Aussie Firebug

Financial Independence Retire Early

Podcast – Coronavirus market crash with Peter Thornhill

Podcast – Coronavirus market crash with Peter Thornhill



Recorded and released on the 19/03/2020 (London time).

There’s a whole bunch of fear and uncertainty going around within the FIRE community right now. A lot of younger investors, myself included, have never invested through a bear market before. 

I thought it would be helpful to hear from someone who has seen a thing or two in the investing world and be the voice of reason during these turbulent times. 

I chat with Peter Thornhill about the current market crash and if this is any different to previous bear markets.

Some of the topics we cover today include:

  • Peter’s experiences with previous bear markets
  • Similarities to the GFC
  • What Peter’s buying in this downturn
  • DCA or lump sum?
  • Is this just fear and confusion or maybe a financial reset?
  • Plus a whole bunch of community questions from the Facebook Group

Show Notes



Aussie Firebug: Hello, Peter. Welcome back to the podcast. Thank you so much for coming on.


Peter Thornhill: My pleasure, Matt. Good to be back.


Aussie Firebug: There’s a whole bunch of fear and uncertainty going around the FIRE community right now. A lot of younger investors, myself included, have never invested through a bear market before. I only started investing in shares back in 2016 and have only ever really known the market to turn up until the last month. I’m currently down a whopping one hundred and twenty eight thousand dollars. Can we start with your experiences with previous bear markets when you’ve had skin in the game?


Peter Thornhill: Well, welcome to the real world. History is, of course, my guide. And as long as you appreciate and understand history, you can foretell the future. I can therefore say with great confidence to most people that at some stage there will be a disaster and everything will go pear shaped. I have no idea when. I have no idea what, but once the herd stampedes, then off we go.


Aussie Firebug: Does this bear market feel any different to the others that you’ve personally invested through and that you’ve lived through?


Peter Thornhill: Well, I guess in one respect, yes, it is, because I’ve actually had a look at all the pandemics that have occurred over the last two thousand years. There’s been a lot of them, but not not many have had the same impact on the share market as they have SARS ebola They’ve all had an impact, but not to the extent that this one has because this is knocking on everybody’s door, whereas a lot of the other epidemics were isolated to largely individual countries, whereas this one this is a global job. And as we’re now all globally connected, news travels like wildfire. So you can have everybody panicking all at once.


Aussie Firebug: Feel like the media plays a big part as well with the fear and the scary headlines sell a lot more than just mild headlines. And that’s not to downplay the seriousness of this virus, because it is is very serious. And there are thousands and tens of thousands of people that are dying. But just this day and age, I think you’re right that it does, especially with international travel and everything. Things are spreading quicker and there’s more there’s more communication and maybe a bit more preparation this time around than previous before.


Peter Thornhill: I wouldn’t say that there’s been more preparation. If you want to see the real story there was a TED talk by Bill Gates in 2015 and I encourage everyone to go and look at it. I’ll put that in the show notes. He suggested in that TED talk that the next pandemic was the world was as ill prepared as it always has been. And whether it’s a war that kills 40 million people or whatever he forecast in 2015 that the next world crisis would not be a war, it would be a pandemic. And listening to his TED talk is just an absolute revelation. This is a guy telling it as it is and governments around the world are totally ill prepared. I mean, if there’s a war, they’ve got armies, they’ve got tanks, they’ve got planes, they got ships, they’ve got missiles, they got everything and they got reserves that they call up. But if there’s a pandemic, there’s absolutely no fallback position whatsoever. And that was the thing that struck me most about Bill Gates talk.


Aussie Firebug: Interesting. I’ll definitely link that talk into the show notes so everyone can have a listen. So so you’ve lived through a few bear markets in the past. Can you speak about some of the ones that stick out in your mind?


Peter Thornhill: Well, rightly or wrongly, they all stick out. 1973/74 was the first that I was really aware of. We were only in England for sort of three when the first oil crisis, share markets tanked. The UK market fell about 30 percent in 1973. Everyone said, Oh, thank God, that’s over. In1974 It halved again and the impact of that, because I was working in the financial services industry in London at the time and it was absolutely devastating the way it affected people. The next one, I guess, was probably 1987 the year before we got back to Australia. 1973/74  I was young, foolish. I didn’t have much money anyway, so it really had little, little or no impact on me, but I was aware of what it did to other people and 87 fledgling investor at that stage. And again, not much money to be able to take any advantage of it. So the big one for for us was the global financial crisis, which just was an absolute crackup.


Aussie Firebug: That’s a good segue way into our next question. So obviously, a lot of my audience and people that listen to this podcast fall into the younger demographic. So they’re just starting their investing journey of Perth. Are they? Or have only been investing for a few years like myself. So the GFC is obviously the big one that we all sort of remember. So I remember I was just out of high school when it happened. And like you said, I didn’t have any money to really take advantage of the situation. It was big news and a lot of headlines, a lot of newspaper selling about the financial markets crashing around the world.Do you do you see any similarities with the the fear and everything that’s going around with this pandemic to the GFC back in 2008?


Peter Thornhill: Well, the key with all of them is fundamentally that fear is based on ignorance. We’re frightened of things we do not understand. Knowledge is power. And the sad part is that too many people have really very little knowledge and easily frightened by what what the hell is going on around them. And my advice to young people today is self-quarantine and put your bloody phone down. Turn off the computer. Stop reading the newspapers. Turn off the television and you can follow me floating through this current disaster.


Aussie Firebug: So obviously, it sounds to me like you believe this is just another crash. Another thing that’s gone wrong in the world, which will continue to go wrong every every couple of years, something like this happens. So you obviously believe this will pass and there will be another time of prosperous business increasing their profits going into the future and it’s only a matter of time before this pandemic passes and the stock market recovers. Would that be fair to say?


Peter Thornhill: I think so because the stock market ultimately is a barometer on a daily basis of the fear, the greed, the stupidity, the day trading, the short selling. Every man and his dog has access to this thing called the share market is reflected in the performance of the stock market. But people for some reason read this as a reflection of all the businesses. When in actual fact, all it is, is the infection. It’s it’s a little bit like when you do get older, you get a favor. Okay. The sharemarket’s got a fever. It’s flashing red and everybody goes bananas.


Aussie Firebug: Indeed. Do you think, though, that there’s going to be some fundamental losses in a lot a lot of businesses around the world that potentially you’re going to have no business for three to six months, like that’s going to affect their bottom line? 


Peter Thornhill: Absolutely. And this is where it’s different to the GFC. For example, the global financial crisis was a disease incubated in the United States with corrupt investment banks, creating some absolutely toxic derivatives and then creating their own derivatives to better get it against them and then they export that disease to the rest of the world. So that was confined to basically incredibly toxic derivatives based on residential property and mortgages. This one is different. And you’re quite right. The impact on business generally is going to be devastating. But fundamentally, I cannot accept that as a result of this pandemic that all of a sudden things have changed and that all human endeavor is going to grind to a halt. I would suggest that out of this, like every awful event, the creative nature of humanity will come through. But in the meantime, it’s gonna be a very painful journey, just like every one of these incidents. Always are.


Aussie Firebug: Now, there’s a famous clip of you on YouTube. I’m gonna put that in the show notes because everyone should watch it. You said you look forward to events such as the GSC. In fact, I think you even said that you love them. Can you explain the reasoning behind this and how you are containing your excitement of the thought of another GFC this time around?


Peter Thornhill: The excitement is tempered by my concern about the health of everybody. My family included that the GFC was an absolute godsend. And just to show you how silly I am, CBA went from sixty four dollars to fifty and I bought so they went to forty. I bought some more. They then went to twenty six with all my sphincters tightened. I bought some more. And funnily enough, I’ve had people say to me, Well, why didn’t you wait and buy them all at twenty six? I said, Well, I didn’t have you there to tell me that that was the bottom. The subsequent events were CBA went back up. So the fifty, forty and twenty six didn’t look so silly after all. But the best part is that was the GFC in 2008. We have had one hundred and thirty five percent of what we invested during that period return in dividends alone. Unbelievable. There was no perfectly believable because I can I could give you the same story for Wesfarmers. We’ve had one hundred and forty six per cent and yes, there was that famous quote. You know, I look forward to the global financial crisis. And the thing is that when the herd is spooked, it goes berserk. And it enables us. I was asked why I lied, why I wanted another GFC, and my comment was quite simply where I’d like to buy some more Commonwealth Bank of twenty six. Some more Wesfarmers at $13. Because I didn’t go hard enough the first time round. I mean, it sounds ludicrous, but to me, when the herd panics, you never, ever stand in front of the herd. When it stampedes, you step to one side. You let the herd go hurtling past in a cloud of dust. And then you turn around and you pick them all off one at a time from the rear.


Aussie Firebug: So that that’s a really great analogy. So what you’re saying there basically is as everyone is liquidating and selling, this is the smart thing to do in a situation like this is to stand to the side.


Peter Thornhill: Hold your shares. And as as the price comes plummeting down, you go shopping.Because we get to buy the future income stream from those businesses at a huge discount.


Aussie Firebug: I probably should clarify it, and I’m sure people understand, but I’m sure yourself as well as my partner. We don’t look forward to to a pandemic, of course, because of pandemic powerful, but this is purely on these podcasts obviously is about finance. So we just trying to navigate the waters in regards to investing. So I just want to make that clear to everyone listening now. There was another golden quote in the same video which I’ve actually referred to on the blog before. And it goes something like you said, watching the share prices drop is a totally different thing to the cash flow that’s coming out of the portfolio. That is what we are living on. We are not leaving on the capital as a source of income. It’s generating the income for us. Now, that quote really resonates with me personally, but I’d love for you to talk about that and how dividends can help during a bear market.


Peter Thornhill: Well, the dividends tend to be far more stable because they are a function of the management of the company defining what is a suitable higher ratio and paying out the dividends accordingly. So companies with higher capital requirements will probably retain slightly more profit. Others with less capital requirements have no point in the company retaining those sitting on their balance sheets so they can lift their dividends. So you sit there and the cash flow pours out of these businesses and that is what sustains our future life. The share price is to a large extent, irrelevant dividends.


Aussie Firebug: Now, we spoke in a little bit about that. These pandemic, unlike 2008, is going to affect a lot of businesses. Bottom line is actually the fundamentals of the business is gonna take a hit. Dividends will most likely or almost certainly will drop in the future, but not as much as the share price. Can you explain why that is?


Peter Thornhill: Well, it’s going to be a mixed bag depending on the industry you’re in. The manufacturers of toilet rolls are going to honor an absolute pardon me, pardon the pun, an absolute roll. So the profit performance will vary according to the pharmaceutical company that creates an virus or a medicine to deal with it Are going to go up. So you’re going to have all different organizations producing different results, which is why I love a broad spread across a whole lot of companies. So there’s going to be good and bad as there are in every stock market. So it’s that diversification that protects us. But yes, dividends are probably going to take a hit, which is one of the reasons that I’m delighted that some share prices are down 30, 40, 50, 60, 70 percent, because I don’t think the companies are going to go broke. But I can buy their future dividend stream at a discount of 30, 40, 50, 60, 70 percent. And I think that is outstanding. So although across the board, there may be a reduction in dividends because I own more of these shares. We are largely insulated from the worst of the disaster.


Aussie Firebug: Now, this is almost gone into my next question here. Speaking of buying shares at a discounted price, what are you buying during this downturn?


Peter Thornhill: Well, it’s interesting, Matt, because at the stage we’re at now. You know, I used to keep myself when I worked in the financial services industry and for a number of fund managers here and abroad that I, you know, knew what I was doing. The realization came that I didn’t know what I was doing. However, I am unwinding how direct individual shareholdings and I am feeding more and more and more of that into the listed investment companies. The old fashioned ones and increasing the holdings there. Because to be honest, Matt, I have far better things to do than mess about my wife than money.


Aussie Firebug: Fantastic. So specifically, which LICs? Because I know there’s gonna be a lot of listeners out there that want exactly which ones that you have on the limit.


Peter Thornhill: Okay. Well there’s there’s a few of them for a variety of reasons, but the original ones and some of them by accident because I ended up with some of them simply because a smaller listed investment company was taken over via larger one. Cambria was taken over by Milton, which is why I ended up with Milton. Anyway, cut a long story short of the good old fashioned ones. AFIC, Argo,  Milton Whitefield. I like whitefield because it’s one hundred percent industrials. It looks like a load of rubbish when there’s a resources boom and it looks absolutely heroic when the resources boom dissolves. Soul patts, brickworks. There’s loads of them. I mean, I’m not going mad, but the diversification is there because the last thing I want is to leave my wife with a portfolio of 40 or 50 shares, individual shares. I mean, she knows why they are there. But she doesn’t want to get involved. She loves the income stream, I’ve got to say. And that’s important. So I’m actually, with a little bit of work over time, I think we’ll probably end up with maybe six or seven listed investment companies speaking untold hundreds of thousands of dollars of income a year. And on average, we are probably gonna chug along at about 10 percent per annum compound. Now, I know there’s a lot of people out there that want the alchemist stone to turn lead into gold, but I’m quite happy with a boring 10 percent.


Aussie Firebug: That sounds good to me. I’d definitely be happy with 10 percent at the moment after my portfolio, the hit that it’s taken.


Peter Thornhill: Think about it on an accumulation basis. You’re going to double it every seven years. Thousand is two hundred. Two hundred is four hundred four hundred to eight hundred eight hundred one point six million 1.6 million 3.2 million. For God sake, in 40 years. What are you going to do? Absolutely heroic.


Aussie Firebug: Yeah,That’s the plan. So I question so I just had a thought popped into my head the last time we spoke. You weren’t the biggest fan of ETFs And I think that type of you just had some questions about them. Has anything changed in that regards with ETFS. or are you more on the at least the investment company


Peter Thornhill: I’m still not uncomfortable.I prefer the company structure rather than the ETF structure. Right. Because if a there is a company takeover and it’s cash, not scrip, the listed investment company can reinvest all that money on behalf of their shareholders. The ETF has got to do something with it. It can’t retain it.


Aussie Firebug: Interesting. When you’re buying these Elyse’s at such a discounted price at the moment, how are you deciding what to buy? Is there a price that you’re looking for? Or do you just invest regularly? You just have a plan that you stick to and it just is like clockwork.


