Author Topic: Early Retirement Australia - what am I doing wrong?  (Read 20072 times)

lemmiwinks

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Early Retirement Australia - what am I doing wrong?
« on: May 21, 2013, 07:16:37 PM »
I got onto MMM from Earlyretirementextreme and have been reading it for a long while now.  Almost every time I read a new article there I can't help but think I must be doing something very wrong!

There's me and SWMBO, both 37 and one dependent 3.  We have about $400K in cash in a "high" interest savings account @ 5% and we save pretty much 100% of SWMBO's $52K (gross) while living off my $71K (gross) plus a bit of saving from that too (generally $700/fortnight reserved for emergencies but transferred to the "high" interest account en-masse occasionally.)

I cycle to work and have done for years now, SWMBO recently started to as well, but not as regular as me.  One car (2005 Kia Cerato) and one motorcycle (225cc four stroke = cheap rego) which I ride if it's raining in the morning and SWMBO rides in lieu of the car (usually.)

We own our own place ($2k p/a land rates) and are reasonably frugal, no pay TV, no A/C, mobile phones are something like an $8/m plan (200mb data but who cares) and we just bought some prepaid internet @ $180 for 12g/b with a 365 day expiry (though we will be scoring a 60 day free trial of the NBN soon.)  Electricity bill is normally about $350-$400 for 90 days and I've done the maths on changing but the bottom line is cost per kW/h and we average about 7 kW/h a day so no saving to be had by changing supplier.

We cook at home, grow some of our own veggies, rarely eat out or go out on the town etc.  We have no debt whatsoever, nor any credit cards.

I figure we should be financially independent, surely?  But we aren't.  I know that having that money stinking up the bank instead of invested somewhere is the problem but we are highly risk averse and at least if it's in the bank I can be reasonably confident that it will always be the same amount or more, never less, when I go check.  I have less than zero clue about investing in stocks, bonds, ETF's, REIT's etc and am not confident in trusting investment advisors.

I thought $400K was a ton of cash, but is it like the song: "I've got just enough cash to pay a lot of tax, not enough to quit my job"?

englyn

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #1 on: May 21, 2013, 08:23:39 PM »
You're doing great!

So, have you worked out how much you do need to ER?

Have you worked out the opportunity cost of NOT investing? At 5% yield your safe withdrawal rate is going to be more like 2% than 4%. Using your personal safe withdrawal rate, personal stash accumulation rate (5% compound interest + savings), and personal cost of living, how many years do you still need to work?

Now, rerun that calc using the worst average 10 year (remembering you're planning to be retired for a long time) yield of the stock market from the beginning of the index. How many years of work is your risk adversity costing you? Is that worth it to you in peace of mind?

If you've consciously made that decision, it might be easier to let go of the "shoulds" and the "must be doing something wrong" and know that whatever you've chosen to do is right for you.

Happy to help with the maths if that isn't your thing.

lemmiwinks

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #2 on: May 21, 2013, 09:01:42 PM »
Thanks englyn.  I've not done any maths WRT ER.  To be honest we don't even have a budget, we just work on a basic principal of trying not to buy stuff (apart from food etc obviously.)

I don't know enough about investing and I'm frankly not interested in learning (I realise that would be the smartest way forward but I find it boring) so I suppose I need to throw myself on the mercies of a fund or something.  I looked into Vanguard after MMM mentioned it but I was largely bewildered by the whole thing.

I've thought about buying a rental but the returns aren't significantly better than the bank when you factor in stamp duty, land rates and so on.

The only rough calculation I've done is that I would need about $1.3M in the bank to live on the interest alone and not touch the principal.  I seriously can't ever imagine saving that much!

Ozstache

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #3 on: May 22, 2013, 02:23:26 AM »
Caring face punch coming....

Ironically, your risk aversion will likely result in a late, not an early, retirement. Share investing MMM style is not rocket science - pick a Vanguard index fund or ETF and stick some money in it, progressively if your late retirement savings account gives you too much comfort.  Your lifestyle seems pretty Mustachian already, it's just your investment style that needs to change.



JamesAt15

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #4 on: May 22, 2013, 02:40:55 AM »
If you haven't read it, MMM wrote an blog post a while back called "How to make money in the stock market" that you might like to read. He talks briefly about risk, diversification, and low-cost index funds.

