Thoughts on strategy to early semi-retirement

Discussion in 'Investment Strategy' started by Kriv, 12th Feb, 2019.

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  1. Kriv

    Kriv Member

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    Hi everyone,

    I love reading the forums and the community here is so fantastic that it’s inspired me to figure out and post my future plans here and ask for everyone’s thoughts and maybe pick the flaws in it.

    About me and my partner:
    -Me: 30yo and earn 170k gross a year (+possible bonus eg 20k gross last year).
    -Her: 32 and earns 110k gross (strong possibility of a significantly higher salary within the next five years).
    -we have purchased a PPOR two years ago, three bedroom townhouse within 10k of Melbourne CBD, and have a 504k IO loan with 125k in an offset account (this amount is lower than you’d expect if you run numbers on our salaries because we have taken a long sabbatical and travelled around the world in the past year). At the time of purchase we didn’t have a fixed plan in mind so went for flexibility (not too expensive, not P+I but big enough with three bedrooms in case we end up needing to live in it, but in a good area for rental demand in case that ends up the plan).
    -I’ve got 30k in my super currently on Balanced, partner has 60k
    -our living expenses would be circa 50k a year combined outside of interest payments on the loan. We park all remaining savings in the offset account so obviously the repayments go significantly down with time.

    About our goal:
    We’ve read a lot about FIREs but it’s not exactly what we’re after despite being inspired by it.
    We would like to be able to semi-retire within 10 years, whilst having two kids if mother nature permits. Semi-retirement means we’ll still earn income, possibly some hobby work, or working 2-3 days a week (we actually enjoy our work and just can’t sit around without being productive in some way so not contemplating early full retirement).
    It’s hard to calculate the exact number but we feel a passive income of 50k per year from investments will allow us to semi-retire comfortably. However we’re conscious that it’s hard to take everything into account (future reductions of income because of parental leave, kids expenses, investment costs etc.).

    After doing some reading I’m making the following assumptions or decisions:
    -I don’t feel very confident in using property for capital growth within the timeframe were after as I believe it will take too long to see growth like the kind others have enjoyed on their journey in the last 15 years so I’m thinking of looking at property for high rental yield.
    -Similarly my risk appetite leads me to disregard share market strategies based on share price growth, but I’d like to get into dividend based strategies for example through LICs.

    Besides working hard, trying to get pay rises and bonuses and investing what we save we’re thinking of the following plan:
    -put as much as we can into the offset account for the next 12-18 months to reduce interest significantly (IO period expires in 2022 but hopeful we can extend another five years if need be)
    -use cash to put a 20% deposit on a high yield property to generate some rental income. Go with IO loan and offset account here too.
    -use all remaining cash to progressively acquire LIC portfolio.

    I’m writing a lot so I won’t post all the numbers we’ve run but these are the broad strokes. I would love some initial thoughts or to read other people’s experiences in a similar journey.

    More specifically if you’re not bored of reading already there are a few things we’re discussing and debating pros and cons:
    1. Is it a good idea to have a mixed strategy of getting some income through an IP and some through LICs? Our reasoning for doing it is more safeguarding in case share profits go down we still have a stream of passive income we can rely on. Diversify in a certain way.
    2. Are we being too optimistic with the timeframe considering we’re not going down the capital growth route so not amassing a big portfolio before converting it to passive income.
    3. Considering we’re not as frugal as the FIREs and we’d like to have kids (though won’t go with private schools etc), is there a cash-flow issue we’re likely to face by splitting between parking cash into PPOR and IP offset accounts and trying to grow LIC.

    Thanks for reading if you got through it and would love any contribution. To give back to the community I’ll post updates of the strategy as we go through!
     
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  2. The Y-man

    The Y-man Moderator Staff Member

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    With the rather high income you are getting, I would personally be looking at tax effective methods to building your wealth. Remember you can "convert" your assets down the road (and hopefully picking an opportune time). Resi IP for income can be a bit of a challenge - esp if you want to play with it in the capital cities.