Peter Thornhill: I have no plan. There is nothing clockwork. It is totally emotional. And it is on the day. How do I feel? And let’s go.


Aussie Firebug: It is interesting to hear. So you don’t. Dollar cost averaging into the market. It is not like a time that you buy every month or know those.


Peter Thornhill: Those days are gone mad. But effectively there is dollar cost averaging. Because with a lot of the old fashioned  dollar cost averaging they have capital raisings. It takes one of two forms. One is a share purchase plan or the other is a rights issue on a pro rata basis, a one for ten or something like that. The rights issues require a full prospectus, so it’s like any company raising fresh capital. The share purchase plans do not require a prospectus. It simply requires a BPay on those on the form and it’s done. Now, these have proven to be a real boon for my three sons because investing in these LICS they don’t ring me up and say, Dad, you know what? What about argo? What about Afic? What about movement? Blah, blah. They just take them up because that’s how I’ve trained them. Now people are going to say, oh, yeah, but what happens if they’re in a think? Asset value is lower than the price. So there’s a premium. Yep. Okay. So if you look at the chart of the stock market, it goes up, down, up, down, up, down. But it’s all headed in one direction. So OK. I bought a premium. I bought a discount. I bought a premium discount premium discount premium. Discount premium. The end result is you draw the line through the middle. And what directions is it heading in…UP! But every one everyone has to finesse everything to the ends degree. I have better things to do.


Aussie Firebug: It seems to me every single time I wake up, with the exception of a few days last week, the prices are plummeting and they’re plummeting down. So what is your approach in a situation like this? I know that there’s a common saying, you know, don’t try to catch a falling knife. Are you waiting for a specific price to hit? Or are you just you wake up one day, like you said, emotionally and you like the look of the price, you’re gonna to invest in it. And then if it’s cheaper in a month’s time, you’re gonna go again.


Peter Thornhill: Matt, as I indicated earlier, I was trying to catch a falling knife. I bought CBA 50. I bought them at 40. I bought my twenty six. I have no idea where the bottom is. No one does. And sometimes I’m going to look like an absolute donkey. But in the overall scheme of things, it doesn’t make a blind bit of difference. But just to give you some sort of sense of where the hell we’re at. Frieda and I have watched four million dollars evaporate from our portfolio.


Aussie Firebug: Well, I was actually I was gonna not so much that I didn’t, you know, it was appropriate that, yes, they formally. That’s a lot of money.


Peter Thornhill: Now, am I having sleepless nights? I have the perfect antidote to the current Corona virus, which is half a bottle of champagne each before we go to bed.


Aussie Firebug: It’s a gritty and strong cash flow, no doubt. Still Strong cash flow. Yep. Yep. Fantastic. Okay, so another question. Do you have much international exposure in your portfolio? Why? Why not?


Peter Thornhill: The answer is yes, I do. I have CSL. And a a number of other high quality, outstanding Australian companies that are global. So you don’t want to buy American share? No. Too much bloody trouble. We have some absolutely fabulous world class companies. I mean, Cochlear and CSL are two perfect examples of this. Both of them being absolutely slaughtered at the moment. And I’m rubbing my hands with glee.


Aussie Firebug: Interesting. Okay, so it’s predominantly everything that you own is on the ASX. It’s just that some of those companies are really a global company.


Peter Thornhill: Well, yes, but in fairness, Matt, I sort of own up to the fact that this may or may not be an issue for you when you come back to Australia. But I wasn’t sure that I wanted to leave what we considered at that stage to be our home. So I left my pension fund in England so that accumulated from nineteen eighty eight onwards. And I converted to a self-invested personal pension when I retired. So I have holdings in the United Kingdom and basically my super fund in England has four holdings. It is four old fashioned listed investment companies.Each of them pays quarterly dividends. That is sixteen dividends a year.So I draw a monthly income.Twelve income payments come out and it’s that is that in pounds. And then you transfer sterling. And because of the double taxation agreement, I pay no tax in the UK, it’s all treated as taxable income in Australia.


Aussie Firebug: Interesting. Oh, you must be liking the exchange rate at the moment.


Peter Thornhill: I’m definitely I’m I’m loving it.


Aussie Firebug: I’m definitely keeping my eye on that because I can sterlings myself the pound and we send money back home to Australia each month to continue our investing. Sorry. Yeah, it’s it’s I’m looking at that with a cane or I think it’s over one pound. Over two. Yes, over $2 now.Okay. So we have some questions now. So I basically know these podcasts to everyone listening. It was really spur of the moment. I actually listened to the mad scientist had a podcast and he brought in someone that was a seasoned investor jail, J.L. Collins. And it was really just a to come over on. Diana was such a turbulent, turbulent time in the market. And I really took inspiration from that podcast and thought, who can I get on really, really quick just to have a chat? And of course, Peter Thornhill being the man, the myth, the legend. I thought, let’s get him on the podcast. So I literally just sent you an email, Peter, last night, I think, and you responded very quickly. And I thought, let’s do it. Let’s jump on and do this podcast and get it out there as soon as possible. So I literally posted something in the Aussie fire discussion Facebook group that I have, and I posted it probably about an hour before this show happened because it was just spur of the moment. And I think there was about a hundred questions within the first 40 minutes, which just goes to show how popular popular you are, Peter. I’ve got a whole bunch of questions from the community that were the most liked and I’d love to hear your response to some of them. So the first one is would you purchase LICs now while they’re trading above the NTA (net tangible assets)?


Peter Thornhill: Yes, the answer is yes. I would.


Aussie Firebug: Yeah. It doesn’t really matter does it. You just purchase. It’s not something that you concern yourself with. You’ve got other things to worry about.


Peter Thornhill: Yeah, well, I have nothing to worry about. I have lots of other things to think about. its A good way to be.


Aussie Firebug: Second question, does the heavy drop in VAS, which is the Vanguard Australian Index, top 300 fund and low Aussie dollar change your mind on buying HFS.


Peter Thornhill: Not one jot


Aussie Firebug: what financial steps did you take during similar events in the past? And did they work?


Peter Thornhill: Well, the answer is that the probably the most significant was the global financial crisis. And the answer is I stepped up to the plate and I took advantage of it. And it had a profound impact.


Aussie Firebug: Expand on what stepping up to the plate means.


Peter Thornhill: Yeah. You may remember my two golden rules spend than you earn, earn borrow less than you can afford. So during the global financial crisis, I was able to go across a whole raft of shares and the impact of that post the global financial crisis because share prices tanked. We bought in at the well, let’s take CBA. We bought CBA at twenty six. For example, the dividends we’ve had since have paid us more than 100 percent of what we put in. In the meantime, the share price came back from twenty six to over 80. It’s currently back around the 60s or something. But where the market recovered from the low point because of buying that cash flow our result and particularly at that point, as far as the index is concerned, our portfolio recovered far greater than the index did and our cash flow exploded also as a result of that. So it was you know, there was no rocket science associated with this. It was just taking advantage of everything being on sale and stepping up. And I’m doing exactly the same thing now. We still don’t spend all we earn. I still haven’t drawn down all the liquidity that I have available. So I’m sitting there with all the armaments you need to be able to sit this war out and take full advantage of it.


Aussie Firebug: That’s a very interesting point. I just want to touch on that. You have obviously some dry powder. How how how much cash reserves do you have or have? Have you had the same amount of emergency filed your whole life? Like you keep a set amount, six months worth of living expenses, a year’s worth of living expenses that gets it. 


Peter Thornhill: No, It relates to, you know, inflation, basically. So what we had originally was nothing like we have now. Because to me, unfortunately, I own an apartment and, you know, it grieves me but unfortunately, whether you’re aware of this in the UK, but security of tenure is not an issue for people who are renting because long term lease holds a part of the furniture in the U.K. They are not here. So there is no security of tenure. And you are left in the hands of bastard property speculators on 12 months and 60 days notice to quit anyway. So we own an apartment. That’s fine. So I’ve got all this money sitting rotting in this damn place. Now I can utilize that because the bank’s been managed by Australians they love property. So they are currently lending me money at 3.3 percent and I am able to invest that in shares producing around for four and a half percent. I get franking credits on top of that. I get a tax deduction for the three point three percent. You’d have to be nuts not to take it. The banks are paying me to borrow money from them to invest. So I have loads of dry powder. There’s probably about 2 million undrawn.


Aussie Firebug: That is that’s incredible, so obviously the dry powder. The point I was trying to make is that is crucial to be able to take advantage in a situation like this. Like if you don’t have the fundamentals, you’re not going to be able to sleep at night, you’re not going to be able to take advantage. So obviously, like you said, the two golden rules spend less than you earn and borrow less can afford.It works really well in a situation where you’re comfortable and you have that dry powder. A lot of people out there maybe don’t have a whole bunch of cash and, you know, a little bit worried about the future in what way it where it’s going to head maybe about their job security. So we’ll be your advice to someone that potentially doesn’t have that emergency fund built up, like would investing be the last thing you would be thinking about if you didn’t have that dry powder?


Peter Thornhill: This is the tough one that it’s really easy for me to sit here at Seventy three telling you these stories and we’re talking to an audience that’s probably not even half my age. And all I can do is cast my mind back to when we began. And I was very fortunate because I married a saver. And I’ve got to say, over the years presenting, I’ve become acutely aware of the issues associated with that. To savers, nirvana, to spenders, not the best, but they’re aligned. The worst is one spender, one saver, because one of them can spend their life white anting all the efforts of the other total bloody disaster.So, you know, two savers, you know, nothing heroic on our part. Free to stop work when the foot when our first child was born back in 1975. And she has her career has been raising three absolutely magnificent young men and supporting me in my donkey job of going out and earning money. And basically, that’s it. So when when there were no reserves anyway, all we could do was with what little we had. And I’m afraid today and I say this knowing I’m probably gonna offend people. So many young people today expect to have today what it took forever and I lifetime to achieve. They want it now. Well, that’s okay. But there’s a thing called opportunity cost and the price you’re gonna pay for having everything now. How can I best express it? Today’s pleasures beckon more strongly than tomorrow’s pay.


Aussie Firebug: Another famous quote, I’m sure that also an Peter. Yeah. I couldn’t agree with you anymore. I think that what I was thinking of when you were speaking was if you haven’t done the fundamentals before, this situation happens like we’re in now, probably not the best situation to take advantage of it. But if you are, I guess the message is things like this happen. These events happen. And that will continue to happen. But it always recovers. And that’s something that I believe in. And I’m sure that you believe in as well. Eventually, in the long run, it will recover and the stock market will reach new heights.


Peter Thornhill: Matt, if I could just interrupt there for a second. The full day presentations that I do and the next ones coming up on Saturday, I have the history of all the sharemarket crashes going back, back, back, back, back. I’ve added an extra slide for this coming Saturday’s presentation and it covers all the pandemics of the last two thousand years.


Aussie Firebug: Always if you’ve got that slide or I can include it in the show notes if you’re willing to share


Peter Thornhill: All of this has been going on. Whether it’s you know, I think about my my parents, my grandparents. You can imagine living through two world wars and a depression. And we’re sitting here, you know, weeping and gnashing of teeth as a result of what’s going on at the moment. I mean, you never know you whether a bomb was going to drop and destroy your entire bloody family. Actually, technology’s an interesting thing. I was just having a look at the First World War. Total casualties, both armed forces and civilians were forty million, but the burst of technological advancements that occurred as a result of the First World War tanks, aircraft, blah, blah, blah.They managed to kill 80 million in the Second World War.Technology is a wonderful thing. Or worse, it’s.


Aussie Firebug: Yes, exactly right. Onto the next question, Peter. Now, you touched on it a little bit before, but I’m going to ask it anyway. Do you recommend continued continuing to dollar cost average and buy and hold index funds or LICs?


Peter Thornhill: Yeah, I’m not particularly interested in index funds because taking the Australian market as an example. I think we may have had this conversation before. I ignore resources, no interest. I don’t want them dragging my performance back because if you look at the comparison between the industrials indices and the resources, the gap is huge. My second cut is I don’t want any property. So the listed property trust sector is very it’s part of the industrials index. If I take that out, the industrials index rises even further. So for my simple mind, the easiest way to beat the All Ords and the industrials index is to get resources and properties totally out of it. And that’s the real simple cup. And it has paid magnificent dividends for us over the years.


Aussie Firebug: Fair enough. Banks are a bit on the nose at the moment. Are you buying more CBA, like you said in the past? Or is the value and growth elsewhere in the markets? Obviously this isn’t financial advice


Peter Thornhill: Absolutely not, because I am moving away from individual shareholdings. I’m moving more towards the LICS. So it’s a fairly dumb option. But to me, if I can have six or seven LICs in a portfolio producing five or six hundred thousand dollars a year in income, what the hell do I need to spend my time trying to finesse it? I don’t want to be a slave to the money doing what you’ve just said, which is try, you know, trying to choose where to tip in. I want money to be my slave. So I’m using the dumb option.


Aussie Firebug: Yep. Now, someone has recently read your book and they say it stands up well. Would they be any new chapters you would add if you were writing it today?


Peter Thornhill: The answer is no. I mean, the principles are fundamentally the same. You know, we’ve had five editions or five iterations of the book. Nothing fundamentally has changed over that period apart from when the GFC hit. But to add another chapter on chapter on pandemics, I don’t think it’s going to add any value to the book itself.


Aussie Firebug: For a younger investor, would you recommend leveraging more into the markets to make the most of a time like this? Because we know that in the past you’ve been a fan of using your home’s equity to reinvest into shares. So what would you what would you say to a question like that?


Peter Thornhill: Let’s not try and be heroic. This is where people try to get ahead of themselves. This is the snap opportunity. Forget it. The most valuable asset that everybody has is their time. As I mentioned to you earlier, you know, 10 percent, you double every 7 years. So 7, 7, 7, 7, double, double, double.The time is going to do all hard work for you. You don’t have to spend time agonizing over. Is it right to go now? Should I go harder? Do what you can afford. Because source law says if you’re really trying to be heroic, what do you do at a particular point in time? Comes back to bite you.Just relax. OK. Self isolate and carry on


Aussie Firebug: Is there any signals that you are looking for in the market or water economy to mark the bottom?


