Retire at 45?

[Graemsay]

Would a margin loan really make sense?

The Oracle of Omaha reckons that stock market investors should expect a 6% to 7% return made up of:

• Inflation (2%)
• GDP Growth (3%)
• Dividends (1 to 2%)

The cheapest rate that I've seen is 6.79%, which would mean you'd be roughly breaking even. The tax system might make it worthwhile with negative gearing, but you'd need to do the sums.

As for investing in shares, cheap market trackers are your friend. I wouldn't be nervous about putting money overseas, particularly if the AUD remains strong.

 

[The Y-man]

Assuming at compound net return of 6% pa over 5 years total portfolio is 1.025M

That won't work - the interest on margin is 7%~8%

So your portfoilo needs to out perform it.

The Y-man

 

[TPI]

You're in a good financial position already, and it shouldn't be too hard to achieve your financial goals from here.

You should consider a PPOR for at least it's CGT-free status, even if you move out from it after 6 months or so and utilise the 6 year CGT-free rule.

25k pa each into super to reduce your taxable income may also be ok, but has to be weighed up against your 6 year retirement goal.

And although a smattering of residential property and shares may make sense, I think you need to have a higher conviction as to which asset class is best placed to achieve your particular goals and focus on this.

In my view, with your income, income security and savings capacity you should consider direct commercial property over shares, residential property or bonds.

If you can't get comfortable with commercial property, then I would focus on shares.

That being said, if you are inclined to be more active with your investing and do developments and renovations, then residential property may also be worthwhile.

You can do all sorts of number crunching but the main thing is to make a decision and get started now, particularly if you are using borrowed funds given how low interest rates are at the moment.

 

[TPI]

That won't work - the interest on margin is 7%~8%

6.65% is achievable on margin loans right now, and a bit lower for higher loan amounts.

Even lower still if you use Interactive Brokers or invest higher amounts through an investment bank.

 

[Ausprop]

With another $2.4mil of property that would take you to around $3.33mil.

Assuming 5% pa growth after 5 years this $3.33mil should be worth around $4.3mil.

Assuming $500k properties at 5% pa growth, they each may be worth $650k in 5 years.

that's a big assumption, the markets I am in have seen nil growth for the last 7 years - I really don't think you can count on growth any more

 

[alexlee]

Would a margin loan really make sense?

The Oracle of Omaha reckons that stock market investors should expect a 6% to 7% return made up of:

• Inflation (2%)
• GDP Growth (3%)
• Dividends (1 to 2%)

The quote is about US stocks, though. Dividend franking (which they don't have in the US) changes the numbers.

 

[Terry_w]

that's a big assumption, the markets I am in have seen nil growth for the last 7 years - I really don't think you can count on growth any more

Yes I agree.

I think the potential investor has to make a call on this. If they think there will be little to no growth then there is no point in investing in property. Money would be better invested elsewhere.

 

[bnm]

Hello and just wanted to say thanks very much to everyone whose contributed-
Its given me a lot of food for thought and will go do more research, then off to see financial planner/accountant

So far my thought process :
Given shorter time frame 5yrs and my lack of experience and time for commercial/add value resi > will probably focus of shares >
Probably index tracker funds with exposure to ASX 200 + International Shares+ Property/Infrastructure funds
> will explore possibility of limited gearing (to 30 % LVR) but possibly via property equity rather than margin loan

Any suggestions/pointers re index tracker funds/ETFs to look into? Also happy to spend some of my hard earned on professional advice if you can recommend anyone to me.

Cheers
BNM

 

[sash]

OK....I will pay the bad guy??

You say that you make more than 450k...and save at least $150k. At 39 I am presuming that you have earned this sort of money for a while.

Why the sudden religion...what did you do previously with your cash?

My tips...

1. Minimise rent...it might be more prudent for you to buy a cheap 1 br or rent a cheap one.

2. I can't see you hitting $3m net in 5 years...definitely possible in 10 years. Concentrate on cyclical markets..Brissie looks good. You can still by 3 brm T/H within 10klms of city for well under 500k

I don't know what you do...but can you structure income to pay less tax...if you are doctor you maybe able to do it.

Hi There

Long time lurker here and thanks in advance for any advice)

So here is my situation
39
No dependants. Partner is also on top tax bracket
IPs: 385 K ( sydney ) , 400K Brisbane . IO 90% LVR on both
PPOR : Looking
Income: > 450K , I currently save nett 150 to 200K a year last 3 years
Liquid assets : 600K cash mainly in offset for IP loans
Super: approx 150K
Shares : approx 150 K mainly Australian equities
I pay a lot of tax > 200K

Would appreciate any ideas/suugestions:
- My dream is to achieve 3M nett assets ( preferably outside super) in the next 5 yrs- so I have option to take a long sabbatical and do something different if I wish to
- income is pretty secure so happy to be a little aggressive
- also shopping for ppor but wondering if better to just rent a lux pad ( 800 to 1000 pwk ) and invest the rest or but a 1.5 to 2M property . I can be a pretty disciplined saver and generally not overly emotionally invested in the place I live.
- currently living in parental sponsored digs but its time to move on...

