Aussie Firebug

Financial Independence Retire Early

Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.

 

 

Question (5:28)


Hey Firebug,

You’ve factored in the costs of owning and paying off a house in your investment strategy, but it seems all your income is in the stock market, and unless I’m mistaken, you’re renting right now.

When the time comes, how are you going to fund your house deposit? Are you going to save money towards a deposit in the first couple years, sit on it, and invest the surplus into stocks (effectively starting your retirement clock after the deposit is saved)?

Are you going to reach your FI number and then save for a deposit? Drawdown from your stock portfolio?

What would you recommend? I’m starting my FI journey and am in the exact same position.

Thanks for all the content!

Luke

Firebug’s Answer


Hi Luke,

I have written about buying vs renting before and came to the conclusion that renting is better financial the majority of the time (there are exceptions of course). This is especially true if you live in a capital city since the comparative yields are so low (compared to the country). The issue for us (Mrs. FB and I) is when kids come onto the scene. One of the biggest advantages of buying, in my opinion, is that it offers stability. If Australia was similar to most European countries who offered long-term leases (decades long), I would 100% never buy a house. I’d be happy to rent somewhere for 10 years or so and have the flexibility to upgrade/downgrade after the lease term without the hassles of selling and avoiding the buying/selling costs along the way which can be up to 8% of the properties value.

Unfortunately, in Australia, the lease laws are very much in favour of the landlord and not many people offer long-term lease options. As a result, we will be looking to purchase a house after we hit FIRE. Things could change, but I’m thinking that the last IP we sell will be used as the deposit for our home which we will be probably looking at buying in around 3-4 years time. I plan to use the debt recycling strategy and basically turn my house loan into a tax-deductible one that I can use to purchase more shares indefinitely. This will essentially mean that we will never pay off our house, but will be using the home equity to leverage more shares to grow our dividend stream. We get the advantage of stability plus the benefit that real estate offers in cheap leverage with no margin calls. Sounds like a pretty good deal to me.

I hate the idea of paying hundreds of thousands of dollars for something that doesn’t make any money aka a house that you live in. Yeah yeah yeah you could potentially sell your home at a higher price later I get it. But you might live there for 20 years and the whole time you’re getting ZERO cash flow from something that costs you a fortune. Lost opportunity cost anyone?

-AFB

 

Question (13:45)


Hi Aussie Firebug,

Loving the new podcast! 🙂

What do you think about this whole idea of a “retirement number”. Have you tried to calculate what number you need to hit before you feel comfortable with retiring? And once you do, do you think you will right away? Or do you think you would be inclined to work a few more years to increase that safety margin? Maybe even think “hey with a bigger asset base I can take on some luxuries down the road if I want to”?

The reason I ask is I’ve been reading about this on the blogosphere and I can estimate my living expenses and how much I could live on, but if I picture myself today holding that bag of money I think I would be anxious to pull the plug like that. I wonder “hey what if a medical emergency came up and I needed to shell out 20k for a surgery?”. Or some other unforeseen major expense came up… say a family member needed my financial support?

What do you think?

Lance

Firebug’s Answer


Hi Lance,

Back in the day, I was really obsessed with a FIRE number. One of the beautiful things about reaching FIRE is that it’s very much a game of maths even though there are non-constant variables. You can calculate with some degree of accuracy how much you need before you pull the pin. I was so obsessed with this that I spent a considerable amount of time creating the Australian FIRE calculator that incorporated Super/ non-Super assets.

The closer I get to FIRE though, the less important the FIRE number becomes (which is why I haven’t really developed the calculator further). There will be a defining moment where we hit our ‘number’ which we have loosely put as $1M, but the reality is that when we get there, the odds of us drastically changing our lifestyle will be low. I want to live a great life on the way to FIRE and then have a few options up my sleeve to further enhance my happiness. I would hate to live a miserable life leading up to the goal thinking that a magical number will solve all my life issues.

I sometimes think about working a couple extra years to reach ‘Fat FIRE’ but this basically goes against my whole belief system and a major reason FIRE is possible in the first place. I’m currently reading ‘Your Money, Your Life’ by Vicki Robin which really hammers home that the path to happiness does not mean spending more money or indulging in more luxuries. In fact, living a simple life will not only save you money but will create an environment where all of the basic human needs that are universal for all of us are cater for. These are simple things like shelter, food, relationships, meaning work and safety.

What’s the point of investing if it’s not a means to an end? I don’t invest money to simply have more money. I save hard and invest to allow me to live the absolute best life I can possibly live moving forward. The stress relief freedom that FIRE will provide to Mrs. FB and I down the track cannot be measured in dollars and cents. We’re literally buying future hours of our lives back each time we save money and invest in the market. And the opposite is true every time we spend money on something we don’t need.

There’s risk with anything you do in life. And the reality is that when the time comes to pull the plug from the corporate world, this doesn’t mean I will stop earning an income from some form of work. I’ll be working in some capacity until the day I die. But the key difference is that I will be choosing exactly what I want to do 100% of the time rather than forcing myself to sit through the pointless meetings and waste hours of my life in exchange for money.

-AFB

 

Question (25:13)


Hi,

Loving the Friday questions.

Often mentioned how important buying below the NTA, however many of the good performing LICs such as WAM are often at a premium and many which are at a discount are permanently under the NTA, so can’t see the benefit of buying at a discount if it’s permanently at a discount?

Would love to hear your thoughts on this?

Thanks

David

Firebug’s Answer


Hi David,

The whole share price to NTA discount/premium business is a bit tricky. Is something really trading at a discount if they are always trading at a discount? And the same can be said for premiums.

The question I would ask is why is WAM consistently trading at a premium?

If we take a look at WAM’s NAV premium and discount history for the last 5 years we get the following.

NAV discount premium

In December 2013 WAM was trading at a 2.73 pre-tax premium. Whereas it’s trading right now at a 20% premium. Wow!

I’m not too familiar with WAM but I do know they have had very strong returns over the last 10 years.

 

WAM historic

They also charge a management fee of 1.00% 😓

The only explanation I can come up with here is that investors value the management of WAM very highly. So high in fact that they are willing to pay a 20% premium plus 1% management fee. The returns speak for themselves to an extent. My main concern would be what happens if there was a change in management or some key people left the company?

Are you willing to pay a 20% premium for the future potential of the funds’ performance? Seems like a lot of investors are.

Another risk is if you buy in at a high premium and then have to sell at a lower premium or even worse, a discount. You will lose as the share price to NAV fluctuates. This can be an advantage of buying at a discount so it swings both ways.

-AFB

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