Peter Thornhill: What’s the bottom? What the hell am I looking for? I mean, for God’s sake, does anybody know where a bottom is? Does anybody know where a top is? This is the problem. For some strange reason, we are led to believe that there is something magical about selling at the top. Buying at the bottom. Blah, blah, blah. I’m sorry. I don’t think anyone has a crystal ball to enable you to pick either tops or bottoms. And all you have to do is watch. And this is this is the other issue. It’s boring being a dividend investor. Because you only get excited twice a year. Whereas with share prices, you can get excited or disappointment disappointed every single day.


Aussie Firebug: Yeah, I couldn’t agree with you any more, Peter. I know it’s I sort of had an idea of what your answer would be to that question, but I had to ask it anyway because I had a lot of likes in the Facebook group at the moment and I’m getting a whole bunch of emails myself. You know what? When do you think the bottom is? How do I know this is the right time to invest? And I couldn’t agree with you anymore. No one knows. And if they say they know they’re lying or they’re delusional. No one knows when the Next week, we could start rebuilding. It’s probably unlikely, but it could rebound and it could go into new highs like you just don’t know. And my view on the matter is just to invest like we usually do every single month we we put in and out into the market, dollar cost average and we just go about our business. But it’s it’s good to hear from you paid. It’s so similar. Thinking, too. It’s basically impossible to know.


Peter Thornhill: In the GFC,Why the hell did I buy CBA? Fifty one to buy them at 40. If I’m an investment guru, shouldn’t I know when the bottom is? I’ve got no damned idea where the bottom is, and I can say to you categorically. Taken to its logical conclusion. I bought shares in a company. This is going back some decades now and the price dropped. I bought some more. Price dropped again, just like CBA. I bought some more and then it went broke.Yeah, that was clever. Was.


Aussie Firebug: Well, like you said, you didn’t have the crystal ball.


Peter Thornhill: And the other difficulty is people are deathly afraid of a company going bust and losing their money. The biggest mistakes that I have been I have made have been sell decisions. If I can illustrate, I was a shareholder in Pacific Dunlop in 1995, Pacific Dunlop incubated and then floated a startup called Cochlear. As a shareholder in Pacific Dunlop, I got my shares at $2 50. They been floating around two hundred dollars, and just to show you how clever I am. My shares went from $2.50 to $20. How heroic was that? I sold some at 50. I sold some at 100. I sold some at 150. I sold some. That has cost me over a million dollars.


Aussie Firebug: It’s a good story, Peter.


Peter Thornhill: Well, I’ve got more. I did a site with CSL in it $7. I’ve been over 300 for a while and being a shrewd investor. You know, you don’t make a profit to yourself. I offloaded them. And I can tell you if I have parcels of, say, fifty thousand dollars in each acquisition, if a company goes broke, I lose fifty thousand dollars.I have lost millions of dollars by selling.


Aussie Firebug: It’s good. That’s a interesting way to look at it, Peter. Definitely.


Peter Thornhill: Yeah. Which is why now I take two aspirin, lay down and wait for feeling to pass.


Aussie Firebug: Very good.Yeah. This one this next question got a lot of likes and I guess it’s a hard one to answer, but to put it to you anyway. Do you believe that the market is declining based on fear and confusion, or is it due to a fundamental issue that won’t just evaporate?


Peter Thornhill: The market will generally react in a rational way to events. So the global financial crisis was a perfectly rational reaction to a period of extraordinary greed, stupidity and connivance by Investment banks in the US, etc.. This one’s slightly different in that it’s a pandemic, but ultimately the market overreacts because you have people who have no knowledge, Are fearful and at the first sign of trouble. Panic and index funds as share prices fall. So we’ve got shares down 40, 50, 60, 70 percent. Index funds have to reweight. So the whole selling process becomes so fulfilling. And this is the bit I love all those people out there mechanically doing what they have to do, simply feed the beast. And I just sit there. I mean, the analogy I have is when, you know, when the herd stampedes get out of the way, wait till the herd has stampeded past you and then turn around and just start picking them all off from the rear.


Aussie Firebug: Yeah, so really there’s no. We’ve touched on this subject so many times, it’s just but it isn’t it isn’t different. It’s different in the sense that it’s it’s a new pandemic. Like we’ve never seen this before, but it’s it’s similar to other events that have happened in the past. And it’s not like society as we know it is going to crumble. There’s going to be a financial reset of the world’s markets.


Peter Thornhill: The financial reset that everyone fears is that all these companies go bust. Okay. Now, that tells me they’re all human endeavor is gonna grind to a halt. There’s gonna be no food companies. There’s gonna be no banks. There’s gonna be no companies making bricks, glass, roof tiles, cement. So your lovely properties won’t exist any longer. I don’t believe that for one minute. I mean, even if there was a monumental disaster and we all went back to living caves. At some stage, I believe my wife and I’ll be sitting there on a rabbit skin rug trying to keep warm and follow the fire and there’ll be a thump, thump, thump on the front of our cave. And when I answer, there’ll be a likely lad at the front. And you say here, looking at. I’ve been grinding up some Alesia rocks and I’ve got some very pretty colors. I can paint your cave and it will only cost you three chickens. And human endeavor starts the whole silly process. One more time.


Aussie Firebug: I really like that story. That’s fantastic.


Peter Thornhill: Well, Matt, basically the stock market reflects the endeavors of the human race. So if you were telling me that it’s all gonna go pear shaped and human endeavor is gonna grind to a halt. I’m sorry, I disagree.


Aussie Firebug: I’m with you, mate. I think it’s gonna be outback as well, and I’m putting my money where my mouth is, obviously. Keep investing every month. It is scary, though. This it’s such a drop. Definitely. And I think you even said it about the GFC like you. You’d have to be someone without a without a heart to not notice or not to have some sort of emotional reaction to such a drop as the GFC. And it’s no different to this one. But I guess it’s just it goes to test everyone’s limits and what how they react in a situation like this, their risk to tolerance. So if you’re not doing too well now, maybe it’s a chance to look at your portfolio and maybe have a more defensive assets if you’re not coping with such a big drop. But it just goes to test everyone’s mettle at the moment.


Peter Thornhill: And Matt, I can say honestly, after 40 years of presenting that some people are just not wired the right way. I’m the lunatic fringe and everything between me and people who emotionally should never, ever own shares.


Aussie Firebug: Yeah, that’s a big one as well. The emotional factor of investing. I actually think it’s more important than, you know, the fundamentals of math behind investing means nothing if you’re not at an emotional state to cope with the ups and downs.


Peter Thornhill: Yeah, the emotional aspect of investing, you know, financial literacy is the key. And the barrier for most people to varying degrees is the amount of rubbish they carry in their head.


Aussie Firebug: Under what particular circumstances, if any, would you advise someone to sell some of their portfolio to take a loss And increase in increase their cash holdings?


Peter Thornhill: The answer is I will do it when my financial advisor tells me to go and I don’t.


Aussie Firebug: I would imagine that you will see him telling or her telling you anytime in the future.


Peter Thornhill: Oh, no. Fair. You know, with with due respect to him, he is extraordinarily valuable to me because he takes all of that away. And it was very important, particularly to Frieda and I, when we decided to retire, because I transferred a lot of shares in Frida’s name into the super fund, etc, etc. So there’s a lot of rearranging to be done. And I know I don’t know the rules. I don’t want to know the rules. The government changes the rules all the time. But again, I have better things to do with my time, so I rely on my financial adviser. And there have been some instances where it has been appropriate to offload a share. I am also guilty of it in the vernacular in England, doing some bed and breakfasting where I sell a share, crystalize a loss to bank it, and then by the share back again.


Aussie Firebug: I can’t do that. I don’t think you could do that in Australia, can you? Yes, you can.


Peter Thornhill: But you’ve got to make sure that there’s a gap between the transactions. So I have crystallise losses are still on the same shares, but I’ve crystallised losses, put them to one side so that if, for example, there had been a company takeover in my portfolio and there was a huge capital gain because it was 100 percent cash, no scrip. I’ve had these losses that I went without interfering with the overall long term holdings. I’ve got the losses that are back sitting there to help offset the capital gain. To me, it makes sense, doesn’t it?


Aussie Firebug: Yeah. Absolutely. Next question. This is obviously your favorite asset class. Do you have any thoughts on the housing market and how it will respond to this crisis. Is now a good time to buy? Or should we wait?


Peter Thornhill: Forget it.Rent don’t buy because the property bubble that has arisen as a result of the ridiculous policy of central banks and governments around the world of cutting interest rates has created massive bubbles in other assets.And I am ever so hopeful that this current corcona virus is going to be the catalyst that tips the whole thing over.And we have the banks up to their eyeballs, mortgagee in possession, owners of property and my sons tied on will be able to walk into the bank with a wad of cash and buy properties for half their current price much closer to their real value.


Aussie Firebug: How do you calculate a property’s real value?


Peter Thornhill: I have absolutely no idea.


Aussie Firebug: So just all that we know, all that you know at the moment is they’re grossly overpriced.


Peter Thornhill: Yeah. And it’s interesting because I often ask audiences if I gave them the balance sheet for Wesfarmers, how many of them would feel comfortable and coming back to me in a week’s time.Having analysed the balance sheet of the company in the annual report and telling me what the company was worth, I’d never had anyone put their hand up to say that they would be comfortable doing that. So my question then is what the most people use in their minds as the proxy for the value of the company?The share price.


Aussie Firebug: Yeah. Yeah, that’s that’s all. Yeah.


Peter Thornhill: On the basis that everybody knows the price of everything and the value of nothing. Where do you think property sits?


Aussie Firebug: Well, I would I would like otherwise look at it on the surrounding properties or similar types of properties. What they’re going for, because we may increase we’re looking to buy a house next year in Australia when we move back and settle down at family at rent. Well, the only thing about renting and like you’ve touched on is the stability. There’s no security and stability with rent either was because mostly I’m living in London now and travelling around Europe. Yes, you do see that stark difference in culture when renting and there’s families as generations that have rented the same place for, you know, 50, 60 years. That just doesn’t exist in Australia. So. I would be totally down for a long term rent. Back in the town that we’re from, but I don’t think we got going to get one. So in the event that we don’t, which is highly likely, we’re going to have to buy. Well, let me not have to buy it. I think we’re looking to buy at this point, which is just the reality of it.


Peter Thornhill: Can I just suggest comeback test the water initially rent? Because if the pandemic does its job then and really wrecks the system, then you’re gonna be able to buy a hell of a lot cheaper because there’s gonna be an awful lot of mortgagee in possession, sales going.


Aussie Firebug: I’m keeping an eye on the market. I’m watching it very closely.


Peter Thornhill: But never confuse property prices with the value of the value of these properties hasn’t changed much in the last 40, 50 years. The only thing that’s happened is the prices have changed. I can remember from some of the comments I think on our previous session together. You know, we left Australia, went to London when we realised we weren’t coming back. We bought a little terrrace house in clatan. I then got headhunted to move to the Midlands of England. We bought a house in Kitterman, soon Worcestershire. We then got headhunted to come back to London. I bought a house in Delage in London, then got headhunted to come back to Melbourne, bought a house in Melbourne, got hit. Harder to come in all that time. All I’ve seen house prices going up, but the values haven’t changed.We’ve just had this huge inflation which your generation is not going to enjoy. So the headwind and the tailwind we had was the tailwind in particular. Inflation devalued our debt and inflated the price of the property. So that terraced housing Clairton that we paid seventeen thousand pounds for, we sold for sixty two thousand pounds. Well that had that property in Strogoff and Road is now worth about 1.6 million pounds. Still the same frigging house.


Aussie Firebug: I was gonna ask you because I’m actually we’re in Clapham North. Funny enough. And I think we were platen common. There you go. It’s it must be. It’s typical Australian Australians to move to Klapper because I’m not sure if this was if Clapham was like that. Back when you hear it.


Peter Thornhill: It wasn’t met. It was Earls Court that was called Kangaroo Valley. We broke the mold and Clapton was close to Brixton, which was I won’t use the term that they described it. But it was largely West Indian and there were lots of Rusty Cortinas in the gutter. But, you know, we we paid 17,000. We sold it for sixty two because my salary had gone up. I could borrow more. So the house we bought in Kidderminster. We paid ninety thousand for. We sold it for a hell of a lot more than that. We came back to London. My salary had gone up. I could borrow even more. So this whole stupid chasing your tail has produced absolutely no value for us. At the end is where we are now.


Aussie Firebug: Wouldn’t you say, though, just on that, that even if the property is fetching more rent as it continues along through the decades in cash flow is rising and know. Property doesn’t have great cash flow. That’s not selling. I’m trying to argue. But if it’s getthis, it’s fetching more rent. Wouldn’t you say that the value of the property by large would rise? Maybe not as much as they are rising at the moment, but definitely in Australia. But if it is increasing rentals, wouldn’t that logically conclude that it is going to be worth more? No.


Peter Thornhill: If that’s the function in the UK and in Germany and Holland and Belgium and France and Switzerland, why are lots of people speculating and property like Australians?


Aussie Firebug: Well, that’s a very good question. I know that there’s a housing market in London icrazy. It’s it’s hard to stay with Sydney and Melbourne. I actually think it’s more expensive. So that’s definitely I know a lot of Europe and Germany. Like you said, it doesn’t have that ridiculous. Income to cost ratio that Sydney and Melbourne do at the moment. But yeah, I have no idea. The answer to that. Just to be frank and honest with you.


Peter Thornhill: Your rent is never gonna grow like the dividends from high quality companies. Number one. Number two, you don’t get franking credits with rent. Number three, you’re holding costs associated with the share – Zero. You’re holding costs associated with a property -Pretty awful. I cannot see we rent the lifestyle. And as I’ve hinted already, the only reason we own this damn property is because, like you, that we can’t get a long term leasehold in this country. I’m trying to get my wife into emigrating so we can enjoy it and we can come on holiday in this country and rent all the apartments that, you know, we were all properties we’d never bother buying.