    The Y-man
     
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  3. Eric Wu

    Eric Wu Mortgage Broker Business Plus Member

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    welcome come to the forum @Kriv.

    you have thought a lot about your plan :)

    there are threads re property vs share.

    without leverage, it is difficult to amass a large asset, and let it grow. this is the advantage of investing in properties.

    saving money is good, but use them to leverage in a growing asset is even better
     
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  4. kierank

    kierank Well-Known Member

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    I know everyone is different but I will share our strategy with you:
    • We use property to primarily create Net Worth, especially with the use of leverage, But it takes time (due to the high buy-in costs, the high holding costs, and the high selling costs) and a lot of work (property is NOT a passive investment) to do this. Property is really crappy for income, especially after all holding costs have been paid.
    • We use shares to primarily create income, with growth being a bonus. It takes time for compounding to weave its magic but shares are a lot less work then property.
    I feel you are definitely young enough to employ a similar strategy but it will probably take more than 10 years.

    If you go too aggressive, you might take on too much risk and can end up losing the lot.

    In the Net Worth creation journey and the passive income generation journey, the tortoise normally does a lot better than the hare.

    For most who have been successful in this, it wasn’t a sprint; it was a marathon
     
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  5. Sackie

    Sackie Well-Known Member Premium Member

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    Based on your income and ages, I would definetly want to have a couple of good growth potential IPs. May take longer than 10 years for them to produce significant CG but over the longer term should provide some nice gains if you buy well. Just avoid buying at peaks. Look at markets showing opportunities. I wouldnt be leaving RE out completely given your strong incomes and ages.
     
    Last edited: 13th Feb, 2019 at 7:54 AM
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  6. willair

    willair Well-Known Member Premium Member

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    If your working on a ten year time frame and 50k passive income then you will need an advisor who is also successful and can supply impartial and unemotional advice and the course of action is crystal clear..

    To make the ten year plan work you will have to change your risk appetite as sometimes anticipating trouble is part of the key strategy and if you listen to the daily headlines in the media most do nothing outside their company paid super and in ten years time the rules on super will change again..

    I know nothing about LIC'S ,there are some highly experienced investors at different age ranges retired from the way I read their posts by investing within this intellectual village ..

    All we have ever done investment wise is property and investing in the top 50 ASX listed and several UK -EU- Banks that is the attraction of stand alone equities ,but the best investment so far was private school education very costly but the end game and the outcomes was worth every cent something you would want factor In the ten year plan..

    This is a very simple quote that I hope you understand from the start while watching the dow as it's up just under 400 and the us xx au dollar the last few hours ..

    """The market is king ..It will decide who is right and wrong""

    Always think about that quote before you invest one cent..imho..



     
    Last edited: 13th Feb, 2019 at 6:38 AM
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  7. jefn89

    jefn89 Well-Known Member

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    Hey Kriv,

    It sounds as though you've thought a lot about your strategy and feel as though there isn't too much further that I can add although happy to give your questions a crack and add some of my insight on my own plans, which may or may not help:

    1. Is it a good idea to have a mixed strategy of getting some income through an IP and some through LICs? Our reasoning for doing it is more safeguarding in case share profits go down we still have a stream of passive income we can rely on. Diversify in a certain way.
    "Don't know enough about this however most millionaires have ~5 income streams.. Seek your own advice etc on this.. My focus is going to be manufacturing profits through development, reno's, sub-divisions etc. While this strategy introduces risk, there's risk in any strategy and I'm all about educating myself to reduce the risk and partnering with "good" people as well.. My goal with these profits is then going to be investing into a combination of higher yielding commercial properties, P2P lending, LIC's/ETF's etc. Again not necessarily everyone's cup of tea."

    2. Are we being too optimistic with the timeframe considering we’re not going down the capital growth route so not amassing a big portfolio before converting it to passive income.
    "I'll answer this one with a quote, whether you think you can or can't, you're right!! I'll leave that one there to sink in".

