Early retirement without a fortune

[kathryn d]

China, I would suggest you read the book "The Millionaire Next Door". Details the reality that the majority of millionaires and multi-millionaires do not live in the up market suburbs, do not have the expensive and flashy houses, do not drive the fancy cars, do not have all the "status symbols" or live the "millionaire" lifestyle that you seem to think they do.

My exact same thoughts

 

[geoffw]

China, have you done the sums on the opportunity cost of saving for your home rather than having a mortgage?
What would your home have cost at the point you started saving for it?
You said it took 11 years to save $700 000 to pay cash so that's roughly 60k per year in savings. As over that time frame houses (on average) doubled your house would have been maybe $350k originally.
You could have paid that loan off in a record 6 years and then had an extra 5 years to save for your retirement adding another 350k to your retirement funds.
With the capacity that you obviously have for savings, maybe you made a poor investment choice to not have a mortgage.
Out of curiosity, where did you live for those 11 years? What were your costs there?

At the same time, he was presumably paying rent, which he would not have had to do if he had bought the house with a mortgage.

On a rough model:
.House worth $350K 11 years ago
.Increased in value 10% pa for 8 years then steady for 3 years
.Rent 4% of house value in any one year
.Interest at 9%, P&I, 11 year term

On those figures:
.He's paid $240K rent on top of the $700K price- $940K total
.Loan P&I would have been $561K

So the method China strongly advocates would have cost him almost $400K more than the method he rubbishes.


Even if the house had vastly underperformed the rest of the market. So say:
.House worth $500,000 11 years ago
.Increased in value 4.5% pa for 8 years then steady
.Rent 3% of house value
.Interest 9%, P&I, 11 year term

On these figures:
.Rent & house price $900K
.Loan P&I $889K

So he would have broken even on some very pessimistic figures.

 

[Peter 14.7]

I would to move on from China back to original topic. That is why most of us are subscribed?

Peter 14.7

 

[geoffw]

Sorry. I shouldn't feed the trolls.

I was interested in those figures for my own knowledge. I'm quite happy now that an investment path with a mortgage is a far better way to get to comfortable retirement than without.

But that depends on your own risk profile. Although I'm quite happy using debt to my advantage, there are many who are not. That can sometimes be a cultural thing- my wife comes from a background where debt is never used, and she is still uncomfortable with it.

 

[skater]

Sorry. I shouldn't feed the trolls.

No, neither should I. Sorry, but I just could not ignore the last post & my blood was boiling a little there.

I was interested in those figures for my own knowledge. I'm quite happy now that an investment path with a mortgage is a far better way to get to comfortable retirement than without.

But that depends on your own risk profile. Although I'm quite happy using debt to my advantage, there are many who are not. That can sometimes be a cultural thing- my wife comes from a background where debt is never used, and she is still uncomfortable with it.

Both you and Joan mentioned stuff that I wanted to note down, but was just so flabbergasted that I could not, so thankyou.

So.....back onto the original topic.

The vast majority of us can't save our way to retirement, so we invest with the hope that the skills we have learnt along the way will bring us a confortable retirement.

 

[daniellee]

Hi,

I had a 'deja vu' moment reading the discussion between China and everyone else. I am quite sure I read in another thread a similar person coming into the property forum not looking to invest in property, but learn about investing mindsets?

China: Surely there must be other forums on investing mindsets that you can go to other that this one?

Regards,

Daniel

 

[china]

It may come as a surprise that there are many VERY nice homes in the outter suburbs. A person is not measured by the value of their PPOR, nor the suburb they live in. Not that it's any of your business, we live in a very nice suburb that has average very nice homes. No, not new, but nice. It just does not come with the $700k price tag.


While I've got better things to do than to sit & read that article in it's entirety, I noted this little snippet "In 2005-06, 5% of households who had recently bought their first home did not have a mortgage" Half your figure, and you will find that some of them had a silver spoon, and others inherited. There really is a small proportion that save their way to being able to purchase their first PPOR debt free.

No you don't! You just said, and I quote "Investors living in low cost housing in low cost suburbs must not be very successful investors or are very cheap people. Not people to emulate." It's obvious that you feel superior because you have a high income & don't have a mortgage. Well, sunny boy, I may have a PPOR mortgage in a suburb that is below your standards, but I can betcha my networth is a hell of a lot more than your's. You can go take your cash, go stick it in a bank & watch it depreciate. On the otherhand, this unseccessful investor will keep her large asset base and have a sustainable retirement.