You might also want to take a look at the Bogleheads wiki - they have an "investing start-up kit" page that is a good starting point for reading on investing in stocks (and other things), planning how much risk you want to take on, putting together a plan, etc.

It might seem like a lot of reading and planning at the start, but you're not in a pressing hurry so don't worry about it. Savings accounts earning 5% interest bring back memories of my youth, where we had to visit the bank to get money out and keep our bankbook updated in pen. (I.e. I haven't seen one of those in a long, long time.) Your money is safe where it is for now, and will keep well until you figure out how best to invest it.

englyn

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #5 on: May 22, 2013, 02:42:37 AM »
Yeah, the basic principle of trying not to buy stuff seems to be working for you.

The Barefoot Investor recommends some low cost funds for the Aus market that seem like very sound ideas to me. Not that I'm hugely educated on the subject either. He explains them in a very unbewildering manner, too.

I did a back-of-the-envelope sort of calculation based on your retirement pre-tax income requirements being 71k less 700/fortnight and came up with a required stash of 1036k. At an average share yield of 9% you get there after 7 years with shares or 9 years with a 5% return from the bank. 'course, the share yield varies a lot. and the bank may well stop yielding 5% too.

What is doing my head in about that, though, is that the oft-quoted 4% safe withdrawal rate is LOWER than your 5% bank interest... which means that unless those term deposit rates drop dramatically (fairly likely at some point) it sort of implies that it's more efficient to hold cash in retirement? What am I missing?

FrugalAussie

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #6 on: May 22, 2013, 02:51:27 AM »
How much do you have in Superannuation? Others will give better info about this but is it worth salary sacrificing into Super to reduce taxable income and building up the balance, remembering you can't access until 60 years old?

$1.3M @ 5% is an annual income of $65,000 per year before tax.  Do you really need that much? Perhaps tracking your spending to get a good understanding of where the money is going (including any leaks) then having a think about post retirement expenses will give you an idea of how much you really need per year and then you can work out what capital you'll have to accumulate to receive that annual amount.  Also consider "semi retirement".  If you work contract occasionally or a couple of days a week you could leave full time a lot sooner.

You're definitely on the right track, at 37 you're doing extremely well. 

Nudelkopf

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #7 on: May 22, 2013, 03:09:23 AM »
To be honest we don't even have a budget, we just work on a basic principal of trying not to buy stuff (apart from food etc obviously.)
I'd be very interested to see where your money goes! You do seem to spend a lot in a year ($71k - $700/ftnight = $52k). That's a lot of food and "etc"s. :P

Also, don't forget to count your super into your planning for retirement - someone posted here recently some way that you can calculate what you'll need, given that you'll get another income after some years (e.g. when you're 60).

Ozstache

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #8 on: May 22, 2013, 03:29:52 AM »
What is doing my head in about that, though, is that the oft-quoted 4% safe withdrawal rate is LOWER than your 5% bank interest... which means that unless those term deposit rates drop dramatically (fairly likely at some point) it sort of implies that it's more efficient to hold cash in retirement? What am I missing?

My understanding of the 4% SWR is that it is based on a long term historical share price return of 7% minus a long term historical  inflation rate of 3%. ie. what you are missing is the inflation factor.

limeandpepper

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #9 on: May 22, 2013, 03:52:14 AM »
To be honest we don't even have a budget, we just work on a basic principal of trying not to buy stuff (apart from food etc obviously.)
I'd be very interested to see where your money goes! You do seem to spend a lot in a year ($71k - $700/ftnight = $52k). That's a lot of food and "etc"s. :P

Also, don't forget to count your super into your planning for retirement - someone posted here recently some way that you can calculate what you'll need, given that you'll get another income after some years (e.g. when you're 60).

The $71k is gross. After estimated tax and savings, they're really living off about $38k for the two of them.

