Author Topic: Where to park a windfall gain?  (Read 4549 times)

bigchrisb

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Where to park a windfall gain?
« on: December 03, 2012, 10:53:35 PM »
So, circumstances in life mean that I'm about to see a windfall gain.  Its a decent size to boot, of about $800k after paying the relevant taxes.  I now have the (good) conundrum of how best to deal with this cash.

First, some background on my current situation:
I'm 30 and single.  I have assets of approx 1416k (mix of listed shares, private company stock and retirement funds) and liabilities of $550k (a mix of a business loan and margin loans on the listed shares).  My pre tax employment income is about $200k, with another ~$60k in investment returns, and about $45k in investment interest.  My employment income is reasonably secure for the next two years, but some uncertainty after that. I'd like to be FI by the end of these two years.  I don't currently own a house, but sublet the house I rent to housemates, which means a near zero cost of housing.  My core cost of living is averaging 11% of my net pay.  I've felt that I've been saving (and missing out on the rest of life) too much, and over recent time have averaged another 9% on travel & experiences. The rest goes to saving and investment interest costs (18% interest 62% savings/debt reduction).  If you want more details, there are good records at https://www.networthiq.com/people/bigchrisb

I'm trying to figure out what to do with this 800k.  In the short term, clearing the 550k of debt is a no brainer (part of this will need to wait 6 months to avoid some break fees).  But it will mean that all that investment income is now taxable, and my income means my tax rate is high.  I established a trust a couple of years ago, and could channel some of these investments in there to improve the tax issues a little (from 46.5% to 30%), but it will still be a significant taxation issue.

That's still going to leave $250k in cash to deal with, and something like $320k of savings over the next two years of working to figure out a place for.  I guess it really comes down to
a) buy a house (I can't get Australian house prices to make sense, and with my current housing costs, there is no real cash flow advantage)
b) keep on investing as I have been (mix of international and local low cost funds, plus a range of individual large cap Australian stocks).

Any thoughts?

sherr

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Re: Where to park a windfall gain?
« Reply #1 on: December 04, 2012, 06:57:13 AM »
I'm not sure I'm qualified to give advice to someone in your position, doubly so given that I don't know anything about the Australian housing market. However, I'll try my hand at it anyway.

The way I see it you are FI right this very second. Your core cost of living seems to be around $30k, and you are making over $100K just on your investments. Add to that the fact that your extremely well-paying job is pretty secure for a couple years (and you seem pretty happy to stay there) and you have an additional $800k coming, and you don't seem to have a thing to worry about financially.

The question then becomes in my opinion more of "What do I want?" not "What is the best place for my money?" A house like you say is an obvious potential choice, to me at least having a paid-off permanent place to live is very important to my (future) peace of mind while in FI / ER. However again the question of "What do you want?" comes into play. If the Australian housing market sounds too ridiculous, is there maybe somewhere else that you would like to live? New Zealand, Europe, North America? Another place in Australia that has a more reasonable housing market? Maybe you want to stay where you are and rent permanently, and you could place the $570k in some kind of safe investment that would always provide rent money?

I guess the core of what I'm saying is that it doesn't look like you *need* to do any particular thing with the money, just make sure you put it somewhere that aligns with your personal wants / goals. Maybe that's housing, maybe that's additional investments to ensure you have enough money to travel as much as you want (although in my opinion you don't really need any more). Either way, congratulations on achieving so much success so young. And (hopefully I can mention the possibility without sounding preachy) you might also consider that you have the resources to do a significant amount of good in the world, you might want to consider using some of your new-found time / resources helping others. Regardless I wish you all the best.

grantmeaname

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Re: Where to park a windfall gain?
« Reply #2 on: December 04, 2012, 05:38:52 PM »
The question then becomes in my opinion more of "What do I want?" not "What is the best place for my money?"
QFT. Are you here because you want to FI/RE or because you heard we're a smart and active community? If you want to retire early, what do you want to do? I ask because you're there!

bigchrisb

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Re: Where to park a windfall gain?
« Reply #3 on: December 04, 2012, 06:57:57 PM »
Good question! I found about MMM through the forum over at Jacob's ERE.  I find it useful to see what others do, the conundrums faced and the solutions people find.  There is always lots to learn.

