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 (2:00)


Hi Aussie Firebug,

Since it’s Friday I thought I’d ask you a question:

How do you feel about REITs? VAP has fairly stable growth and something around a 7-8% yield and would provide diversification across different types of property (commercial etc) and across the whole country. I think there are some tax implications in that distributions don’t qualify for franking credits, but since they may be gone soon anyway, does this really matter?

I have also read that REITs are only loosely correlated to shares, which could be beneficial during market crashes.

Thanks,

Liam

Firebug’s Answer


Hi Liam,

I’m not a real big fan of A-REIT’s because I think if you’re going to invest in real estate you might as well invest directly and take advantage of all the things that come with direct ownership vs using a structure like A-REIT’s. Even if you’re technically investing in real estate, by using an A-REIT you lose the ability to leverage at a low-interest rate, physically add value to the investment, use your skills and experience to solve problems and cut out the middlemen during transactions etc. etc..

I would much rather invest in shares if I’m a passive investor and real estate if I’m an active one. I also think the management fee on A-REIT’s is too high. VAP is decent amoungst A-REIT’s but even that is sitting at 0.23% which is more than double my most expensive ETF/LIC.

You do make an excellent point with the franking credits, however!

I’ve actually started to lean away from fully franked dividends since the ALP went after the refund. I know they didn’t get in and the changes won’t go through but my naive ass didn’t actually think such a dramatic effect that would have severely altered our retirement plans, was even on the cards!

I’m still buying Aussie stocks but the legislation risks associated with fully franked credits has me altering my strategy a bit (currently in the middle of an article about this).

So, in this case, I can definitely see an argument to use A-REIT’s unfranked income to soak up franking credits from Aussie stocks. I don’t currently have them in the portfolio but I’d consider a small amount (5%-10%) in the future if talks about franking credit refund flare up again.

-AFB

 

Question (8:33)


Hey Aussie Firebug,

Love the blog! Thanks for providing great content!

I have a question about helping family to invest. My family are clueless about investing. Their idea of building wealth is to hide money under the mattress, they barely even trust their super and when they do make ‘’investment’ decisions, I don’t think they’re based on a sound understanding of the market.

My parents are approaching retirement and luckily have a bit of cash sitting around that could be put to better use. The problem is I don’t feel comfortable telling them what to do with it. I’m new to this myself and don’t want to be responsible in case things go wrong.

I’m even scared to suggest possible options (eg, Vanguard) in case they take my word for it, don’t do their own due diligence and then things go belly up.

How would you handle this? Give them the info I have and let them decide, or don’t get involved at all?

Appreciate your response!

-Girl On Fire

Firebug’s Answer


Hi Girl On Fire,

This is a great question and something I have personal experience with so let me walk you through what happened with me and my parents first and then I’ll get into my take on your situation.

I owe nearly everything I’ve learnt about discipline, value of the dollar, hard work, and investing to my parents. They didn’t teach me about ETFs and the stock market, but the lessons I learnt from an early age set the foundations for a healthy savings rate, financial discipline and what constitutes getting ‘ripped off’. These are astronomically more important to learn than simply understanding how the stock market works. There’s plenty of people out there that know all the principals of FIRE like the back of their hand, but don’t have the discipline or can’t accept the delay gratification it takes to reach the end goal.

My folks are now both retired and financially independent. Not bad considering they were modest earners with three kids who all went to Uni too! They achieved this through hard work, saving a decent amount of their disposable income and eventually investing in real estate.

And let me just jump in now before any conclusions are made, like…

‘Ahhh no, not another Boomer couple who rode the property boom! Give me a break’

They missed the 2000-2004 boom and actually started relatively late in life (by FIRE standards) around their mid to late 40’s I believe. Which is why I always laugh when someone writes in asking if they’ve missed the boat because they’re now the ancient age of 37 and have just found out about FIRE lol!

Long story short, Mum and Dad reach FI through property and were in a position later in life where they were equity rich but cash flow poor. Dave at SMA wrote about this common situation Aussies find themselves in here which is worth a read.

They had a bit of Super and other assets but the bulk was in property.

So when the time came to retire, I was curious to see if they had enough and was well into my FIRE journey too (which they know about) so it only made sense to sit down with them and go through it all. Using some very conservative math we worked out that they were well in the clear and could realistically retire now and never have to work another day in their lives to live the lifestyle they were currently living.

That was the easy part though. The hard part was actually setting up a plan and putting it into motion that would enable them to live off their portfolio to fund their retirement.