Aussie Firebug: Yeah, we’ve rented a whole life as well. with Mrs. Firebug, so I’m definitely, definitely agreeing with you there. I just think some got to be some value summaries of the properties fundamentally rise in values. I don’t think it’s just cause I think a lot of it’s to do with the low interest rates, of course, but there’s got to be some sort of value placed on these properties. I would imagine and the price obviously doesn’t reflect that completely


Peter Thornhill: And there’s a whole lot of properties in Sydney and I’m sure in other capital cities in Australia that aren’t even occupied, they are bought by overseas. If I can use the word investors who are simply trying to hide their money somewhere else. You’re probably reading all the stories of the first time homebuyers who can’t compete with the investors in Australia. Investors like inverted commas there as well, who are betting against first time homebuyers. Have they still got the mortgage tax deduction?


Aussie Firebug: I dont know. 


Peter Thornhill: Because when we were there and bought the house in Clapton, you got a tax deduction on the mortgage interest. Oh, yeah. It’s the other way round. First time homebuyers get crapped on, but everybody who wants to speculate in property gets a tax break. That is absolutely obscene. So, you know, a kid behind the eight ball as a potential property owner in Australia.


Aussie Firebug: Yeah, It’s interesting one. We could talk, we could have a whole podcast on it, I’m sure, about if we could. The struggles of the first time buyers and everything. But we’ve paid up. We’re just about time to wrap up this podcast. Before I let you go, what’s the one piece of advice you would give to someone young that’s just starting investing? And also to someone who is already retired or is close to retirement in this environment?


Peter Thornhill: Self isolate, number one. And number two, just get on with investing whatever you possibly can. In good quality, diversified, and I prefer the LICS, simply for the diversification. Because I don’t want young people wasting their time. I don’t want potential retirees wasting their time. The more important things in life are your family, your career, your future… is your slave. Don’t become the slave of your money and just get on with the process of investing. Unfortunately, it’s very boring and it takes time. But just be confident that if you can simply compound money at 10 percent a year, you will have a reasonably secure financial future.


Aussie Firebug: Right. And what about the people that are already retired or close to retirement? Is the same advice? Or do they need to look at this a little bit differently?


Peter Thornhill: Well, the tough part is they don’t have much choice because how much are you getting on your term deposit today? You should see the audience when I remind them of the interest rates that were available in the early 90s. 13, 14, 15 percent credit. Anyone who buys an annuity today needs their head examined. But, you know. So you have this these issues. There’s all this money swilling around. But ultimately, you don’t have any choice. That’s the hard part is getting over the one big problem with the stock market. It’s publicly available. It’s in your face every day. And they’re going to do every damn thing they can to get up your nose. The news this evening at about five o’clock, they were talking about this, this massive interest rate cut today of point to two five percent. We’ve watched interest rates go from 14, 15 percent all the way down, death by a thousand cuts.This is just complete and utter waste of time. Difficult times. But this tests the mettle of the individual. Are you ready for tough times? My parents. My grandparents. Damn it. I remember there was no money. You tighten your belt if dividends Okay. Let’s say our income drops from whatever it is now by 10 or 20 percent. Okay. What will we do? Okay. We’ll only travel abroad three times a year instead of four. Sorry, that’s being facetious, but you cut the cloth accordingly.


Aussie Firebug: Yeah, that’s that’s timeless advice. I feel as well in tough times you you tighten the belt, you find ways to spend less. You do the things necessary or you do the things that you need to do to get by. Because really, I look at you out lifestyle and our situation. Obviously, everyone’s different, but there is so many things that we can cut. It’s absolutely crazy to hear some of these people, especially from a first world country, that maybe is the first time they got to go through a tough time and they’re acting like it’s the end of the world. But unless and I want to downplay the pandemic and the seriousness of this virus. But to to say that you can’t cut costs we’re talking about in this day and age, I think is very few people that truly living week to week who probably couldn’t carry out a whole bunch of crap out of their spending.


Peter Thornhill: Matt, it’s all bollocks. Try cooking your own food. Try doing your own bloody laundry. And yet here a thousand and one things you could do. You don’t need a new car just because you got pissed off at the last bill for fifteen hundred dollars for a car service does not qualify you to go out and spend thirty thousand to buy another car. Just suck it up and. 


Aussie Firebug: On that note, we will wrap it up, Peter. Thank you so much for coming on and being the voice of reason during this scary time in the markets and for a lot of us Like I said, a lot of millennial investors, this is the first bear market we’ve really gone through. So thanks a lot for sharing your wisdom, sharing your experience and coming on the podcast.


Peter Thornhill: Matt, my pleasure. And for heaven’s sake, have courage, everybody. It’s all going to come to an end and we will look back and it will be part of history. And you and a lot of other young people, when you are 60 and 70, you’ll be able to talk to younger people and say, I remember when just like me.


Aussie Firebug: That’s that’s excellent. Thanks a lot


Podcast – Superannuation and FIRE

Podcast – Superannuation and FIRE



We’re kicking off 2020 with probably my most requested podcast topic of all time… and that’s Super and its role in the FIRE journey for Australians.

This is an absolute monster of a podcast (nearly 1.5 hours long 🤯) where I’m speaking to Super Guru James Coyle. We cover so many things in this pod and the topics range from “I know nothing about how Super works” all the way into the nitty-gritty technical details that hopefully will shed some light for us FIRE folk and maybe will help some people out there that are weighing up the pros and cons of Super when it comes to FIRE.

Shoutout to everyone who contributed to the questions on the Aussie FIRE discussion Facebook group. I did my best to tried to ask James the most ‘liked’ questions from the community but couldn’t get them all in.

Also massive shoutout to Josh for the transcript below and Victoria who helped with some of the technical questions we had 🙏

Some of the topics we cover today include:

  • The basics of how Super and the pension work in Australia
  • Tax benefits of Super
  • The tax-free environment within Super and how it works in practice.
  • The major differences between funds and what to look for
  • Children inheriting Super
  • How it works from the accumulation phase to your pension fund
  • Smart things to do if you’re 50-60 and nearing your preservation age
  • SMSF, are they worth it for FIRE chasers?
  • Women-specific considerations to maximize the outcome of Super (great tip below)
  • How do minimum withdrawal rates work in retirement
  • First Home Super Saver Scheme

And that’s not even all of it I swear 😅

Show Notes



Aussie FIREbug: Hey James, welcome to the podcast. Thanks so much for coming on.

JAMES: Thanks. Great to be here.

Aussie FIREbug: Now you’re someone who has spent over 20 years in the super industry and I can’t tell you how good it is to finally have someone of your expertise on the podcast, this podcast talking about super talking about FIRE and the role that super plays in someone’s FIRE journey has probably been the most requested podcast and in my whole time podcasting. I’ve been trying to get an expert in super on the show for a while and it kept on falling through, so it was like the one podcast I could just neverland and finally it’s booked and here. I’m really excited to get into it. So let’s just jump straight in. James, let’s start with the basics because I’m sure there’s going to be people listening who have a general idea about how super and the pension works, but probably not precisely. I myself fall into this category. So when can someone access the age pension and super and how does it generally work for the majority of people in Australia? We will get into the FIRE specifics in a bit, but generally, how does it work in Australia?

JAMES: Right? So both, both the age pension and super have age-based access rules and they’re actually different. So right now someone can access the age pension when they’re 66 years of age. But that the government is like many governments around the world increasing the age at which people can get, get social security, pensions, et cetera. So by 2023, you won’t be able to access the age pension until eight 67. Super is slightly different and there is whole bunch of other rules around how much income, and we can talk about that a bit later. The, super, you can access earlier. Right now people are able to access super at about age 58. If you’re 58, now you can access your super, but that’s increasing again over the next four or five years to the point where people can’t access it until age 60. So I think for most of your FIRE listeners who are going to be possibly in their forties or younger, it is going to be that they can’t get the age pension until 67 you can’t get your super until age 60. So that’s a couple of things to think about with regard to them. I’m happy to talk about sort of assets and income test and different things around, around, te pension if you’d like a bit later

Aussie FIREbug: So I’m just, I’m just curious, and this is, I guess it’s not related to the audience listening to this podcast because we’re on the road to FIRE. As someone who is on the road to FIRE we are not planning on relying on the pension at all. I am curious how much is the pension, how much does someone get?

JAMES: So if you, if you are eligible for a full age pension and you are a couple, you’d get about 36 and a half thousand dollars per annum. You’d get about 20 or 24,300 as a single per annum for the age pension. You also get also get a card that gives you access to a range of different health benefits, but it’s really a subsistence level of support

Aussie FIREbug: We don’t, we definitely don’t want to be relying on it. There is an asset based test anyway, so we, the FIRE crowd definitely wouldn’t be eligible for it. Correct me if I’m wrong, but wasn’t the original idea of super to slowly phase out the need for an age pension. Do you think that will ever happen or, maybe I’ve missed, read that somewhere?

JAMES: Well, yes sort of. That’s a, that’s a, that’s a terrible answer to say sort of. But the original hype around super was that it was going to reduce or eliminate the need for for an age pension. But really that was only ever just hype. Now the way people talk about it is the fact that it will, it will reduce the reliance on age pension. But people talk about super in the context of supplementing the age pension. So when we talked about, when we talked about those limits that, you know, if you’d say a couple on 36,000 or a single on 24,000, if you’ve got super, you can supplement that so you can have a reasonable amount of assets and you can have a reasonable amount of income and still get access to to all or part of the age pension. So super can reduce the reliance on the age pension, which is, which is a good thing you’ll find, I think they think about 70% of Australians are going to rely on all or part on the age pension. For those people on a part age pension, they’re supporting their income through, through super. So that’s really where it’s coming in. But you know, nine and a half percent of your salary going into Super is just not going to eliminate the need for any age pension for the majority of Australians.

Aussie FIREbug: Right. But, but that’s a rising, right? That 9.5% goes up over time, isn’t that right?

JAMES: That’s the theory. It is meant to go to 12% and at one point it was meant to go to 15%, but the respected governments have delayed those increases over the, over the years. But yes, it will be increasing to, it will be increasing to 12%.

Aussie FIREbug: I know they keep changing the rules, which, you know, there’s always the raging debate amongst the FI community about is super a valid strategy or is it part, should it form part of your strategy to reach FIRE? Or are you too scared that the government’s going to change the rules. We’re going to get into specifics later on, but you know, I just couldn’t help but mention something when you, when you said there that they’ve changed it because they’re tinkering with it all the time. It’s hard to know and plan for the future when they’re changing the rules

JAMES: Well I firstly, I agree 100%. From a personal perspective, I’ve spent much of my career in superannuation running a few different roles, but one of the roles that I’ve run has been providing education and communication around super and to try and get people engaged, contributing and planning better for their for their retirement. The common complaint that people make is that they’re just going to change the rules on me. So I’m just as frustrated as some of your listeners might be. I think too much rule changing actually undermines confidence in what I think is actually a terrific system. I’m a really big advocate of the system, but I really get annoyed at the way rule changes can undermine confidence. Overall I don’t think there’s any need to be so worried however every time you tinker with something, it reinforces this perception and lots of that tinkering is just unnecessary.

Aussie FIREbug: Yeah. It’s, it’s bizarre. I completely agree with you as well that the whole idea of super. The original idea is such a fantastic idea about investing in assets, starting young, gaining all these tax benefits and slowly over time this would reduce the reliance on the pension and the strain on the taxation system so much that you could theoretically people could be self sufficient, which is what we’re trying to do in the FIRE community to be financially free and retire on our own terms and not have to rely on the system to fund our retirement. But I could not agree with you any more. Every single time these politicians get together and they start tinkering with the rules, it just discourages people to seriously look at their super and to seriously invest in it and take all the advantages like we will discuss later. With all the constant changes, you just dont know. I’m not on the the doom and gloom side myself. I think if you’re planning to retire on super, then there’s a pretty good chance that it’s going to work out in the long run. But it is very frustrating when politicians are constantly making change.

Aussie FIREbug: Yeah no doubt it’s frustrating. But also even with all of the tinkering, you look at some of the opportunities for FIRE and where it fits in. Super should be a core part of people’s retirement planning as it isa terrific vehicle with some terrific advantages.That’s a good segue to talk about super in regards to FIRE now. So can you explain the tax benefits of super and why it is one of the most tax efficient vehicles an investor can have in Australia?

JAMES: Yeah. So the first thing is if you’re, if you’re a typical a typical Australian and you’re in a paid or salary job, your employer will be required to pay nine and a half percent of your salary into super. And we mentioned a little bit earlier that’ll increase the to 12% with some employers paying more. The tax effectiveness of it is that super contributions are taxed within the fund at 15% and that’s a lot less than the vast majority of people’s marginal tax rate. For the FIRE community thats thinking of retiring in their forties, et cetera while they may have some terrific tax accountants and all sorts of things, at the end of the day, most of them are going to have a marginal tax rate. For someone earning 37,000 they wiill pay a tax rate of 32.5%. So the money in super is taxed a lot lower than your marginal tax rate. That’s the first advantage. And that’s, there’s a few reasons for that. this has a benefit for savings. We talked a little bit earlier, you don’t get access to the money for 60. So part of the benefit of being forced to save and forced the lock your money away is this lower tax rate. Again, the earnings in your in the super fund, are taxed that 15%. Most of the funds are able to get the effective taxation rate well below that. So you’re finding that the earnings on those investments are also taxed at a very low, low level. So if you’re able to have the money in super up until when you can access it in your sixties or you, you, you want to retire on an income stream, that’s a terrific place to have some of your money.

Aussie FIREbug: Can I just jump in there? I just want to drill down on a few points you made. So there is a maximum that you can contribute at that 15% rate every year which is 25,000 is that right?

JAMES: That’s correct.

Aussie FIREbug: I’m just going to use an example. Let’s say you make $100,000 before taxes, you can actually reduce your taxable income by $25,000 and that 25,000 can go into your super and it’s taxed 15% going in. Is that right I’m doing well so far. And then when it’s in super it’s taxed 15% on the earnings within super so that if you’re investing in stocks that pay a dividend, those dividends are taxed at 15% within the super fund. Is that right?

JAMES: It is, so that’s the maximum taxation rate on the super funds on the super fund earnings. But what what the super funds able to do, because once again, it’ll get, it’ll get advantages around for instance, Australian stocks, franking credits capital gains, et cetera. The funds will be able to get the effective tax rate lower than that. Many of the funds work pretty hard to get the taxation rate of the fund’s earnings lower than 15%.