    3. Considering we’re not as frugal as the FIREs and we’d like to have kids (though won’t go with private schools etc), is there a cash-flow issue we’re likely to face by splitting between parking cash into PPOR and IP offset accounts and trying to grow LIC.
    "Can't really comment on this, there's thread's out there on a concept called debt recycling you may want to read and a good podcast called FIREBUG, which is an Aussie example that can probably help you with the types of questions you're grappling.. I would say with this, don't get too caught up on the detail, put a long term plan in place and be flexible with the approach, have buffers etc.. Unfortunately even the best laid plans will probably change as who knows what's down the road but this isn't a reason to not have some solid goals in place".

    One last point I'd challenge you on is getting clearer on what you want to do with your time once you're in the position to be financially independent and scale back/cut out paid work altogether. This may mean volunteer work, a business, travel etc maybe even more property investing.. If you could do anything with your time, what would you do?
    Ultimately while you mention you enjoy work, you're building someone else's dream, which is not a bad thing but what impact/dream etc do you want to have on the world?

    All the best and looking forward to reading updates on how it goes! :)
     
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  8. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    I wouldn't be taking cash from an offset account to invest, just debt recycle instead and save tax as well.

    Also on your high incomes all you need to do is save. You could work for 6 months and take 6 months off for example. But I am not suggesting you don't invest, just pointing out you could semi retire now
     
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  9. Kriv

    Kriv Member

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    Thanks everyone for the great replies.

    Thanks for taking the time to reply. I know of the tax benefits of both having an IP on an IO loan and why I should park my cash in a PPOR loan, and I know about the tax benefits of LICs (pending next election), but are there other obvious methods I’m missing here? Super isn’t in the plan because of the timeframe despite its tax advantages.

    Thank Eric. I have looked at the threads and along other ressources they were a bit of a revelation for me to think that unless I want capital growth I should have at least somewhat of a focus on dividend paying shares.

    Fair enough and to be honest I know we’re being ambitious with the 10 years. If it doesn’t work out we won’t sweat it and will readjust as we need. We have some risk appetite but certainly a lot less than others we know who play on the share market so will aim to be reasonable.

    If I can ask, how do you balance how and when to use your available cash to buy a property vs continue buying shares to increase the compound effect?

    Thanks for the reply. I can see the benefit of this but I’m a bit reluctant because of the wait and holding costs, and the fact that it will use so much of our available cash flow so not allow us to get shares.

    I wish we could find a compromise with properties that have both high yield and good opportunity for CG. But we may as well chase unicorns ;)

    Thank you for the sound advice. I will need to find someone we can trust and has experience with similar cases to ours. I’ll take recommendations!

    Thanks for the taking the time and for the references. You’re right, the path we’d take in semi-retirement needs to get clearer. I will see how I feel after another 10 years in my industry but I think that I can continue what I’m doing albeit as a freelancer or for my own solo business. If I network well enough by then I should be able to pick and choose and work on things I am passionate about, a few projects a year or days here and there in consultancies. Things are somewhat similar for my partner.

    It’s funny you list volunteering, it’s very likely I would also take time for some community work and volunteering. Our idea of semi retirement is less about doing nothing and more about flexibility and never feeling that we have to go to work everyday to sustain our lives (or have to wait for super), so maybe I’m not really using the right terms.


    Great to hear from you Terry. I’ve read a lot of your posts and I’m really impressed at how open and thorough you are with your responses on the forums.

    Our salaries go straight to our offset account currently so do you mean technically you would never diminish the cash in an offset account but use remaining savings to do other stuff?

    I need to learn more about debt recycling as my only understanding is to get non tax deductible debt to tax deductible debt (which I guess we’d be doing with an IP and with LICs if the politics around it stay the same). If you know a good ressources online I’m a taker.

    Not sure I understand your next point. We want the buffer of the 50k income to be financially independent to a degree where we can reduce our work enough for it to be a nice top up vs a necessity.
     
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  10. Kriv

    Kriv Member

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    Also there is a wildcard I forgot to mention in my initial post.

    There’s an opportunity with a family member to co-invest and do a mini property development project. It would be a land purchase in Brisbane and either a subdivision to build two houses or to build multiple townhouse. That person is a well connected builder and builds these for a living which is why we’re considering it (otherwise I don’t trust us complete novices in something like this).

