Retire at 45?

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 !
 
Hello Y man and thanks for your reply:)

Short answer : Ideally I would like to generate 70 to 100K in todays dollars in passive income. I will probably continue to work in some income generating capacity but want to be able to spend long periods travelling/volunteering.
I think Im being reasonably conservative coz not taking into consideration partners income in my calculations
 
Hello Y man and thanks for your reply:)

Short answer : Ideally I would like to generate 70 to 100K in todays dollars in passive income. I will probably continue to work in some income generating capacity but want to be able to spend long periods travelling/volunteering.
I think Im being reasonably conservative coz not taking into consideration partners income in my calculations

100k passive income (after tax) is approx $143k before tax, say $450 per week rent from each property you'll need 6 unencumbered properties to achieve this. with your income achieving this should be fairly easy. you ought to commence your acquisition phase as soon as you can just ensure your loan structure is all good for what you want to achieve.
 
Plenty of opportunities out there if you move away from residential and dip your toe into some higher risk/return properties but it will mean moving away from your sub $400k per property comfort zone in one foul swoop.
 
y man - properties are renting appox 420 to 450 pwk . Probably will be negatively geared except Ive parked all my spare cash in the offset.
450 K does not include investment income.

Scotty no mates: are you referring to commercial property? I have considered but am quite new to the game but also realising I have to take more considered risks otherwise my savings will just get eaten away by inflation. Any suggestions/pointers welcome.

jerrym - would you consider a more diverse portfolio? If I were to aim for another 4x 500K Ips returning about 400 nett per wk - I would need another 10 year saving 200K pa to buy them outright. Doable but hoping to set a higher bar for myself - if I could achieve similar in 5 yrs that would be ideal .

Thanks for all your responses, much appreciated!
 
If you have such a high savings capacity it's very tempting to not borrow hard and high from the outset.

your financial needs may change a bunch over the next x years, so many pepos risk management tool is to borrow to their max notional capacity and park cash (taxpayer paid) funds in offset.

Some see this a high risk strategy, however on closer analysis, all you are doing is transferring risk to a lender.

Ta

Rolf
 
If you have 700k or so net now, you want 150k income before tax, and you can save 200k a year...

Just buy shares and bonds. 200k a year for 5 years, reinvesting everything. Should result in 2m+ assets in 5 years.

Done!
 
Very roughly

If you want $70k pa you would need about 25 times this in assets.

$70k x 25% = $1,750,000

At 4% return this would give you $70k.

This would have to be unencumbered assets though. So you may need to purchase $3.4mil worth of property and
1. Keep saving in the offset
2. wait for the rents to rise
3. Maybe even sell a property here and there to pay down other debts. This may help you go quicker if capital gains are faster than rental increases.
4. Live off equity by retiring before you hit the required $70k in assets and using some of the offset money each year to live on.

This is all assuming the $70k figure was before tax.

You could speed things up by lowering the amount you actually need. Most people don't even earn $70k so do you really need this much?
 
I would consider purchasing a quality PPOR (high growth, good depreciation), moving in and then changing it over to an IP where you can take advantage of the 6 year year rule. Rent during that unto 6 year period, then you could sell without paying CGT but still being able to claim interest/expenses during that period. (Get advice on this strategy of course)

I would also be investing in shares/managed funds/ETFs to provide diversification and flexibility. Dollar cost averaging has worked for me - with reinvestment of all earnings and long term hold.

You could use at least part of that 600K in cash to take out a conservative margin loan to purchase the equities and part to pay for the deposit on the PPOR - rest borrowed IO.

Continue to build equity and invest and I would not ignore super as it will be very tax effective once you can access it. You should at least have the max concessional contributions going in (25K) and have it high growth assets.

Over time you want to build up both IPs, Equities and your Super and that will give you the diversification and flexibility. You will however had to some detailed planning to make sure you have the $$ to cover the sabbatical and not have to sell your assets to fund it.
 
Hi all - its great to hear from all the posters whose stuff Ive read avidly all this years!

Rolf and Terryw- it would seem your suggestions seem consistent with each other - must be a strategy that works well! Just wondering, with 3 M + portfolio- would you consider multiple resis or say commercial or block of units ?

Alex Lee - Shares and bonds technique - I like the relatively KISS aspect of it!!:)
Would you say a 30% gearing margin loan is risky - What do you think of exposure to international vs ASX ?

New York - Thanks for breaking it all down for me into manageable but important points - I will defiantly consider the PPOR/IP/PPOR option...


So putting it all together - perhaps a rough way forward

1) 200K as deposit for a 1m ppor chosen for likely capital gain/depreciation - stay for 6 months then rent out as IP with a view to returning in 6 years time. In the meantime I rent elsewhere? Should I take out the loan as IO then ?? would it be better to do P+ I and fix ?

2) 200K invested in ETFs/bonds. Maybe gear a 30 % LVR?? Which ETFs- US ? ASX 200? worldwide ex us ? Property ? would you hedge if international currency

3) 200K cash buffer

4) In each year forward invest 100K each into shares : property portfolio . Big unknown here how best to structure portfolio / gearing ratios/ asset protection

5) 25K into super each year

6) need to make sure Income protection /wills up to scratch


Thanks all for the very helpful ideas - of course I plan to get advice specific to my situation but it really helps to have a framework in my head beforehand! Also happy to take recommendations for anyone who could help me the above advice.
 
May I ask which industry both of you are in for both partners (assuming you are male and female) are to be earning $200k+ each??
 
Hi all - its great to hear from all the posters whose stuff Ive read avidly all this years!

Rolf and Terryw- it would seem your suggestions seem consistent with each other - must be a strategy that works well! Just wondering, with 3 M + portfolio- would you consider multiple resis or say commercial or block of units ?