Aussie FIREbug: That’s very interesting. I actually did not know that. So they can the super funds can do some accounting wizardry and use franking credits and use all these advantages to lower the income of the fund as a whole. And that, that benefits all members. Is that essentially what they’re doing

JAMES: That, that’s basically what they’re doing. You’ll probably, you’ll probably start to, to get beyond my “off the top of my head” knowledge fairly, fairly soon. But they do the, I think probably all the funds work pretty, pretty hard to make sure that through the nature of their investments, whether it’s infrastructure investments, or the way they’re treating capital gains, et cetera, they work pretty hard to maximize the earnings of their, of their fund members. And obviously part of that is part of that is going to be through the way they’re investing in allocating assets. Another way that they’re doing it is, is to get the best tax outcomes across the fund as a whole. You can find that, some of the big funds will have various tax statements to drill down into some details on that.

Aussie FIREbug: I just thought of something that is very interesting. I’m thinking that in the context of FIRE let’s say because a 15% tax rate is very low. The majority of people on the road to FIRE, they’re not going to get anywhere near 15%, unless I’m forgetting something. But, that is probably the best tax rate you could hope for, for any investment on the way to FIRE. However, once someone has retired, let’s say someone does retire in their forties or mid thirties, if, if they’re on the road to FIRE then they’re pretty hardcore. Is it possible that you could have investment shares in super being taxed at or the dividends in super being taxed at 15% or close to 15% when actually your tax rate outside super is lower, because let’s say you’re retired and you’re leaving the FIRE lifestyle and your, you and your partner, you’ve got a 50/50 split of assets as a couple and let’s say that as a couple have combined income under the tax free threshold, Is it theoretically possible that you’re paying more because you’re holding those assets within super paying that 15%

JAMES: Yes that’s possible. It’s certainly possible to have a higher tax rate within super than your tax rate outside of super. So if you’ve got people that have retired and their assets generating a very low income,they could be below the tax free thresh hold of $18,500 .

Aussie FIREbug: But the FIRE crowd, I guess is unique in this regard because a lot of us don’t spend a lot of money and if you have a couple, it’s, it’s not uncommon to see a couples expenses to be under a combined total of 45,000. So if you split that between two people, you know, you’re almost getting to the, the under the tax free threshold or maybe just a little bit above. So I thought I was just interesting that potentially pay more tax.

JAMES: It’s a good look and that’s, that’s correct. That’s a good point, some people that are at thats sort of level, and living on a pretty pretty low income could be taxed at a higher rate. One of the things I didn’t mention with regard to the $25,000 contribution limit was that that’s a concessional contribution limit. You can put what they call non-concessional or after tax contributions into super as well If people want to load up their super and some people might choose to load up on their super closer to retirement because in retirement the tax on your super is essentially tax free once you put it in an income stream.

Aussie FIREbug: That is that’s a perfect segue because that’s actually my next question. I’m learning things in this pod, which is great. You just mentioned if you go past the 25 K you get taxed at just your normal tax rate. So then I’ve heard, and maybe people in the audience have heard about it as well, this magical tax free threshold that super can provide. So how can you explain how it works? How does your super work when you get to the retirement phase and you actually start living off your super and where does the tax free threshold come into play with all this?

JAMES: So when you retire we talk about the preservation age – if you’ve retired, you’re no longer working and you breach that preservation age, you can have your money and transfer your super balance out of that. That in what’s called an accumulation account which can then transfer into an account based pension. This account based pension will pay you an income stream. The money in that account based pension and the earnings within that account based pension, a tax free. That’s one that’s one of the advantages. Now we’ve already talked a little bit more about that. For most the target retiement age is 60 however if you’re a target age is 40, that’s, that’s still a long way away. There’s a limit on how much money you can put into this tax free environment and that $1.6 million. So that’s actually a terrific environment to have a lot of your retirement savings in.

Aussie FIREbug: Let me see if I can if I’ve got this right. Let’s just say for example, someone’s done really well for themselves and they’ve got $2 million in their super fund. When they hit their preservation age and they want to start with withdrawing money from this fund, can they choose to only pull the 1.6 out of that 2 million into this into this retirement account that you spoke of in the tax free threshold and keep the other 400,000 in, in the super fund that’s taxed at the 15%?

JAMES: Yeah, they could. They could take the whole $2 million out of super if they want, and place it in a bank account. The other thing they could would be transfer $400,000 out, shove it in a bank account, put $1.6 million into the the account based pension. The third is what you’d suggested leave the $400,000 and just transfer 1.6 million out of the account based pension.

Aussie FIREbug: When you say you’re transferring it into the account based pension, is that all done within the one super fund and are you selling off the assets to bring it into cash to put it into that pension to withdraw from it? Or does it, is there just a, a definition within the super fund that says this portion of the portfolio is now in the asset based pension and they can start living off the dividends from the share portfolio or how does that work?

JAMES: So what’s happening, but most funds will have an account based pension but it’s a separate product. Right. So this is actually one of the, one of the things that many funds are trying to try to deal with how they, how they can ensure there’s not a sort of a capital gains gains event. In terms of moving from an accumulation phase into an indirect drawdown phase there are some trickier things that thefunds are dealing with. One of the big funds I worked with was Australian super, but I could pick a hundred a hundred funds that would have similar arrangements. You, you’ll be able to essentially essentially just start a new product, transfer your money within from the accumulation phase within Australian super into their account based pension withdrawls from that point.

Aussie FIREbug: So if you had shares in the accumulation, let’s say that your if you’re with a super fund that you can pick your portfolio quite well. Like I know i am with vision super…. And I hope they’re good by the way!

JAMES: Yeah, I know, I know, I know vision there are there, I haven’t worked for them, but I know, I know vision super and they are a pretty good fund.

Aussie FIREbug: They are an Industry, super fund. I’m pretty sure. But yeah, so let’s get on with them. And my split, like my portfolio allocation with them is I think it’s 55% international, 45% Australian. And that was, I think the most, the riskiest. I could go, I just went full. Like I went in there and said, I want the most riskiest option on what all shares, I don’t want any bonds. And they had an offering for that and I went for it. So in that example, if I’m moving from the accumulation to the pension fund, even though it’s a new product, are they just going to say, you’ve got this example, you’ve got $1 million in your accumulation fund, we’re just going to deplete that and then spin that same million dollars in the exact same units of shares in your pension fund that you now have to sell off. You know, I know there’s a compulsory withdrawal each year or something. Do they, do they literally do that or do they act, do they have to cash out and, and put it there as cash?

JAMES: Yeah, so this is, this is actually one of the things if everything’s in a poor fund, so you’re not treated as an individual within the fund. And this is one of the challenges that the funds have. If you’re an individual and all of the assets were in your name and that the individual shares are your name then that’s treated differently to the way it is a pooled fund within the super account. This is not my particular area of area of expertise, but generally all of the capital gains are going to be taxed within the fund. I don’t think that you within that situation inccur a capital gains tax but the money that’s moving from accumulation to pension is treated at the fund level. I am probably given a bit of a waffley answer here because I’m not that good on the detail on that particular event.

Aussie FIREbug: All right. I’m interested to know it’s, it’s sorta sounds like they’re just giving you it in cash and then you withdraw it down from cash. But I’d be interested to know that you’ve you could have it actually as a portfolio because, you know, a big part of FIRE is that alot of people don’t want to sell down their portfolio. And it, to me it doesn’t make sense if you’ve got a big enough portfolio, why wouldn’t you just keep living on the dividends? So if you can’t withdraw those shares into the the pension mode then That’s, that’s interesting. But anyway, we’ll move on to the next question. Next question. So let’s talk about the differences in super funds and what they offer. It’s so hard to compare funds these days because they’re all offering something beyond just the management of your assets. They have different types of insurance they might offer co-contribution depending on where you work, financial help different management fees, et cetera, et cetera. Is there anything someone should look for when choosing a super fund If they’re planning on retiring early? Other than the obvious management fees, which is what the majority of people in the FIRE community just look at, they just look at the management fees. How well are the assets going to perform? Is there anything, any key things that we should be looking out for?

JAMES: I think there’s some, you talked about the obvious, you talked about the obvious things. I, I’d say I’d say you look for a fund that’s got a reasonably diverse investment before portfolio so you do have the opportunity to get access to a range of different investment options, management fees are important and really important as are administration fees and advisory fees. The fees for that advice can be quite low. That’s the sort of advice that’ll help you with things like transitioning to retirement within the fund. So I think that’s worth looking at. Insurances are certainly worth looking at cause there’s some, there’s some tax advantages to having life insurance within super. So that, that can also, that can also help you. Do you mind if I take a very quick tangent on that?

Aussie FIREbug: Yeah, go for it. Yeah.

JAMES: So so that’s actually one of the advantages for people that people within the FIRE community that want to see, what are the benefits of, of super before they retire? Well one of the things that you can benefit from super before you retire is by actually having your life insurance sort of death cover, total and permanent disablement or income protection, that’s often going to be cheaper as instead of your after tax dollars going to buy death cover or TPD cover you’re actually paying for that out of the super fund.

Aussie FIREbug: Yeah, it was, it was a sort of an open ended question really because there so many people look for different things like one size doesn’t fit all. But in, in regards specifically to the FIRE community, it seems to be the general consensus that the lowest fees are the best options, which is one point that you made to like for the investment options is usually on the top of the list for anyone trying to reach FIRE. And, and just on your tangent as well, it was was gotta be a question a bit later on, but I’ll jump in now. So you mentioned the insurances. Is there any reason someone would have those types of insurances, the income protection TDP and so on? Is there any reason that you would have them outside of super verse inside a super? Are there any pros to that?

JAMES: Yeah, so there are, there are some reasons why you might have it outside of super, but firstly, there’s a couple of the couple of advantages, but inside of super are that tax advantage that I talked about. The second reason for insider Inside of super is many super funds have what’s known as a group insurance policy. That means you, you automatically get insurance cover as part of this big group policy. And that means everyone within the fund is insured. And so if for instance, a funds such as Australian super you’ve got 2 million members so the buying power they have got for a pretty good insurance policy is just terrific. So you get this automatic cover at pretty lo cost and there’s tax advantages for those premiums being paid for within your super account. So yes, there’s really good reasons to have it inside super. One of the disadvantages is that there are some limits to how much cover you can get within super. So you can find that you can find that if you’re particularly high income earning, you might find that insurance within super doesn’t exactly meet your need. But you might want more than you’ve got significant debts, you significantly exposed, You’ve got lots of kids, I don’t know, but you want a lot of cover, you just can’t get enough super, so that the first reason you might have to go outside the group policy and get some additional cover outside super. There’s also limits in the product design within these group policies so you might find I want a different type of total and permanent disablement cover or I want a different I want a different type of income protection than is available to me because of my particular circumstances. So there are reasons, but those reasons generally would apply to the minority of people. I think the most people most of the time would do pretty well to have had insurance within super.

Aussie FIREbug: That’s great answer James. I definitely didn’t know that. And you make great points about a lot of, a lot of these, the answers to these questions like there isn’t a right answer to a lot of these questions because it is very circumstantial, you know, it good to, to learn the pros and cons for each side. Onto the next one. Children and inheriting super. How does that work?

JAMES: Yeah, another, another area where it’s getting a little bit, it’s a little bit tricky. so the first thing is that there’ll be different things that occurring when you’re retired versus when you’re still working, working, et cetera for example: trusts, binding nominations, testamentary trust or there’s a bunch of different things that are going to be involved in children inheriting super. Different taxes are going to actually apply kids getting super. If as an example, you’re 50 and you die and you don’t have binding nominations and different trusts in place, your fund will basically make a judgment about who are your dependents.

Aussie FIREbug: Interesting.

JAMES: And so, and this is actually a source of, it’s sort of a terrific, it’s sort of in some respects a, a terrific principle, but it also can be quite a complicated principle because the fund is not the oblidged to give the money to your estate. They are obliged to give the money to your dependents and they make a judgment as to who your dependents are. And so different people can say, I’m dependent on, you know, Matt, you know, I don’t know if you’ve got kids or anything, but let’s just say your kids.

Aussie FIREbug: No, not yet, not for a few years.

JAMES: So hypothetically you may have no dependence or you, might have a partner, et cetera. If you’ve got a partner it’s likely, it’s likely the fund will decide that your partner is your dependent. So the money in your, the money in your super account plus any insurance you’ve got, your death benefit would go to your dependent in your case, that’s probably just your partner and then share your would get all of that. So they will essentially make that call. If you’ve got no dependence and there’s no one that’s got any claim on being dependent on you. Sometimes it can be your parents might be dependent on you, it could be your partner, it could be your kids, it could be some cousin, it could be all sorts of things, it could be a flatmate. There’s all sorts of people might be determined dependence, but if there’s no dependence, it would then go to your that that money would then go to your estate. As you can see by this idea of the dependence it’s different. It is actually different to your estate and you do find that if for instance, you, you have been married, you have had kids that’s broken down, you’ve started up another, you’ve started up another relationship, you’ve now got a partner, but you’ve got an ex with, with kids, it starts getting quite complicated. You dislike your ex and your disowned and your kids but you are sort of legally obliged to keep paying them money and now youve got a partner who’s living with you and sharing the rent or sharing the mortgage… Who gets that money and who’s determined dependent? It starts getting a bit tricky and complicated and I’ve sat on a couple of those committees from time to time sort of working out who the dependents are. Believe me, it’s, it’s, it’s hard and people complain and people challenge because there’s, there’s not a perfect right answer. You’re trying to make a judgment as to, okay, there’s $1 million here, we’ll give, you know, 200,000 of the partner will give 400,000 to the X. We’ll give 100,000 each to the kids.

Aussie FIREbug: The cat, the cat gets 50,000

JAMES: So it’s sort of good because the principal is the people that need that money and it was originally insured to ensure that those people that depend on you, that their livelihood are protected and you don’t suddenly just find through a whim a whole bunch of people that should be protected are unprotected. So its really, it’s a really important responsibility of the trustees, but it can also be quite difficult and messy. And as I said, there’s then other arrangements that people that are on top of the game, they can nominate beneficiaries, binding nominations, have trusts in place, et cetera. But you can, you can do a fair bit to protect your kids and ensure your kids get, get that money.

Aussie FIREbug: That was going to be my question, Like if you have something in your, will that specifically says where the super is if something happened to you, is that considered enough estate planning to sort that?

