Author Topic: Reader case study, high income, help us retire yesterday!  (Read 10274 times)

Gasman

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Reader case study, high income, help us retire yesterday!
« on: May 12, 2015, 01:36:53 AM »
We have joined up to post a case study. We have had a really high income for the last 18 months which will continue until we retire, and having read the forum avidly for a few months, I see comments from people like, if I had your income I would retire in a year etc. I would love to retire asap. Work is very complex and I can't wait to get out of it, so maybe you can help. The income and expense info is from the last 12 months. I know the forum is generally very hard on high earners so looking forward to some serious face punches. And if nothing else it will give you all a laugh.

Life situation: My partner age 38, and I age 37, both work full time. We have a toddler and two cats and live in Australia. I find our life stressful and I long for a time when we can just do what we want with our time and enjoy more time with our child.

Gross salary/wages before deductions
-me 516388 plus about 7300 super
-partner 75000 plus super of 7125

Pretax deductions 'salary sacrifice'
-partner super 17875
-me super 17700- i just pay this myself from my pretax income

Rental income
-24250
-but expenses have used up all of this and more although we don't forsee any major expenses. Came to negative 19000 for last 12 months

My work expenses are 119574 for last 12 months
administration 77450,
dues/subs 2923,
car 10444,
petrol 2088,
indemnity insurance 6600,
education 2330,
my pretax super contribution see above 17700

Taxes
-me this year will be about 155000
-partner 16000

Total income after taxes, expenses and super contributions/deductions for last year 289043

Personal expenses last 12 months total 117409
-rent 25872
-mortgage interest 26258
-insurance 10354
-groceries 9170
-travel 8770
-restaurants/cafes 5107
-hobbies 4963
-daycare/babysitting 4473
-clothing/shoes 3312
-gifts 3308
-utilities 3036
-electronics 2781
-atm/cash 2278
-home improvement 1785
-pets 1337
-entertainment 1268
-internet 974
-healthcare/medical 778
-personal care 636
-cell phones 584
-service charges/fees 141
-charity 98
-general merchandise 36
-other 47

Expected ER expenses 60000 gross
-basic expenses with paid off house and living in the house would be 25000 per year
-I would like to add 20000 for travel and hobbies
-rest is taxes

Assets total 882000
-me super 93421
-partner super 39879
-vanguard vts 6390
-cash 8269
-car 14000
-camper trailer 42000
-house contents 50000
-house estimate value 675000

Liabilities total 393629
-mortgage 301000. Original loan was 615000 just over two years ago. Variable Rate was 5.2% but now up to 6.65%. It is a 25 year loan so just under 23 years remaining
-credit card one 1400 paid in full each month
-credit card two 45400 paid in full each month
-tax owed for current financial year 45000

Net worth is 489000

Our aim at present is to pay off the mortgage in the next year, then invest the income with vanguard index funds. We thought it would be good to aim for 200000 each in super which should increase to 1200000 by the time we can access it but I wonder lately if it would be better to abandon our extra super contributions.

I calculate and re-calculate projections on when we can get out of here and drive off into freedom.

Ok, so hit me with it. Help us decrease our expenses, increase our savings and get out of here! And any suggestions about proper accounting for expenses, super etc would also be much appreciated! Every month I struggle with that due to varying tax amounts on everything, and I am only ever estimating the amount of tax I will have to pay.

 A friend of mine calls me 'cheap'. If only he could see my expenses list!

Thanks
« Last Edit: May 12, 2015, 04:12:02 AM by Gasman »

marty998

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Re: Reader case study, high income, help us retire yesterday!
« Reply #1 on: May 12, 2015, 01:59:58 AM »
This is insanity. My jaw dropped reading through your case study mate.

How long have you had the high income (You're a Medical Specialist?)

Lots to consider, if I were you I'd:

- get some serious tax advice
- reduce my deductions, or try to figure out how I could turn some of my personal deductions into business/work deductions
- start acquiring some income producing assets that don't rely on my work effort

I'd also think about spending 2 years maxing out Super - concessional and non-concessional contributions (to the $180k cap). That takes care of old age years.

I would assume that the Camper trailer is a one off purchase...congratulations - there's $46k right there available for this year to top up your Vanguard stocks...


happy

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Re: Reader case study, high income, help us retire yesterday!
« Reply #2 on: May 12, 2015, 03:14:48 AM »
Gasman = anaesthetist? If so welcome, medicus. Weclome anyway if you're not.
Just trying to see where all this moula went. I see you paid off a lot in mortgage principle.
What is "rent" under personal expenses? Do you have a PPOR? Or is this expenses for a rental property?

Given the size of your income the rest of your expenses are not completely outrageous although tree is some tightening up you could do e.g. groceries for 2+ toddler is pretty high, and a lot of things like restaurants, travel, electronics, entertainment etc could go if you are really serious about hitting this hard. Insurance 10 k? What in heck are you insuring? How is it your mortgage rate has gone up? At 6.65% you need to consider if you can refinance this, or are you locked in in some way?

I agree with Marty, have a talk to an accountant and see how you can structure your affairs to be more tax effective. If you are a doc, see if you incorporate whether this will save tax.  Then read Big Chris Bs journal and the Aussie Investing Thread. You can finish the job with super like Marty says, and pay off PPOR/rental without changing much and these are low risk. But as soon as you start stash in stocks you will have a problem with tax unless you get a good tax structure to get you down to 30%. Its worth thinking about whether you want to pay down debt/max super, then start with investing, or whether you wish to do some of this simultaneously. Look at the differentials in rates of return after tax at these different options.

