Author Topic: Australian Specific Investing Question  (Read 2700 times)

Adventures With Poopsie

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Australian Specific Investing Question
« on: January 27, 2017, 09:33:53 PM »
Hello fellow Australians! I would like some feedback on our specific investment scenario. I have come up with these plans by reading through the forums, including the Australian Investing thread, but wanted to post my situation separate to that feed.

I am 29, partner is 42. We earn just under $200k combined income (pre-tax). We pay about $20k child support per year for partnerís children, of which we canít lower. Every other expense is pretty negotiable and we are quite happy with our savings rate. We have reduced as much as we can without impacting enjoyment of life. This should be a big savings year for us.

Assets:

House- $375 000. We currently live in this so it is classed as PPOR.
Vanguard- $180 000
Direct Shares- $25 000
Offset Account- $6000

Liabilities:

Mortgage- $242 000

We are planning to retire in 6-7 years. We both have an excellent super scheme (government), of which we will receive a defined benefit pension at age 55. The pension amount is based on time in the job, so there is nothing we can do to increase it except work for longer. Our own super contributions do not increase the pension, just the lump sum that we will receive at 60. Because my partnerís pension will be more than enough for us to survive on with a bit of supplement from Vanguard, we are treating the lump sums as bonus money and not contributing extra toward these. We believe that money can do more for us outside of super right now.

When we bought our house, we bought it as an investment property, just one that we would live in for a couple of year before taking a work transfer interstate and renting it out. It looks like that work transfer is happening in December, so as of December, it will be a rental property. We have lowered the mortgage amount to a level that the rent will cover the mortgage repayments (principal and interest) plus expenses. It may end up negatively geared with depreciation but we shouldnít need to cover many costs from our own income.

We intend to buy our retirement home in Newcastle. While not as crazy as the Sydney market, it is pretty intense and we donít expect to spend less than about $600 000. We want this paid off prior to retirement, as carrying a mortgage on our PPOR does not appeal to us.

For the 5-6 years we will be retired before my partner receives his pension, we intend to live off of our Vanguard dividends, with some potential withdrawal of capital. So we need Vanguard to be high enough to fund these years without eroding the entire capital, as we still want some leftover to supplement the pension (expected to be about $40 000 per year).

We also want to spend the next 3-4 years saving up enough to be able to put a roughly $300k deposit down on our retirement home (20% to the bank and the rest sitting in the offset). The reason for this is it will leave us with 3 years and $300k to pay off before retirement which we know is doable. While we are living here, we are saving up for that deposit in our current offset account as itís a guaranteed return and it lowers our interest. We will then withdraw from the offset to fund the next house when we are ready.

However, next year, it becomes an investment property. By fully funding the offset, we will definitely be positively geared. My question (if youíre still reading this novel), is once this become an investment property, should we instead place all our money into Vanguard and save all of our money (at least $6k a month) into Vanguard until we are ready to buy a house? Itís possible the tax deductions on the IP will at least partially offset the earnings in Vanguard and therefore lower our tax bill. However, once we withdraw money to buy a house, weíll be liable for CGT (saving in the offset negates this).

I am leaning toward putting everything in Vanguard because the earlier weíre in the market, the better. If at the end of this year we put all our extra cash into Vanguard, we will be close to $250k invested which is working for us for at least three years before we withdraw some as a deposit. Or should we go for the guaranteed saving in the offset, forgo the tax deduction and slowly increase Vanguard to the tune of about $1400 a month (everything else going into the offset)?

Sorry itís so long but I wanted to try and get all the details in. I notice in many journals/questions people donít put all the details in and that frustrates the people providing the advice. Thanks!

deborah

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Re: Australian Specific Investing Question
« Reply #1 on: January 28, 2017, 11:04:28 PM »
You don't have to just put money into the one super fund. In fact, the government places I am familiar with allow you to salary sacrifice into a separate super fund (more or less of your choice). Since you have high incomes, salary sacrifice might be a good idea (depending upon how much you will need between retirement and 55). Of course, because of your ages, anything salary sacrificed into another super fund may only be available when your partner turns 60, rather than 55 - I'm actually a little surprised that the government pension will be available at 55 (but not entirely surprised). You should be able to find a superannuation account that does Vanguard (I think SunSuper was mentioned as doing it).

As your Vanguard investment income outside superannuation is taxed, and the offset is not, you might do the maths and find out you are better off with the offset - especially as you are in a high tax bracket.

Adventures With Poopsie

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Re: Australian Specific Investing Question
« Reply #2 on: January 28, 2017, 11:29:55 PM »
Hi Deborah, thanks so much for taking the time to reply.

Yes, we could salary sacrifice, but we believe we need this money prior to age 55, so it's better invested now outside of super. And yes, it's an excellent super, probably why they no longer offer it. We were very lucky to get in on this one and it's one of the main reasons at least I have remained in this job. Every time I think about looking elsewhere, I remember the super scheme!

