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What to do with 40k/yr

Discussion in 'General Investing Discussion' started by crimpy, 1st Nov, 2009.

  1. crimpy

    crimpy New Member

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    Hi all. I just wanted to know what some of you would do in my situation. My partner and I have a 2 bed room unit in brisbane and a 3 bed room house that we currently live in. The unit is rented out and covers the holding costs. We have 2 teenagers living with us but in 12mths we will be down to one so we want to sell the house and move back to the unit. This will allow us to pay the unit off completely and renovate it. We will then be able to live rent and mortgage free :) and be able to save 40k per year comfortably.
    I am 37 and my partner is 44 and we want to be able to say that we dont NEED to work anymore in approx 10yrs time. The way I was thinking of achieving that goal was by investing the 40k each year into a fund like MAN OM-IP AHL which is capital guaranteed and has returned 16% p.a. since 1983. 40k/yr @ 15% compounded would grow to approx 1million in 10yrs. We would then be able to live off the income from the investment.
    I would like to know what you guys think of this strategy. I would also like to know if I would be better off using the services of someone like Strategic Wealth Management.
    I don't have much confidence in financial planners at the moment after what happened to Storm Financial.
    Thanks in advance for your input :)
     
  2. troy81

    troy81 New Member

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    Crimpy,

    I don't know if all will agree with me but I think that selling the property you currently live in will put you back a couple of year rather than bring you closer to financial freedom.

    I would keep both houses, rent the one you are not living in and use the equity that you have/build up to invest in the managed fund and/or more property.

    Troy
     
  3. troy81

    troy81 New Member

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    Also using previous history as a guide for future performance is risky. Especially if you are hoping to consistently get 16% pa from a capital guaranteed fund. It usually costs a couple % to get that guarantee and the very claim of the guarantee means that it will be a risk averse fund, which may limit the return.
     
  4. AsxBroker

    AsxBroker Well-Known Member

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    Hi Crimpy,

    If Storm worries you about financial planners, there are many stories of accountants and solictors doing just as bad things (as well as running off with client's money). Eg, Australian Securities and Investments Commission - 09-211AD NSW accountant and company director pleads guilty

    If you go to a financial planner I would suggest a licensee owned by a larger group (eg, ultimately a bank or insurance company). If a planner attached to a larger licensee does the wrong thing the client will be compensated as the banks and insurance companies have a brand name reputation to uphold as well as deeper pockets than other licensees.

    Just as Troy said, higher return = higher risk. You can read ASICs information about Complex Investments Products here Complex investment products - Australian Securities and Investments Commission

    Cheers,

    Dan
     
  5. Waimate01

    Waimate01 Well-Known Member

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    That's a very impressive return, particularly for a capital guaranteed fund.

    But that aside, it's also worth being aware that "capital guaranteed" doesn't mean guaranteed in all cases. There have been capital guaranteed funds where people have lost their money because the body making the guarantee went belly-up.

    So the corollary is not to put all your eggs in one basket. Put it in at least 3 or 4 pieces so if any one went kerplunk, you'd be seriously damaged but not out on the street living in a cardboard box.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Agree - a "guarantee" is only as strong as the company offering it. We've recently seen some of the largest financial institutions in the world go under (or almost go under).

    Do NOT put all your eggs in the one basket. If that basket breaks, you've lost the lot.
     
  7. crimpy

    crimpy New Member

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    Thanks for the advice guys. The way I feel atm I think I should just sell my ppor, which by the way is a liability because of the money that you have to pour into it. Yes I know over time it will go up in value. If I can live somewhere that costs me nothing in the way of rent and mortgage, and be able to save 40k/yr, I am sure I would be better off than 90% of Australians in our age group. The only trick is what to do with the 40k/yr to achieve financial independence in 10-15yrs. If I can't trust a fund that has been returning 16%pa since 1983 and has a capital guarantee by westpac then what hope do I have :confused:.
    No wonder so many people retire poor with all the different investment advice/products out there its so hard to know if you are doing the right thing. It is easier to just live for today which is what so many of us do. Why invest your hard earned money if there is a good chance of losing it when you could be enjoying yourself spending it. You could die tomorrow..... all that saving and ivesting for nothing :mad:
    I have just lost all confidence in investing since the GFC. If you can't trust your local bank to not go broke then what hope do we have. I might as well save my 40k/yr and put it under my matress :eek:
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Putting it under your mattress is the worst thing you could do - inflation would destroy the value of that money in pretty short order.

    I think the key thing we've been trying to explain is that you should not just "trust your local bank". Bad or unexpected things can and do happen - how well you survive depends on how well you've managed your risk. Surviving the GFC has ALL been about risk management.

