Accumulating wealth and the steps to take in preparing for Financial Independence and funding retirement expenses

Welcome to Finance and Fury, the Say What Wednesday Edition

Today’s episode is about building wealth and getting ready for retirement

1. Keeping with the Theme – Solving the economic problems
   1. Using the resources you have (income, savings, equity, etc.) to get what you want
2. Today – run through considerations to take when looking at accumulating wealth for retirement
   1. Like last few episodes – doesn’t have to deal so much with age – but you own situation
   2. Some want to retire at 50, others 70 if ever

First step – What are your retirement lifestyle costs like? Types of expenses to account for

1. Essential costs – Food, bills, – what your basic budget looks like
2. Discretionary costs – Holidays, dinners out – enjoying the good life
   1. What will this cost you?
3. Asic money smart – has benchmarks – But work it out for yourself
   1. What do you spend today on the essentials and what would you like to spend?
   2. By the time you become FI – probably won’t have a mortgage – so can neglect this cashflow requirement if paying it off can be managed

How much will you need invested to fund this?

1. Asset levels and types are Income-based – work off 4 to 5% p.a. income yields as a rule of thumb
   1. Rule of 20 to 25 – What is the income that you need times by 20 or 25 – depends on the yields of the investment
   2. 4% = 25 times or 5% = 20 times – This is for the ability to not deplete capital in retirement
   3. $100k income = $2m in today’s funds at 5% p.a. or $2.5m at 4% p.a.
   4. Might see figures of $300k in super – but that is assuming you draw it down to $0 and die exactly when you forecast – better to have an income source in perpetuity to avoid longevity risk

1. Types of investments Yields and amounts Depends on what assets are held and the net incomes after tax
   1. Super – After 60 = Tax free income – no need to account for tax
      1. Accounts do have costs – may be a fraction of a % though
      2. Also – Min income drawdowns – 55-64 4%, 65-74 5%, 6%, etc
   2. Property – Net incomes need to be taken – after agents fees
      1. If personally held or in a trust – Tax may be payable as well
      2. Assuming all debts have been repaid as well – otherwise interest expenses
   3. Shares – Aussie shares – Franking credits can offset
      1. Earn about $100k of Dividends FF and with the FF of $42k on that – offset your $42k of tax

1. Example – $1m of Aussie shares in Super – Paying a 5% FF div versus 2 properties for $500k each – renting at $450per week – Super – $71,428 versus Property – $34k p.a. = More than double income

1. Monday Ep this week – GBI – Rather than traditional assets, will your investments generate enough income to maintain your expenses
2. Property may be a good way to generate equity/value through leverage – but do the calculations to see if you can repay the debts and the gross incomes are enough – same with super – need income paying assets – not just $1m sitting in cash paying 1%

When will you need it by?

1. Working out when you need it by determines future values
   2. Example – Inflation of 2.5% p.a. in 20 years turns that $1m into $1.64m (1.025^20)
2. Also important – how much you need to put away to hit this future value?
   1. Monthly investing – put some away each month – either SS or personal investing
   2. Need a help? Calculators on members section available – rough guide to how much to invest each month to hit the goals – doesn’t take into account super/tax/etc – just rough guideline
3. If you want to retire before super preservation – Better to focus on personal investing

Other considerations

1. Debts – paying those down in time to alleviate cashflows –
   1. Personal debts/mortgages or investment debt – One will be deductible, but both eat into cashflow
   2. Personal should be the main focus – at least tax reduction is MTR for every $1 spent – but still spend $1 for cents back
2. Supers – Are you already on track with your super? Do you need to adjust the asset allocations
   1. Higher growth – long timeframes
   2. Close to retirement – want the right asset mix in super – ability to have cash accounts to fund incomes/lump sums
3. Lump Sums at retirement – either renovation costs, buying a new home
   1. Comes back to lifestyle – become a grey nomad – need a lump sum to buy the caravan – don’t want to borrow for this ideally – so have additional savings targets to meet goals/needs
4. Investments – where they are held and are they providing enough income?
   1. Property/investment debts – No point having 20 properties if your net cashflow if $30k p.a. due to debt repayments – just need to work longer to pay back the debt then – can ruin retirement plans
   2. Shares or managed funds – Again – depends on your goals and level of income needed to if you need emergency cash funds if markets crash – share incomes can go down – same with MF distributions
   3. Other investments – business etc. – Strategies to take such as small business concessions

Leading into Retirement – while you might be physically decaying, your finances don’t have to – threshold on funds needed is important to know – whole part of the journey

Calculators and resources available in the members section on the website here https://financeandfury.com.au/member/

Back to answering questions from next week – so if you have anything you would like covered – https://financeandfury.com.au/contact/ on the contact page

Thanks for listening,