Welcome to Finance and Fury, the Say What Wednesday Edition
Today’s episode is about building wealth and getting ready for retirement
- Keeping with the Theme – Solving the economic problems
- Using the resources you have (income, savings, equity, etc.) to get what you want
- Today – run through considerations to take when looking at accumulating wealth for retirement
- Like last few episodes – doesn’t have to deal so much with age – but you own situation
- 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
- Essential costs – Food, bills, – what your basic budget looks like
- Discretionary costs – Holidays, dinners out – enjoying the good life
- What will this cost you?
- Asic money smart – has benchmarks – But work it out for yourself
- What do you spend today on the essentials and what would you like to spend?
- 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?
- Asset levels and types are Income-based – work off 4 to 5% p.a. income yields as a rule of thumb
- Rule of 20 to 25 – What is the income that you need times by 20 or 25 – depends on the yields of the investment
- 4% = 25 times or 5% = 20 times – This is for the ability to not deplete capital in retirement
- $100k income = $2m in today’s funds at 5% p.a. or $2.5m at 4% p.a.
- 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
- Types of investments Yields and amounts Depends on what assets are held and the net incomes after tax
- Super – After 60 = Tax free income – no need to account for tax
- Accounts do have costs – may be a fraction of a % though
- Also – Min income drawdowns – 55-64 4%, 65-74 5%, 6%, etc
- Property – Net incomes need to be taken – after agents fees
- If personally held or in a trust – Tax may be payable as well
- Assuming all debts have been repaid as well – otherwise interest expenses
- Shares – Aussie shares – Franking credits can offset
- Earn about $100k of Dividends FF and with the FF of $42k on that – offset your $42k of tax
- Super – After 60 = Tax free income – no need to account for tax
- 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
- Monday Ep this week – GBI – Rather than traditional assets, will your investments generate enough income to maintain your expenses
- 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?
- Working out when you need it by determines future values
- Example – Inflation of 2.5% p.a. in 20 years turns that $1m into $1.64m (1.025^20)
- Also important – how much you need to put away to hit this future value?
- Monthly investing – put some away each month – either SS or personal investing
- 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
- If you want to retire before super preservation – Better to focus on personal investing
Other considerations
- Debts – paying those down in time to alleviate cashflows –
- Personal debts/mortgages or investment debt – One will be deductible, but both eat into cashflow
- Personal should be the main focus – at least tax reduction is MTR for every $1 spent – but still spend $1 for cents back
- Supers – Are you already on track with your super? Do you need to adjust the asset allocations
- Higher growth – long timeframes
- Close to retirement – want the right asset mix in super – ability to have cash accounts to fund incomes/lump sums
- Lump Sums at retirement – either renovation costs, buying a new home
- 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
- Investments – where they are held and are they providing enough income?
- 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
- 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
- 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,