Critique our plan for FI (Australia)

[kaetana]

My husband and I live in Melbourne, Australia, and have worked out a plan to get us to FI. I am 30 and he is 59. It will be early retirement for me, but quite late for him due to poor financial choices he made before me. I'm hoping to tap into the collective powers of the MMM community to see if we're on the right track or if we've missed something. Below are our financial details.

NET WORTH

ASSETS
   House: $345,000 (valued at the price we bought it for)
   Superannuation - his: $120,000 (30% bonds, 68% shares, 2% cash)
   Superannuation - mine: $22,000 (98% shares, 2% cash)
   Shares outside super: $1,000 (VAS, bought on a lark)
   Cryptocurrencies (mostly BTC, some LTC): $2,700
   Cash (sitting against mortgage): $25,000
   Car (2011 Toyota Camry Hybrid, fully paid): $0 - I'd rather not include this as an asset

LIABILITIES
   Mortgage: $320,000 at 4.7% interest

NET WORTH: $195,700

MONTHLY INCOME (Net of taxes)
   His: $9,200
      Employer contributions to super: $1,000
      Salary sacrifice: $1,800
      Total monthly pay: $6,400
   Mine: $5,800
      Employer contributions to super: $600
      Salary sacrifice: $1,800
      Total monthly pay: $3,400
   Combined monthly pay after supers and tax: $9,800

MONTHLY EXPENSES
   $4,300 - This includes mortgage interest but not the portion of our repayments paid towards the principal.

AVAILABLE AFTER EXPENSES: $5,500

Our priorities:
   1. Max out both superannuation accounts
      This means that my limit for concessional contributions is $30,000 and his is $35,000. We plan to move my super contributions for the year into his via contribution splitting. The monthly contributions should get us most of of the way there, with us possibly needing to top up by $1,500 or so each at the end of the year - we would salary sacrifice this amount too but we're afraid we'll go over our caps if we forget to take something into account. So we're thinking we'll just salary sacrifice this from our June pays after checking our balances.
   2. Get to 80% LVR on our mortgage and refinance. (Expected date: this time next year)
   3. Pay off the house. (Expected date: 4-5 years)

THE PLAN:
   now: He and I continue to work at our current jobs for 4 more years. We expect my salary to go up significantly, but if this happens we would use it to offset him dropping down in hours or getting a lower-key job.
   4 years from now: He retires and converts his super into a retirement account, which means we won't get charged interest on earnings from it. He says he'll want to continue working in some fashion, but given his age I'm not including this in our calculations. I keep working, putting any extra money first into our supers, and then into the house.
   7 years from now: The house should be paid off in this time. I either drop to part-time work or switch gears to a lesser-paying but location independent job. I will be 37; he will be 66.
   10 years from now: By my calculations, we will be FI 3 years later when I'm 40, when our expenses are less than 4% of our investments. I will likely continue to work well past this in some way or another, just because I actually like working.

Is this doable? Is there anything we can further optimise? Are there any strategies we've missed that might yield faster results?

[syednaeemul]

Hello! Fellow Melbournian here and a pretty new Mustachian.

Since you've bundled up the monthly expenses into one figure it can be difficult to determine where you can save there, can you split it out?

I'm also confused by your 20% LVR target, do you mean get to 80% LVR i.e. you will pay down $44,000, and the mortgage will be $276,000 by next year.

Other than those, you look to be on track for FI by 40 / 69. Looking at post-tax only you have a potential 56% savings rate, after paying down all debt you can move excess cash into a managed fund / ETFs.

[kaetana]

Hello! Fellow Melbournian here and a pretty new Mustachian.

Since you've bundled up the monthly expenses into one figure it can be difficult to determine where you can save there, can you split it out?

I'm also confused by your 20% LVR target, do you mean get to 80% LVR i.e. you will pay down $44,000, and the mortgage will be $276,000 by next year.

Other than those, you look to be on track for FI by 40 / 69. Looking at post-tax only you have a potential 56% savings rate, after paying down all debt you can move excess cash into a managed fund / ETFs.

Hi! :) I'm also a relatively new Mustachian, in that I found MMM 3 years ago and before that lived a life of absolute excess. I mean, seriously, at one point we were earning significantly more than we do now and yet were about $40,000 in debt and lived paycheck to paycheck.

I didn't include the monthly expenses because I've had people critique my budget here before, and after incorporating some of the suggestions I received, I pretty much know where we need to cut back (mostly our mortgage interest, personal pocket money, currently at $175 a month each, and the $150 a month for entertainment). However my husband is not keen on cutting back further, so it's something I'm working on separately. I figure that if I use $4300 in the calculations and then cut back later on, we will at least be on the conservative side.

