Cross roads - where to invest our last significant savings before FIRE

[lush]

Hi everyone - I'm at a cross roads for decision making regarding an early retirement strategy. My wife and I have had the following vanguard managed portfolio since 2017: VAS=$500k  and Balanced =$900k.

We have managed to save $500k which and are trying to decide whether we put it into VAS - for the tax breaks it provides or high growth as we are prepared to take on high risk. We are also thinking of moving some funds - maybe $300K out of the balanced fund into either VAS or high growth as we think this would be a better long term strategy - meaning 10+ years. Balanced seems just too conservative, however are wondering if the CGT impact would be worth it.

I am on the highest tax bracket and my wife mid range tax bracket (she works part-time). I am 48, she is 51. I intend to work full time for another 3-5 years, then maybe drop down to some sort of part-time work - just to keep me sane. My wife intends to work another 1-2 years.

We have considered topping up our super (we both have about $350k in our individual accounts) but given that we can't access it until we are 60 and would like to live off our investment returns from our portfolio (need about $70k per year) we're not convinced that is the way to go. My wife is salary sacrificing as well and we do top up extra into her account from time to time.

We also have additional emergency savings for about 2 years that we will keep in cash.

Would love to know what your recommendations would be. Thanks

[Gremlin]

I'm not going to tell you what to do, but I'll tell you what we're doing given a very similar situation and you may wish to reflect on it.  I'll use your numbers to demonstrate, not ours.  Whatever you choose, make sure it's the right circumstance for you and Mrs Lush.

The tax benefits of super are amazing, but there's a window until we can access it.  Once we get to that age, ideally we'd have all our investments in super to maximise that tax advantage.  But the challenge is, what do we do in the interim?

If we've got $500k in VAS, plus $900k in Balanced, plus two lots of $350k in super plus another $500k to invest, then we have a total of $2.6m generating an investment return (ignoring the two years emergency savings).  If we're looking at a need of $70k per annum, then we've already won the game.  The portfolio should be throwing more than that off even if some of it is 'inaccessible' until super preservation age.

But money is fungible.  We can draw your $70k per annum from our 'outside of super' funds, just as long as we're offsetting the capital component with an additional contribution into super.  We've got more than enough outside of super to do just that.  After all, we've got $1.4m already (leaving aside the additional $500k) and if we only need $70k per annum, then that's got us well covered for the 12 years until we both hit preservation age.

So if it were Mrs G and I, we'd be putting the extra $500k into super.  Because your balances are below $500k, you can carry forward any unused concessional cap from the past few years.  So it's quite possible you could plonk $250k into each individual account.  Or maybe a little more into Mrs Lush's and a little less into yours if you like (depending on how much unused concessional cap you both have), since she'll be able to access hers three years earlier than you.

In our situation, we have our super in index funds within a SMSF as we know what we're doing.  External funds are fine, just as long as they are low cost.  Our super is still growth dominant.  I can see the merit in having some assets in a balanced fund.  If you're drawing down from your 'outside of super' funds, you can do this slowly to spread any CGT liability, especially once you've stopped (or reduced) working.

[lush]

Thanks Gremlin for your response. I like the approach :)

But money is fungible.  We can draw your $70k per annum from our 'outside of super' funds, just as long as we're offsetting the capital component with an additional contribution into super.  We've got more than enough outside of super to do just that.  After all, we've got $1.4m already (leaving aside the additional $500k) and if we only need $70k per annum, then that's got us well covered for the 12 years until we both hit preservation age.

The $1.4m does fall short providing a kind of “guaranteed” return of $70k per year, so are you saying if required, draw down on this portfolio ($1.4m) to close the gap on any required funds and keep doing this until we get to access our super?


To throw a bit more into this mix my wife and are considering downsizing out of our home and need to decide if we keep our savings to put towards that. We love the area we live in, nice and quiet, but maintaining a property with garden and pool etc is not our desired state. We’d much rather have an easy to maintain apartment that we can close the door on and not have to worry about a thing. However we have had terrible experiences with apartment living – mainly noise issues and are very nervous and anxious of experiencing that again. We had about 10 bad years of not being able to sleep.