I was now facing a situation that many do, where they know what they would do but get extremely scared to say anything just in case something happens and they are blamed!

I knew that if I were them, I would sell all the properties and put the profits into my super where I could invest it in the sharemarket and live off the passive income.

But the thing is, I’m not them, and what way too many people forget is that sometimes it’s not about the total return. Sometimes peace of mind and being comfortable with a strategy pays psychological dividends that can’t be measured in dollars. Nearly all mistakes people make with investing come from an emotional response rather than a calculated one.

So with that said, I recommended a financial advisor because I simply didn’t have the knowledge of the Supersystem at the time to comfortably steer them in the optimal direction. But I wanted to stay involved to make sure I understood the plan and everyone was on the same page.

The plan of attack was a pretty common one I guess for this type of situation. They were to sell off some properties and pay off the debt for the ones they had in the town they live in. The rent minus expenses alone for the remaining properties would be enough to fund their lifestyle. There was some other stuff done with super and pension phase but the main strategy was to sell down and live off the rent.

This was a perfect plan for my parents, especially my dad. He’s the sort of guy who can’t sit still and is always working on something. We have a family joke about giving him a ball of cotton and a toothpick and he’ll fix/make anything you want haha.

So basically dad spends most of his time improving the remaining properties that are all in town within a 5-minute drive and fixing them up if things break. It keeps him occupied and if you know him personally, you’d know that his idea of a perfect day is getting everyone together to work on a project like building a deck or ripping out a tree or building a new fence. All while the radio would be blasting in the background and him probably yelling at me for doing something wrong. That’s basically a snapshot of my childhood growing up and helping him with stuff haha.

So wrapping up this long-winded story, the retirement strategy my parents went down is completely different than the one I’m going down but it’s tailor-made for them and even comes with added benefits of meaningful work that brings joy and sleep at night factor.

Now back to your question.

Do you have a strategy for retirement?

Assuming yes, how comfortable do you feel about your strategy?

Could you easily explain it to someone you’ve just met and most likely answer all their questions they might have?

Are your parents open to learning about the market?

What is their risk tolerance?

You’re going to know them better than most, do they have the psychological mettle to keep cool calm and collected when the market crashes?

What you’re asking has a hell of a lot more to do with what type of people your parents are than it does about giving them bad advice.

FIRE or any retirement strategy, really, has been figured out a long, long time ago. The codes been cracked and it’s out there for everyone to use.

1. Save more than you earn
2. Invest in assets
3. Wait

Everyone has become obsessed about number 2 and what to invest in, but the truth is that it doesn’t particularly matter what you invest in, as long as it’s a good asset is the key. It could be gold, shares, bonds, property etc. but the really important step is number 1.

If I were in your position, I would offer as much education on the market as possible and it might even be worth booking in an appointment with a financial advisor. Boomers tend to trust professionals over financial blogs anyway and you’ll probably learn something about super along the way. It also takes heat off you in case there is a huge bear market and your parents freak out… But you’ll be there, of course, explaining that these things happen and should be expected and that the markets always bounce back!

I believe the key to a good retirement strategy really comes down being comfortable with it and full understanding of how it works. You’ll need to figure out what this is with your parents which can be done through an open conversation of the topic. If you get stuck, suggest they see a professional.

Hope that helps and good luck!

-AFB

Question (21:25)


What is your view on bonds in your portfolio asset allocation?

All the traditional advice is that 100% shares is not the best approach, yet I see over and over again people saying go 100% shares while you are young. Older, wiser heads that have gone through bear markets suggest a 60/40, 70/30 type split as a more responsible allocation.

What are your thoughts on this?

Do you plan to include bonds in your portfolio at one stage? Do you think a cash emergency fund or offset account for a mortgage is a substitute for the bond portion of a portfolio?

-Matt

Firebug’s Answer


Hi Matt,

Bonds have a place in some portfolios for sure.

It comes down to what risk tolerance and investing horizon. Would I go 100% shares if I were retiring at 65 with $1M? Probably not! I might want to smooth out the ride with some bonds and mitigate my risk against a bear market straight after retirement which would be my biggest issue.

You don’t usually see bonds in a FIRE portfolio because our investment horizon is decades and we usually have more options up our sleeve like returning to work which might not be possible for someone at 65+. Share historically outperform bonds but are more volatile.

There’s no right answer really and if you feel more comfortable with some bonds it ain’t gonna hurt.

Cheers,

AFB

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