Alex Lee - Shares and bonds technique - I like the relatively KISS aspect of it!!:)
Would you say a 30% gearing margin loan is risky - What do you think of exposure to international vs ASX ?

New York - Thanks for breaking it all down for me into manageable but important points - I will defiantly consider the PPOR/IP/PPOR option...


So putting it all together - perhaps a rough way forward

1) 200K as deposit for a 1m ppor chosen for likely capital gain/depreciation - stay for 6 months then rent out as IP with a view to returning in 6 years time. In the meantime I rent elsewhere? Should I take out the loan as IO then ?? would it be better to do P+ I and fix ?

2) 200K invested in ETFs/bonds. Maybe gear a 30 % LVR?? Which ETFs- US ? ASX 200? worldwide ex us ? Property ? would you hedge if international currency

3) 200K cash buffer

4) In each year forward invest 100K each into shares : property portfolio . Big unknown here how best to structure portfolio / gearing ratios/ asset protection

5) 25K into super each year

6) need to make sure Income protection /wills up to scratch


Thanks all for the very helpful ideas - of course I plan to get advice specific to my situation but it really helps to have a framework in my head beforehand! Also happy to take recommendations for anyone who could help me the above advice.
 
- 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

Ok, if you were to go a "bit" aggressive (some might find it boring, some might freak) imagine if you did this (certainly NOT saying yous hould, but let's bandy some ideas:

You got 2 properties getting $450 pw rent (is that total or per IP?) = $22.5k (allowing 2 weeks vacancy etc)

You pull out the $600k and join it in the share market giving you $750k in shares.

You have a interest cost of $35k on the ip's


But given some tax releif, the bill might be around $25k (you get $10k tax releif)

So your net income now is $238 k pa

Now here's the "risky" bit
Let's just speculate the share market can make you 9% pa (including dividends)

By end of 1 year, your shares are worth $833k (pumping everything back in) + $238k of income (as abaove) = $1.07M

Year 2: 1.40M
Year 3: 1.77M
Year 4: 2.17M
Year 5: 2.60M

Lets say your IP's do NOT grow in value at all: your equity (as now) $78.5k

Total at Year 5: $2.68M

Close enough to $3M? :D

If you pulled 5% income from dividends on the portfolio, that'd be $130k pa + rental income.

Now remember we've made some pretty major assumptions here - mainly the 9% return form the sharemarket.

The Y-man
 
If you want to go even more aggressive...

$600,000 / 0.25 = $2,400,000

So, using 20% deposits and allowing for 5% costs you could buy more property to the value of $2.4mil
 
If you want to go even more aggressive...

$600,000 / 0.25 = $2,400,000

So, using 20% deposits and allowing for 5% costs you could buy more property to the value of $2.4mil

You already have
$385,000 IP
$400k IP
$150k shares
-------
$935,000

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.

Each property would continue growing and the rents should be increasing. After 5 years they would probably be cashflow positive but probably way too low to live on.

However, you would also continue working and would hopefully save another $200k per year or $1mil over 5 years.


Say the properties were returning 4% rental yield after costs and were worth $4.3million in year 5. That would give you $172,000 per year in income.

Assume you have loans of
$347,000
$360,000
for the existing, and
$2,400,000 for the new ones
= $3,107,000 in total loans
@5% pa = $155,350 pa

But income of $172,000 from rent
= $16,000 pa cash in your pocket

But you would also have $1mil cash (from saving $200k pa) in the offset accounts.
So you would pay interest on $2,107,000
@ 5% = $105,350
Rent of $172,000 pa
= Net income of $66,650 pa.
Almost there.

But this has left out a lot of costs and rates could be higher than 5% (but you would be paying much less than 5% now). Also prices may not increase at 5% pa either.

You also have the option of selling one house CGT free (assuming you move in and out) and using the cash to park in the offset and save even more interest. This would increase your income from the properties.
 
Hi terry and Yman - wow thanks for crunching those numbers for me- it really is interesting to see your different approaches using shares vs IP

I hope you won't mind if I try to blend your suggestions ( for diversification purposes).
Also Ive tried to be more conservative with the returns and left a cash buffer for myself

Ive come up with this:

Current portfolio

IP1 (Sydney) – Purchase 385 K (2010) /Loan 350K/Current value?/Rent 430pwk
IP2 ( Brissie) – Purchase 395 K (2011)/Loan 350K/Current value?/Rent 450 pwk
Cash – 600K
Shares – 150K

Assume savings of 150,000 pa divided equally btwn share and property portfolio

Going forward:
Property arm
New investment 250/0.25 = 1M + current investment 800K = 1.8 M and loan of 1.45 M
Assuming 4% pa growth over 5 years , portfolio value 2019 = 2.16 M
Yield 4% pa of 2.16 M= 86 400
Assuming interest rate of 6% pa and I pay loan down to = 1M
At 2019 = I can earn approx 27K pa from properties

Shares arm
150K + 200K = 350K
Margin loan LVR 30% brings investment to 455K
I put in 70K each year
Assuming at compound net return of 6% pa over 5 years total portfolio is 1.025M
Shares at 2019 -= 1.025M – 105K ( paying loan back) =920K

Total net assets 2019 = Properties 1160 K + Shares 920K = 2080K + Cash 150K = 2.2M
4% return of 2.2M = 88,000 pa - pretty good :)

Please feel free to critique !
Specifically I still haven't factored in worse case scenarios if property or share market crashes :0 , how much income I will need to generate to not have to firesale stuff
Are my estimated returns/ interest rates reasonable or too optimistic?
Still lots of questions re how to actually invest portfolio and asset structuring but perhaps thats probably a whole new post :)
 
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