Author Topic: Case Study: Target FIRE in 2021 (Australia)  (Read 2443 times)

Wadiman

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Case Study: Target FIRE in 2021 (Australia)
« on: February 05, 2016, 04:45:14 PM »
Hi MMMers -

Any feedback on my broad strategy as outlined below would be very welcome.

Firstly - some of the basics:
* Married with one small child (possibly one more to come); I'm in my late 40's.  Wife is stay-at-home mum.
* Live in house in Sydney with remaining mortgage of around $180k (value about $1.5M); another $200k in borrowings against mortgage for investment purposes (more on this below)
* Work full-time in a well-paying but demanding role, great job but want to do something totally different in the future - hence aim to FIRE
* Current savings rate (including mortgage payments - around 70%)
* Am keeping living costs reasonably low while still allowing a good holiday each year.
* 1 investment property - an apartment which has been growing in value at around 6%pa (mortgage is interest only, around 4.3%, balance of $560k, value $730k)

Current arrangements:
* 50% of monthly savings gets paid to mortgage on residence (current rate around 4.3%); expect to pay out this portion of mortgage in about 3.5 years
* Other 50% gets invested into ETFs and direct equities; all dividends either DRP or cash reinvested
* Maximising salary sacrificing to super to limit
* All rental income paid into investment property loan - property is close to neutrally geared
* Have a small unlisted property trust holding ($50k) funded by mortgage (separate account) - distributions go into this account and interest debited to account - loan balance being reduced over time.  Continue holding trust until end of term (5 years to go) and then decide what to do based on options provided by trust.

Strategy:
1. Continue arrangements as above until I hit target FIRE sometime in 2021 (target balance of $500k) - I propose to draw on this for 5 years until I hit preservation age (60 at present) and then able to access super and move into pension phase.  Start a small home/internet business of some kind with a target income of around $10-15k pa

2. Once FIRED - Sell residence in capital city and purchase in a rural area or perhaps even overseas - expect to met a net gain of around $300k on the transaction after paying off any residual loan amounts (may roll this into super or other investments depending on situation at the time)

3. When I hit preservation age - start receiving super pension and then sell investment property (aim to minimise capital gains tax payable).  Balance of proceeds after paying off mortgage goes into investments (super or outside of super depending on situation at time)

Any thoughts/comments very welcome!

deborah

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Re: Case Study: Target FIRE in 2021 (Australia)
« Reply #1 on: February 05, 2016, 09:34:57 PM »
Sounds like a good strategy.

One problem that Australians have is working out whether they have invested too much into super and not having enough outside super for the intervening years before they reach preservation age. I assume your target retirement budget is $110,000 per year ($500k/5 + $10k) which seems awfully high.

Let's pretend that you were born in late 1966. Currently the gradual increase in preservation age is a year a year, so if they change the preservation age upwards (which I have said before would be stupid because people start to need disabled benefits if they increase preservation age further), you may need to have enough to last you until you are 62 rather than 60. The $300k from your house exchange would do that and provide you with 3 years extra leeway, although you would only need two.

Your child will probably be at school when you move. Will this be a challenge that makes you stay in Sydney? Are there other things that may delay your move? I actually see this as your biggest risk.


Wadiman

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Re: Case Study: Target FIRE in 2021 (Australia)
« Reply #2 on: February 05, 2016, 10:25:39 PM »
Thanks Deborah  -

You've raised some good points.

I don't plan to use all the $500k from pre-super savings target.  Annual amount drawn would be no more than $50k.  This would leave circa $250k at the end of the five year period.

Child is 3 now, so yes, it could be a little challenging to change schools when 8 or 9.  We'll manage I'm sure!  There could be other challenges too but I can't see anything major at this time.

potm

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Re: Case Study: Target FIRE in 2021 (Australia)
« Reply #3 on: February 06, 2016, 12:17:23 AM »
I would put all your money into paying off that non-deductible debt mortgage. Get a loan on it to buy shares.
Same result as what you are doing except now more of your interest is tax deductible.

You haven't listed all your numbers so it's hard to say but just based on the value of your home, you are probably very close to FIRE if you were to downside and move somewhere cheaper.

I would definitely max your concessional contributions to super. All the talk later is about taxing contributions more so get it in good while you can.

Wadiman

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Re: Case Study: Target FIRE in 2021 (Australia)
« Reply #4 on: February 06, 2016, 02:19:50 AM »
Thanks POTM -

I'll model the difference between the 50/50 savings to mortgage/investment vs 100% mortgage and loan for investment.

I am maxing super contributions at present.

deborah

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Re: Case Study: Target FIRE in 2021 (Australia)
« Reply #5 on: February 06, 2016, 02:38:13 AM »
I am maxing super contributions at present.

I'm not sure that's true - you are probably maxing pre-tax super contributions. I doubt that you could max post tax super contributions.

Wadiman

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Re: Case Study: Target FIRE in 2021 (Australia)
« Reply #6 on: February 06, 2016, 04:11:11 AM »
Probably not using correct terms - yes - maxing pre-tax but not post-tax contributions.

kaetana

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Re: Case Study: Target FIRE in 2021 (Australia)
« Reply #7 on: February 06, 2016, 10:33:31 PM »
How old is your wife? If she is a similar age to you, it may be worth looking into splitting your (concessional) superannuation contributions with her to get a tax rebate of up to $3,000. Since she's not working, I believe she would also be eligible for the government co-contribution and low income super contribution bonuses. Each would give her $500 (total of $1,000) into her super for contributing $1000 after tax. The low income super contribution is automatic; the government co-contribution needs to be claimed on her tax return.