If you really think you need 86k a year then you're looking at a paid off house and about 2.1 mm at a 4%WR. If you save 200k a year (keeping expenses to 89k), then you've got less than 8 years to go…depending on your investment returns.


former player

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Re: Reader case study, high income, help us retire yesterday!
« Reply #3 on: May 12, 2015, 03:31:06 AM »
An annual net income of $289,043 and annual personal expenses of $333,197 gave me my first laugh of the day: thank you.

Reading on, I note your "expenses" include $173,788 of mortgage principle and the purchase of a camper trailer which presumably took up a significant part of the $46,963 on hobbies.  So not quite as bad as it might be.

I don't understand the entries in your personal expenses list for $26,258 on mortgage interest and $25,872 on rent.  You live in two houses?  Two very expensive houses?  One of which you own and one you rent?  Where does the rental which you say lost you $19,000 last year come into this?

How much use will you be getting out of the camper trailer before you retire?  Looks to me a bit like you jumped the gun on buying it and would have been better waiting until you were ready to roll.  On the other hand, if having it sitting around gives you the impetus to get your finances in order and drive off into the wild blue yonder as soon as possible, then good for you.

Gross income of $600,000 per year and net assets of $447,000 puts you way upside down for retirement.  I could be charitable and assume that you were scraping along on an average professional income until recently, but being a miserable kind of git I suspect years and years of hedonistic adaption.  That makes me deeply suspicious of the idea that you could live on a limited income in early retirement.  You need to prove your figures (to yourself, mainly) over the period until you retire.  (Well done on keeping track of your spending, by the way - can't have been easy with so much to count.)

Evidence for hedonistic adaptation is the $50,000 you estimate as the value of house contents.  That may be what you spent: I really doubt it is what you would get if you sold up.

Your investments (including cash on hand), on which you would be living in retirement, are less than $150,000.  On a 4% Safe Withdrawal Rate (that's the USA rate, you will wish to check the SWR for Australia) that gives you a passive income of $6,000 per annum.  You've a way to go, my friend.  Start by taking a serious look at you housing situation.  For instance, how much is the rental worth and can you sell it and put that money into income-producing investments?  On retirement, can you sell your main home and buy somewhere without a mortgage?  If you are renting a second home for work reasons, can you rent somewhere cheaper?  Changing your property situation is going to be the biggest win towards getting you retired soonest.

I'm not going into the details of your day to day expenses, which on the whole, and taking into account a working couple with high incomes and a young child, don't look too bad.  Although charity at $98 and gifts at $3,308 is one of the more extreme demonstrations of charity beginning at home.

Best of luck with the facepunches.

happy

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Re: Reader case study, high income, help us retire yesterday!
« Reply #4 on: May 12, 2015, 03:42:42 AM »
Quote
An annual net income of $289,043 and annual personal expenses of $333,197 gave me my first laugh of the day: thank you.
Yes I smiled too, just too polite to mention it :). 

Quote
On a 4% Safe Withdrawal Rate (that's the USA rate, you will wish to check the SWR for Australia)
Around 3.5% for Australia, 3% is conservative.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #5 on: May 12, 2015, 04:55:07 AM »
Thanks for all the great comments. Yes I am an anaesthetist and my wife works in an office.
Yes sorry the structure was a bit strange with expenses being more than income, and I have edited it now so I think it makes better sense. I think some savings from previous years were used for mortgage payment or something like that so expenditure was higher than income for that 12 month period, and the credit card is loaded up for the next month too which may have contibuted.

I consulted an accountant about tax minimisation but really didn't get the feeling that structures such as trusts or companies were as worthwhile as perhaps they were in the past. That was over a year ago so will make another appointment and see if it might be different now. What sort of structure would you think would be best for the stock stashing period?

How does maxing the super to the 180k cap help do you all think?

The insurance is:
-car insurance 237,
-roadside assistance 179,
-health insurance to avoid medicare levy surcharge 1700,
-life for partner 652,
- house 1057,
-life/trauma/disability/income protection for me 7560

We rent a house off the owners in the city for $550 a week, which we live in near work. We own a house in a small country town, which we have a mortgage on and which we rent out to tenants for $550 a week. We have made a loss on it this year due to expensive upgrade of fences and driveway which I thought were better to do now while we have a big income.

Yes we have been earning money for years, and have never really saved anything except for immediate spending such as a car, our wedding etc. Then had a really embarrassing situation where we had to borrow money off family, and realised we had to change. So managed to pay off student loans, bought the house, after which we found MMM and realised all our mistakes. And then came the big income.

Yes we can rent somewhere cheaper and I think will do that once the lease is up here. We can halve the rent if we move to a 2BR unit. Currently we are in a 3BR house. The house we own in the country town is where we plan to retire to and so we prefer not to sell it even though it was expensive and we would be better off without it.

The mortgage is not locked in. We can fix a rate much lower than it is, but then we can only pay off a small proportion of the mortgage per year, and I thought it would be better to have a higher rate and pay it off quicker. I also recently set up an offset account to store the tax department's money in, so as to decrease the interest payments.

I have altered the ER expenses to about 45000 net income, which I think will be enough. Our hobbies are fairly cheap things like hiking, camping, fishing, and all of these are on the doorstep of our retirement home so expensive international travel will be a rare thing I think.