    One of the key strategies of risk management is to NOT expose all of your assets to the same risk. This means not investing all of your money into a single financial institution where if it went bust you would lose the lot. It means not putting all of your money into a single investment where if it went bust, you would lose the lot.

    Spread the risk around a little (not too much - that can be counter-productive). Educate yourself (you're on the right track by being here - keep at it and keep asking questions!), don't let yourself become paralysed by fear and uncertainty. Most importantly - keep saving and keep investing!

    One of the best times to invest can be right after a crash ... unfortunately that is when most people are least likely to feel confident with investing. There are risks, the trick is to learn how to manage them.
     
  9. Waimate01

    Waimate01 Well-Known Member

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    It's very confusing. But I think you are 100% spot-on in having the goal of living "for free". The vast bulk of most people's income goes on mortgage or rent. Once you get that out of the way, your disposable income absolutely skyrockets.

    Eschew debt, avoid gearing, run like hell from CFD's and the like. I know there are many hear who will disagree, but the fact of the matter is that gearing magnifies both your gains *and* your losses.

    Given your age, I think once you attain your goal of living for free, then divert a big chunk of what's left into something like the STW or VAS ETF's. Low fees, no adviser leaching onto your assets, and highly diversified. Make regular investments through boom and bust. Then, as you near retirement age, shift into capital guaranteed funds.

    But what would I know - I'm not a financial adviser :D
     
  10. Chris C

    Chris C Well-Known Member

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    I think the old analogy of if it looks to good to be true it probably is.

    I'm not saying that managed funds can't outperform the index on a reasonably regular basis, but at the same time it's equally true to say past performance isn't indicative of future performance, and I think at the end of the day having expectations that you can just park your money somewhere and expect it will get above market returns is a very risky expectation.

    Also whilst that fund has a track record of that goes back to 1983, this period was also the period in which the world has seen that largest credit bubble in history, so it's hard to frame the performance of the last 20 odd years as indicative of what the next 20 will be like. As we have seen with the whole financial crisis, unfortunately recent financial history isn't sustainable so people shouldn't be forming retirement investment return expectations on recent performance.

    I personally think (and please bare in mind this is just my personal opinion) anyone who is expecting a double digit yearly real returns from investments throughout retirement from just parking their money in some diversified fund is going to be rudely surprised. I think at the end of the day achieving a 5 - 7% real returns over the long term is much more realistic and what people retiring should be looking to base their retirement figures on.

    Assuming you will get a 15% return over the next 10 year is a VERY big assumption. The 100 year return on stocks is much closer to 10%. So whilst many might like to argue against the figure I'm using to project forward, I'm a more conservative person as a result I'd rather be wrong on the upside than wrong on the downside when projecting forward.

    So using a 10%pa return saving $40K a year, you'll have around $700,000 (please bare in mind this doesn't factor for the tax you'd need to pay on dividends and capital gains).

    So in actuality using a return figure of 8.5%pa return might be once again a more realistic figure, which would leave you with around $640,000 in 10 years time.

    But of course that figure doesn't take into account the invisible tax of inflation. Now I personally don't tend to use CPI as representative figure of the increase cost of living (see below), because I think it undervalues the rate of cost of living increases. Over the last 10 - 20 years I think I'd be safe in assuming that the real cost of living inflation has been closer to 5 - 6%, but for the calculation lets assume it will be 4% going forward. That will mean that your $640,000 will only be worth closer to $430,000 in today's dollars.

    So I guess the question now is, what would your lifestyle be like today if you were living on $36,500 a year (8.5%pa on $430,000).

    Then after that question you need to project further forward another 20 years from then, when you and your partner are 67 and 74, living off the interest of a nest egg that will have been eroded to a value of about $190,000 in today's dollars.

    I hope this highlights that whilst a million dollars today may seem like a lot it won't have the same value as a million dollars in the future, and if you have any intention of making it to 80 years old a million dollars in todays terms is not going to be enough IMHO.

    The thing that catches most people out are inflation, taxes, expectations of unrealistic returns and the fact that they will likely live for quite awhile.

    It doesn't help when people use the RBA's CPI (inflation) figure is an accurate reflection of increases in the cost of living (inflation). The RBA says they plan (and have been able) to keep the CPI to 2.5% over the long run, but that would mean that the cost of living would only double every 28 years!

    I don't know about most people but I'm willing to say the cost of living is doubling at a much faster rate than every 28 years, I'd say it's much closer to every 12 - 15 years which would mean the cost of living is rising at about 5% per year. This highlights the fact that if your investments aren't getting at least 5% return per annum you making a real loss.

    Anyway I hope this gives you some food for thought, and best of luck with your retirement planning.
     