What I'm really looking for is feedback on whether I've come up with this plan correctly. Most of the resources I've found online don't really deal with couples with a big age difference, for example. This makes maxing out my super more valuable because I can transfer it into his, whereas others my age probably wouldn't bother. Here are some other things we've considered:
- him going on a transition-to-retirement plan, which is confusing but I THINK we would be worse off because we would also have to withdraw money from his super
- whether or not he would qualify for pension (currently not included in calculations)
- whether we should have any money at all outside of super
- buying an investment property after paying off our house
- not paying off our house and investing instead

Yes, sorry, I do mean an 80% LVR. I just had the 20% that we needed in my head and accidentally typed that one in. I've edited it now, thanks!

Re: our savings rate-- net of taxes, I'm looking at $15,000 combined income and $4300 of expenses, yielding a 71% savings rate by my calculations. This does take into account our mandatory + voluntary concessional contributions, though. Not that it matters; I've done my own spreadsheet calculations given our particular circumstances instead of relying on MMM's "Shockingly Simple Math of Early Retirement" table.

[deborah]

Keep Transition to retirement in mind. Access to superannuation is really only available when you retire from your current job, but TRP can be accessed at any time, and is effectively the same (unless you want to take out more than a 10% lump sum).  So if he stays where he is, and cuts down his hours, TRP is the way to go. Superannuation has two phases - accumulation phase and pension phase. When you are taking a pension, you can still have some in accumulation phase and some in pension phase, so if you need to take less than 5% (after 65), you could leave some in accumulation phase.

If he isn't working (passing the work test) after 65, you won't be able to put any money into his superannuation, and you won't be able to put any money into accumulation phase (you can take it out of accumulation phase and put it into pension phase but not vice versa). Of course, he could take out money, and put it into your superannuation.

I'd check your house value and see what it really is now. My recollection is that you have had it for a few years, so you may be under 80% now.

[kaetana]

Keep Transition to retirement in mind. Access to superannuation is really only available when you retire from your current job, but TRP can be accessed at any time, and is effectively the same (unless you want to take out more than a 10% lump sum).  So if he stays where he is, and cuts down his hours, TRP is the way to go. Superannuation has two phases - accumulation phase and pension phase. When you are taking a pension, you can still have some in accumulation phase and some in pension phase, so if you need to take less than 5% (after 65), you could leave some in accumulation phase.

If he isn't working (passing the work test) after 65, you won't be able to put any money into his superannuation, and you won't be able to put any money into accumulation phase (you can take it out of accumulation phase and put it into pension phase but not vice versa). Of course, he could take out money, and put it into your superannuation.

I'd check your house value and see what it really is now. My recollection is that you have had it for a few years, so you may be under 80% now.

The problem that I saw with going the TRP route is that I believe we would have to withdraw a minimum amount of 4% every year. We're not going to need this extra money until I retire from full-time work in 7 years, so we're not keen on withdrawing from his super just yet. Even if he decided to cut down his hours now, we could still survive on my income - unless you're suggesting TRP as a way to draw from the super and funnel it into mortgage repayments?

I did read that we can't contribute to his super after 65 unless he's working. At that point, if we've paid off the house, I'm thinking we would probably start investing outside of super, since my super will be next to useless if things go according to plan and I am FI more than 20 years before I can touch it.

You're right-- we've had the house for nearly three years now. From a quick look at similar houses, including one on our own street that sold recently, we estimate that the house could probably go for $400,000. Which WOULD bring us to that 80% LVR. But it was my understanding that banks usually lowball you when they value your house, especially if they're the ones who will be on the hook for it. When we bought the house three years ago, it really should have been valued at $360,000. We bought it for $15k less because the previous deal had fallen through and the owners were desperate to sell before their baby was born. How do I go about getting it revalued? I was thinking about refinancing with UBank. Do I just call them and ask them value the house first before refinancing? Do we have to pay for that? What happens if their estimate is too low?

[deborah]

TRP is the same as super. If you are retired before 65 you have to take out 4% OF ANYTHING THAT IS IN PENSION PHASE. This is the same in TRP. But you can have as much as you like in ACCUMULATION phase, and not take out any of it. After 65 it is 5%, then it goes up as you get older.

PENSION Phase - 0% tax on investments (no CGT, no tax on earnings) BUT you must take a minimum amount out each year.
ACCUMULATION Phase - 15% tax, MUST NOT take anything out

Super can be easily moved from ACCUMULATION to PENSION phase, but if you are over 65 and not working, you can't move it back into ACCUMULATION phase. Before you are eligible for super, it is all in ACCUMULATION phase. Many funds allow you to have some in ACCUMULATION and some in PENSION phase, maybe in different accounts which both belong to you.

You can look at it as if his super only needs to last 20 years, then yours kicks in (so his are your pre-super retirement investments).

[happy]

If hubby is still working you can take out the 4% of  the pension side and put it back in the accumulation side. If you put most of the super in pension phase then the dividends/growth is tax free. 

Your's is an interesting situation..I would read up all you can on super e.g. Trish Powers super guide, and try to access any free retirement seminars run by your super fund or centreline.

[kaetana]

If hubby is still working you can take out the 4% of  the pension side and put it back in the accumulation side. If you put most of the super in pension phase then the dividends/growth is tax free. 