I hope that answers a few of the questions so far.
« Last Edit: May 12, 2015, 05:13:35 AM by Gasman »

ShoulderThingThatGoesUp

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Re: Reader case study, high income, help us retire yesterday!
« Reply #6 on: May 12, 2015, 05:07:58 AM »
-travel 8770
-restaurants/cafes 5107
-hobbies 4963
-daycare/babysitting 4473
-clothing/shoes 3312
-electronics 2781
-atm/cash 2278
-pets 1337
-service charges/fees 141

Wow.

What the hell is "atm/cash"? That is not a spending category and it definitely shouldn't be a budget category, that's $2300 a year that just evaporates from your mental picture.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #7 on: May 12, 2015, 05:51:11 AM »
Yes you are right about the cash! That is bad! It was babysitting, cafes and other small purchases in shops that don't take cards, or when the purchase price is below the lowest card payment allowance, camping grounds, parking on street or in buildings that only take cash. Will keep a track of it on phone from now on and really get a handle on what it is.
« Last Edit: May 12, 2015, 05:59:19 AM by Gasman »

happy

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Re: Reader case study, high income, help us retire yesterday!
« Reply #8 on: May 12, 2015, 05:58:51 AM »
Quote
I consulted an accountant about tax minimisation but really didn't get the feeling that structures such as trusts or companies were as worthwhile as perhaps they were in the past. That was over a year ago so will make another appointment and see if it might be different now. What sort of structure would you think would be best for the stock stashing period?
There are a few financial wizards on here who might help you with ideas. If none come by here, ask the question on the Aussie investment thread, or as a separate thread marked Australian.

Quote
How does maxing the super to the 180k cap help do you all think?
Read up on the super rules for your income bracket on moneysmart.gov.au or Trish Powers' super guide. For your "old man money" super is probably your most tax effective way to save. Once you retire you won't be able to put anymore in, so you need to work out what you will need, and make sure you have enough in there before you retire. Then it will compound away. I think Marty's point was that you could put 180k in for a couple of years, then you're done, or you could just put in less over your remaining years working. There's lots of rumbling about high income earners and super so stay informed. How much to trust the govt? Who can say. Personally I would put enough in, but not go overboard, just incase the rumours about compulsory annuitization come true.

Quote
The mortgage is not locked in. We can fix a rate much lower than it is, but then we can only pay off a small proportion of the mortgage per year, and I thought it would be better to have a higher rate and pay it off quicker. I also recently set up an offset account to store the tax department's money in, so as to decrease the interest payments.

You can get a mortgage at 4.5-5% with the big banks, which will not only have an offset account, but also the ability to make extra repayments  and pay it off early without penalty. If you try other lenders you may well go even lower. Let them know you are shopping around.

waltworks

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Re: Reader case study, high income, help us retire yesterday!
« Reply #9 on: May 12, 2015, 06:05:14 AM »
Attempt to live on your proposed re budget. Come back in a year and let us know how it went.

-W

morning owl

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Re: Reader case study, high income, help us retire yesterday!
« Reply #10 on: May 12, 2015, 07:44:37 AM »
Attempt to live on your proposed re budget. Come back in a year and let us know how it went.

-W

+1

If you can live off of your proposed 25k / year for all expenses minus mortgage, travel, and business expenses NOW, then you're set. You will be testing the waters for ER and increasing your savings exponentially while you still have the high income. 

You need to speed-save into your financial investments at this point. DH and I also have a high income (no kids though) and have paid off our mortgage, and are now power-saving into the investment accounts. We also have most of our net worth in our house, but are looking to reverse that. In a HCOL environment (i.e. in a city or workplace surrounded by big spenders) 25k/ year is very difficult. Are you planning to downsize and move somewhere cheaper in ER for this level of spending?

ETA: just read your post about the country town house. This sounds like a great plan for RE, but I would still try to see if you can live off of this budget now, if possible.
« Last Edit: May 12, 2015, 07:52:49 AM by morning owl »

PharmaStache

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Re: Reader case study, high income, help us retire yesterday!
« Reply #11 on: May 12, 2015, 07:52:38 AM »
$98 to charity?  Wow. 

Some of your expenses don't look terrible.  8k on vacations when you make that much could be considered fairly reasonable.

CommonCents

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Re: Reader case study, high income, help us retire yesterday!
« Reply #12 on: May 12, 2015, 07:55:55 AM »
Liabilities total 393629
-credit card one 1400 paid in full each month
-credit card two 45400 paid in full each month
-tax owed for current financial year 45000

What does this mean?  Do you have a monthly credit card bill of $46,800 EACH MONTH that you pay off in full ($561,600 yearly).  Or does your "paid off in full" not mean what it's intended to mean (that you pay off the balance in full each month) and instead, you are just paying the full amount of the minimum?  If so, what's the interest rate on this money?  I'm guess it's high - 15-20% and would strongly urge you to pay it off ASAP like yesterday.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #13 on: May 12, 2015, 08:09:20 AM »
$98 to charity?  Wow. 

Some of your expenses don't look terrible.  8k on vacations when you make that much could be considered fairly reasonable.

The charity wow is bad I guess. I hope to be more charitable once we are retired.