I agree that buying on credit for consumer purposes is going to erode your quality of life, but you simply HAVE to live somewhere. Unless you've been bludging off your parents while you save for your PPOR, you would have had to pay rent. Even you must admit that there is a break even point where it is cheaper to have a mortgage than to rent.

It is obvious that you have lived a pampered life & you are now on a high income. You're successfull! Bully for you.

But you know what, there are tons of people that don't have a large income & no matter what they do, will never, ever have one. They go about their lives & live within their means (well, most of them). They are not cheap people, just average, normal people. Take some time & stop belittling others. Normal, average people can not save their way to a PPOR. They save a deposit & get a mortgage.

I think you will find that "In 2005-06, 5% of households who had recently bought their first home did not have a mortgage, down from 18% in 1995-96"

http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/4102.0Chapter9102008


So in 1995-96, one in five first home buyers bought their home without a mortgage. This is and official australian bureau of statistics report so it is far more credible than any individual conjecture.

Skater, I am amazed that you find a 700k ppor to be extravagant. The median house price in over 100 Sydney suburbs is over one million dollars. So 700k is far below the median.

I reject the notion that buying a PPOR with cash implies a pampered life and that "normal average" people cannot do this. Especially when house prices are not rising, mortgage costs and interest are wasted money. For most people, their PPOR is an indulgence, not an investment asset. I think that buying a PPOR with cash reflects years of hard work and frugal living.I would suggest that this is the key to early retirement without a fortune which is what this thread is all about.

 

[Rolf Latham]

I would suggest that this is the key to early retirement without a fortune which is what this thread is all about.

cough

2 to3 mill in cash ..................

I guess with the average Super exit drawdown being something less than 120 000 in total last year 2 to 3 mill in 2013 AUD $ would be regarded as as a bit of a fortune ?

ta
rolf

 

[china]

China, have you done the sums on the opportunity cost of saving for your home rather than having a mortgage?
What would your home have cost at the point you started saving for it?
You said it took 11 years to save $700 000 to pay cash so that's roughly 60k per year in savings. As over that time frame houses (on average) doubled your house would have been maybe $350k originally.
You could have paid that loan off in a record 6 years and then had an extra 5 years to save for your retirement adding another 350k to your retirement funds.
With the capacity that you obviously have for savings, maybe you made a poor investment choice to not have a mortgage.
Out of curiosity, where did you live for those 11 years? What were your costs there?

Hi Joan.

I am not sure whether it was a poor financial decision to put away savings over 11 years. For the first eleven years of my working life, I was somewhat itinerant. I did six month to one year stints in various parts of Australia, in metropolitan, remote and rural areas. For much of this, I lived in either employer subsidised housing and occasionally, there were periods where I had to pay market rent.

I did not even think about buying a PPOR until my current employment situation arose in 2009 wherein I knew that i would be in the one place for at least the next five years.

I suspect that my ppor was probably worth 350k eleven years ago but I would not have bought it as I did not know that I would be in that area. In that eleven years, although I did not invest in property, I did have modest share invesments, which prior to GFC, enjoyed some modest gains.

However, when I bought my ppor in 2010, I was certainly immensely pleased that I could pay with cash as it felt like quite an achievement. But, I really am not sure about the exact details of what if and opportunity cost. I suspect that if I needed to take a mortgage for PPOR, especially in an environment of stagnating house prices in various parts of Australia, it would actually delay my retirement. In some parts of rural/regional australia, there has been no upward movement of house prices since 2003. So therefore, a mortgage, which is essentially a leveraged situation, will compound your losses in stagnant or downward falling markets.

 

[china]

cough

2 to3 mill in cash ..................

I guess with the average Super exit drawdown being something less than 120 000 in total last year 2 to 3 mill in 2013 AUD $ would be regarded as as a bit of a fortune ?

ta
rolf

Sure, but many retirees have the majority of their assets outside their super. I have often seen many pensioners driving around in mercedes in certain suburbs of sydney. The debate then is whether 2 mil as a retirement fund is considered a fortune.

 

[china]

China, I would suggest you read the book "The Millionaire Next Door". Details the reality that the majority of millionaires and multi-millionaires do not live in the up market suburbs, do not have the expensive and flashy houses, do not drive the fancy cars, do not have all the "status symbols" or live the "millionaire" lifestyle that you seem to think they do.

I think that there is some misunderstanding about my position. I do not advocate for people driving fancy cars or having flash houses, if they seek early retirement. I have neither. My advocated income stream for retirement of 100k p.a. pre tax does not allow for any flash goodies. It does require an income producing asset base of 2-3 mil. But this 2-3 mil cannot really be touched if you want it to last for 40 years of living if you retire at age 42. So therefore, I understand the concepts presented in the book "millionaire next door" and am a strong advocate of frugal living for the purpose of early retirement without a fortune.