And yeah, factor in super as well.

lemmiwinks, I understand your trepidation about investing in stocks, I am hesitant about it myself but it's definitely something I am looking into. I'm doing ok, but honestly, if I had taken my family's advice about that stuff, I'd be even better off. Yes there is more risk than a term deposit, but you can still go with a reasonably conservative and sensible route in the sharemarket, and everyone I know who has done that, has increased their net worth as a result, over the years.
« Last Edit: May 22, 2013, 03:54:05 AM by limeandpepper »

happy

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #10 on: May 22, 2013, 03:56:20 AM »
@ Englyn The problem is, that that 5% interest return is taxed at the OPs marginal rate...as well as being subjected to inflation.  So for 400k , 5% = 20k interest less 32.5 % tax = $13500 ie 3.375% return. And of that inflation is taking around 2 - 2.5%.

OK , OP:
tax on 71k = 14850. Net = 56150
Tax on 50k = 8550 Net = 41450

total net = 97600

Savings rate 41450+ 18200 (From 700x26) / 97600 = 61% savings rate.

Current expenses 37,950.

At 4%SWR you need $948750 to retire with reasonable assurance, but if you are conservative and wish for a 3% SWR then you need $1252350.

However in the good land of Australia you should also have a stash in your compulsory superannuation for use after age 60.                    Do you know how much super you have in those accounts? Your 400k (or whatever figure) may only need to last until you are 60, if you have adequate super for after that time. So you might be better off than you think. Don't forget even if you retire early, whatever you have in super will sit there compounding. Keep in mind whether you like it or not you ARE invested in the stock market in your super. Is this causing you anxiety?: possibly not since you didn't decide to put it there.

I agree with the others, your very conservative approach regarding your personal stash is actually paradoxically having the opposite effect (although with 5% interest we are better off than the Americans who often get about 0.5% and are losing money by not keeping up with inflation). Consider also that the maximum bank government guaranteed amount if there is a bank crash or financial meltdown is 250k, so if you have 400k in one bank then you risk losing 150k of that. So if you are that risk adverse consider using more than one bank. I agree, read MMMs posts, JLcollins on investing and bogleheads wiki. I have been very untrusting of the stock market in the past, but since doing MMM I find these approaches conservative enough for my risk adverse nature. In any case I have a fair size stash in super that I have had no control over, and its still growing after 25 years i.e. I didn't interfere with it because I couldn't, and stayed the course because I had no choice and it has grown at 7% in the last 10 years.  In previous decades it was higher.

At 61% savings you are doing great. Have a look at your super, as your "old man " money. If there is not much in there and you are willing to trust that the govt won't changes the rules too much in the future, consider topping up your 9% up to the max concessional cap of 25k. This money and its returns will then be tax sheltered especially if you take a pension at age 60. Also you have experienced investors in control of investing your money.  Probably a lot of advanced investors here will think they can do better themselves, but if you are not one of these, the experts are OK. Just make sure you have a LOW cost industry super fund, not a private one.

At 37 you have 23 more years to 60. At 400k you have 17k/year saved or 10.5 years of expenses. 23 years of expenses is 872850, but you shouldn't need that much due to compounding and returns. Conservatively IF your old man money in super is adequate, then  if you invested the 400k and could achieve a 7-8% return, leaving you with a net return  after tax of 5% and kept adding 5k a month as you currently do, then in 5 years you should have 925k and can retire with some margin of safety. Some would say you could retire in 5 years even if your super was inadequate if you accept 4%SWR.




lemmiwinks

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #11 on: May 22, 2013, 05:06:52 PM »
Thank you everyone for the fantastic replies!  So much better than I dreamed of.  There's a lot there to digest, so I will do that before much else except to say that I should have clarified what I mean by ER.

I'm thinking MMM style ER, i.e. I actually rather like working (though my current job is very cushy, 35hr weeks and pays extremely well for a regional area (I do not have a degree) it's often REALLY booooooring which is awful) so, like MMM, I would quit my job but take a range of others doing a variety of different things as my interests, skills and prospective employers would allow (all of which would most certainly pay less than I get now) on short term and part time basis'.  Probably would not start my own business.  Oh and of course Mrs Lemmiwinks would definitely want some job quittin' part timin' action as she would like to spend more time with the rugger.

As for super, I have a defined benefit plan (don't know how much is in there, probably quite a bit as I've been here 15 years) although apparently it was looking very shaky a while back but they've stopped sending out letters saying "Everything will be fine!" so either it's gone completely belly up or it actually might stagger along for a while longer.  As you might tell, I don't have a lot of faith in super, nor the old age pension.  I sort of think that if I want to avoid eating dog food as a pensioner I'd better get better at growing my own veggies!

