Are you happy to retire by "living out of capital"?

[always_learning]

I have been very interested in the option to retire based on spending (increasing) capital gains.

I was interest to poll forum members views on the option to fund your retirement from "living out of capital". One option that Steve Navra proposes is by using cashbonds ( for some background take a look here and even more here ) another option is reverse mortgages.

In this thread our famous accountant DaleGG said:

It is when you borrow money from the banks and use those funds to enjoy a lifestyle without paying tax.

Because the money is borrowed, it is not classed as income and hence the tax free status of it.

However, the trap is that your debt level is rising each year and you must be personally comfortable with this notion, and, find a banking source that will be comfortable with you doing so.

Obviously, you need to have a reasonable level of assets to be able to do this.

Dale

Some like my IP hero RPI have retired "happy" using such a method as per this post I presume that a more "complex" method was used woven from Steve's 6 ways to use a dollar

Diversity is the way to go:
Most buy property for capital gain, others for the income; either way it would be wasteful not to divert these dollars (The exact same dollars) into another investment.

It is about using the same dollar many times over so:

• Dollars into property for leverage, which provides income and capital growth.
  
• The income and capital growth into a cash fund, safely housed and converted into an income stream for further serviceability.
  
• Resulting income stream into shares for capital growth and dividend income.
  
• The returns from the shares into your LOC to reduce the property loans
  and thus create opportunity to acquire more property.
  

A wonderful cycle of optimised use of the same dollar 6 times.

Home:
1) Capital growth
2) (Not paying rent to someone else)

Investment Property:
3) Capital growth
4) Rental income

Cashbond: for cashflow and extra serviceability

Shares:
5) Capital growth
6) Dividend income.

Anyway, this is how I do it.

Regards,

Steve

 

[Aceyducey]

Always_Learning,

IMHO it's a viable strategy, but probably best for people who are not looking to take greater risks through investing for potential greater rewards in the mid-long term or those who are looking at a slightly early retirement with a large asset base.

So you could say it would suit people from late 40s onwards, including retired people looking for a better lifestyle but unwilling to sell assets & cop the tax.

Younger than this I feel most people have alternate approaches to investing.

We looked into it a few years ago now & may consider using the Steve Navra approach to it at some stage, but probably not in the near future - we're quite happy to take active investment risks

Cheers,

Aceyducey

 

[Patosan]

Could we have an extra option : "will consider in future" ?
Actually I hadn't even consisdered it til reading a post recently.

I agree with Acey on this one, I'd look at it once I start to feel I've built up a strong enough asset base. Then that begs the question of how much would one be comfortable with, that again would be dependant upon one's aspirations at any point in time.

I'd like to hear more stories from those who already have the dirt of this path on their shoes.

 

[perky29]

I would be happy with a mix of both the Cash Bond approach AND having properties that return good rent (which are fully paid off - would need to sell some property to do that when the time comes).

 

[Easymonet]

For me it would depend upon the capital growth per annum of my existing assets, I would only feel comfortable borrowing slightly less than that capital growth. That way my "real wealth" would still be increasing every year.

 

[Aceyducey]

Easymonet,

You've spot on hit the way this concept works.

Essentially you buy annuities for periods of at least 3 years (absolute minimum) and preferably 5 years or more.

In this way there is plenty of time for the property to grow in value so you're still increasing your equity.

Refer to Steve Navra's posts for more info - or go to one of his courses

Cheers,

Aceyducey

 

[Easymonet]

Incidentally some forum members may be unaware that "cashbonds" is another name for what banks usually call "immediate annuities". You can read about typical conditions and fees for immediate annuities on most bank websites.

 

[quoll]

Maybe

I like the idea of living off rental income and dividends. The current goal is to have 10 (20 maybe) lots of rent coming in from property we own outright, have some income from dividends (not sure how much yet), and I might do some spot work here and there if I get bored.

The annuity idea is good and I've thought about it as a way of increasing cashflow and having a break from the 9-5 job.

The plan keeps changing but this is the current one.