JAMES: No. The example I gave where the monies within the super fund and you, you’re dying at 50, 55 the trustees will definitely take into consideration your will and, and the estate, but they are not bound by that.

Aussie FIREbug: That’s, that’s very interesting. I don’t know if that’s a good or bad thing, I’ll have to think about that. We think about super as our money. Like if I write a will and I want my super to go somewhere, I would think that it would go where I want it to go. Do you know what I mean? But that’s an interesting system. I didn’t know that.

JAMES: Well, it is, and that’s important also because there’s an insured benefit and part of that insured benefit is for your feel dependence there’s who’s dependent, who’s dependent on you. And as I said it’s, there’s, there’s lots of, there are lots of views on that and in most cases it does by the way, it’s got to reflect, it’s gonna reflect that. But you could change, you could just suddenly change your will and all of a sudden people that were insured and part of your insurance benefit was because you had kids and you had debts and just just decided to, you know, you’ve met someone new and you change your will thenThat doesn’t, that doesn’t bind the the fund to, to honor that. They definitely take it into consideration. As I said, there are other arrangements, If you can do binding nominations and if youve got trusts in place or testamentary trusts and If you’re in the, the drawdown phase, there are, there are ways to deal with this. But for most people, they don’t have that in place. And as a result the fund will act in their best intent

Aussie FIREbug: I sort of said it like, you know the funds sit around and rubbing their hands together and like, yes, we get, we get to make a big decision now. But yeah, that, that’s a terrible situation for everyone involved. Y

JAMES: As you leanr about the situation you start to think Oh my God, as it starts to unravel, you find scenarios where somebody might have a second family or they might have some, you go, Oh Jesus, how are we going to deal with this? It’s not, it’s not terrific fun.

Aussie FIREbug: Sounds complicated. Alright, so next question. In the age leading up to the preservation age in your 50s and 60s, are there certain smart things to do and set up before Turning the fund into a draw down pension or before you hit that preservation age where you might be still working, is there any key tips and tricks that you can talk a bit about?

JAMES: Yeah, so I think there’s probably, there’s a few things that you can do. Obviously as you’re starting to get into your, 50’s is you’re getting pretty close to the time when you can access your super. So some of the decisions become a little bit more immediate. For a a 20 year old and great reasons to have money in super for 40 years by the way. But, but a 20 year old, it’s so damn far away for someone that’s in their 50s. They’re thinking, actually I can get this money back out pretty soon if I need it. So obviously if you’re going to be well below that $1.6 million cap that we talked about earlier, it makes sense to get more money into super to be able to access that to get the full advantage of that cap If you’re gonna have your money in an account based pension tax free, get, get as close to their cap as you possibly can.

Aussie FIREbug: As a just quick sidebar. I know it’s been spoken about you know, going after that 1.6 cap. I wrote quite a controversial piece/ on the franking credit refunds. I don’t know how familiar you are with that whole debate, the franking credit refunds, but it was going to affect the FIRE community quite significantly. And it was pretty obvious to me that the government was going after to that tax free threshold within super, within that 1.6. The way they were going about it was through the refund because to my understanding, if you’re in that 1.6 tax-free free threshold and you receive an Australian dividend that has a franking credit attached to it because you don’t pay any tax, you actually get that franking credit refunded. So there was a whole sort of wrought with that tax free threshold. But I thought that that, that was the issue in the debate, but there was a bit of politics being played within that campaign promise and they were going after they were going after the refund, they said they were going off of the refund, but really they wanted to get at the 1.6 million tax free threshold. Do you think it’s going to be around in 10/ 20 years time or like I know it’s sort of political suicide to, to go after it because there’s so many retirees who vote, but I’m, I’m interested. Like it just seems too good to be true.

JAMES: Well, they’ve already made, they had made some changes already in the sense that a few years ago they didn’t have the $1.6 million limit. You had a much higher tax free limit. So they’ve already restricted it to a degree, three years ago, you could have had $3 million in an account based pension and enjoyed all of those benefits. So it was, it was terrific. The point is they’ve already made some changes to that. The last thing I could do is hand over heart and say there’ll be no further further changes to that. I think they will continue. I think there’s actually, right now there’s a retirement income review that’s taking place that’s going to be helping the government make it, make decisions on how we have a better retirement income system. I don’t know what’s going to come out of it. I’d be, I’d be surprised if they got rid of it entirely because I think, I think you want to create incentives to keep their money in the system and not take everything out as a out as a lump sum and spend it. Right now a 60 year old could get access to all of their super, they could get all of that money out if they chose spend all of it and then totally rely on the age pension. I think the government was going to want to continue to create incentives for people to have their, keep their money in super or in the super system and that this tax free threshold is one of those incentives. I actually think that’s a good thing. They’ve also, they’ve also made some changes to the way they treated annuities In terms of the, the age pension, again, to help people have some of these products to keep, to keep money in super or other retirement products longterm. If they don’t do don’t do that and they do completely eliminate that incentive that it’s no longer tax free, there is likely some obligation and force people to transfer super into these products and then it, and I think that’s an even more onerous obligation. Imagine, You have to have it in, in one of these products they made. They made, they made by the way do that. But I think if they force people to do that, the payoff will be, they’ll still have that tech spray amount. I think, you know, if it’s, if it’s a discretionary sort of a voluntary approach, you have to create the incentive and the incentive is the tax benefit. If they, if they force people to do it, I think they’re still going to have to have some form of preferential tax treatment. But, gee, it’s, you know, I’m trying to predict what the government’s going to do and whatever. I’d really be surprised if they got rid of it entirely. But that wouldn’t be the first time I’ve been surprised in super.

Aussie FIREbug: Well, that’s the thing, It goes back to what we spoke about in the beginning of this pod. It’s, it, it puts people off if there is uncertainty and tinkering/changingthe laws. You know, like I said, there, there’s a fair percent of the FIRE crowd that just can’t be bothered with all that even they see the tax advantages, they see how beneficial it can be. But they’d rather just invest in their own. And I, I sort of fall into that myself, just because the preservation age is so far away from me. But if I was definitely a bit older and I was closer to it, then I would take advantage. But at the moment, you know the employer contributes their 9% and I haven’t put in any anything else. But Hey, that could change, you know as, as I get older, definitely. If it’s still around and the tax free threshold still around, I would assume if I’m earning any money leading up to the preservation age, it would be all dumped in.

JAMES: I actually get where you’re coming, you know, super industry in my early thirties, and despite working in the industry retirement saying that bloody long way away, I’m now, I’m now mid fifties. All of sudden that becomes a bit, a little bit more real. It’s sort of amazing how, how in your 20s and 30s it feels a long way away but in your 50’s and all the sudden it’s, it’s not as far away. But the other thing you asked about a couple of other things that people, can do. So for instance, you’ve got non-super investments and those, those sort of non-super investments, you, let’s just say you’ve got 100,000-$300,000 in your bank account that are white, leave it in your bank account…Certainly not for the interest rates, right? Let’s just say you’ve got that amount of money and you’re, you’re in your 50s. You, you can transfer $100,000 a year into your super account in addition to that $25,000. That’s, that’s treated effectively from a tax purpose. In fact, you can bring forward up to three years of that. So you could transfer in any one year, $300,000. So that’s one of the things they get more money into super, particularly if you’re getting to that point where you’re still working. You can see that there’s going to be some tax advantages having a whole bunch of money and super your below that $1.6 million cap and you’re saying, actually it makes a bit of sense for me to get some more money into the system now. And one of the ways that I can do that is by bringing forward these, this would be called non-concessional contributions and putting in one year I could actually get $300,000 into super. So that’s one of the things that you could do and there’s other things that you can do in your sixties if you’re downsizing your home that might be getting too late for your audience. There’s certainly other things that you can do later in later in retirement to, to keep some money and get and continue to get more money into the super system.

Aussie FIREbug: Okay. Well that, that was very interesting. I had no idea you could do that. So that’s you know, for someone listening, if you’re in your 50s, yeah, $300,000, I’m not too sure, like you said, how many people would have that in cash, especially in today’s interest rate environments. But Hey, if you have it, it absolutely makes sense to chuck it in there, especially if you can see the light at the end of the tunnel and your preservation age is there. Absolutely should take advantage of that tax free threshold. Now next question, I think these are extremely complicated, but if you’ve got any insight, it’d be appreciated. Self managed super funds, are they worth it for someone trying to reach FIRE? What are the general pros and cons of setting one up?

JAMES: This is a can of worms. But, it depends. Great answer. So some of the things, some of the things for most people, they’re probably not worth it. Self managed super funds require a reasonable amount of work and effort because a lot of the compliance costs, et cetera. If you don’t have reasonably substantial assets, then those costs are just too big a percentage of the via total total portfolio and your earnings. Once you enter the retirement phase, people said, actually, I don’t want to keep having to manage this. I’d just rather something that was simpler. So for most people I’d be saying it’s probably not worth it. There are some people that it is worth it though for instance if you’re running a business, you can, you can often have the business being run and owned by the, by the super farm. So they could be, could be some reasons for doing that. If you’ve got very, very substantial, very, very substantial assets, the compliance costs that I talked to talked about and the effort, well it’s not much more effort for $4 million a self managed super fund than it is for $100,000 self may super funded. So if you’ve got, you’ve got substantial substantial assets and you’ve got a business and you’re running aspects of the business through the super fund, then it can actually terrific because there can definitely be some real real advantages.rSo yes, and they, there can also be, and I’m really not an expert from there, so hopefully don’t probe, probe too much on the question. But again, you know, some of the, you know, some of the, some of the treatment of people going into, you know, into the pension pays, they can be in a drawdown phase. Again, there can be someadvantages the people within the self managed self managed super fund. So there are, there are, I think there’s definitely some advantage. Personally It doesn’t suit me and I wouldn’t do it. Get, gets get. That’s a classic one that gets them advice. There’s no, yeah, there’s hundreds of thousands of Australians have get they’ve got them and lots of those people It’s terrific for them.

Aussie FIREbug: Yup. I I did some research years ago into self-managed supervise just because I was interested and I’m like, like you said, so much of this is, it depends. It’s very circumstantial for the individual and from the research that I did, it was sort of similar to setting up a trust and putting your assets in a trust outside of super. We invest through a trust, but it is very complicated and it complicates things almost to an unnecessary degree. Yes, there is tax advantages Potentially for an, again, it depends on your circumstances. But if I could do my time again, I probably wouldn’t have set up a trust. Like, I’ve set up one now and we invest through a trust outside super and it’s working well and it actually has, has worked quite well for us because, cause we’re overseas at the moment and we’re not residents for tax purposes in Australia anymore and there’s some, some cool stuff I can do with investments back home. But it’s very, it’s like most of these, the answers here, it’s, there’s a lot, there’s pros and there’s cons and it, it really depends. I found for the self managed super fund as well, if you’re a high roller and you your have have got a lot of assets, it’s, it’s potentially worth it, but if you’re someone, and this is more relating to the FIRE crowd, usually people in the FI crowd, we don’t need a whole bunch of assets to retire on it. Like if someone has got more than well it depends where you live of course. But if you’ve got, you know, over 2 million, 3 million, 4 million like you mentioned, unless you’re doing fat FIRE, which is sort of the exuberant FIRE path, , you’re not going to have that, those type of assets. If you do have those types of assets, I agree, you probably should pay to get some advice and see if it actually is worth it for you. Moving on, I had some fantastic questions from the Aussie FIRE discussion Facebook group. It’s only a month old and We’ve nearly got 2000 members. So please anyone listening, feel free to join us and join in on the discussion. I posted, because this podcast was so requested, I posted a question to the audience, Do you guys have any questions? There were just so many responses, really, really good ones. I’ve got a few here that I’d like to read out, some of the ones that were, had the most likes on them. If you could just give your your general thoughts and an answer that would be great. So I’ve got the first one here. Is there any women or woman’s specific considerations to maximize the outcome of super it as an example, super whilst on maternity leave when your employer may not be contributing?

JAMES: Yeah, so really quickly they should be far more women’s specific considerations because women generally have less super in retirement for a whole bunch of reasons: salary parodies and time out of the workforce for kids, et cetera is another there should be far more. Some employers pay super on maternity leave. I think that’s going to become far more the far more than norm to be paying super on maternity leave. I think there’s some terrific groups. There’s a group called women in super that are doing, doing a lot of work to try and get more advantages for super and some other, some other groups such as AIST that are trying to do more work in this area. But to be honest a lot of it’s left up to the individuals to compensate for the fact that they’ve got time out of work you know, contribute early. If you can get your partner to contribute get spouse contribution that may be of benefit. I think there should be more done to compensate women. One of the legislative things is to actually pay women higher to compensate for the time out of the workforce. Yep. So different things like that.

Aussie FIREbug: Yeah. You touched on one I actually had no idea about. So can you, you can contribute to your partners super. Is that, was I hearing that correctly? Yeah. Well, there you go. Do you get a $50,000 cap in that regard? So if you do 25% to yourself, your own super, could you then contribute 25,000 to your partners super?

JAMES: No, you still get that same $25,000 tax free limit. But you can get a little bit of a rebate which i am hazy on the detail, but there’s actually a rebate for the spouse contribution I might say. I think there’s some sort of, there’s some thought that there’s a, an offset on your super contributions, I think up to something like $3,000 for spouse contributions. So there are still some tax advantages, but they don’t apply to your $25,000.

Aussie FIREbug: We can put it in the show notes. We can do some research and get the facts in the show notes after, after this pod. But that’s a really good one. I’m glad you brought that up. Thanks for that. Second one. And we haven’t really touched on withdrawal rates. So maybe if you just start with what’s a withdrawal rate, that’d be good. But it is, how do minimum withdrawal rates work in retirement? Why is there a minimum withdrawal rate to begin with, surely it’s in everyone’s best interest not to force people to take more than they need to.

JAMES: There are withdrawal minimum withdrawal rights if you’re in one of those account based pensions that I talked about earlier, there’ll be minimum withdrawal rights at different ages.

Aussie FIREbug: So just to clarify, We’re talking about, so you’ve got the contribution phase and then you’ve got the pension phase. So we’re talking about once you convert it to the pension phase, the, the legislative requirements state that you must withdraw a certain amount every single year is that correct?