One last thing, we're considering doing something borderline anti-mustachian (though OTOH maybe it's very mustachian), taking a chunk of our 'stash and getting a place for reno in a better location.  The idea would be to DIY as much as possible.  The reasoning is 1) our current place is a house, but sandwiched between two duplex units, good neighbours now but it's not always been so and I think this kind of lends it to being a rental 2) we're in a low spot so significantly colder in winter than the elevated position we're looking at (perceived as a "better" neighbourhood too but that is subjective), so I'm thinking reduced heating costs + the northerly aspect gives a hope of some solar passive 3) value adding from all our blood sweat and tears (though buying in a bubblicious market might be a zero sum game as we would not try to flip but rather have a quality place for ourselves for the long term).

We would start out by renting the place we are presently living in to see how that works out for us (I estimate rent would be somewhere around $300/w ± $50) though we could sell for good money over what was paid I think I would rather diversify (even if it's a pretty crappy one since there's carrying costs which are no doubt higher than index funds etc) as we are 100% in cash at the moment and I'm not sure that's a good idea.

Thanks again everyone for your input.  I will do some reading!

Nudelkopf

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #12 on: May 22, 2013, 06:18:31 PM »
As for super, I have a defined benefit plan...
My mum (who retired about a month ago) has a defined benefit plan, but the rules attached to it meant that she had to keep working until she hit 55. If she scaled back her work before then (which she could have afforded to do), it would have impacted her payment in retirement. Make sure you check up on that, if you end up relying on it! I'm not sure of all the details, but you should at least know all the rules before making any decisions.

lemmiwinks

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #13 on: May 22, 2013, 06:30:13 PM »
My mum (who retired about a month ago) has a defined benefit plan, but the rules attached to it meant that she had to keep working until she hit 55. If she scaled back her work before then (which she could have afforded to do), it would have impacted her payment in retirement. Make sure you check up on that, if you end up relying on it!

Oh!  Thanks for the warning.  Part time work/MMM style ER is probably my main goal rather than full, sitting on the beach sipping cocktails type retirement so that's definitely worth being aware of.

englyn

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #14 on: May 22, 2013, 07:12:22 PM »
Huh. Inflation. *kicks self*

travelbug

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #15 on: May 22, 2013, 09:53:22 PM »
Hi, another Aussie here.

You are doing great, but I would work out the rate of income you would generate with a cash sale of your current home, invested, versus what the rental income and all out goings would be.

Also, regarding shares; you can put your money in the bank or you can own part of the bank. If the bank goes belly up they will pay out their shareholders before their customers. Just a thought for your conservative mind. My DH is very conservative too, but either blue chip shares and property will generally rise with inflation.

And the shares are fully franked, which is much better than paying PAYG tax rate on any interest income.

Good luck.

lemmiwinks

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #16 on: May 22, 2013, 10:16:34 PM »
You're right, if I can figure out an investment strategy (other than just saving cash which is all we've ever done) I would probably rather not own more than one house.  I prefer houses as shelter, not an investment vehicle or a store of wealth, but I wouldn't sell at the moment simply because I'll just bank the money because (at this stage) that's all I know how to do.

The Barefoot investor link was good and I'm going to read the Bogleheads one too.  I think the only way forward is if I get over my fear and put some money in a ETF or something.  Getting taxed at income tax rates on savings interest really sucks.

lemmiwinks

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #17 on: May 22, 2013, 11:58:15 PM »
I've been doing some homework.  So if I understand correctly, say for example Argo, you don't give them your money like a bank, you buy shares in them, then they use that money to invest in a diverse range of shares etc and then pay you a dividend which you can reinvest or (presumably) take as cash.  I was given IAG shares when NRMA split off the insurance arm because I was a member, but that's the extent of my knowledge of shares.

Looking at their Investment Portfolio Returns shows 26.8% for 1 year.  Obviously it's not the case that you can pull your money out at the end of the year and get 26.8% over and over, so WTF does that mean?