I've always lived with a fairly high savings rate and investment risk.  As a goal, financial independence has always been more important that early retirement per-se.  I want the ability to be able to change to a different occupation, should I want to, without having to worry about money. 

But, at the moment I have no idea what that is, and being honest, I'm not dis-satisfied with my current job. Even if I was, being on a good income means that each year I work adds significantly to the safety factor.  I think I'm going to keep going until I come across something else I'd rather be doing.  In the meantime, I want my financial affairs structured such that should I choose to pull the pin in 6 months, or 6 years, I've got a setup to support me.

I suspect I'm going to be pretty boring, and just plow it into more of the same investments I'm already in, and bump up the passive income a bit that way.  Setting up a set of accounts in a separate country appeals, just in case Australia's political system keeps deteriorating.

Ozstache

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Re: Where to park a windfall gain?
« Reply #4 on: December 04, 2012, 09:56:13 PM »
I'm right there with you that Australian property prices don't make sense. Our market's comeuppance is well overdue, however I wouldn't be surprised if the latest 0.25% interest rate cut puts a spark back into prices here. Aussies love their property and most believe that the last few years of flatness are only a pause on the next upswing towards a $1m median across the land!

I've been a property bear for years but ended up buying a house outright last year when I was feeling even more bearish than usual and thought the whole global financial system, including Australia, was going to collapse this year. My logic was that at least I'd have something tangible with a house if it happened and if it didn't I was no longer paying dead money into rent that I didn't have to. You are living essentially rent free, so this latter benefit doesn't apply so much to you.

Have you thought of buying yielding shares with franked dividends that you can reinvest, such that the tax effect of your investment income is nullified?

bigchrisb

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Re: Where to park a windfall gain?
« Reply #5 on: December 04, 2012, 10:46:22 PM »
Yes, my main investment income is from dividends, most of which are fully franked - in FY11-12 this totaled about $22,000 of franking credit.  They are certainly an attractive part of dividends in Australia, and avoid the issues around double taxation of dividends.

However, I find it odd the way a lot of people think about franking credits.  They are fully refundable, which means they should be thought of just like any other pre tax income, as the whole dividend, including the franking credit gets taxed at your marginal rate.  I've got some of my investment through a trust, with myself and an investment company as the beneficiaries.  Any dividends I get I send off to the company, which uses the franking credit to pay its company tax (and get added to its franking account).  The neat thing is, should I need the money in future (presumably when my income is lower), the franking credit comes back to me as an individual.  If my tax rate is below 30% at that stage, then part of it gets refunded.

Alas, from the ATO's perspective, re-investing a dividend (through a DRP) is still classed as income, so doesn't solve the tax issue!

My latest thought is to buy a house outright as a rental, take out a line of credit on it, for the same amount as my current margin loan.  Pay out the margin loan.  This would:
- Add some diversification in my income producing assets (albeit with lower yield than shares)
- Reduce the interest cost on my margin loan by about 1% - i.e. increase the net cash flow from the shares)
- Remove the potential of a margin call on the margin loan (well, unless Australian house prices really tank and banks start calling in mortgages for breaching their LVRs - if we see that, I think we might have more to worry about than asset allocation!)

Agree with you on the property bear - I've been saying that since ~2004, and thus far have been soundly proven wrong.  Guess only time tells!

Ozstache

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Re: Where to park a windfall gain?
« Reply #6 on: December 05, 2012, 02:13:58 AM »
I didn't realise franking credits were so convoluted, but then nothing should surprise me when the ATO gets involved in finances. I'll have to do some more reading about them for my own education before I start putting my money to work in smarter ways.

My bearishness started around a slightly earlier 2002 time frame, when Sydney prices were going gangbusters and even taxi drivers were telling you you were a fool if you didn't get in on the property flipping game.  Ten years later and prices didn't bust like I thought they would, but they didn't continue going gangbusters and have actually lagged inflation over that period I believe. I am ever the pessimist though, and think we'll be seeing similar house prices in 2020 as we do now. We'll see!

smedleyb

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Re: Where to park a windfall gain?
« Reply #7 on: December 05, 2012, 07:11:44 AM »
Move to the Philippines.  Live large.