Target 2020! My retirement goal - some advice please?

[ChasingSugar]

Hi there,

I was hoping for some advice from some people that already have their plans set out for retirement or investors with a clear set of plans!

I need some help making sure I know where I am going!

I think I need to provide some background, so please bare with me.

I am 31 & married with 2 kids. I fortunately have a high paying job and this enables my wife to be at home with the kids. We started investing in property a few years back (2007), and have put together a small portfolio. I have a goal that I have plucked form the air, and that is to retire on my 40th birthday, occuring in 2020. Hence the title of this post!

I am trying to calculate what else we need to do and what position we need to be in in order for us to retire with an income of around $75K per annum.

The current situation is as follows:

PPOR: Value 420K Owe $380K

Investment Properties (6): Value $1.4Mill Owe $1.2Mill

Superannuation (Combined): $70K​

Using some basic calculations*, in 2020 I think it will be more like:

PPOR: Value 800K Owe $240K

Investment Properties (6): Value $2.2Mill Owe $1.2Mill

Extra Cashflow after costs from rents on the above: $20K per annum

Superannuation (Combined): $240K

(*Some basic numbers I used to calculate this - I used a 5% average annual growth rate for capital growth & rents. I presumed I am keeping investment loans on Interest only. I allowed an average Interest rate of 7.47% over the period for the loans. I pay down PPOR with an extra 450 per month on top of P&I currently paid. I've also rounded everything down or up to be cautious).​

So using the rough calculations above, in 2020 I would have equity of 1.8Mill with cashflow of $22K per annum from rents.

My questions are:

1. Does the above 2020 projections seems somewhat plausible?

2. Would an asset base this size be ok for a sustainable retirement? I have used some calculators and spreadsheets online and it seems ok?

3. Any advice or ideas on other thing I can do over the period to shore all of this up? Should I look to add more property as LVR allows?

I am aware that if the above doesn't happen - I just keep working. But worth a shot I think at having such a goal!

Thanks for taking the time to review!

Chasing.

 

[The Y-man]

How much are you able to put aside p.a.?

The Y-man

 

[Propertunity]

I have a goal that I have plucked form the air, and that is to retire on my 40th birthday, occuring in 2020.

Congratulations. Just having a written down goal puts you way in front of the herd.

I am trying to calculate what else we need to do and what position we need to be in in order for us to retire with an income of around $75K per annum.

Is $75K enough to live on??? You can't even buy a decent car for $75K in today's money, let alone in 10 years time. ....and it is less than 1/2 what you 'need' to live on now. Will the kids be left home by then?

Investment Properties (6): Value $1.4Mill Owe $1.2Mill

OK so these are not expensive IPs. They seem to average out at anout $230K a piece. Are these in regional areas? If so, are yo going to get the GC you have calculated?

So using the rough calculations above, in 2020 I would have equity of 1.8Mill with cashflow of $22K per annum from rents.

$1.8M in 10 years time may not amount to much. Even now, in 2010 it isn't much. But I suppose it depends on your anticipated lifestyle.

My questions are:

1. Does the above 2020 projections seems somewhat plausible?

Yes. Have you taken into account any Land Tax thresholds that you are likely to cross as CG kicks in?

2. Would an asset base this size be ok for a sustainable retirement? I have used some calculators and spreadsheets online and it seems ok?

Not for mine - but maybe I am high maintenance.

3. Any advice or ideas on other thing I can do over the period to shore all of this up? Should I look to add more property as LVR allows?

Definitely. Actually, on a serious note, you look to be overweight in property and I would be looking to rebalance in some shares as well.

I am aware that if the above doesn't happen - I just keep working. But worth a shot I think at having such a goal!

Agreed. If you don't know where you are going, you will probably end up somewhere else. ~Lawrence J. Peter

 

[rugrat]

I would be looking at paying down some debt (shock horror!) and investing in other areas such as shares.

 

[Gools]

CS, what are you planning to do for cashflow from 2020 onwards? Are you thinking of selling down the portfolio as the $20k net income wont be enough?
I'm surprised you're only looking at putting in an extra $100/week onto your PPOR mortgage. You're in a strong position with your income being well above average but I would want to be knuckling down and paying off a lot more of your debt or gear into more property/shares.