 The vacations are all trips back to hometown to see parents with toddler. It is not exactly a holiday unfortunately, more or an obligation. It is hard to say no to coming home for Christmas, although we did it one year before we had baby.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #14 on: May 12, 2015, 08:14:51 AM »
Liabilities total 393629
-credit card one 1400 paid in full each month
-credit card two 45400 paid in full each month
-tax owed for current financial year 45000

What does this mean?  Do you have a monthly credit card bill of $46,800 EACH MONTH that you pay off in full ($561,600 yearly).  Or does your "paid off in full" not mean what it's intended to mean (that you pay off the balance in full each month) and instead, you are just paying the full amount of the minimum?  If so, what's the interest rate on this money?  I'm guess it's high - 15-20% and would strongly urge you to pay it off ASAP like yesterday.

Sorry to be unclear. We pay off the full credit card balances each month. The one with 45000 on it has just been used to pay a big tax bill and the payment isn't due until June. We don't carry any credit card debt. I think the rate is 20% for these cards so yes that would be very expensive credit! Our only debt is the mortgage.i put it under liabilities because it will need to be paid next month.

ZiziPB

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Re: Reader case study, high income, help us retire yesterday!
« Reply #15 on: May 12, 2015, 08:17:15 AM »
Quote
Assets total 882000
-me super 93421
-partner super 39879
-vanguard vts 6390
-cash 8269

-car 14000
-camper trailer 42000
-house contents 50000
-house estimate value 675000

Your liquid income producing assets currently stand at ~148,000.  You would like 60,000 annually in retirement.  At 3.5% SWR (which someone said is the number for Australia), you need an investment portfolio of 1,715,000 plus a paid for house.  So you need to save 1,566,000 on top of paying off your mortgage.
« Last Edit: May 12, 2015, 09:01:29 AM by ZiziPB »

ZiziPB

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Re: Reader case study, high income, help us retire yesterday!
« Reply #16 on: May 12, 2015, 08:33:03 AM »
Liabilities total 393629
-credit card one 1400 paid in full each month
-credit card two 45400 paid in full each month
-tax owed for current financial year 45000

What does this mean?  Do you have a monthly credit card bill of $46,800 EACH MONTH that you pay off in full ($561,600 yearly).  Or does your "paid off in full" not mean what it's intended to mean (that you pay off the balance in full each month) and instead, you are just paying the full amount of the minimum?  If so, what's the interest rate on this money?  I'm guess it's high - 15-20% and would strongly urge you to pay it off ASAP like yesterday.

Sorry to be unclear. We pay off the full credit card balances each month. The one with 45000 on it has just been used to pay a big tax bill and the payment isn't due until June. We don't carry any credit card debt. I think the rate is 20% for these cards so yes that would be very expensive credit! Our only debt is the mortgage.i put it under liabilities because it will need to be paid next month.

And how exactly are you planning to pay it off next month?  You have 8,000 in cash on hand...

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #17 on: May 12, 2015, 08:43:37 AM »
Attempt to live on your proposed re budget. Come back in a year and let us know how it went.

-W

+1

If you can live off of your proposed 25k / year for all expenses minus mortgage, travel, and business expenses NOW, then you're set. You will be testing the waters for ER and increasing your savings exponentially while you still have the high income. 

 Are you planning to downsize and move somewhere cheaper in ER for this level of spending?

ETA: just read your post about the country town house. This sounds like a great plan for RE, but I would still try to see if you can live off of this budget now, if possible.

Yes thankyou for the ideas, we will try that for the coming twelve months. We have committed to cutting down the groceries to 100/week, accounting for all the cash precisely, minimise cafes and restaurants, cut out electronics, cut out home improvement, cut out entertainment and halve the personal care category. When we retire we won't have rent, mortgage interest, childcare nor most of the insurance except for house, contents and car which we will keep. So that will really help too.

The retirement house is just outside a small rural town. It has some grassy land. We may have a small productive garden if it is not too much work. It backs onto a river so opportunities there for hiking, camping and fishing. There is also hills within a short drive so more hiking trips. We will drive into town and the city further away to visit with people now and then and invite people out at times. It will be a quiet life. Our child can go to the local country school which is quite good. We have lived there before but we were commuting to the city and it was not so peaceful doing that. We are both introverts. I have an interest in poultry so may be able to develop that into a nice hobby. We have a spa pool there too and dream of soaking in it looking out at the green hills. It might be nice to have another child too if we have the chance before it is too late. I would like to volunteer at the local library, spend time at the school, paint out graffiti in the town, amongst other things.

We have some ideas for income during that period such as growing and selling hay, afterschool care for daughter's school friends, selling hatching eggs etc in case we retire in a bad period for the investments. But I would really rather not have to do any of these things.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #18 on: May 12, 2015, 08:52:35 AM »
Liabilities total 393629
-credit card one 1400 paid in full each month
-credit card two 45400 paid in full each month
-tax owed for current financial year 45000

And how exactly are you planning to pay it off next month?  You have 8,000 in cash on hand...

I know it looks bad doesn't it. I get paid twice a month and there are three pay days between now and then which should bring our cash accounts up to about 75000. I have just paid 85000 cash to the tax office which is why the cash is depleted. Usually the credit card balance is around 8-10000 a month.

ZiziPB

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Re: Reader case study, high income, help us retire yesterday!
« Reply #19 on: May 12, 2015, 09:00:17 AM »
Quote
usually the credit card balance is around 8-10000 a month

So 96,000 to 120,000 on the credit card a year?  Presumably this does not include your rent or mortgage interest (which are another 50,000) and various other expenses you listed that don't appear to be of the type that could be paid with a credit card (utilities, childcare, ATMs, etc.).   So we're probably talking close to 200,000 a year, way higher than the numbers you listed.