What I know about the share market you could chisel on the back of an aspro with a crowbar, but I did read somewhere that a "buy and hold" strategy is no good any more.  That seems to be the strategy of Argo and they appear to be doing Ok (I think, I wouldn't really know but according to Scott Pape:

Quote from: Scott Pape
Before you buy Argo, you need to check two prices. One is the share price (which is set daily on their share market), and the other is the actual value of Argo’s entire share portfolio (called their Net Tangible Assets, which is calculated and released in a statement each month by the company).

Now you may expect that the share price and the underlying portfolio should be the same – but they rarely are. And right now the Argo share price is trading at a premium (higher) than the underlying value of the portfolio.

In short it’s a great investment, but it’s an even better one when the share price drops below the value of the underlying portfolio – and when that happens (and it does on occasion), it’s a screaming Dean Jones smash for six.

I did and according to him it's a screaming Dean Jones smash for six at the moment.

I'm guessing this is the stuff us little guys have available to us, is there any opportunity to invest in a quantitive trading firm (start the day holding zero, close the day holding zero but do a bazillion trades and make millions because your data centre is in the ASX's data centre) or is that strictly for investment banks etc?  When I read stuff like some days up to 40% of trading on the NYSE is done by quant/algo/bot things I just wonder how anyone else can make a buck.

englyn

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #18 on: May 23, 2013, 01:52:59 AM »
shows 26.8% for 1 year. 
Because we're in an outrageous bull market *does double take at how outrageous. I needed to be paying closer attention* That's what it earned over the last year. And it's what makes it worth it to those who've been holding it at lousy returns for the previous 5 or so - most years it doesn't get anywhere near that.

I just wonder how anyone else can make a buck.
Because it's untrue that a buy and hold strategy is no good any more. The people saying that are either media looking for something new to say or investment advisors trying to make you think you need them.
Also, day trading = gambling != investment.

according to him it's a screaming Dean Jones smash for six at the moment.
.

HMMM. My guess as to the reason is that because it's such a bull market everyone's buying other things. Argo is a little more conservative than some other options from memory. Also, it's trading at about a 5% discount to the value, which isn't huge, and was pretty much fully valued a couple of weeks ago. Still a bloody good idea in my not so educated opinion.

marty998

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #19 on: May 23, 2013, 03:40:44 AM »
Oh what I would give to have $400,000 cash. The things I would do!

When I saw you live in a regional area my first thought was rentals. As you probably know rents and yields are higher in regional areas than in the capital cities, though the quality of tenant is lower at least it is easier on the negative gear.

Suggest your starting point for property is to have a read of everything on this wonderful forum:

www.somersoft.com/forums

Pay special attention to financing structures and your $400k is an amazing launching pad.

Regarding super...this is a bit too far off, but that doesn't mean you shouldn't contribute a bit more. Salary sacrificing a few hundred dollars a week will add up to several hundred thousand over the next 18-25 years.

Regarding Argo...yes there's Argo, there's also AFI, Milton, STW, DJW, AUI and my favourite, Marcus Padley's moron portfolio (BHP, CBA, WBC, ANZ, WOW, WES, AMP, IAG and TLS). Oh and Vanguard just to keep the die hards here happy.

good luck

p.s. I don't suppose you are a South Park fan are you? Little lemmiwinks had some NASTY adventures in his time!
 
« Last Edit: May 23, 2013, 03:43:50 AM by marty998 »

happy

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #20 on: May 23, 2013, 10:46:38 PM »
Lemmiwinks, before you do anything rash with that beautiful stash, promise me  you will read the investing links we've given you and some of the recommended books on investing. :)    You need to understand the choices you are making re index fund investing versus buying and holding  individual stocks, and in Australia particularly about franked dividends on individual stocks since this will save you some tax. Another issue to get a grip on is asset allocation. And do NOT even think about day trading.

Don't get overwhelmed, since it can all sound daunting at first,  but on the other hand educate yourself as much as you can.

naki

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #21 on: May 23, 2013, 11:27:54 PM »
Also, regarding shares; you can put your money in the bank or you can own part of the bank. If the bank goes belly up they will pay out their shareholders before their customers. Just a thought for your conservative mind.
This isn't right - the customers are effectively creditors of the bank, so will be paid out before shareholders. The Aussie banks are still a fairly stable place to invest however.

pom

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #22 on: May 24, 2013, 04:19:35 AM »
Hi Lemmiwinks,

Happy has really good advice.