Cheers
quoll

 

[RPI]

I currently live off capital and will be happy to do so for the rest of my life so long as over a 5 year period or so my net wealth is increaseing. My main aim is to draw an income that keeps increasing so although I do like to look at my net wealth and increase this is not as important to me as providing an income. If I had to choose between reaching a net wealth of say $10m or having a steadily increaseing income to live off I'd take the income everytime. Yes it's nice to be a 'millionaire' on paper but would happilly forgoe that for an income. However if I was like a lot of retirees wh hope their money last longer than they do and my net wealth was going backwards every year so it looked like I was going to run out of money and not be able to draw my income that would scare me.

 

[MJK]

I've been along to the Navra seminar.................my understanding is this,

To access equity by selling you lose 25% in taxes but the 75% youre left with is unencumbered. eg 500k equity - 125k taxes = 375k

To access equity via the cash bond you recieve 100% of your equity but you create a 100% debt along side it. The benifit really is you've still got the asset. Assuming assets grow by the same value as the "debt amount" over the given period your no better or worse of than when you started....but you have not needed a job in the meantime!

To me the only benifit of the cash bond as opposed to living off purely borrowed money is a suspect loophole allowing your interest to be tax deductable and your new debt to be subtracted from any capital gains calculation if you do in the end decide to sell an asset.

You need to be able to prove that the cash bond was purchased to invest with not to live on dont you ? Which may not be that easy if under audit?

MJK

 

[simonjulie]

There's an old chinese saying "never sell anything of value" - all I would add is "just hock it to the hilt". However, The chinese where also into the balance of things. Keeping that in mind there is a world full of untold riches awaiting those with brave hearts.
IMHO, this is one of the best polls to be posted on this forum thus far.
It will really sort out the strengths of convictions.
And it is also my belief that living off equity works and will continue to work as long as balance and conviction are at its base.
About 3 years ago I read an article by Kevin Young (Investors Club)about living off equity. At that time I could not get my head around it but the idea fasinated me so much that I had to pursue all options to prove or disprove the concept. I might mention that I am not a member of the club and am not associated with them. But what an idea! To build wealth to a point that it became self perpetuating.
I did my due diligence and proved the theory works. Now I can confidently say what a great feeling it is to know I can do what I want, when I want, where I want (as long as it's alright with my wife!)
... and it gets better every day.
Kind regards
Simon

 

[always_learning]

So 5 people 10% of respondants so far are living off capital.
More than I guessed. 46% are doing it or plan to do it almost 1/2 of the somersoft members (if voting is representational of typical members)

I had expected 70% to say that it is unsuitable for them, as I guessed most people are planning the "sell" off after retirement and paydown debt or generating income out of rental returns.

With the IT offshoring gaining pace, I have lost 5 lower level people out of my Japan IT team this year to China offshore support. It is only time before offshoring moves up the food chain a little to one big fat expensive lazy white guy

My 10 year retirement plan looks to be in need of some turbo-charging or at least a good backup plan!

 

[MJK]

Interesting reply Simon. I think we all lament the selling of assets. In the short term it may seem like a good idea but in the long run usually shows up as a mistake.

Where I'm stuck is that we have to claim the cash bond / annuity purchase was bought to fund investment, dont we ?
If we declare ( or are audited ) that its purpose was to "live off the capital" I assume the borrowing becomes non deductable ? We have avoided CGT though.
So the purchase of the cash bond / annuity needs to be associated with the purchase of some shares or property. Is this correct ?

MJK

 

[simonjulie]

Hi MJK
I once had a cashbond. I cashed it in when it had done its work. I bought more property with the proceeds with the help of a couple of lo docs.

Investors with substantial IP portfolios might tell you that they are living off their capital (realised equity) but to the tax man they are living off their rents. But wait, the rents don't bring in enough to pay the costs of holding the IP's. So what does the investor do? He starts to rearrange finance on the portfolio. Example:
"Property (A) has gone up in value so it can now take the loan from property(B)as well, hence leaving property(B) unemcumbered and ready to do deals with".

Imagine this type of Equity grab happening on a regular basis.

Arrr.... but what about serviceability?

Loan to value ratios must always be balanced at whatever your comfort zone allows.
This is where time can be your friend
Some strategies for serviceability:
1.cash bond/annuity
2.setup a LOC(on a spare title)(some might use the proceeds to live off. But remember, we live off our rents!)
3.Look at Lo doc/no doc loans for futher investment growth.
4.Sell a lemon(a property that has not performed the way it was supposed to.)a big gross income looks good to lenders.