 

[Rixter]

Sure, but many retirees have assets outside their super. I have often seen many pensioners driving around in mercedes in certain suburbs of sydney.

They're not are they?

The crafty old buggers.

 

[china]

They're not are they?

The crafty old buggers.

In my business, I often give discount rates to pensioners. Yet, I often feel a bit bemused when they have come in, shown me a pension card, haggled for 20 dollar discounts and then I see them driving off in E class merc.

 

[OKFFW]

I think that there is some misunderstanding about my position. I do not advocate for people driving fancy cars or having flash houses, if they seek early retirement. I have neither. My advocated income stream for retirement of 100k p.a. pre tax does not allow for any flash goodies. It does require an income producing asset base of 2-3 mil. But this 2-3 mil cannot really be touched if you want it to last for 40 years of living if you retire at age 42. So therefore, I understand the concepts presented in the book "millionaire next door" and am a strong advocate of frugal living for the purpose of early retirement without a fortune.

And yet you deride those who choose to live in $450k "shacks"(as you once referred to them) in "cheap" suburbs in the "middle of nowhere".

So frankly it doesn't sound like you understand the concepts much at all.

 

[Rixter]

In my business, I often give discount rates to pensioners. Yet, I often feel a bit bemused when they have come in, shown me a pension card, haggled for 20 dollar discounts and then I see them driving off in E class merc.

Note to self - Things I must do when I get to pension age to get my hands on an E class.

 

[china]

At the same time, he was presumably paying rent, which he would not have had to do if he had bought the house with a mortgage.

On a rough model:
.House worth $350K 11 years ago
.Increased in value 10% pa for 8 years then steady for 3 years
.Rent 4% of house value in any one year
.Interest at 9%, P&I, 11 year term

On those figures:
.He's paid $240K rent on top of the $700K price- $940K total
.Loan P&I would have been $561K

So the method China strongly advocates would have cost him almost $400K more than the method he rubbishes.


Even if the house had vastly underperformed the rest of the market. So say:
.House worth $500,000 11 years ago
.Increased in value 4.5% pa for 8 years then steady
.Rent 3% of house value
.Interest 9%, P&I, 11 year term

On these figures:
.Rent & house price $900K
.Loan P&I $889K

So he would have broken even on some very pessimistic figures.

Basically, a mortgage is only worthwhile if there is rising house prices. This is not always guaranteed - look at Britain, USA, Europe. For many homeowners with mortgages in these countries, there is certainly no early retirement.

Secondly, if I was to break even with a mortgage over eleven years, it would have been better to have been mortgage free without the financial stress of regular payments.

 

[china]

And yet you deride those who choose to live in $450k "shacks"(as you once referred to them) in "cheap" suburbs in the "middle of nowhere".

So frankly it doesn't sound like you understand the concepts much at all.

450k PPOR is extravagant if you earn 50k per year and need a large mortgage to finance it. Whereas 3 mil house bought with cash is humble if your net worth is 10mil plus. The main principle of "millionaire next door" is not to live beyond your means.

 

[OKFFW]

450k PPOR is extravagant if you earn 50k per year and need a large mortgage to finance it. Whereas 3 mil house bought with cash is humble if your net worth is 10mil plus. The main principle of "millionaire next door" is not to live beyond your means.

But what has $450k got to do with it being a "shack" in a "cheap suburb in the middle of nowhere"? Those were your comments afterall.

And there is actually quite a bit more to the book than just that.

 

[china]

But what has $450k got to do with it being a "shack" in a "cheap suburb in the middle of nowhere"? Those were your comments afterall.

And there is actually quite a bit more to the book than just that.

Probably not the best choice of words but I would hardly refer to a 450k place in sydney as a good house in a good suburb.

 

[Rolf Latham]

Sure, but many retirees have the majority of their assets outside their super. I have often seen many pensioners driving around in mercedes in certain suburbs of sydney. The debate then is whether 2 mil as a retirement fund is considered a fortune.

self funded retirees are usually not in receipt of a the old age pension.

Back on topic.

The majority of retirees have super and PPOR and stuff all else.

I dont think there can be any debate that 2 mill in income producing assets in addition to a PPOR isnt a fortune, not only for retirees, but for all bar 90 +x % of the population.

Nothing wrong with aspiring to that, but this debate does not belong in the context of this thread.

ta
rolf


ta
rolf