I just looked at the Financial Times and it says that the dividends in Australia have an average yield of 4.1% which is actually pretty good.

My advice is:

- Start small and slow (something like 1000 AUD every other month to get started)
- Don't try to guess what will be the best company, buy an index fund that holds the whole (or most) of the Australian market.
- Watch out for fees. Vanguard ETFs charges 0.15% to 0.3% per year for exemple.
- At first, get the dividend paid to yourself (as opposed to reinvested) so that you will experience the benefit of this way of investing in a concrete manner.
- Don't worry about daily of even monthly price changes.
- Be wary of people's advice, specially from a random poster on the internet ;)

limeandpepper

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #23 on: May 26, 2013, 07:59:09 AM »
Your salaries are fairly low for Australia. Have you considered relocating to Western Australia?  Truck drivers with no high school diploma can pull down $200K/year.

That seems to me to be an urban myth. When I do a job search online, I don't see anything at the 200k mark for truck drivers. Have you got anything to back that up at all?

I found this link which says the average for truck drivers in Perth is more like 50k. And for those who earn way above that average, they probably have some very specific skills and/or do crazy hours.

http://www.adzuna.com.au/perth/truck-driver#stats_pay_distribution

50k is decent but it's nowhere near 200k.


marty998

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #25 on: May 26, 2013, 03:45:39 PM »
All that glitters is not gold, especially in the mining industry. FIFO (fl in fly out) working has some serious drawbacks, not least being the tendency for families to break up because of it.

Yes it will get you to FI quicker, but what would be the point if your spouse leaves you because you are never around.

AdrianM

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #26 on: May 26, 2013, 07:16:23 PM »
Having done FIFO work in a mine for two years.

I can tell you that the money was not as good as the headlines make out.
You will work a lot more hours than you would in a normal 9-5 job
On a 8-6 roster you work 12hrs a day = 96 a fortnight or 48 a week

On the longer rosters like 21-7 = 252 a month or 63 a week

So you work more hours than you normally would.
Your home life will suffer, Not being there for your kids/wife is a major reason of family breakups.

That said if you have a short time frame of two years, get in and get out and use the time wisely you will do ok.
We used the money to pay off the mortgage, replace the car and buy a boat.
Then it was home to be a dad to my daughter and husband to my wife.
Not some random stranger that turned up every second week.


AdrianM

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  • Location: Queensland , AUS
Re: Early Retirement Australia - what am I doing wrong?
« Reply #27 on: May 26, 2013, 08:44:19 PM »
Mate you are going great guns.

You just need to work on your investing.
My recommendation is to start by reading some books on investing to start your education.
Did you ever buy jacobs book ?
I am going to hazard a guess and say not. Thats ok it is pretty heavy going.

So try this one.
http://www.amazon.com/Millionaire-Teacher-Wealth-Should-Learned/dp/0470830069
It is my go to book for new to investing.

lemmiwinks

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #28 on: May 28, 2013, 10:30:34 PM »
Once again, thanks everyone for the great replies.

marty998, yep the gerbil king is the inspiration ;-)

sloanbj, they're high for a regional area and the costs of living are comparatively low.  What I'm reading about mining investment (capex spend by the miners) indicates that it's peaked and the mining sector is heading for decline.  I wouldn't be interested in that work anyway, I love my lifestyle.

The buy a house/reno house thing has cooled at the moment as I realised that our place is better than 99% of the places we were looking at (being between two duplex units notwithstanding), though I do like the idea of cashing the place in if/when we do eventually move and investing that.  So some seeds have been sown.

I'll borrow some books from the library (how Mustachian is that), thanks AdrianM.

I know I need to do something (damn interest rate cuts, we're down to 4.76% but it's a cash account not term deposit - I like to stay liquid) and now I have a slightly clearer idea of what.  Just need to get over the fear factor!

Wildflame

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #29 on: May 29, 2013, 07:29:10 AM »
Assuming you have no unusual deductions, a $71k gross income will attract $15k in income tax, leaving $56k net (take-home) pay which you live off. Of this figure, you generally save $700 per fortnight, which is $350 per week, or $18,200 per year.

Deducting this additional savings off your income, you get a net expenditure of $37,800. You should track your spending for a month or so to confirm this is correct.

