Living off equity – a Reality Check

Steve Navra said:
If you want 100% guaranteed income you will get returns based on that low risk profile. (Cash rate about 5%) Also you will give up all your future capital growth.
Steve,

I disgree - I am not giving up all future capital growth. I combining a low risk strategy with a high risk strategy. I am receiving a guaranteed base pension (abet at a consequently relatively low rate of return). But I still have IP & shares, which have higher risk & also growth, which I use to LOE. This is in contrast with your structure which appears to combine 2 high risk strategies.

Steve Navra said:
I wish to make a point here:
The vast majority of forum members are at the asset acquisition stage (Still building their portfolios) and that with such a low risk profile (100% guaranteed) they will literally never get to a decent retirement.

Another very valid point I wish to make to all retired members, is that 100% guaranteed income with no risk and low returns is VERY RISKY !!!

This is what our parents did and then high inflation completely wiped them out:
When their investments were earning them just the cash rate and inflation was more than double that. (Their dollar buying power was less than half)

It is very easy to forget these times, especially now in times of low inflation.
The risk of 100% guaranteed income is that there is a chance (Certainly greater than a 10% chance) that inflation will again one day exceed the return on cash.
I agree that most here are in the asset acquisition phase. But this thread is titled 'Living Off Equity - a Reality Check' - it's about the degree of risk when retiring using LOE.

Steve Navra said:
If this is your choice then I am surprised: I DIDN”T REALISE YOU WERE SUCH A RISK TAKER. :confused:
Everyone is a risk taker, the great thing is everyone gets to choose which risks they take. I value my SANF, therefore I have chosen to combine a guaranteed base income and also a LOE strategy.

The point I keep making is the use of a guaranteed base income strategy combined with additional growth assets for use with LOE.

Cheers,

Keith
 
Patosan said:
All this talk of zero risk & guaranteed are we living in the land of Oz ?
Well most of you are but I ain't ... he he he ... not at the moment anyway.

Seriously though what are those seeking guaranteed safety asking for ?
IP are long term one of the safest investments araound, that's why most of us are here. So I am somewhat puzzled by arguments against Steve's plan on this point. There may well be cycles but nobody's going to lose their shirt doing LOE unless they start spending a majority of the portfolio very quickly and with timing. This is where common sense comes in.

It's not the system ... rather it's application that will determine it's safety.
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Hi Patosan,

1. I've attended one of Steve's Seminars last year in Brisbane. What Steve, is advocating is a combined asset portfolio comprising cash, stock shares/managed funds and property for retirement planning, the same formula as Robert Kiyosaki is saying lately in his books too. I think Peter Spann also advocates the same thing.

2. Like you, I am also a strong believer in planning my own retirement mainly through a residential property portfolio.

3. At this point, I am still not comfortable investing in Australian stocks myself, though I do not rule out investing in them directly in the near future myself and having made some monies for myself, investing in unit trusts/managed funds and the Singapore stock market ditrectly, in the past.

4. While I agree with what Steve is saying that investing in stocks either directly or /and through managed funds, will now offer better returns and cashflow at this stage of the property cycle in Australia, I still however choose to stick to investing in residential properties as I am presently most comfrotable with it and that is why I am now beginning to look into investing in residentlial properties outside Australia too (and beside Singapore/Malaysia where I am presently from).

5. In fact, I am now presently in New Zealand to research into and get a feel of its residential property market. Unfortunately, it has also peaked too and will soon be due for a correction, probably by the end of this year, making safer and more viable to consider investing into this NZ property market sometime in 2008/2009 when the next property cycle starts and when the property market's next recovery phase is in sight.

6. To me, Steve is one of few and better well-informed "pro-property" investors who are actually advocates in shares-investing.
He is NOT against investing in properties, or building a property portfolio for retirement. He prefers to have a more balanced mixed asset class portfoilo comprising cash, shares,managed funds, properties for retirement planning and that he believes that better returns from investments can be achieved now, through investing in stocks/managed funds and property (additional 5% more i.e total of 23%p.a) if I can last recall from his seminar) , during this stage of the property cycle, than solely to stick in investing in properties alone (15%).

7, I fully agree that it is the application of the system and our own common sense in managing our cash/monies effectively on a daily basis, rather than the system per se itself, that will ultimately determine whether or not, the LOE or/and our present property portfolio is safe or not, to survive through the downturn of the property cycle till its next Recovery Phase is in sight again in 2006/2007 especially for both the Melbourne and Sydney property markets.

8. Thank you

regards,
Kenneth KOH
 
Steve Navra said:
Living soley off equity without CG or Income sounds risky to me.

Wouldn't you run out of money eventually? Then like Duncan you would have to go back to work at 70 years old! :confused:

So tell me Kiethj, is this really your definition of LOE or were you joking?
Hi Steve,

No not joking. See the v. first post in this thread for my views.

Duncan won't be going back to work aged 70 - he's had a sleepless nights or two, but he's to much of a forward planner to use solely LOE.