Your's is an interesting situation..I would read up all you can on super e.g. Trish Powers super guide, and try to access any free retirement seminars run by your super fund or centreline.

OH, that's a good point. I kept thinking that we are already maxing out his contributions (and mine), and so we would not be able to offset the 4% we would have to withdraw. But it's just occurred to me that we CAN put it back as non-concessional contributions. If that's the case, is there any reason why we shouldn't immediately do this right now? And how much should we leave in the accumulation phase?

Yes, I'm currently going through a lot of the Super Guide site! It's fantastic for information. But it can be hard to put it all together and find the optimal solution for my particular situation. Bouncing ideas off people like you helps, thanks. :)

[deborah]

Thinking aloud here.

Why would you take it out to put it back in?

1. To stop the PENSION phase portion of super from having CGT and income tax. This would enable you to rebalance without any CGT implications or change the investments the money is in.

2. To change the tax status of the superannuation (remember there are three types of tax status of the money you get from super - if you put money into super before tax, the income you get has some tax on it, whereas income you get from the money you put in after tax has none. You cannot identify money as one sort of the other - if you have put in 20% after tax and 80% before tax, that is how your income from super is taxed. If you then put this in as an after tax contribution it dilutes the percentages.

I'd do a spreadsheet and work out if either of these makes it worth it, as there will be fees for putting it in.

[happy]

You definitely need to read the fine print and then do some math for your own situation as Deborah says. I looked  at doing this ( I'm <60 and the rules are slightly different if you are <60 yrs) and with my particular set of numbers there was no advantage at all.

[kaetana]

Assuming a $120,000 balance in super, a 37% marginal rate, and the 15% tax rebate on pension income for under 60s, the cost of a TTR would be :

120,000 * 0.04 * (0.37-0.15) = 1,056

Assuming we leave $5,000 in the accumulation phase, the savings should be 15% of the earnings on $115,000 plus 15% of the earnings from super contributions throughout the year. If we intend to put in ~$63,000, we can say that on average, we'll earn half the interest from this amount due to the contributions being spread out over the year. So:

120,000 * 0.07 * 0.15 + 63,000 * 0.07 / 2 * 0.15 = 1,538.25

The net savings from the TTR approach would be ~ $482.25

So it looks like for us there's a small advantage while he's under 60. When he turns 60 next year, it will be even more of an advantage because he won't have to pay tax on the 4% we withdraw. I'm thinking we might as well switch him over to TTR now.

[kaetana]

So I called our super fund to ask about TTR and the logistics of switching. Apparently, they only let you move money from your accumulation account to your new pension account once, when you're initially transferring the money over. There is no way to transfer more money into pension later, except by closing that account, moving all funds back into accumulation, and then creating a new pension account. Each time you do this, all shares have to be sold in the accumulation account and re-bought in the pension one.

All this moving around is giving me pause. I don't want to have to sell shares especially now that they're down, and I don't want to pay the brokerage fees in doing it all over again. Is this normally how TTR accounts work, or is it just my super?

[deborah]

Yes, one of the rules (I think ATO) is that pension accounts cannot be added to. However, funds that are set up properly for TTR are also set up so that this is seamless to the customer, and you aren't actually selling anything. Before I retired I had several funds (partly because my work would not salary sacrifice into the funds I was already in), so I went to several different TTR talks by funds, and they all explained how it became seamless - after all, the nature of TTR is that you are accumulating at the same time as you are getting a pension.

As I have an SMSF, it is completely seamless to me and I do not know which funds do it better and which do it worse. Also, I think you may have talked to the wrong person at your fund - someone who was explaining the mechanics rather than what is actually visible to you. It sounds a bit like you may have a WRAP, which I have always thought were not a good superannuation set up.

[kaetana]

Hmmm. I'm not sure if my fund is a wrap, but I'm with ING Direct. I'm not keen to sell and take a loss now, especially since we intend to max out both our concessional contributions and funnel them into his super for the first time this year. It seems like we might as well just wait until he's 60.

And on that note, maybe a SMSF is an option for us later on when we have more money in his super.

[deborah]

I don't quite understand.

If you are moving things into pension phase, surely you are selling and buying on the same day, and you are getting the same things, so you should be able to pay the same amount for them. Since things in pension phase do not get CGT when sold, and things in accumulation phase DO attract CGT, you would actually be better off selling them now, and getting a CGT loss in the accumulation phase account.

[kaetana]

It wouldn't be on the same day, because according to the customer service rep that I spoke to, we would have to sell everything, wait for the money to be moved into the new pension account, start the mandatory payment from the balance, and then buy the shares. From what she said, there's no way that's all going to be on the same day - probably closer to 10 working days from start to end. Plus I would have to pay brokerage fees both ways (the greater of $20 or 0.13% per trade). And then do it all over again at some point, to move more money from accumulation into pension.

I didn't think about the CGT being applicable in the accumulation phase and not in pension phase, though. Maybe it's still worth it...

[deborah]

That is outrageous! And why don't they do "in-specie" transfers?