JAMES: That’s correct. Yep. That is correct. For instance, if you’re a 60 year old, it it’s 4%. So it starts at around 4% and it increases right up to it. I think if you’re about 95, it can be something like 18% must come out. So there’s a whole age, age based tier. Basically as you get older, you’re having to take more and more out of your super each year. As I said,

Aussie FIREbug: Is the goal with that, that they want every single person to essentially, as morbid as it sounds, as they’re approaching death to have their super balanced run out. Is that sort of what they’re, they’re, they’re trying to do with those withdrawal rates?

JAMES: Yeah. Supers meant to provide an income in retirement that that’s sort of a key or, or supplement your income in retirement. It’s not meant to be a vehicle to have tax free lumps of money going to your kids. If you had $2 million in super and I was one of those pension cafes, pension, it’s incurring absolutely no tax. You take no money out, you die, your kids get all of that. So it’s not meant to be set up for that. It’s meant to be providing people an income. So, so they wanting to, they’re wanting to basically force people to take an income and withdraw money over there over their lifetime from their super. And if we all, you know, had an expiry date on our birth certificate, exactly are going to die they’d have those withdrawal rates exactly right. But that’s what I, that’s, that’s what they want. And in a way that, that actually makes sense. Whether the amount, it does say the amount is correct is a different matter because you sometimes find people are being forced to withdrawal more than they need. At a particular age and they have to take it out put it into that to put in their bank account or somewhere else where it’s taxed.

Aussie FIREbug: You’ve explained that incredibly well. Like it shouldn’t be, especially again, it comes back to these tax free threshold area that I could see the government saying it’s meant to serve the purpose of a person retiring, but it’s not meant to be a big inheritance for the kids in a tax free environment. All right, so this was quite a popular question that we had and I have a feeling, again, it’s gonna be ” it depends” , but if you could do your best, that’d be great. Does the investment approach within super change for people who are in their twenties to someone say in their 50s. Could you briefly explain the key differences between the decades starting from your 20s to your 50s in terms of an investing strategy within super?

JAMES: Are you thinking that you’re thinking this about this from the perspective of whether the fund has got a default approach to their investments or whether the individual should be investing differently in their twenties and fifties. Some funds have a different investment strategy. The people in their twenties than people in their sixties, they have life cycle style investments. Other funds might just have a default from everyone that’s in the accumulation phase and then a different default for everyone that’s in the retirement phase.

Aussie FIREbug: It was asked, it was asked by someone from the Facebook group, but I believe what they were getting at was in terms ofthe product that you’re investing in within the super fund. Financially speaking I’m sure your answer would be, you know, contribute as much as possible every single year, all the way up until retirement. But in terms of the the mix of the portfolio within the super fund, you know, more aggressive when you’re younger probably makes more sense and sort of what would you, what would you typically see someone shift towards as they move on later in life?

JAMES: Most people the longer your time horizon, the more aggressive you are in your asset allocation. So you’re more likely to in the 20s to be very heavily exposed to grow the assets. Matt, you talked about sort of your split up international and Australian equities now thats a long time horizon. If you’re going to live to 85 or 90 or et cetera, you’ve got 50 or 60 years then looking for the growth assets makes a lot of sense. And for the most, most people, they start to get more conservative later, later in life. Part of the reason for that is, is for a lot of people, they want more stability of income later in life. When you’re investing you want to maximize your returns as much as possible as the assets are growing. When you actually living off it, you want to have a little bit more stability of and there’s different ways to achieve that. But some people will have a more conservative investment option and some funds will will also have lifecycle style options, which, start to move people into more conservative asset allocation as they get closer to an inter an into retirement. But the other, the other side of that is if you think about all of the different layers of your income in retirement, if you’ve got money inside and outside of super, if you’ve got annuity type products as well, you can know, you’re going to have an annuity which gives you a fair bit of income, stability and certainty and then you can have a lot of other money in very aggressive asset allocations, so you can actually get that certainty and stability in other ways than just having him all of your money in very conservative allocations. The default settings for funds will generally be more conservative for people in retirement than they are in their 20s. Did I answer that answer?

Aussie FIREbug: I thought that was good. I’ve often wondered as well, and maybe you can answer this bit, the default allocation of the portfolio for majority of people is, as you said, it’s, it’s usually in the middle, if not to the conservative side, which I think is missing out on a huge opportunity for people in their twenties and thirties when you can’t even access this until another 30 years or 40 years potentially. Wouldn’t it make more sense for more super funds to have that slider as you by default? Don’t rely on the people to go into their super fund and change this because 90% of people never do it. If people do, do it it’s already too late in their 50s. I was given the conservative allocation through vision super and I to actually manually go in and change it, but I just feel like that’s missing out on a lot of opportunity. Are there is super funds out there doing this and sliding it up as you go through the decades. But yeah, it makes more sense to be super aggressive in your 20s and 30s. And then like you said, as you get to your 50s, you go in and change the portfolio to be a bit more conservative. And just quickly for those who may not have heard of them before, can you explain and you and your annuities a little bit in how they work?

JAMES: So there’s a few different, there’s a few different types of annuities Basically. Things such as term annuities and lifetime annuities provide a guaranteed guaranteed income stream to you. So you can, for instance, could buy an annuity was super money. You can actually buy it out outside of super money, but you could buy with some of your superannuation money and annuity that if for instance, it’s a lifetime annuity, it would pay you a guaranteed income for the rest of your life no matter how long you live. So if you bought, if you bought that lifetime annuity at age 60, depending how big an annuity you, you bought, it will provide you a guaranteed income for the rest of your life.

Aussie FIREbug: who’s guaranteeing that?

JAMES: They are basically backed by a life insurance company. So there, is that what might be called counterparty risk?The restrictions on how and the capital that you have to have to back these annuities, there’s some very tight controls on that. So nothing’s I guess perfectly yeah. The capital requirements that sit behind these, these annuities are pretty, pretty stringent. So the advantage of one of them might be if you, if you buy one at 60 and you live to a hundred, geez, you’ve got a terrific deal. You buy one at 60 and you lived at 61 you, you don’t care cause you died..but there’s no money going to your estate. They haven’t take up in Australia because of, because of that, that idea. But from a personal perspective I’d sort of like the idea of of having that degree of certainty. You know, I’m probably one of those sorts that would continue to have this is absolutely personal and not advice, but I’m the sort of person, very aggressive asset allocations. But I’m supplemented by an annuity. There’s also a term annuity that will provide a guaranteed income for a period of time. Some people might have a whole series of term annuity and they were a little bit different. I’m not an annuities expert. They’ll also be the annuities that that you can actually have some provisions where if if you die, you know, the residual value of those can, can go to, can go to partners, et cetera

Aussie FIREbug: Right. Okay. now I promise I’ve only got two more questions left. It’s, it’s been quite, quite a big podcast, so thanks for sticking with it. How does the first home super saver scheme work – at a bit of a tongue twister there? Can you just talk a little bit about that? Because I feel as though it’s a bit under utilized and the reason is because not too, not too many people understand actually how it works and what are the benefits of that game.

JAMES: The first time savers game basically allows people to save thier money in super for the deposit to purchase their first home. So you can volunteer contribute about 30,000 into super and withdraw that and withdraw that amount plus any plus any earnings on that amount to buy your first time. And if you’re a couple, you could both do it soyou could get 60,000 in. One of the advantages is that money is sitting there and earning at the super tax rate of 15%, not at your marginal tax rate.

Aussie FIREbug: So then you’re able to withdraw it without incurring any tax – I would assume? And then you’re able to put that down as a deposit for a home?

JAMES: This is, this is where I think it’s actually not the 15%, so I think it’s actually what’s called a voluntary contribution. So it’s money above that. I’m a tiny bit vague It’s a voluntary contributions above your above the nine and a half percent. So you have to make additional voluntary contributions. I’m not entirely sure whether they’re taxed at the 15%.

Aussie FIREbug: I’ll put them in the show notes so don’t worry about it. Yeah. So if you wanted to take part in this game, what are the, what are the processes? Do you, do you contact your super fund? How does that work?

JAMES: Yeah, you do it with the, you do it with the fund. I’ve never done this particular, I’ve never done this particular one. I don’t think that you have to tell the fund before you do it, that you can just do it. I am a bit vaugue on this so would need to check.

Aussie FIREbug: Ah, well we’ll put some links in any way to the show notes that you specifics about that. But the general idea, I’m, I’m pretty sure people listening got the general idea. And then the last one from the community do you get slugged with any capital gains tax, if youswitch super funds?

JAMES: Oh yeah. You could do, you could, you could just transfer your balance from, if you’re in vision super or I’m an Australian super we can transfer our balance from one to the other and we’re not going to get slugged with capital gains tax that’s going to be handled at the attend or that the, the fund funding. So, so whatever you’ve got. So say it’s $100,000, you can transfer that to another fund.

Aussie FIREbug: Right. Okay great. So no, it doesn’t trigger any, any capital gains is fantastic.

JAMES: It’s cause the assets, the assets aren’t in your name. There could be some different treatment with regard to, self managed funds where the assets are in your name, but that’s one of those more complicated scenarios. Unwinding self manage super funds can be a bit complex. That’s another thing to think about with your money and vision or my money and you know, whatever we could, we could transfer into another fund and that’s not a capital gain.

Aussie FIREbug: Yep. Great. Fantastic. Well, James, we have reached the end of the pod is an absolute monster. You did a fantastic job. If anyone wants to find you or contact you, what’s the best way they can reach out to you?

JAMES: That’s right. They can reach out to me. So I work for a company called super ed. They could reach me like a Richard by LinkedIn: James Coyle. I’m not sure the protocol, giving emails out but I’m probably happy to talk to people. They can email if they like it: [email protected]. I’m so happy for people to happy with people, but I’m also not a financial personal financial advisor. So if people are wanting very specific advice on things, i am not the person to go to.

Aussie FIREbug: Ill put a link to superED in Tin the show notes. And your email address too, just don’t blame me if you get, you’re getting tons of emails, James and your inbox blows up! Look, it was an absolute pleasure having you on. Thank you so much for coming on and sharing your experience and your expertise.

JAMES: It was lots of fun. Thank you, hopefully it’s useful to people. It was monster, you might need to do a bit of editing.

Aussie FIREbug: I’m sure it’s going to be a big hit. Thanks a lot James!

Podcast – Making Money On Youtube – Brandon

Podcast – Making Money On Youtube – Brandon



Have you ever heard stories about some people being able to make a living by uploading videos to YouTube?

You know what I’m talking about, those urban legends of a cat video going viral and the owner receiving thousands of dollar each month in passive income.

Today I’m speaking to Brandon, a 24-year-old Physio from Canberra who also runs the Aussie Wealth Creation YouTube Channel that currently has over 45,000 subscribers and generates over $3,500 thousand dollars a month through YouTube Ad revenue. 

Some of the topics we cover today include:

  • Why Brandon started his YouTube channel
  • How to monetise a Youtube channel
  • What’s important when creating content
  • How much money you can expect to make per views
  • Other passive income techniques Brandon has tried
  • The Young Investors Podcast

And much more!

Show Notes

Podcast – Ted Richards

Podcast – Ted Richards



Today I’m speaking to the former Fullback of the Sydney Swans, AFL premiership player Ted Richards.

Although Ted has had an illustrious career in football, he is also passionate about investing and is currently the director of business development at SixPark, an Australian Robo advisor investment platform. Today’s pod combines two of my favourite things which are investing and footy!

Some of the topics we cover today include:

  • Investing as an AFL player
  • What Ted learned in footy that can be transferred to investing
  • The power of rules-based investing
  • Why understanding behavioural economics is so important
  • Six Park Robo investing platform
  • The Richard Report
  • Quickfire AFL related questions

And much more!

Show Notes

Election Results & Strategy… 2.5?

Election Results & Strategy… 2.5?

In case ya missed it, earlier this year I published what turned out to be my most controversial article of all time (and it’s not even close). The Curious Case of Franking Credits and the FIRE Community of course.

The thing is, I actually really don’t like talking about politicians and what they say and plan to do at all. That piece was never meant to be political but after reflecting for some time now, it was always going to be that way due to the nature of the subject matter.

So why the hell would I ever go near it again?

Because even though I don’t like those 🤡, politicians do affect us in the journey to FIRE and I need to set the scene first in order to talk about how we come to the conclusion at the end and where we’re heading moving forward.

And the beauty of having your own blog is you get to write and publish whatever you want. I create content from my point of view and never claimed my writing was balanced. This site isn’t the ABC or some neutral FIRE outlet. I presented facts in that article with my opinion which I understand everyone isn’t going to agree with.

However, that topic was interesting to me (and a bunch of others) so if I’m offending you or you don’t like what I’m writing, maybe you should follow another FIRE blogger ✌


Franking Refunds Survived…For Now

Like Steven Bradbury before him, ScoMo and the Coalition skated past the ALP for a come from behind victory and with it, the franking credit refunds will remain for the foreseeable future.

This was a hot topic amongst the FIRE community and now that the election has passed, it seems like things should proceed as per normal right?

I mean, franking credit refunds didn’t get the chop so fully franked dividends are safe to retire on yeah…?

Well… about that

Whilst I think that the result of the election speaks volumes to where the majority of Australians priorities lie, I strongly believe that a lot of the policies the ALP were trying to win votes on will not be touched for a very, very long time. They were aggressive with their tax reforms, franking credit refunds being one of the smaller changes (CGT and trust distributions being a lot bigger).

This was supposedly the unlosable election for the ALP. Every poll in the country had them winning by a landslide. Sportbet even paid out on them winning two days early to the tune of 1.3M 😮

For them to lose in the fashion they did, especially after all the shit the Coalition has done during its previous term tells me that the majority of Australians did not agree with the policies they were proposing.

And it’s my opinion that aggressive tax reforms played a huge part!

Now I’m definitely not an expert on this subject and don’t know for sure (no one really does) but I doubt we will see such aggressive policies proposed by any party for some time. I’d almost bank on it that scraping franking credit refunds will not even be thought about in the next election. They’ll go after something else, that’s a given. But it won’t be the same policies that contributed to them losing the election this year.

Sidebar: I’m not here to talk about the policies or politics so for the love of God don’t @ me in the comments about it.

But that’s enough about the election.