Can I dare ask what you do with all your spare income? How much are you negatively geared at the moment?

Gools

 

[ChasingSugar]

Hi there,

Thanks all for the prompt responses! I am glad I have asked as some good questions raised!

In terms of current use of funds, I've been buying and rennovating property!

Of the property we have, they were purchased (Year of Purchase/Purchase Price):

IP 1 - 2005/265K (was PPOR now IP)
IP 2 - 2007/110K
IP 3 - 2008/255K
IP 4 - 2009/150K
PPOR - 2009/365K
IP 5 - 2010/225K
IP 6 - 2010/230K

So the money has been spent on getting those in place and up and running!

The properties are in a mix of regional and suburbs, with reasonable rental returns (neutral) and annual average growth of 10% plus over past 10 years.

I am thinking paying down the PPOR will be the focus, and that was the extra 450 per month minimum. I was presuming extra funds would be used to purchase more property, or maybe some shares. Although property is my preferred method due to leverage capability. If I just focus on debt reduction, absolutely there will be extra funds! (I'm not that much high maintenance!).

In terms of at the tailend, 75K per annum for a couple seems ok based on all the online calculators. Remember PPOR will be paid off (theoretically). As to what to do - I'm not sure - will prob need to speak to my accountant or adviser for best thing... might be sell to reduce debt and increase cashflow?

 

[Gools]

CS, now you're getting closer to your perfect plan. Either you will have more paid off or you will have more equity/assets by 2020 than you originally estimated. That's great. Keep on doing what you're doing and the 10 years will go past quickly and you'll be in a great position.

Gools

 

[investor2009]

Keep doing what you're doing and you'll be fine. It couldn't hurt to add more along the way though also.

My plan is living off equity and am almost there, but will keep working to add some more to the picture because I would like more income than I'm currently producing.

I never need to pay tax on my profits so my view is this (eg)
Please note that my plan can change along the way if need be but my goal has always been living off equity because it makes the most sense to me, and I have time on my side.

Scenario/1

$2m equity.
Want to use $100,000 and take a year of work. Take $100,000 cash out.
No charge, only equity charge. Who knows what rents have done by this stage. Probably won't notice equity charge. Asset keeps growing in value and asset base never gets any smaller in numbers. The portfolio grows by more than $100,000 within the time it takes to spend this money if setup correctly.
In my view, asset base should be at least doubling this number every year. (the desired income level being consumed) If this does not happen in that time or buffer is not large enough, spend less. In the event of the opposite, more can be spent.

Scenario/2

$2m equity.
Want to use $100,000
Sell off 1 property that is worth $500,000
Loan is $250,000.
Capital gains tax on $500,000 sale with 50% rule= $75,000 plus neg gearing costs over the years $8000 (needs to be paid back at settlement) plus solicitor and agent fees $30,000, equals a total loss of around $113,000 after sale.

We now have less $500k of asset, but paid $250k loan out also, so lower debt.

So after everything you have $137,000 in cash. Not very attractive seeming you've lost an asset and paid lots of your profit to the Government. But still, I can think of worse problems to have.

Theres two options to consider.
Congrats on your efforts too by the way.

 

[investor2009]

Oh, and by the way. Most banks do a maximum of 10 years interest only so you'll probably have to end up forking out $100p/w extra or something, but rents will easily cover this so don't fret too much.

 

[ChasingSugar]

Thanks for that - looks similar to what I had in mind. It's good to bounce ideas.

I think I might focus on the pay down of PPOR debt, and then as equity allows look at adding more property in 12 months or so. I was aiming originally to add 2-3 per year. Last added 2 in April so there is some time to pay down debt!

I'm just not sure on the living off equity thing....but I guess when closer to the 2020 goal I can asses.

 

[tess85]

Wow, you have a fantastic portfolio so far. And welcome to the forum

Incidentally, I couldn't help but notice your username, were you profiled in API by any chance?

EDIT: I could be completely on the wrong track here, so never mind if this question makes no sense at all! Welcome anyway!