    It’s very very early and there would be plenty to do to see if it’s viable but the reason I mention is it to see if someone has gone this route early on vs purchasing IPs progressively. Within our strategy I guess it would come before any other property purchase and likely before the bulk of share purchases considering the expenses associated with build and development.

    Any thoughts welcome of course.
     
  11. Sackie

    Sackie Well-Known Member Premium Member

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    Have done and currently doing a couple of these . Putting aside the whole JV dynamic, you need to be very careful the dev stacks up as many sites bought now are hard to make stack up because land values have gone up making margins slim.
     
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  12. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    I was meaning that you shouldn't directly use offset account funds to invest as the increased interest won't be deductible. Get some tax advise on paying down a loan and reborrowing to invest.
     
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  13. Kriv

    Kriv Member

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    Nice and did you start your property investment journey there or did you have substantial assets before you looked at development?

    For the dev that you are doing currently what are you expecting the timeframe and % returns to be? (if you’re happy to share)
     
  14. Sackie

    Sackie Well-Known Member Premium Member

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    Started by investing in IPs then did alot of renos and built up alot of equity and knowledge before I started my first dev which was a JV, so i eased into it. My number 1 consideration for investing from day one has been risk mitigation at every step. With the grace of god, havent lost money on a single prop/deal since i stated 18 years ago.



    For the splitters construction time is around 8 months but one thing ive learnt with devs is they are never on budget and in perfect time schedule , so best to be prepared for that. Returns on TDC sit around 25-30%.
     
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  15. HenryF

    HenryF Well-Known Member

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    Well Kriv everyone else seems to have commented so I will give you some of my view points:

    • @Beano and others in the Commercial Real Estate section of the forum talk about starting in residential and then upgrading to commercial real estate. With your income levels you might be able to go straight there=commercial will give you much higher yields (rental returns) & potentially more stable returns too, so if passive income is what you desire then this might be worth a shot.
    Consider also that many REITs (a type of investment trust) are in essence commercial real estate investment vehicles anyway (why/how do you think they get such high yields (6% or so) even after taking out the REIT management fees?).
    • I'm not well versed on LICs, but I encourage you to listen to an episode of the Freakeconomics Podcast called: 'The Stupidest Thing You Can Do With Your Money'=may change your mind on LICs as a long term strategy. REITs and ETFs/Index Funds may arguably be safer.
    • You are smart though I think to not have all your eggs in real estate or all in LICs, I'd encourage you also to consider three other ways to spread risk: invest in different states (real estate wise here), invest globally in shares (either through LICs or some other way), and consider bonds (the third, unloved investment vehicle).
    • I'd be wary with developments as Sackie says, do 'What If' scenarios where things go bad and see if it is 'swallowable' as a risk for you based on your education levels to minimise said risk. Be conservative in your forecasts for development.
    • Finally, have a plan for making sure the Passive Income keeps up with inflation (cost of living going up)-e.g. if your $100,000 passive income was made up of properties in Melbourne & Sydney right now you might find rental growth a little sluggish. Conversely things such as land tax increases or hitting a new tax bracket can really curtail your returns.
    Cheers.
     
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  16. Kriv

    Kriv Member

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    Thanks Henry. I’ll have a look at commercial property which I might have mistakenly discounted as not achievable on our incomes and within the timeframe, and I’ll check out that podcast.

    I do usually operate under the mantra that if something sounds too good to be true it probably is, so I agree I’ll need to mix things up beyond just LICs for shares.

    Inflation is a big worry in my plan. I don’t really know which type of passive income can keep up with it. I think LICs would based on past performance, but residential real estate I’m not so sure. Something to look into more.
     
  17. The Y-man

    The Y-man Moderator Staff Member

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    IMHO you'll need a bigger deposit / access to equity than what @Kriv has for a decent commercial

    REITs would be no prob.

    The Y-man
     
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  18. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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    Henry spelt that podcast incorrectly so hard to find. It is freakonomics
     
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  19. Terry_w

    Terry_w Mortgage broker licenced 4 tax/legal advice Business Member

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  20. HenryF

    HenryF Well-Known Member

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