How Long Will it take to RETIRE on SHARES

Discussion in 'Financial Independence, Retire Early (FIRE)' started by MTR, 5th May, 2017.

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  1. Zenith Chaos

    Zenith Chaos Well-Known Member

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    The calculation for the risk free return for money against a PPOR is 5% / (1-.375)= 8%

    Reading this may be useful: Tax Tip 9: Don’t use Cash in Offset account to Invest
     
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  2. MTR

    MTR Material Girl Premium Member

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    there are many strategies with property investing than buy and hold if prepared to go outside your comfort zone and become an active investor.
    Quite a few developers on this forum that can manufacture growth.
     
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  3. johnpendlebury

    johnpendlebury Well-Known Member

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    No doubt. Credit to those that have achieved success via this path.
     
  4. OscarBravo

    OscarBravo Well-Known Member

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    thats not compounding mate, thats leverage.
     
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  5. Lacrim

    Lacrim Well-Known Member

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    I think the perfect, balanced early retirement scenario would be:

    - approx $1-1.5m in high yielding blue chip shares/LICs, ETF's etc
    - a large buy and hold property portfolio that beats the average in terms of CG and is self sufficient
    - a cash buffer in excess of $1m
    - PPOR paid off
     
  6. pippen

    pippen Well-Known Member

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    Cash buffet of 1 mill! Gee wiz! Best of luck and all to you for these end goals!

    I myself would prefer a fully paid off ppor (done) 300 to 500k cash at bank and fully paid off ip along with lic's dishing out around 40 to 50k per annum!

    The problem lies in how to and the long term compounding and staying the course notion and realising the enemy of a good plan is the dream of a perfect plan!
     
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  7. MWI

    MWI Well-Known Member

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    It had to grow by another $6million hence it is leverage and compounding!
     
  8. OscarBravo

    OscarBravo Well-Known Member

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    10 years worth of compounding is far less consequential than borrowing at and LVR of 80% - have a look at the difference between simple interest and compound interest over ten years. I used 6 million and 10% annual growth (!) and a quick back of the napkin calculation has the difference between compound and simple interest at about $2.5m. Obviously nothing to sneeze at!

    On the other hand, borrowing $4.8m and and assuming it doubles over some period is obviously going to give you good results, compounding or not.

    I guess the point I'm trying to make here is: if you assume 10% compound growth over the next ten years, borrow as much as you possibly can - the leverage will make you rich, not compounding (although the compounding is a nice bonus).
     
  9. OscarBravo

    OscarBravo Well-Known Member

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    I've done my maths poorly and used some made up numbers it appears. Apologies! Compounding is obviously more important over 20 years.

    Probably labouring the point here a little but investing in 6m of shares at 80% LVR gets you to the same place, right?

    I understand your point that nobody sane will let you borrow that much against shares, rightly or wrongly, but as long as you assume long term growth and no calls against your debt, you really should borrow every single dollar you can get your hand on and invest it.*

    *not advice obviously
     
  10. MWI

    MWI Well-Known Member

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    I don't think we understand each other, if you borrow $4.8m and you assume it 'doubles' - the 'doubles' refers to compounding, to growth, if no double, no growth, you are still left with $4.8m.
    Leverage can multiply gains or losses and stay neutral if there is no growth.
    I agree property investing is a great vehicle if you use leverage and compounding (meaning it grows in value the asset base, each year, so $1m to $1.1m to $1.21 and so on).
    Assume you invest $1m of cash funds and it compounds and grows in value to $2m (whatever the time you wish), you will make $1m, hence 100% or double or 1 times more (as ROI). BUT, if you invest your own funds of $200K and $800 OPM borrowed, then your return is $1.8m hence 9 times more!
    I agree property is not so attractive if we only look at rents, only look at %, what makes it attractive is that we can access OPM large leverage, yet we get to keep any growth on the asset (via compounding!).
     
  11. MWI

    MWI Well-Known Member

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    Agree! That's what makes property attractive as investment in comparisons to other investments.
    Now my strategy is never to sell, and to at least hold the asset base for 30 years, hence compounding only makes sense the longer we hold, hence I suppose why Sydney prices are where they are today?
     