I suspect you are seriously underestimating your real spending...

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #20 on: May 12, 2015, 09:17:01 AM »
The spending is completely accurate as it automatically uploads to my accounting software from the banks.

 It is just that my estimate of the credit card balance is wrong sorry. It varies a lot. We do pay utilities and childcare with the credit card. All the tax goes on the credit card too, as well as the insurances and the groceries. Actually everything except for the cash, the mortgage and the rent goes on the credit card. We use the credit card points for groceries.
« Last Edit: May 13, 2015, 07:10:04 AM by Gasman »

totoro

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Re: Reader case study, high income, help us retire yesterday!
« Reply #21 on: May 12, 2015, 09:24:16 AM »
I don't know the tax rules in Australia but in Canada you'd want to incorporate and retain income in the corporation at a lower tax rate.  You'd then want to look around for ways to invest it to get the capital gains tax deduction.  I don't know if you have something similar where you are but I'd check it out as it seems likely given the public policy reasons behind it - ie. encouraging re-investment in the economy and small businesses.

Jeremy E.

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Re: Reader case study, high income, help us retire yesterday!
« Reply #22 on: May 12, 2015, 09:50:58 AM »
I also am not real sure what the tax laws are in Australia, I'd say if you are paying less than 30% in income tax, then I would skip the supers(I assume a super is some sort of retirement account like a 401k in the United States?) and pay off that high interest rate mortgage first. That is a crazy high interest rate on that mortgage and it seems you are paying a LOT in mortgage insurance as well, once you pay it off you will eliminate all interest and mortgage insurance payments and be able to really pile money into that retirement.

Spondulix

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Re: Reader case study, high income, help us retire yesterday!
« Reply #23 on: May 12, 2015, 08:23:31 PM »
Here were the red flag items for me:

Personal expenses last 12 months total 117409

-groceries 9170 What are you buying? I know Australia is expensive, but this still seems like a lot for 2.5 people

-restaurants/cafes 5107 Are you eating out for entertainment or necessity? What could you be doing from home?

-hobbies 4963 What are these?

-clothing/shoes 3312 I'm guessing you're not wearing suits to work every day. This is 275/month (a yearly budget for some couples); or nearly 10/day. Why is this so high?

-gifts 3308 What kinds of gifts are these? Why is 3k in gifts acceptable, but more than 100 to charity is something that "can wait til retirement"?

-electronics 2781 What new gadgets are you buying every year?

-atm/cash 2278  I know you brought this up, but in your budget this should be broken down more tightly

-pets 1337 Is this just food and vet expenses, or what are the extras?

-entertainment 1268 What is this?

-internet 974 Are you paying for high speed? Why is this so high?

-personal care 636 Some of the high earner case studies we see have weekly manicures and monthly highlights, so this isn't bad at all.

-service charges/fees 141 Are these avoidable?

-charity 98 This is 0.02% of your salary (even less if wife is counted); are you ok with that?


A couple questions (no face punches, just curious): where do you want to travel that you need to add 20k a year?
How does your wife feel about your quality of life - does she want more time and less stress, also? What are you gaining (or losing) from her working when your income is so high?

The face punch: the reason I'm getting so critical on this is because your expenses are only going to go up as your child gets older, and let's be honest - you make a crap ton of money (which it's pretty badass to get there just on a job!) But here's some perspective: Your "extras" (eating out, entertainment, toys, clothes etc) are some people's entire yearly budget; your personal expenses are more than your wife earns in a year. Do you spend more on a meal than you do donating to charity in a year?

Are these things in line with the life priorities that you have? What elements of your spending are actually complicating life, or making it harder to spend time with your family?


bigchrisb

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Re: Reader case study, high income, help us retire yesterday!
« Reply #24 on: May 12, 2015, 09:08:14 PM »
Hi,

Already some good comments here.

One thing I'd want to give some serious thought to is your structure and how to play some tax arbitrage over time. You are paying a massive amount of tax over the next couple of years, and then intending on being in a very low tax rate.  Paying 50% of your income during the accumulation phase in this way isn't very helpful.   I'm in a somewhat similar situation - might be worth having a look at my journal on this forum.

If I were you, I'd seriously look into if I could arrange the following structure:

- See if I could change my work arrangements from being an employee to a contractor.
- Create a family trust and two companies.
- Use one company to conduct my work - bill my previous employer, and pay myself a salary of $80k.  This company should be owned by the trust. Call it gasco.
- Pay out the remaining profits as a dividend to the trust.  This would be taxed at 28.5% (as of yesterday), but would come with a franking credit of the same amount.
- Stream the dividends through the trust to the other company - call it investco.  Use this to invest, and have your investment income compounding at a 28.5% tax rate, rather than a 50% tax rate.
- When you pull the pin and draw down income from investco, you will get the franking credits back at your new tax rate. 

Costs: - admin and stuff around of a trust and two companies.  Your employer may not let you bill as a company.
Benefits: retain ~43% more of your income to invest, and have it compounding at a much higher rate.  Furthermore, the trust/company structure provides some asset protection in case you were to be sued form a botched job.