Again, I really don’t like politicians in general and try to avoid talking about them as much as possible. I only bring them up because it’s important to set the scene for the decisions we’re making in regards to investing for financial independence which is what this blog is all about.

Which brings me back to the point about the franking credit refunds.

Whilst I truly don’t think any political party will go near them for a very long time. I also learnt something very valuable from that campaign policy.

The legislation risk associated with franking credits in general.

I was completely naive in thinking the government would not pull the rug out from underneath us and the refunds would be here to stay.

What a fool I am!

I’m just thankful we’re still in the accumulation phase and have a chance to mitigate this risk a bit moving forward (more on this below).

But wouldn’t it have absolutely sucked if you’d worked your whole life and built up a retirement fund utilizing franking credit refunds only for the government to turn around and change the rules on you!

The refunds are safe for now. But I plan to be retired for 50+ years. That’s a long time for people to forget what happened in 2019 and if I were a betting man, I’d wager that sooner or later, franking credit refunds will be back on the chopping block!


Are Aussie Shares Worth It Without Franking Credits?

The thing about franking credits for those who are chasing FIRE in Australia is that without the refund, they are worth a hell of a lot less and in some cases, will mean that you don’t receive any benefit from the franking credits at all.

Let me give you an example.

Mrs FB and I know that to fund our current lifestyle in Australia, we spend around $48K over the course of 12 months.

We plan to own a house one day, so if we remove our rent and add on a bit to cover rates, maintenance on the property, insurance etc, we get to around ~$42K at a guess.

The plan before the election was for us to split our dividend income 50-50 and pay ourselves the $18,200 (tax-free income threshold) each from Aussie franked dividends. Let’s assume that the dividends are fully franked.

We each would receive $18,200 in cash throughout the year plus $7,800 in franking credits each. This means that the ATO would look at us having a taxable income of $26,000 for that year (dividend plus the FC).

Here’s the math behind the grossed-up dividend.

Dividend % Franking Franking Credit Tax Before FC Tax After FC Grossed up dividend
$18,200 100% $7,800.00 $1,482 -$6,318 $24,518.00

The franking credits soaked up the owed tax of $1,482. This will still happen if the refunds were ever removed.

But more importantly, the franking credits refunded us $6,318!

Because we, as the shareholder, have already pre-paid tax @ 30% that was removed from the dividend before it hit our accounts. It’s only fair that this is recorded (the franking credit) and the ATO is aware of us pre-paying the tax so we can be refunded later if we paid too much tax for that year which in this example, we did.

This was always the intention of imputation credits. Not to only stop double taxation (which consequently it also does), but to ensure that income is taxed once by those obliged to pay it.

So the end result is around $24.5K each to fund our life after retirement.

That’s almost $50K! More than enough for us to live comfortably forever whilst factoring in inflation.

But if we remove the refund. We only end up with $36K between us.

That’s a whopping $13,036 dollars difference and means we need to head back to work. 

Or let me put it to you another way. You’re losing 28% of your return 💸


Tipping Point

I was on the fence for a long time before moving towards an Aussie dividend approach with Strategy 3.

A lot of people out there don’t realise that a major part of the dividend approach for me was not about total return. In fact, I even mentioned it in Strategy 3 that if I were to guess, I’d wager that Strategy 3 would slightly delay my FIRE date because of the less efficient tax method of income (dividends are less efficient vs capital gains) and less diversification.

We moved to Strategy 3 predominately because of the psychological aspect of receiving income that was not affected as greatly by human emotion (share prices) and is more anchored to business fundamentals (income of a profitable business that is passed to the shareholder via a dividend).

There have been great Australian based articles written that objectively looks at retiring on dividends vs capital growth and I constantly receive messages that link to studies showing superior returns for an internationally diversified low-cost ETF portfolio.

Guys, I’m a die-hard FIRE fanatic,

I’ve come across most of these theories and articles before! What’s missing here is the human element. We’re not investing robots. I’m not too fussed between minor differences in returns and place great value in simplicity and sleep at night factor.

I thought the trade-off of less international diversification and a slightly delayed FIRE date was worth retiring on dividends vs dividends + capital gains.

But everyone has their tipping point.

Without the franking credit refund, Aussie shares just don’t cut the mustard IMO.

The difference is just not worth it for us. But everyone’s circumstances are different.

For instance, those looking to retire on FATFIRE will not be as greatly affected by this change since they will have more of an income to soak up those credits.

And many people have rightly suggested to me that there are a lot of alternative strategies to generate unfranked income such as REITs, Bonds, P2P lending etc.

These are viable alternatives for some, but we want to continue investing in companies for now.


Mitigating Risks

Let me be quite clear.

I’m still a massive fan of the dividend approach.

But placing such an enormous amount of faith that politicians won’t change the rules around franking credits over the next 50 years just doesn’t seem logical to me.

I want to mitigate the legislation risk of a potential franking credit refund axing as much as possible but at the same time, continue our overarching investment philosophy of investing in great companies.

We want to reduce our portfolios franked dividends and take advantage of a more diversified portfolio again. Which means…

I kept the international part of our portfolio when we decided to focus on Aussie shares. And when the very real news of potential changes in franking refunds was mentioned, I felt such a huge sigh of relief knowing we still had some international exposure. I guess this just goes to show the power of international diversification. If one country stuffs something up, there’s plenty more out there so you’re covered… doesn’t really work if you’re all in on the one country though 😅

Given that I don’t think franking credits refunds will be there over the next 50 years (no refund for us basically means no credits at all). I would like to receive some income from international companies along the way. It’s not going to be as good as the Aussie yield, but it helps the situation and my sleep at night factor.

Also, with the help of capital gains, an internationally diversified portfolio according to almost every major study done of the subject, will reduce risk, volatility and increase safer withdrawal rates!


To LIC or Not To LIC?

This one’s quite straightforward. A LIC has to pay a fully franked dividend. An ETF does not. VAS, for example, has a franking % of around 70-80 % which means that part of the income is not franked.

As I detailed in my ETFs vs LICS article, they are so similar that we are basically splitting hairs when comparing the two. As such, the greater legislation risk associated with LICs to me has shifted my favour towards ETFs.

I want to make myself clear again. I’m still a fan of LICs. I love the dividends they produce and the two companies I’m invested in (Milton and AFIC) have goals that align with my own (to grow their income over time).

It’s just that A200/VAS are so incredibly similar but have the key difference in utilizing a trust structure and not a company. The legislation risk has tipped the scales in favour of ETFs for me moving forward.

This is purely a tax minimisation decision. It has nothing to do with changing the overarching investment principles (investing in great companies) or a shift away from Aussie dividends.

The FI Explorer wrote a great piece on a sceptical view of LICs which some of you out there have emailed me about. I agree with what is written in that article, always have. I never invested in LICs expecting a superior return. What I go back to is the mental aspect of investing. A lot of people who retiree will feel more comfortable living on a relatively stable smooth flow of dividends vs more volatility but a slightly higher return.


Strategy 2.5

Okie Dokie.

So here she is. The new…ish strategy moving forward.

It’s called 2.5 because it’s extremely similar to strategy 2 just with a few tweaks. It’s almost like we’re going back to strategy 2 and I didn’t think enough has changed to honour it with strategy 4.

Change 1

Firstly, with the addition of buying more international shares back in the plan, we will move back to a ‘split’ approach.

Our splits have changed slightly from strategy 2 with more of an emphasis on Aussie shares as the dividends are still attractive regardless of franking credits refunds.

We will be looking to maintain a split of

60% A200/VAS/LICs (Aussie)

20% IVV/VTS (US)

20% VEU (world ex US)

We’ll keep our two LICs in the portfolio but won’t buy any more units moving forward.

The plan when buying new shares is a lot easier than looking at when LICs are trading at a premium or not.

Before we buy each month, we will look at the current splits in the portfolio and purchase the shares which have the lowest targeted weighting.

For example, this is what our portfolio currently looks like.

So next time we buy, it will be to ‘top-up’ the lowest split, which in this case will be World ex US or VEU. The splits are all out of wack because we focussed on Aussie equities during the last 12 months. Ideally, you want to be as close to your splits as much as possible. When your portfolio reaches a certain point however, the market movements will be so great that you might find it hard to maintain your splits even by buying the lowest weighting split. But this will be a good problem to have since your portfolio at that stage will be in the 7 figures.

Something really cool about this strategy is that you’re always buying the split that is down. If one split booms but the others don’t, you won’t be purchasing more of that booming split.

Change 2

The second change we will be making is switching from VTS to IVV.

iShares Core S&P 500 ETF is extremely similar to VTS with a few differences but no major ones we’re concerned about. VTS is more diversified and 0.01% cheaper but is not domiciled in Australia and does not offer DRP. This means that we need to fill in the W-8BEN-E form every three years or so.

The W-8BEN-E form is literally 10 minutes of your time every 3 years and is often overblown in terms of effort, but nonetheless, the two funds are so similar that it’s worth saving the extra admin plus having the DRP option available which I’ve been looking to use as of late.

Here are their 10-year returns to just show how similar they are.

Change 3

The third part of the plan is a hybrid approach between relying only on dividends vs dividends and selling parts of the portfolio. IVV and VEU don’t pay a lot of dividends, but they still pay them.

IVV has returned 3.27% over the last decade and VEU has done 2.85%. Not great, but still cash flowing into the account. And more importantly, those dividends are unfranked income!

We will aim to not touch the portfolio and use the dividends from both Aussie and international shares to live on. If it’s a bad year, however, we will look to sell-off some units to cover the shortfall.

I’ve already gone into why selling parts of the portfolio is perfectly ok if you allow for it to recover in strategy 2. In fact, from a rational market point of view, there’s really little difference between selling units for income and having the company pay you via a dividend. In theory, both should have the exact same consequences. But markets are not rational so they vary to some degree and is a prime reason why we like the dividend approach more.

How It Works

Let’s look at how the newly allocated portfolio would have done during the last 12 months. Here, I have created a dummy portfolio with all trades done exactly one year ago with the total of the portfolio’s value being a cool $1M which is what we’re aiming for.

Aussie equities (I had to use VAS to go back far enough) @ 60%
US (IVV) @ 20%
World ex US (VEU) @ 20%

$46,809 worth of dividends ain’t bad and is more than of FI number of ~$42K!

Bumping up the weighting of Aussie shares to 60% (it was 40% for strategy 2), plus the lower dividend payments of our international shares have actually generated enough income for us to live off during the last 12 months.

But this was a particularly good year for Aussie shares and it won’t be this good all the time. We will save any extra income during those good years to create a cash buffer in preparation for the bad ones that will no doubt come.

If it’s a particularly bad year for dividends, we will look at selling off some units to cover our expenses.

The other thing is that the likelihood of us not earning any money in retirement is extremely low. I’ve covered this in what retire early means to us in the context of FIRE.

I’m extremely confident that the dividends from a $1M portfolio that is weighted to 60% Aussie shares plus any additional income will be more than enough for us.

Selling off units is there as an option but I don’t think we’ll need it tbh!

Time will tell.

To summarise strategy 2.5

  1. An internationally diversified portfolio consisting of 60% Aussie shares and 40% international
  2. Buying IVV instead of VTS moving forward for DRP and Australian domiciled.
  3. Buying Aussie ETFs and not LICs due to risks associated with franking credits. ETFs don’t pay fully franked dividends and are impacted slightly less in the event of legislation passing.



Stop Changing Strategies Dude!

This is you

“Man, you flip flop more than my thongs! Stick to one strategy mate and stay the course. If the axing of the franking credit refund caused you to change strategies, you were never in it for the right reasons.”

And this is me

“Yo! The overarching strategy of investing in great companies has never changed. There was definitely a major difference between strategy 1 and strategy 2. But the fundamentals from strategy 2 to 3 and now to 2.5 are exactly the same”

The thing is, investing in great companies should always be the number 1 goal. All this other shit comes later.

The issue with picking the good companies from the duds is that it’s really hard to do. Which is why index investing is so cool.

The tweaks between our strategies are really fine-tuning our portfolio to meet our specific needs in the following areas:

  1. Mindset/sleep at night factor
  2. Simplicity
  3. Tax minimisation
  4. Mitigating legislation risk (something I hadn’t considered before)

I think everyone should be a bit flexible with how they invest to a certain degree. Picking one strategy and literally not changing anything during your whole life seems unlikely. Franking credit refunds are a great example of this.

And what’s to say the government won’t impose some stupid tax on other asset classes or something else within our life?

It would be ridiculous to suggest that if the government turned around and started taxing Aussie shares an additional 30% that everyone should just ‘stay the course’ and not look at alternative methods.

Everyone has their tipping point when enough is enough. And even though the refund remains, for now, I’m looking at protecting against this potential rule change without drastically upheaving everything.

I think strategy 2.5 is a nice balance between everything that’s important to us in an investing strategy.



I’m still learning as I go.

Judging by some of the emails I get, you’d think that I’m some sort of investing guru which couldn’t be further from the truth.

This years election taught me a valuable lesson that I hadn’t considered as much as I should have before.

The legislation risks for investing in general but particularly the very real possibility of no more franking credit refunds one day.

For us and I assume a lot of people chasing FIRE, franking credits without the refund in retirement won’t be worth the concentration risk or the ~4% yield (still pretty good) when you consider that you’re losing up to 30% of your return due to the additional tax that you otherwise wouldn’t be paying had you invested in something other than franked dividends.

Although not completely, Strategy 2.5 mitigates this potential change by re-introducing international shares back in the portfolio which reduces our reliance on Aussie dividends. It also makes other small changes as mentioned above.

When we made the shift away from property to focus on shares, the number 1 goal was to invest in great companies. None of this other stuff is as important as that. Index investing means we don’t have to research which companies are going to be good or bad. It filters that stuff out for us.

Because we don’t have to worry about choosing the good companies from the bad, we can instead spend our time to tweak our strategies so they align with what’s most important to us.

Mrs FB and I optimise the portfolio to improve these areas:

  1. Mindset/sleep at night factor
  2. Simplicity
  3. Tax minimisation
  4. Mitigating legislation risk (new)

Strategy 2.5 improves on all of these areas whilst not uprooting our investing fundamentals which is what any good tweak should do!

That’s it for now.

Let me know what you think in the comment section below 🤙


Spark that 🔥

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