Ideally we would like to keep the house and rent it out and eventually sell it if we enjoy our apartment lifestyle. However we would have to take out a loan of around $600 – $800k to make this happen. In some ways that would be a good thing as we are both being taxed extra each year, me especially so – usually an extra $20-40k in addition to my PAYG tax….so a little negative gearing would be beneficial. The concern we have is that once we get the loan we relinquish the easy option of dropping out of the work force if we should want to. There would need to be a commitment for at least another 5 years. We are also very conscious that if we don’t make a decision about taking out a loan soon that we would not be eligible for a loan in the future when we reduce our work, so really the time to do it would be now.

[Gremlin]

The way I think about it is this...

Question 1. Am I generating sufficient return on my assets to fund my FIRE budget and not deplete my capital base?

You have $2.6m in assets generating a return (ignoring, at this stage, that some can't be accessed for another 9 to 12 years).  That might be 3 to 4% income and some growth that will hopefully negate inflation and not deplete your capital base in the long run.  In the short term the growth will fluctuate.

3% income throws off $78k per annum.  Franking credits bump that up a bit further, so you could probably achieve $70k after tax right now if you had no other income. 

So based on your proposed FIRE budget and your asset position, you have enough in investible assets to FIRE.  The problem is, between now and when you turn 60, only SOME of the assets and their returns are accessible. 

Question 2.  Do I have enough assets accessible to fund my Early Retirement?

So the next part is whether you have enough in assets outside of super to bridge the gap to when you can access super?

If all of your $2.6m was in super, you couldn't FIRE.  Even though your assets were generating enough income to meet your needs, you couldn't access it for another 9 to 12 years.

If all of your $2.6m was outside of super, you COULD FIRE, since you know you're generating enough income and it would all be accessible.

In an ideal world, once you hit your preservation age you would ideally want all of your assets in super, since you can then put $1.7m into a pension account and everything^* that flows from it is tax free.  So you have up to $3.4m to play with between the two of you.  If it's outside of super, you pay tax on it as you do now.

Your $1.4m currently invested outside of super might be delivering somewhere close to $42k in income, plus some franking credits.  You could sell down a little bit to cover the gap to your $70k budget.  The other $36k in income will be generated in super and reinvested.  That should be more than enough to 'offset' what you have to sell down (bearing in mind you may have to pay a little bit of CGT).   You have enough in total assets that you are no longer requiring that reinvested income in super to grow your asset base to an appropriate level for your retirement - it's already at that level.

More importantly, your $1.4m may need to be partially sold down, but you won't exhaust it over a 12 year time horizon at that level of spending.

Question 3.  How do I best set myself up for retirement?

So you now know you have enough in total to FIRE.  You also have enough outside of super to cover you to preservation age and the tax rules are better for assets in a pension account than outside super.  So ideally, you want to be transitioning assets to super over the next 12 years.  You have some caps on how much you can shovel in to super each year.  And one thing to bear in mind is that once it's in there, it's there until preservation age - but that restriction gets less and less important the closer you get to that age.  So if there's big purchases you may make in the interim, make sure you keep enough outside super to do so.

Based on your initial info, you already have enough outside of super for your lifestyle until 60, so you may want to think about shovelling as much as you can into super from now on, subject to contribution caps. 

House or apartment?

The above assumes you stay in your current home, and you don't retain your current home, take the loan and downsize to an apartment.  It also assumes that you FIRE immediately, which also doesn't sound realistic (which is a good thing from an asset perspective - you should be able to start loading into your super faster without selling down any assets at all).  You'd need to relook at everything in that scenario.  One thing you should be careful of is how you structure your loan and whether you'd get deductibility on the interest.

Based on my own experience, I'm not sure I completely agree with the idea that if you take the loan, you'll relinquish the option to drop out of the workforce.  Your net asset position won't change that much under this scenario.  You'll just have more (and different) assets and more debt.  And a debt you could clear at any time by liquidating assets.  Mrs G and I have actually just done something similar, although we're renting out the apartment and staying in the house in the short-term.  If you'd like, feel free to DM me.  I'd be happy to share a few more details there.

^* Not quite everything.