To be ready for early retirement, you will require the following amounts of savings/investments at certain real rates of investment return:
1% - $3.78m
2% - $1.89m
2.5% - $1.51m <- note that with Aus inflation at 2.5% and your cash account returning 5%, this is how much you would need in that bank account.
3% - $1.26m
4% - $945k
5% - $756k
6% - $630k
7% - $540k
8% - $472k
9% - $420k
10% - $378k

Note that with inflation at 2.5%, you will be adding 2.5% to each of these real rates of return to find the nominal (quoted) returns required.

By this math, if you were to place your $400k in a fund returning ~9% real (~11.5% nominal) returns per year, you could retire tomorrow. Risky, though.

Given you are getting 5% nominal returns, this explains why you are not feeling particularly independently wealthy, despite having in all likelihood in excess of a million dollars’ assets (median house price in Australia is close to $500k, so if your owned-outright house is median, you would have ~$900k total assets).

However, given you are saving something like $60k a year ($40k being approximate net income from your partner’s work, plus $18k from your ongoing savings), that required rate will fall as your savings pile grows.
If you work for another year, your required return will fall to 8% real (10.5% nominal if inflation is constant). Another year after that, and you will need only 7%. Another year on top? Almost down to 6%.

How much should you aim for? That depends. MMM discusses the 4% safe withdrawal rule, which assumes that you will get 7% nominal returns in the long term, with 3% inflation, meaning you can withdraw 4% each year without reducing the buying power of your investment pool. The nominal amount will increase by 3%, but each dollar will buy 3% less, so it ends up at the same purchasing power.

Research has found that a 3% SWR will give something like a 95% chance of having money left after a 30 year period. However, a closer look at the data showed that in all but two years (in which a crash occurred just after starting to invest), a 4% rule gave as much chance of having money left over. I personally am aiming for 5, 6, even 7%, but I am not going to have a sit-on-my-hands retirement - part-time is as good as retired to me!

Ultimately you have to trade off the likelihood of having money left over after x years against working for longer. The longer you work, the more you save, the less you will need to draw from your account (and the less risky the investments you will need to choose) in order to maintain your current standard of living. However, you have to work longer.

Given your current position you could ‘retire’ if you invested in Australian equities or bonds, both which average 7-8% real returns over the long term, with between $470k and $540k of savings – which is one to two years’ extra work for you and your partner.

However, the decision is not binary. You do not have to either work full-time or retire full-time. If you wanted an in-between step, shifting to a 4-day working week or similar is one option, which allows you more time with your family while only decreasing your income somewhat.

Remember that if you switch your investments to returning more like 7% pa real (9.5% nominal) you will be receiving $28k pa in investment income in addition to your work incomes (as opposed to the $10k you should be getting now in real terms); at that stage you only need $10k work income to ‘get by’ – any extra will increase your stash, and allow you to either shift your portfolio to less risky investments or to increase your spending.

Alternatively, you should currently be able to withdraw $10k per year from your savings account (which should be getting $20k in interest; the other $10k goes to keeping the purchasing power of your stash the same as last year). That means you only need $28k in income to maintain your standard of living, with any extra going to making the stash bigger.

Put a third way, your stash currently pays for ¼ of your expenses. If you take on some extra risk, it could pay ½ or even ¾ of your expenses without drastically imperilling your savings.
That sounds pretty financially independent to me. =)

TLDR: You are very financially independent. I suggest you invest your savings in 7% real return (split 50-50 between Vanguard’s Diversified Bond Fund and one of its Australian Shares funds, for instance). Visit the investor section of the forums for more comprehensive guidance.

Pick your preferred retirement. Were I you, I’d choose between something like:
1.   Work for 1-2 more years, retire entirely or go part-time.
2.   Work part-time from now, keep adding to your stash until you get bored of part-time work.

lemmiwinks

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Re: Early Retirement Australia - what am I doing wrong?
« Reply #30 on: May 30, 2013, 07:57:14 PM »
Thanks Wildflame, I'm with you - part time is as good as retired to me as well.  I could easy handle working another couple of years, the work is not particularly demanding.

Part time for me and the Mrs when our child goes to school (if we could get 10-2 or similar) would be perfect IMO.