Thanks so very much for your suggestions PM me if you like !

 

[bnm]

Sash --- be kind - Im a late bloomer ...

Misspent youth before knuckling down to do something useful . So big income is a recent thing - hence the crash course in investing , never had this "problem" before !!

I think I do ok with saving - 500K after tax approx 200K Im left with 300K and I save around 200k - sometimes less if I have to help out with extended family . But I take your point- probably don't need to splash out on big PPOR if I wanna retire early ..good to have a reality check

Have looked into ATO stuff but I don't have much debt and cost of doing business is lowish .. (thats how i like it tho..) So not too much too offset my income atm- hence looking into some conservative gearing strategies.

Yeah - if 3M not achievable in 5 yrs thats ok - just something to aim for - I don't hate my job that much )


BNM

 

[sash]

OK....knowing where you have been and realising the change required.

A couple of things you can do to minimize taxable income:

1. Salary sacrifice till you are contributing up to 25k in Super (you maybe already doiung this)

2. Try to buy newer properties. I call this depreciation farming. If you can get say 7.5k in depreciation per year per property. You reduce your taxes by 75k with 10 properties.

3. If you are not a PAYG...you maybe able to structure your income to be paid to a company instead of you. You hit 46.5% tax ...companies pay tax 30%. Check with your accountant.

Hope some of this helps.

Sash --- be kind - Im a late bloomer ...

Misspent youth before knuckling down to do something useful . So big income is a recent thing - hence the crash course in investing , never had this "problem" before !!

I think I do ok with saving - 500K after tax approx 200K Im left with 300K and I save around 200k - sometimes less if I have to help out with extended family . But I take your point- probably don't need to splash out on big PPOR if I wanna retire early ..good to have a reality check

Have looked into ATO stuff but I don't have much debt and cost of doing business is lowish .. (thats how i like it tho..) So not too much too offset my income atm- hence looking into some conservative gearing strategies.

Yeah - if 3M not achievable in 5 yrs thats ok - just something to aim for - I don't hate my job that much )


BNM

 

[Rolf Latham]

I don't know what you do...but can you structure income to pay less tax...if you are doctor you maybe able to do it.

how pls ??

ta
rolf

 

[Aaron_C]

how pls ??

Service companies controlled by related parties that bill the medical practice for 'consultant services'.

 

[sash]

There are friends of mine in IT who legally minimize tax by paying having the wife do the books part time. The wife does not work. I believe he only deducts about 50k per year on this (includes super, insurances, etc).

The other thing is to have some of the income quarantined in retained earnings. This is more of tax deference ...tax is still paid at 30% instead of 46.5%. Again advice is needed.....

how pls ??

ta
rolf

 

[Rolf Latham]

Service companies controlled by related parties that bill the medical practice for 'consultant services'.

the same "grey"available to most self employed then ?

ta
rolf

 

[sash]

There is always the option to buy a laundry to wash your money....


....trouble is ML crimes have jail sentences up to 25 yrs.....

the same "grey"available to most self employed then ?

ta
rolf

 

[Rickardo]

Any suggestions/pointers re index tracker funds/ETFs to look into? Also happy to spend some of my hard earned on professional advice if you can recommend anyone to me.

Cheers
BNM

Have a look at the range of Vanguard ETF index funds, due to their business structure they are very low cost.

 

[oracle]

Would a margin loan really make sense?

The Oracle of Omaha reckons that stock market investors should expect a 6% to 7% return made up of:

• Inflation (2%)
• GDP Growth (3%)
• Dividends (1 to 2%)

The cheapest rate that I've seen is 6.79%, which would mean you'd be roughly breaking even.

That won't work - the interest on margin is 7%~8%
So your portfoilo needs to out perform it.

You need to negotiate hard and shop around. The cheapest home loan rates people are on here are not advsertised. They are all negotiated.

I am paying mid 5% margin loan interest. My loan and portfolio size is under $1m but when it does go above I will again push for more discounts and shop around.

I believe IV managed to secure margin loan interest rate of around 4% something but his loan amounts were large.

So don't give up thinking low margin interest rates are not possible. It is certainly possible and if used wisely can make big difference to your net worth over long period of time.

Graemsay, I do agree with your assessment. But usually there is also an equity premium over and above what you mentioned. Remember stocks are not considered 100% safe investments since business can go broke hence, the premium. This is around 1% to 2%. Therefore, long term stock market returns have been around 9%.

Cheers,
Oracle.

 

[Aaron_C]

I remember IB and Macq prime were the cheapest but not sure if that has changed..

 

[cadence]

2. Try to buy newer properties. I call this depreciation farming. If you can get say 7.5k in depreciation per year per property. You reduce your taxes by 75k with 10 properties.

Sash love your work. Don't mean to nitpick, but just want to point out, with 7.5k in depreciation per year per property, you get $75k in depreciation with 10 properties. You're not actually reducing your taxes by $75k. You're reducing your income by $75k, so you have to apply your top tax rate to work out your tax savings ie: $75k x 45% = $33,750.

I'm sure you're well aware of this and it was just a typo, but I just wanted to clarify for others who might be reading who are new to the forum/investing.