I too believe living solely of equity growth is risky. I'd guess no advisor (including yourself) would ever advise anyone to retire by living solely on equity.

I wouldn't like to think Steve & I were monopolising this thread:D. Comments from others are welcome.

Cheers,

Keith
 
Patosan said:
All this talk of zero risk & guaranteed are we living in the land of Oz ?
Well most of you are but I ain't ... he he he ... not at the moment anyway.

Seriously though what are those seeking guaranteed safety asking for ?
IP are long term one of the safest investments araound, that's why most of us are here. So I am somewhat puzzled by arguments against Steve's plan on this point. There may well be cycles but nobody's going to lose their shirt doing LOE unless they start spending a majority of the portfolio very quickly and with worst timing. This is where common sense comes in.

It's not the system ... rather it's application that will determine it's safety.
Hi Patosan,

The problem is the high volatility & the low yield & potentially zero growth for prolonged periods that both Steve & I employ strategies to attempt to avoid.


Cheers,

Keith
 
Keith & Steve

I think at this point you both have to agree to disagree. It has been interesting reading both of your points of view in anycase.

Good luck

Best Wishes

Corsa
 
keithj said:
I agree that most here are in the asset acquisition phase. But this thread is titled 'Living Off Equity - a Reality Check' - it's about the degree of risk when retiring using LOE.

Okay at last we are starting to agree :D

The thread is indeed about Living off Equity.

So far I have portrayed a method that might be used to get an investor into a position to be able to live off equity.

Chapter 4 will show a working example of the cashflows of this position.

Chapter 5 will be about Risk Profile.

I REPEAT we are not there yet in the presentation.
Kieth, I appreciate that you are at this stage in real life and are impatient to see the end, but please on behalf of the rest of the members try and excercise some patience.

I say this because all your posts are about the RISK PROFILE . . . and this has not been covered yet!

Happily you will see that depending on an investors choice of risk profile, that ONE of the options WILL be guaranteed cash vehicles as the backstop to LOE. :) (Which very closely matches your choice.)

Other options will be of different Risk Profiles . . . and each investor will choose their OWN level of comfort. (Without trying to impose their viewpoint on anyone else)

At that point, I will stay out of the discussion and the group can debate which Risk Profile they think is most appropriate for themselves.

So we are getting there:

Regards,

Steve
 
Just an interesting side note......

Banks take into account 75-80% of rent as servicability......
They also take into account 30% of wages........

Maybe theres a hint there about what they consider the more secure cashflow..........

Just a thought for those who consider by reliant upon investments for living expenses risky.......
 
qaz said:
Just an interesting side note......

Banks take into account 75-80% of rent as servicability......
They also take into account 30% of wages........

Maybe theres a hint there about what they consider the more secure cashflow..........

Just a thought for those who consider by reliant upon investments for living expenses risky.......

I've heard that some lending institutions may take into account up to 35% or 40% of someone's main wage/salary... Does this sound right?

I personally haven't heard of any examples...

Also, I think someone with an average wage/salary, (i.e. earned income), would be mad to use 40% of their main income servicing a property. ;)
 
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keithj said:
I wouldn't like to think Steve & I were monopolising this thread:D. Comments from others are welcome.

Hi Keith & Steve

I'm enjoying reading both your posts and believe that the contrast in opinions is healthy.

Keith, you're making Steve explain his method in detail and coming up with 'arguements' (for the lack of a better word) that there's noway I'd come up with, so all are very much appreciated.

Looking forward to chapters 4 & 5 :p

Cheers :)
 
Qaz,

I would favour a different interpretation.

Most wage earners have their wage as the primary income source. Before having an IP about a third of their wage goes in tax, a third on living expenses and a third is available for loan payments.

Having bought an IP, 20% of the rent is considered to be consumed in expenses; hence the other 80% can go towards the loan.

I think the different percentages should not in any way be interpreted as indicative of relative security of the income streams.

regards,
 
Merovingian,

Well, you'd consider me mad.

Much more than 40% of my income goes towards investment loans against residential properties. I think there was a poll on the forum not too long ago on the very subject.

When I worked for a wage, about mid 2004, it was about twice that, I think. Maybe more.

That is when I stopped work and bought a beachfront house; at a time that I was unemployed. (I have since set up as a contractor employee working on an hourly rate in the resource industry, in Perth.)

I reckon I'd have been mad NOT to do what I did - be at ~80% income into investments. For me it was very affordable and the results have been excellent. Starting from a low base, I doubled my net wealth each year; reaching a $1,000,000 in under 4 years.

regards,
 
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This has been such a long thread that I can not remember if the following idea for LOE has been floated or taken into serious consideration.
An investor starts with say 50Kequity and a wage of say 50K.
Over a number of years his/her equity grows to 2ml and wages to 85K.
I don't see any reason why the person in the above example would not use some of that equity to live off or improve their lifestyle :) it does not really matter what strategies they used because it worked a whole lot better than just living off wages :)
My point is that it depends what your own personal goals are as to what you do with what you have already got(equity)The chances are that if you have equity producing strategies that has worked for you in the past why would you not find the same for your future?
I'm not afraid :)
Kind regards
Simon
 
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Pete said:
Merovingian,

Well, you'd consider me mad.