  11. crimpy

    crimpy New Member

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    WOW Chris, you really knocked the wind out of my sails :eek: I get what everybody is saying and thankyou to all that have replied. I understand that you have to diversify to spread your risk when it comes to shares/managed funds.
    Planning for your future is full of UNKNOWNS so the best we can do is work off worst case scenario and anything above that is a bonus.
     
  12. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Worst case scenario is you die this afternoon. I think you can do better than that.

    The best you can do is to have a realistic understanding of what is possible, to educate yourself to be able to identify opportunities when they arise and to identify risks that need to be managed.

    Risk management is the key to everything.

    Not making a decision to invest is probably the worst decision you can generally make.

    Choosing to hold cash can be a valid investment decision (provided it is an informed decision and not just a cop-out).

    At the end of the day, if you are so utterly confused by everything that is going on, I suggest you go back to basic principles and keep it simple:

    1. spend less than you earn
    2. get rid of unproductive debt (ie get rid of personal debt, debt for assets which make you money is okay provided it is carefully managed)

    Once you have those basics under control and you have spare cash to invest, consider putting it in something simple like an ASX200 index fund or ETF. When you get enough spare cash to make another investment, just invest it. Ignore the short-term movements of the markets, just keep adding to your investment when you can.

    If possible, set up an automated investment plan (managed funds usually let you do this) - have an amount deducted from your bank account automatically each month to invest in more units. Just set it and forget it.

    Once you've had a chance to educate yourself about other options that are available, then you can start to look at diversifying into other areas - but not until you are ready.
     
  13. Waimate01

    Waimate01 Well-Known Member

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    It isn't necessarily all that grim. If you invest in shares, then there are two components to think about:

    - "revenue", in the form of dividends
    - capital growth

    You need to make your own assumptions for each, but let's say you go for 5% dividend yield, fully franked. During the next ten years, you take the income and reinvest it. After the ten years, the dividends are what you live off. The fully franked component means that for taxable income up to (I can't remember - something like) $150k, there's no extra tax to pay.

    On the capital growth side of things, assuming you invested in real, useful, viable businesses and not some sort of too-clever-by-half company that has no longevity, then the *value* of your capital will be preserved without being ravaged by inflation.

    For example, if you invest $1000 in a nut & bolt manufacturer today, and it pays a 5% fully franked dividend, then you get $50 per year. The company is worth a hundred mil, and you own You own 0.00001 of it. If you wanted to, you could take your $50 dividend and buy 50 mars bars with it.

    Let's say ten years hence inflation has ravaged the country by two orders of magnitude, and let's assume the but & bolt manufacturer is a well run company and has survived. Instead of selling a nut/bolt pair for ten cents, they now sell for ten dollars. Instead of paying their factory supervisor $50k, they now pay him $5m per annum. Mars Bars cost a hundred bucks, and the dole is a quarter of a mil per week. (If a hundredfold increase seems crazy, just consider the origin of the saying "another day, another dollar").

    Let's assume the company has not grown one iota in those ten years, and still makes exactly the same number of nuts and bolts each year. It's now worth ten billion, and you still own 0.00001 of it. Your holding is worth a hundred grand and your annual dividend is five grand.

    For which you can still purchase 50 mars bars.

    But in reality, there will probably be more people living in Australia who need more nuts & bolts, so sales will have increased over the ten years, producing a larger dividend in inflation-adjusted terms.

    Also, for the first ten years instead of blowing your annual $50 on mars bars, you will have reinvested it in more shares. That reinvestment means you probably will own 50% more of the business at the end of ten years than you did at the beginning, so instead of being able to buy 50 mars bars a year, it'll be more like 75.

    You will have paid no capital gains tax along the way, because you never sold your shares. Capital gains tax is the only optional tax we have.

    Now obviously there's an absolute shed-load of assumptions here. For example, if you put your money in a buggy-whip & horseshoe manufacturer 200 years ago, you'd be in strife today. Inflation doesn't affect all things equally and business do not necessarily stay viable over the long term. That's why you diversify through something like an index fund.

    All greatly over-simplified, but hopefully you get the idea it isn't necessarily all that bleak.
     
  14. Chris C

    Chris C Well-Known Member

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    I'm not looking to knock the wind out of your sails, I was just trying to give you some more food for thought. I think your general attitude is great towards saving and investing is great - I just think at this stage you might be a little on the optimistic side, but that's just my opinion and I'm definitely one of the more bearish members of this community.

    :D

    I think what Sim has said here says it all, with the key points being:

    • Have a realistic understanding
    • Educate yourself
    • Identify opportunities
    • Identify risks and manage them

    There is no reason why you can't retire early, but there's also no such thing as a free lunch either.


    I don't think there is anything particularly grim about today's reality - it is what it is. And I didn't mean to come across like we're all doomed or anything, I'm just a big believer in confronting the truth rather than being caught in the pipe dream.