That's enough for now
Kind regards
Simon

 

[dantheman]

To answer this question I have to say that ever since I got interested in investment I have never wanted to NOT live off my equity when I retire.
With modern finance systems I have easy access to my equity and am too impatient to wait for a high enough rent level.

When I wanted to buy a house I had just finished uni so didnt have any money, but still wanted to get started so I used personal loan and credit cards for the deposit. I hardly paid any off but IMHO it doesn't matter because the capital gain was 500% of that initial debt.
Debt isn't something to be scared of even when income is limited, I couldn't afford to pay off that personal loan while keeping my lifestyle but it worked out ok.

I wanted to give the sharemarket a go, and get some laser eye surgery and these cost money which I didnt have an income for. But hey I had equity so I did them from the line of credit, and then my house value increased enough to cover the money I had drawn from the line of credit so it didnt seem like a debt to me, just using money that was already rightfully mine.
I guess I think of the interest as the cost of exposing myself to the property market, and the capital gain as the wage that pays that. Any equity i just think of it like money in the pocket, but you have to have a buffer of course.

What I'm saying is that I'm not retired I'm only young but I'm "partially" living off my equity right now whenever I want to spend a little more.

I think by living off equity you can start early your retirement because you need less properties.

If you want to live off rent I think it is a waste because rent is a smaller percentage of your asset value than capital gain is.
To live off capital gains you can earn more sooner.

For example if the property market goes through a major boom and doubles in 3-4 years like recently - this means living off equity you could double your income. Living off rent though isn't as lucrative because the rents haven't increased nearly as much and you would have a huge chunk of unused equity wastefully sitting there.

On my last month of work before retirement I'm going to apply for a whopper of a line of credit loan and live off that for a few years till it is maxed out

Then at the end of that I have a number of options which you have all mentioned above, selling a house, annuities etc.

I'm not too worried about planning it - as long as I have big equity I'll feel fine about accessing it whichever way is best at the time. It will be many years before I retire though so there may be mainstream products for this by then that aren't as restrictive as the current retiree mortgages.

 

[always_learning]

I had drawn from the line of credit so it didnt seem like a debt to me, just using money that was already rightfully mine.

Nice way to think of it, not only that but you are using money that is already rightfully yours, but it is still working for you because you still own the property and "expect" the price to continue to grow in future years!.

 

[MJK]

Thanks for your replies guys, gets the old brain going!

MJK

 

[see_change]

Ok

So what happens if we have a period where we do have no growth or even negative growth for a period of years.

What happens if interest rates go up and / or banks decide to change their lending policies at some stage.

These have happened.

Not trying to sound a profit of doom, but just a note of caution.

If cash bonds are the only way you can expand you portfolio , and you are prepared to take the risk , fine, but there seems to be a perception on the forum that this is almost a no risk / certain method . In my experience very little in life is associated with no risk.

Having said that , probably the biggest risk is associated with doing nothing.

BTW , I am doing Steve's next course in sydney , so I might change my mind after that .....

See Change

 

[simonjulie]

Hi see_change
IMHO the answer to your "What If's" are governed by the investors flexability in those situations.
The trick to staying flexible is to be able to access equity in as many ways as one can imagine.
I don't believe that Cash bonds are the "Holy Grail" but they can be a useful tool when the strategy suits the situation.(the trick is finding a lender who will recognise them as income)
Low doc and no doc loans are another way through the muddy waters.
LOC's are great to access equity quickly.
Selling property is another but less desireable avenue.
Allowing lenders to take mortgages over term deposits can be helpfull to show better serviceability.
IMHO Flexability of finance within the IP portfolio is one of the most important strategies for long term survival.(that is one great big can of worms all by itself.

I believe the bottom line is to get there first and then worry about how you are going to hang on to it . It's much more fun that way.
Kind regards
Simon

 

[simonjulie]

Another thought.
When I was in the workforce I had finite solutions for finite problems and now that I'm out of the rat race the problems I face are infinate, but the comforting thought is that the solutions to these problems are also infinate.
Think outside the square!
kind regards
Simon