In your situation, it would be worth spending a few thousand bucks on a good accountant for some structural advice.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #25 on: May 13, 2015, 04:39:03 AM »
I don't know the tax rules in Australia but in Canada you'd want to incorporate and retain income in the corporation at a lower tax rate.  You'd then want to look around for ways to invest it to get the capital gains tax deduction.  I don't know if you have something similar where you are but I'd check it out as it seems likely given the public policy reasons behind it - ie. encouraging re-investment in the economy and small businesses.

Thanks. I am going to see an accountant and discuss these issues next week

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #26 on: May 13, 2015, 04:42:33 AM »
I also am not real sure what the tax laws are in Australia, I'd say if you are paying less than 30% in income tax, then I would skip the supers(I assume a super is some sort of retirement account like a 401k in the United States?) and pay off that high interest rate mortgage first. That is a crazy high interest rate on that mortgage and it seems you are paying a LOT in mortgage insurance as well, once you pay it off you will eliminate all interest and mortgage insurance payments and be able to really pile money into that retirement.

Thanks for this. Super is a tax advantaged way of investing in Australia. But the money can't be accessed til much later in life. Yes the mortgage interest rate is high but it is the best variable rate available for that property. We don't pay any mortgage insurance. We are hoping to pay the mortgage off completely in the next twelve months. I'll report back in a year!

happy

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Re: Reader case study, high income, help us retire yesterday!
« Reply #27 on: May 13, 2015, 05:31:50 AM »
Overnight thoughts:
1. if you decide  the mortgage is your priority and at 6.65% thats not unreasonable since you are not likely to do much better than that after tax, and you plan to throw everything at that and pay it off in 18months, then it may well be not worth trying to re-fi at a lower rate because there could be a couple of grand in loan application fees which will negate the interest saved - over 18months it won't be much.

2. If you are planning to do this quickly, and really move to 45k income ( you could consider the recommendation for a "comfortable retirement" for a couple is around 57k which would give you a little breathing space) then you are moving from an incredibly high tax picture to an almost non-existent tax picture after retirement. Since you and you wife only need to have 22.5k income each, this is very little above the tax free threshold and if your income is derived from franked dividends you will get a good tax refund, not pay tax. Its worth thinking about tax structures for say the 8-10 years in the high tax environ, and then how that structure will work (or not) once you retire with the lovely low taxes of early retirement.  Maybe BigChrisB knows the answer, and would care to reply if he's still reading?

3. Stick to your guns and don't let the hecklers rattle you. I assume you were on registrar wages until "the big money came". Don't give in to hedonic adaptation and you will be fine. Not all docs are addicted to the big bucks and some of us see the light and don't want to spend 12-14 hours a day with fluorescent lighting and hospital smells. I do believe you can realise your dream if you wish to…my dreams are similar although I've had a different path…its important to be in touch with nature, and spend time with family and generally smell the roses. Your big money is a hard earned "gift" , if you can maintain self control, you can escape.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #28 on: May 13, 2015, 05:44:08 AM »
Here were the red flag items for me:

Personal expenses last 12 months total 117409

-groceries 9170 What are you buying? I know Australia is expensive, but this still seems like a lot for 2.5 people yes it is a lot and we are going to try to cut it down, primarily by not visiting the supermarket so often.

-restaurants/cafes 5107 Are you eating out for entertainment or necessity? What could you be doing from home? neither. It is basically unpleasant due to toddler behaviour, except for the odd nice trip to the beach for fish and chips and to watch the sunset. I don't think we will do this much anymore.

-hobbies 4963 What are these? camping, four wheel driving, cycling, diy ,homebrew, gardening

-clothing/shoes 3312 I'm guessing you're not wearing suits to work every day. This is 275/month (a yearly budget for some couples); or nearly 10/day. Why is this so high?
Mostly because I needed a work wardrobe a very scruffy until now. I do have to see patients in the office quite a lot

-gifts 3308 What kinds of gifts are these? Why is 3k in gifts acceptable, but more than 100 to charity is something that "can wait til retirement"?
Half of this was for a family in need, rest probably wasted. but big charities are all just supporting their own admin. Have been looking at direct charities lately. How much do you think we should give them?

-electronics 2781 What new gadgets are you buying every year? a new printer and cartridge, a new tablet $2500.

-atm/cash 2278  I know you brought this up, but in your budget this should be broken down more tightly mostly babysitting I think, rest would be small cafe purchases

-pets 1337 Is this just food and vet expenses, or what are the extras? fleaing worming, one stay in cattery for $132

-entertainment 1268 What is this? aquarium $85, swimming pool concession card 20 swims $145, two dinners out on our own $47.80 and $20. Cinema $42 and $37. A steam train $58. A bar $26. A party $57. A few taxis the nights we went out. Baysitting $560.

-internet 974 Are you paying for high speed? Why is this so high? it is $60 a month, and $120 for ipad data a year.

-personal care 636 Some of the high earner case studies we see have weekly manicures and monthly highlights, so this isn't bad at all. this was a haircut for my wife $65, a breast pump $300, some bulk shampoo $30, and bulk nappy liners $50 and a band for my toddler's sunglasses $6.

-service charges/fees 141 Are these avoidable? due to credit card annual fees.

-charity 98 This is 0.02% of your salary (even less if wife is counted); are you ok with that?
How much do you think we should give? 10%? It Is good to know that $46000 of the tax I paid last year went to Australian welfare which I guess is a kind of state-imposed charity. Ironic of course that I will have got $4500 of it back for daycare rebates.