Tax is my worry. However, I also think it's very hard to predict as a) unsure of how much capital growth the VG account will see and b) unsure of interest rate rises, of which I am positive we will see in the next seven years.

The other thing I was thinking (@potm gave me the idea) was taking a $100-$200k loan against the house and putting that in VG. Then just using all of our own money to pay down both offsets and, when the time comes to purchase the other house, draw down the offsets. This will mean we will have almost what we need in Vanguard right from the beginning, earning dividends and capital growth, and the new loan interest is tax deductible. This is still something I'm thinking about, unsure if it will prove to be ultimately beneficial, or if investing in VG fortnightly would have achieved a similar outcome.

LittleAussieBattler

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Re: Australian Specific Investing Question
« Reply #3 on: January 29, 2017, 12:28:15 AM »
Also remember that the Aussie housing market is different to the US. Our mortgage rates are 4+% and likely to go up to the historical average of 6-7%. So you need to be able to have a paid of PPOR in Newcastle for this plan to work on day 1 of FIRE. Your partners lump sum and DBS are 13 years away.

So you need a couple of things:

- Unless the dependent child turns 18 you are on the hook for $20K of after tax money while hubby works.
- You need 600K in cash to buy your Newcastle property in 7 years.
- If you take the ASIC comfortable living for a couple FIRE number (55K) you will need 350K in Vanguard to supplement your 40K pension at 4%
- You currently earn 126K roughly after tax and CSA. With a 50% saving rate you can stash 63k a year, 441K in total.

Option 1
=======
On FIRE Day:
120K Equity on sale of home (taking into account transaction costs of 50K)
-120K 20% Deposit on Newcastle Home (480K Mortgage at 7%)
Ongoing cost of $3400 a month for mortgage
720K in Vanguard, drawing down on 55k and 4% after tax compound - 513K left at pension age

On Defined Benefits Day:
Use 40K pension + $20,523 from vanguard to live off.
Pay additional super off mortgage.
Sell vanguard down to 350K (15K at 4%). Pay capital gains tax and then pay rest off mortgage.
Not sure how much you have in super but should cut the mortgage by half. Leaving you with 2K a month to pay off mortgage, cutting your living expenses to $2000 a month.

Option 2
======
140K Equity from selling house - transactions costs
600k cost of new home + transaction costs
At 63K per year for 7 years you would have 450k (Assuming offset at 4%)
That will get you 590K of your purchase price, more if you get your savings rate above 50%

Your vanguard + shares will be at $260K with a paid off PPOR.

If you draw down on this over 8 years until your DBS kicks in at 55 you are likely to run out of money.

A few things that will change the model considerably:
Savings rate about 50%
Cutting your living cost to 45K instead of 55K
Equity growing faster than the average 2.7% Sydney has grown for the last 30 years
Interest rates staying at 4%

Try AussieFirebug's FIRE calculator for Aussies with super to model it more accurately if these change.
http://www.aussiefirebug.com/australian-financial-independence-calculator/

I suspect that your timeline will need to move to 7-10 years to avoid hitting a negative balance between FIRE and Defined Benefits Scheme.





Eucalyptus

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Re: Australian Specific Investing Question
« Reply #4 on: January 29, 2017, 05:26:41 AM »
Other things to consider with regards to the child support.

As your income increases, so does the child support you pay. Salary Sacrificing to Super while reducing your taxable income, doesn't decrease the CS assessment income (they add the salary sacrifices back on). However, compared to holding the same shares outside of super, income on the shares (dividends, or capital gains) inside super is exempt from the CS income calcs. Dividends on shares outside, and any realised capital gains, add to your CS income. Same goes with income from rental properties I'm pretty sure (check the rules carefully). They take that into account as well. So if you rent your current house out, there is a chance that the rent will be taken as income and added, and your Child Support amount will thus go up in the following year. So be careful with this. PPOR of course doesn't affect CS income at all...so I would prioritize property "investment" towards your PPOR...if it was me I'd probably sell your current residence (cop the fees, etc), and put that income straight into your next PPOR, and then ETFs in that order. I'd also ride that inside/outside super line pretty closely. And bias my ETF portfolio outside of super a little towards ETFs with lower dividend/capital gains ratio...ie (simplification), put more into US ETFs vs Australian ones than you otherwise would.

How much you bias your decisions on this would also depend on how long it is until your child(ren) turns 18. Once you get onto that last CS assessment period, that covers up to their 18th birthday, you no longer have to worry about these things.

I should make it clear: I'm all for people paying Child Support, and making sure it happens. There are plenty of deadbeat parents out there that don't do what they should by their kids. The mechanism is there for a reason; to make sure that both parents can adequately provide for and care for their children. However, $20k/yr is a fair bit for Child Support already, it probably doesn't need to go up, in any city of Aus, especially in any reasonable shared-care scenario, and I don't see why one parent's careful life choices and financial decisions (eg carefully living below their means) should be penalized unduly.