  12. Lacrim

    Lacrim Well-Known Member

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    Possibly....but personally am not aiming for fully paid off IPs. There is an element of risk to that but paid off IPs entails oodles amount of income tax depending upon how many IPs you have. LOR is not an optimal cashflow strategy IMHO.
     
  13. Snowball

    Snowball Well-Known Member

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    One issue often ignored with leveraged property growth is this... As your equity grows as a portion of the asset base, your return on equity actually gets lower and lower.

    So unless you stay leveraged to the max permanently, your return on equity will decline and it becomes less attractive over time.
     
  14. OscarBravo

    OscarBravo Well-Known Member

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    Yeah we had a problem of definition! I think you are using compounding and growth interchangeably whereas I was specifically referring to the growth on growth portion, if that makes sense.

    For example: 10% in first year and 10% in second year - the growth component is 21% (1.1*1.1) but the compounding component is only the 1% you get over and above "simple" growth (being 10% plus 10%).

    Of course I agree that if you borrow a great deal and it grows you will get rich.
     
  15. MWI

    MWI Well-Known Member

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    BUT the investment is more attractive as you have more equity, more growth, worth more! How can that be less attractive?
    That is the great thing, over the years if you do not accumulate more, inflation makes your loan worth less too, your asset is worth more too!
    You cannot always continue leveraging more, especially if you wish to retire and live off it one day!
    The great thing about it is that yes, you have more equity, hence if you choose so and serviceability permitting, you can then take out the equity and invest more.
    I don't see why that would be a problem?
    It would be the same principle, as having cash in the bank, or shares, the ROI depends how much of your funds you put in, yet I doubt you can keep leveraging by talking out equity like from property....
     
  16. Snowball

    Snowball Well-Known Member

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    The pure numbers make it less attractive. Return on equity goes down the more equity you have in there.
    Once the property has low leverage it has pretty poor returns generally.
    Max leverage returns are great, yes, but do the numbers and see how it looks later on.
    Great if you wanna work forever, but not if you want to live on your investments. Leverage then needs to be pretty low/none.
    You will see the lower the leverage the less appealing the returns are. This happens naturally as the property grows in value.
    The decline in lvr creates decline in return on equity.

    No, unleveraged investments don't have a diminishing return on equity because it is all equity.
    I used to have rose tinted property glasses on myself, but after taking a more balanced view and doing a few calcs of how the future looks to me, the numbers just don't stack up.
     
    Last edited: 28th Jul, 2017
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  17. MTR

    MTR Material Girl Premium Member

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    Now I am very confused?:) Not unusual
     
  18. nth brisbanite

    nth brisbanite Well-Known Member

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    Does cash buffer mean superannuation? If not, why don't you include superannuation?
     
  19. Gockie

    Gockie Unicycle anywhere and everywhere... Premium Member

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    Return on equity is a percentage. Its a derived number based on two other numbers, the income (and/or growth, depends what you want to call the return, I would include both) is the numerator and the equity is the divisor. As your divisor (equity) goes up, the percentage (ROE) figure goes down.

    Most powerful thing to do to keep it a high figure is to keep buying more assets with a return, to keep the amount of equity you have in each investment on the low side. Pull equity etc. Then you have a bigger asset base and over time, it should all grow. I would tend to invest in property for the growth though, less so for the yield. Leverage makes property investing a worthwhile way to go.

    Once you finish your growth phase and want to live off your assets, sell down some assets.

    Ps. This is the same notion of why lower yielding stocks aren't necessarily rubbish... if the divisor (current stock price) keeps going up, obviously that yield figure won't necessarily increase if you are dividing by a number that keeps growing. But if you look at it in absolute numbers....
     
    Last edited: 29th Jul, 2017
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  20. Lacrim

    Lacrim Well-Known Member

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    It probably should but I wouldn't consider 60 early retirement. Good point though - is there ANY way for a person who's retired early to get his/her hands on Super before 60?