 

[ChasingSugar]

Haha - yep actually. Good get! They asked me if I would comment and was happy to as I do thinnk Ballarat has some great growth ahead.

The name comes from Sir Allan Sugar. IE: Chasing Allan Sugar! They were nice enough to let me choose my own Alias...

 

[Fudge]

Thanks for that - looks similar to what I had in mind. It's good to bounce ideas.

I think I might focus on the pay down of PPOR debt, and then as equity allows look at adding more property in 12 months or so. I was aiming originally to add 2-3 per year. Last added 2 in April so there is some time to pay down debt!

I'm just not sure on the living off equity thing....but I guess when closer to the 2020 goal I can asses.

Even turn PPOR into IO loan, and use available funds to purchase another sooner?

F

 

[Bill.L]

Hi all,

Investor2009,

Sell off 1 property that is worth $500,000
Loan is $250,000.
Capital gains tax on $500,000 sale with 50% rule= $75,000 plus neg gearing costs over the years $8000 (needs to be paid back at settlement) plus solicitor and agent fees $30,000, equals a total loss of around $113,000 after sale.

I know you are trying to prove a point, but telling porkies in the case against doesn't cut it.

If the sale price is $500k, this is not what you pay CGT on. Perhaps including the buying price as a deduction could help.
$8000 needs to be paid back at settlement?? If you are talking about adding back depreciation (building only) for tax, then you could be on to something.
solicitor and agent fees of $30,000 perhaps you need to get new solicitors and agents, mine are much cheaper by a long way.

bye

 

[tess85]

Haha - yep actually. Good get! They asked me if I would comment and was happy to as I do thinnk Ballarat has some great growth ahead.

The name comes from Sir Allan Sugar. IE: Chasing Allan Sugar! They were nice enough to let me choose my own Alias...

Cool, I was right! I just remember reading API and thinking "That's an unusual alias"! I'm still not entirely sure if I get it, but hey, welcome anyway

 

[gooram]

There's alot of people quite pessimistic about property in the short to medium term at the moment, not saying I agree, but have you considered the possibility that your properties don't move much in the next 10 years?

Being young, that's probably ok, you can wait, and no doubt if prices are flat for 10 years, they're more likely to move and move fast soon after that. Retirement at 45 perhaps?

Certainly if there aint much movement over that time, the more properties you can accumulate, the better off you're going to be when prices to start to go up.

 

[ChasingSugar]

Yep that's a fair point. I have been a little aggressive in taking on debt for that reason as well. Young with a bit of time 'in case things go wrong'.

As the properties are pretty close to neutral, I am hoping rents should sustain and even with flat capital growth hanging on to all won't be a problem over the longer term.

Something I have been reading about is an ATO ruling that enables investors to channel rent recieved into their PPOR to help reduce that, allowing the reaosn for it is to build a bigger investment portfolio. This does certainly fit with my goal. If I could remove PPOR debt in 3 or so years, this might free me up for more investment?

Anyone have experience/knowledge on this?

 

[gooram]

There's lots of threads on that topic, do a search on 'capitalising interest' and 'debt recycling'.

I've used it in the past to great effect. I don't really have the spare equity at the moment to set up the required LOC. It's a pretty aggressive strategy, and possibly a little bit risky but it can work if you're disciplined.

 

[ChasingSugar]

I'll take a look - thnaks for the heads up.

Given you have done it previously - can you give me a bit of an insight into the risk side?

I can't see too much Risk here as the debt levels don't change, only the debt location, IE secured against PPOR or against IPs?

 

[Ski-bum]

Hi chasingsugar,

to enable debt recycling you'll need enough equity to set up a LOC where your investment expenses (ie. interest repayments, insurance, body corp etc...) can be paid out of.

Your figures show that LVR is ~90% for PPOR and ~85% for IPs, so you probably won't be able to get a LOC as these LVRs are high.

You've done very well to accumulate so far, and great that holding costs are minimal. I'd be inclined to sit tight property wise (esp if you are in Melb, things may not move imminently), and try to pay down PPOR. That's my opinion, others may differ