FFA

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Re: Australian Specific Investing Question
« Reply #5 on: January 29, 2017, 05:28:26 AM »
Hi Adventures, if I understand right you plan to buy in Newcastle in ~3 years time, and weighing up accumulating your 50% deposit in a Vanguard fund or in the mortgage offset ? Purely from an investment timeframe perspective I'd suggest 3 years is a bit short for shares. If it's a Vanguard balanced/conservative fund it might be okay. But for growth or high growth, you really should be able to hold for 5-7+ years, which is not the case if you need to cash out in 3 years time. So purely from this perspective, my first thought is to use the offset. Tax is an important consideration but I still treat it secondary to investing in the right things based on your risk tolerance, timeframe, etc. Those tax savings might not be so appreciated if we find ourselves in the middle of another sharemarket collapse in 3 years time. Alternatively if you have more flexibility in your plans, e.g. in such a scenario rent for X years, that's another way to manage it.

Adventures With Poopsie

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Re: Australian Specific Investing Question
« Reply #6 on: January 29, 2017, 04:23:27 PM »
Thank you everyone for your replies. You have given us a lot to think about!

@LittleAussieBattler- I found your post a bit depressing. Lol. When we have run numbers, we have come up with a better outcome. We are definitely aiming for a higher savings rate, perhaps 60-70%. Our spending is closer to $45k a year (not including child support and mortgage interest, which we don't intend to have in FIRE), so that certainly helps the situation. We have run most numbers at about the 5.5% mortgage interest mark, do you think we should run them with 7% as you did?

@Eucalyptus- We have definitely noticed the increase in child support. My partner had a $20k increase in salary and that has seen our CSA go up by almost $200 a fortnight. Fortunately, the Vanguard accounts are just in my name, so they don't impact child support. I came to the relationship with these accounts already established and we have just never changed them. I do like your idea of selling now and immediately buying PPOR. Unfortunately, we aren't ready to buy yet as we're still debating area. However, maybe it's worth selling and throwing that money in Vanguard where it doesn't contribute to child support and copping the CGT when we are ready to buy.

@FFA- Thank you for your advice. The more I read, the more I agree about the short timeframe and therefore may be best to keep in the offset.

So many decisions to make! We are feeling a tad overwhelmed by it all at the moment, but really appreciating the feedback as it's making us think about things we did not consider.

marty998

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Re: Australian Specific Investing Question
« Reply #7 on: January 30, 2017, 12:18:31 AM »
I wouldn't be too worried about the tax position RE: offsets and negative/positive gearing. If the property becomes positively geared because you have a lot in the offsets then that is a good thing. It means you are not losing as much money as before.

Negative gearing only reduces your losses by your marginal tax rate, it doesn't give you all of your losses back on tax.

You should also look to change your $242k mortgage to interest only (while still building up the offset against it). Doing this will maximise the loan when it becomes an IP and thus maximise your interest deductions, and also maximise the cash in offset so you can have your bigger deposit.

englyn

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Re: Australian Specific Investing Question
« Reply #8 on: January 30, 2017, 12:45:32 AM »
FFA said what I was going to.

Adventures With Poopsie

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Re: Australian Specific Investing Question
« Reply #9 on: January 31, 2017, 04:06:16 PM »
Thanks Marty. You're right. I have had the conversation with friends so many times... "Yeah but you're losing money to get a tax return" yet I got caught up in it myself. Silly. Thanks for setting me straight.

itchyfeet

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Re: Australian Specific Investing Question
« Reply #10 on: February 02, 2017, 10:06:14 AM »
The PSS superannuation scheme requires one to make employee contributions to get the maximum points so as to get the maximum pension. Have you maxed out the contributions to the super scheme? That should be a no brainer.

FWIW, I also have a PSS pension coming to me, but I only worked for the Govt for 5 years before heading back to the private sector, so it will only end up being 10-15% of my retirement income. Still a nice contributor, and no risk!

 I was once told I could re-enter the scheme if I got another job in Govt, amd then my pension would be based off my new (higher) final avg salary and not what I was earning in my 20s. If anyone knows the truth of this or otherwise I would be interested. I am not totally opposed to wrapping up my career in the public service.

deborah

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Re: Australian Specific Investing Question
« Reply #11 on: February 02, 2017, 04:20:40 PM »
See page 2 of https://pss.gov.au/publication/resource/?id=96 - they change the preserved benefit multiple to match your existing salary so it is the same effective amount. So you don't appear to get any extra.

itchyfeet

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Re: Australian Specific Investing Question
« Reply #12 on: February 02, 2017, 09:14:37 PM »
See page 2 of https://pss.gov.au/publication/resource/?id=96 - they change the preserved benefit multiple to match your existing salary so it is the same effective amount. So you don't appear to get any extra.

Thanks for that. So no free ride there!...... unless I was to get a job with a low salary and then get some rapid promotions to a high salary. All too hard. I will be happy with my mini pension amd keep building my stash.