Just waiting on kids to all finish school first before we retire, because we don't see much point in pulling the trigger before that point.

In order to pay off our remaining debt, we are investing in shares, and will pull that back out either when it is enough to pay out any remaining mortgages in their entirety, or if interest rates rise dramatically and it makes more mathematical sense to put it on the mortgage. Current overall debt to valuation ratio of all our properties sitting at around 40%.
At this stage, if we just sit back and done nothing more then paid our mortgages with simple savings, we would hit our goals without even really trying. I anticipate it being quicker putting that savings into shares, and then using that to pay the mortgages.

Plus now my youngest will be starting school in the next 2 years, I am considering the possibility of starting paid employment outside the home, which will mean an enitre new income we haven't planned for. (Which would in turn likely create some new servicability as well if we did devide on more property). This part is still undecided yet though, so I haven't factored it into our plan properly, it isn't nessecary. Just briefly considered the possibilities it opens up. It would likely change the game plan a bit. But the end goal would remain, retire with paid off assets, preserving the capital investment and living off income produced.

 

Financial planners say $1M is enough

 

none of what I wrote requires you to borrow more money.

 

Sorry, I probably wasn't very clear in my post.

We are currently investing in shares, in order to pay off the remaining debt. Realising the rate of return on shares is a lot higher then the <2% we are paying in mortgage interest.

We won't be be paying the actual debt off until we have enough funds elsewhere to clear it in its entirity and are actually ready to retire. But debt free remains the end goal.

We 'could' sell a property and be debt free tomorrow. But we wish to retain capital.

 

But why pay it off at all?

 

Enough for who? I love these numbers that journalists throw around in their write ups. Headlines like how much you need to retire. Such silly blanket statements and numbers.

 

Many assumptions to be made there. Age, how many IPs, how long owned etc.
Here's my take.

Sell one IP = 1m (Sydney median)
That gives about $32,000 pa for 25 yrs to cover expenses at $625 per week. Enough for good healthy food, coffees and drinks at the sailing club overlooking the bay, and paying the bills. And I reckon $100 for a cleaner/house keeper can fit in that budget.
No shares, bonds or whatever. Interest is about 0.8% so first year is only around 6k. Not much but enough to rent a unit for a month or two in Airlie Beach when the weather gets cold in Sydney.

Sell another IP = 1m
This one is monopoly money for investing, shares, trading, JVs etc.
LICs or ETFs? Sure when the index drops at lest 20%.
I don't recommend buying a holiday house, maybe a small unit. Better to just rent wherever you want and go to different places.

Call me ole skool but if after 20-30yrs you don't own many or haven't paid it off you're doing it wrong.
It's no different to owning a share portfolio, the income and wealth comes from the net equity.

The financial adviser! Who else lol.