A couple questions (no face punches, just curious): where do you want to travel that you need to add 20k a year? Was thinking of going to northern hemisphere for our winters.
How does your wife feel about your quality of life - does she want more time and less stress, also? Yes
What are you gaining (or losing) from her working when your income is so high? Her income is partly tax free and partly lower tax than mine. Also her sanity. Cons are strain on family, loss of time with toddler, daycare, a few trivial coffees and meals out with colleagues.

The face punch: the reason I'm getting so critical on this is because your expenses are only going to go up as your child gets older, and let's be honest - you make a crap ton of money (which it's pretty badass to get there just on a job!) But here's some perspective: Your "extras" (eating out, entertainment, toys, clothes etc) are some people's entire yearly budget; your personal expenses are more than your wife earns in a year. Do you spend more on a meal than you do donating to charity in a year?
Yes we have done that on two occasions in the last year!

Are these things in line with the life priorities that you have? What elements of your spending are actually complicating life, or making it harder to spend time with your family?
I think the hobbies are important as they are what we want to do when we retire and they give us the most enjoyment per dollar spent. The rest can go.

I have spent all evening writing a reply to this, only to lose it at the end with an error saying I wasn't logged in. So sorry the new reply is much briefer than the great one I had prepared.
« Last Edit: May 13, 2015, 06:10:51 AM by Gasman »

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #29 on: May 13, 2015, 05:48:07 AM »
Hi,

Already some good comments here.

One thing I'd want to give some serious thought to is your structure and how to play some tax arbitrage over time. You are paying a massive amount of tax over the next couple of years, and then intending on being in a very low tax rate.  Paying 50% of your income during the accumulation phase in this way isn't very helpful.   I'm in a somewhat similar situation - might be worth having a look at my journal on this forum.

If I were you, I'd seriously look into if I could arrange the following structure:

- See if I could change my work arrangements from being an employee to a contractor.
- Create a family trust and two companies.
- Use one company to conduct my work - bill my previous employer, and pay myself a salary of $80k.  This company should be owned by the trust. Call it gasco.
- Pay out the remaining profits as a dividend to the trust.  This would be taxed at 28.5% (as of yesterday), but would come with a franking credit of the same amount.
- Stream the dividends through the trust to the other company - call it investco.  Use this to invest, and have your investment income compounding at a 28.5% tax rate, rather than a 50% tax rate.
- When you pull the pin and draw down income from investco, you will get the franking credits back at your new tax rate. 

Costs: - admin and stuff around of a trust and two companies.  Your employer may not let you bill as a company.
Benefits: retain ~43% more of your income to invest, and have it compounding at a much higher rate.  Furthermore, the trust/company structure provides some asset protection in case you were to be sued form a botched job.

In your situation, it would be worth spending a few thousand bucks on a good accountant for some structural advice.

Thanks a lot. I will ask again next week about this. I do all contracting now, but there is still some super paid for certain jobs hence the super bits.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #30 on: May 13, 2015, 07:03:14 AM »
Overnight thoughts:
1. if you decide  the mortgage is your priority and at 6.65% thats not unreasonable since you are not likely to do much better than that after tax, and you plan to throw everything at that and pay it off in 18months, then it may well be not worth trying to re-fi at a lower rate because there could be a couple of grand in loan application fees which will negate the interest saved - over 18months it won't be much.

Yes I think that is what we will do. We might be able to pay it off in a year if we apply ourselves. The house actually isn't in Australian territory and the interest rate we have is the lowest variable rate available. We can fix at a lower rate for six months or a year, but  I think that only means we pay more interest due to the limit on the amount of principle we can pay off each month.

2. If you are planning to do this quickly, and really move to 45k income ( you could consider the recommendation for a "comfortable retirement" for a couple is around 57k which would give you a little breathing space) then you are moving from an incredibly high tax picture to an almost non-existent tax picture after retirement. Since you and you wife only need to have 22.5k income each, this is very little above the tax free threshold and if your income is derived from franked dividends you will get a good tax refund, not pay tax. Its worth thinking about tax structures for say the 8-10 years in the high tax environ, and then how that structure will work (or not) once you retire with the lovely low taxes of early retirement.  Maybe BigChrisB knows the answer, and would care to reply if he's still reading?

Mm that is all really interesting thanks! The tax free threshold is really great. I still have a lot to learn about shares and franked dividends before we start buying shares. I have a lot of reading to do.

3. Stick to your guns and don't let the hecklers rattle you. I assume you were on registrar wages until "the big money came". Don't give in to hedonic adaptation and you will be fine. Not all docs are addicted to the big bucks and some of us see the light and don't want to spend 12-14 hours a day with fluorescent lighting and hospital smells. I do believe you can realise your dream if you wish to…my dreams are similar although I've had a different path…its important to be in touch with nature, and spend time with family and generally smell the roses. Your big money is a hard earned "gift" , if you can maintain self control, you can escape.

Thanks, that's very inspiring. Towards the end of the twelve hour day, I really think, what am I doing in this windowless room, and when am I going to get out! But soon I will be free. And if I can follow the principles and ideas here, it will be even sooner.
« Last Edit: May 13, 2015, 05:13:19 PM by Gasman »

ZiziPB

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Re: Reader case study, high income, help us retire yesterday!
« Reply #31 on: May 13, 2015, 08:12:27 AM »
I have read your additional replies and explanations and you appear earnest and eager to make some changes.  So here is what I think you need to do.