Well, you've put it into perspective, and I'm grateful for that. I could edit my post again, to further refine my sentence, but I just can't be bothered. ;)

Pete said:
Much more than 40% of my income goes towards investment loans against residential properties. I think there was a poll on the forum not too long ago on the very subject.

Did you have other passive income that allowed you to live; or did you keep expenditure down, i.e. live frugally for a while?

Pete said:
When I worked for a wage, about mid 2004, it was about twice that, I think. Maybe more.

That is when I stopped work and bought a beachfront house; at a time that I was unemployed. (I have since set up as a contractor employee working on an hourly rate in the resource industry, in Perth.)

Crikey! It sounds like it paid off. :eek:

Pete said:
I reckon I'd have been mad NOT to do what I did - be at ~80% income into investments. For me it was very affordable and the results have been excellent. Starting from a low base, I doubled my net wealth each year; reaching a $1,000,000 in under 4 years.

May I ask: Could you elaborate on what you did a little more? I'm very curious as to your strategy. Always trying to learn more... :)

Thanks. :)
 
simonjulie said:
This has been such a long tread that I can not remember if the following idea for LOE has been floated or taken into serious consideration.
Hi Simon,

I've been feeling the same way:).

simonjulie said:
An investor starts with say 50Kequity and a wage of say 50K.
Over a number of years his/her equity grows to 2ml and wages to 85K.
I don't see any reason why the person in the above example would not use some of that equity to live off or improve their lifestyle :) it does not really matter what strategies they used because it worked a whole lot better than just living off wages :)
My point is that it depends what your own personal goals are as to what you do with what you have already got(equity)The chances are that if you have equity producing strategies that has worked for you in the past why would you not find the same for your future?
The risk is that Oz will have a downturn, just because IP has grown in the past doesn't mean it will continue to do so. EG - Japan had a boom in the 80's yrs followed by 20 yrs of 0% growth. There is a risk (however small) that Oz had a boom in the early 2000's to be followed by a similar prolonged period of 0% growth. So drawing down equity for LOE will erode equity. According to 'The Economist' Hong Kong IP has plummetted >50% between 1997 and now, so anyone with an LVR of > 50% who was planning on using LOE was wiped out. It may sound like doom 'n' gloom, but even if there is a 1% chance of it happening I'm heading for the exit.

That was the bad news, now for the good news.....

There is an easy way to mitigate this risk - sell some IP to realise some CASH, spend this cash on risk free govt bonds, low risk LPTs, high risk shares or funds in any combination depending on your risk profile. This is swapping high growth assets (IPs) for low risk assets, so there'll probably be some (50% discounted) CGT to pay.

However, retain some IPs so this Imaginary Investor can use the IP growth for LOE for the 99% probability than the DnG scenarios don't happen.

Of course none of this is advice:), this Imaginary Investor should talk to their financial advisor ASAP:D.

Cheers,

Keith
 
Keith, I think you are being too generous with a 1% risk of a D&G event. I think the risk is much higher than that and should be allowed for in planning.

I'm not suggesting buying gold, rifle and provisions and bunkering down. The reason the share market is attractive to me is that you can change sectors, or even get out entirely, before lunch.

And congrats, you do keep busy :) :)

Thommo
 
Merovingian,

There was also rental income, of course; though the properties are not high yeilding.

Living expenses for me are moderate; not frugal.

Strategy: gear to 80% into IP; with growth, revalue & borrow again to 80%; buy another IP. As basic as it gets.

Rapid progress thanks to market moving at near 20% p.a. capital growth!

I was pushing the limits but comfortably & confidently. Had carefully modelled cashflows in Excel; kept buffers; managed the risks.

Little more than follow the basic recipe as espoused by so many.

Now sorting through the details of living from equity. I think that will be better with some more equity. Portfolio now ~2.6 million and strong growth likely next few years. Expect another two million equity in next five years and to be totally out of day job a long time before then.
 
Thommo said:
Keith, I think you are being too generous with a 1% risk of a D&G event. I think the risk is much higher than that and should be allowed for in planning.
Thommo,

So do I, but I'm desperately trying to lose any perception that I'm a D&Ger ;).

Actuaries tell me I've probably got 45+ yrs of retirement to look forward to. Statisticians tell that there's a greater than negligible risk that some time during that period some left field event is going to stuff up lots of asset classes. Govt bonds ARE risk free & gold is the asset class that is least likely to go down the tubes.

Thommo said:
I'm not suggesting buying gold, rifle and provisions and bunkering down. The reason the share market is attractive to me is that you can change sectors, or even get out entirely, before lunch.

And congrats, you do keep busy :) :)
You made me think about what I actually do do - thanks,

Cheers,

Keith
 
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