First, you are sorely lacking any type of a plan or organization method.  Especially as it regards taxes.  Whether you set up some type of an elaborate tax structure or simply pay the income tax due on your income, your approach to it seems haphazard at best.  You seem surprised by the tax payments and totally unprepared for them.  You need to have a system where you set aside a portion of your pay (regularly, each time you get paid) to pay the tax due on it.  Here in the US, you would be making quarterly estimated tax payments.  I don't know what the method is in Australia but you need to put a certain percentage of your income aside so that it is there to meet your tax obligations.  Putting it on a credit card and paying it from future income doesn't make sense to me and it is bound to catch up with you at some point (that future income is taxable too, so at some point you will end up with a large tax liability and no income to pay it from). 

Same for savings - you need to look at your numbers and decide how much to put towards the mortgage and how much to save/invest and then you need to do that consistently every time you get paid.  Is there a way to automate contributions to your retirement account, savings account, brokerage account?  If so, decide on a number and just do it.  Pay yourself first and you will see a big difference in your net worth.

Also, I think you need to increase your cash reserve/emergency fund.  I know with your income it seems irrelevant because the money is pouring in on regular basis but if something happens to you (accident, illness, bad mistake at work that leaves you unable to work for a period of time), your family will need more than 8,000 in the bank.  People generally aim for 3-6 months of living expenses in a savings account or some other liquid and safe investment.  If you have a sudden loss of income, you still have your credit card to pay off, your rent, your mortgage payment (and taxes due, unless you change your method of paying them - see above), and it may take some time for any type of insurance payout to kick in.  As it is, you are living on the edge, despite your very high income.

If you at least do these 3 things, you will be in a much better position to FIRE in the near future.
« Last Edit: May 13, 2015, 01:52:37 PM by ZiziPB »

BlueHouse

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Re: Reader case study, high income, help us retire yesterday!
« Reply #32 on: May 13, 2015, 01:51:03 PM »
It sounds like you should concentrate on:
1.  reducing discretionary spending
2.  optimizing taxes

For #2, if you are under contract, can you set up a defined benefit (vs. defined contribution) plan?  In the US, this seems to be the most favorable tax shelter for doctors and other ultra-high earners. 

Good luck!  I also spend way too much money and I also have a "cash" category.  I'll get rid of that now before I get a face punch too.  I'm working on figuring out my real retirement expenses, which means I need to live it to believe it.

Spondulix

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Re: Reader case study, high income, help us retire yesterday!
« Reply #33 on: May 13, 2015, 10:47:31 PM »
I think the hobbies are important as they are what we want to do when we retire and they give us the most enjoyment per dollar spent. The rest can go.

I have spent all evening writing a reply to this, only to lose it at the end with an error saying I wasn't logged in. So sorry the new reply is much briefer than the great one I had prepared.
All good - the answers are more for you to think about than for us to know, anyhow! :)

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #34 on: May 14, 2015, 08:12:47 AM »
Ok thanks a lot.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #35 on: May 14, 2015, 08:14:00 AM »
I have read your additional replies and explanations and you appear earnest and eager to make some changes.  So here is what I think you need to do.

First, you are sorely lacking any type of a plan or organization method.  Especially as it regards taxes.  Whether you set up some type of an elaborate tax structure or simply pay the income tax due on your income, your approach to it seems haphazard at best.  You seem surprised by the tax payments and totally unprepared for them.  You need to have a system where you set aside a portion of your pay (regularly, each time you get paid) to pay the tax due on it.  Here in the US, you would be making quarterly estimated tax payments.  I don't know what the method is in Australia but you need to put a certain percentage of your income aside so that it is there to meet your tax obligations.  Putting it on a credit card and paying it from future income doesn't make sense to me and it is bound to catch up with you at some point (that future income is taxable too, so at some point you will end up with a large tax liability and no income to pay it from). 

Same for savings - you need to look at your numbers and decide how much to put towards the mortgage and how much to save/invest and then you need to do that consistently every time you get paid.  Is there a way to automate contributions to your retirement account, savings account, brokerage account?  If so, decide on a number and just do it.  Pay yourself first and you will see a big difference in your net worth.

Also, I think you need to increase your cash reserve/emergency fund.  I know with your income it seems irrelevant because the money is pouring in on regular basis but if something happens to you (accident, illness, bad mistake at work that leaves you unable to work for a period of time), your family will need more than 8,000 in the bank.  People generally aim for 3-6 months of living expenses in a savings account or some other liquid and safe investment.  If you have a sudden loss of income, you still have your credit card to pay off, your rent, your mortgage payment (and taxes due, unless you change your method of paying them - see above), and it may take some time for any type of insurance payout to kick in.  As it is, you are living on the edge, despite your very high income.

If you at least do these 3 things, you will be in a much better position to FIRE in the near future.

Thankyou, these are all excellent tangible things we can easily do.

Gasman

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Re: Reader case study, high income, help us retire yesterday!
« Reply #36 on: May 14, 2015, 08:15:36 AM »
It sounds like you should concentrate on:
1.  reducing discretionary spending
2.  optimizing taxes

For #2, if you are under contract, can you set up a defined benefit (vs. defined contribution) plan?  In the US, this seems to be the most favorable tax shelter for doctors and other ultra-high earners. 

Good luck!  I also spend way too much money and I also have a "cash" category.  I'll get rid of that now before I get a face punch too.  I'm working on figuring out my real retirement expenses, which means I need to live it to believe it.

Thanks very much, I will find these things out.