June 20, 2020
Welcome to a fresh edition of Strong Money Q&A – where I answer a bunch of questions sent in by readers.
These posts are to provide you with more thoughts on certain topics, or situations that don’t require a whole blog post.
This week we’re talking about…
— How to answer the question, “what do you do?” after reaching FI
— Growth vs income when retirement is 10 years away
— Switching to a more aggressive option in super
— Will the government remove franking credits to pay off their debt?
— What I think of the “FANG” ETF
— Invest in a joint account or separately?
— Weighing up marriage, kids, and freedom
Friendly Disclaimer: Remember, nothing on this blog is personal advice. I’m not an expert on tax, investments, or anything really. Please do your own research before making any financial decisions.
Hi Dave. I’m 34, with 3.5 kids (one on the way). We have a paid-off house and are about 1.5 years away from reaching FI.
Just wondering what to tell people when they ask what I do for work?
I think I’ll start another business and take on some other projects/volunteer, but a bit concerned about the green-eyed monster and being judged during the downtime.
First, congratulations on getting to this point! You point out an interesting dilemma. As I see it, you have a few options…
— Tell people you’re taking some time off and are living on savings.
— Say you’re just having a break before you get started on something new.
— Tell the truth – that you have enough savings/investments to support you and don’t need to work (or while you decide what to do next).
The important part is that you shouldn’t feel guilty about anything! You’ve earned the right to do whatever the hell you like at this point! And taking time off and going into cruise mode for a while is just one example.
So for a while you’ll be fine by saying “we’re taking some time off.” Later on, you’ll start some new activities when you get around to it and you can say, “I just do X part time.” And if they wonder how, you can simply say, “we have some savings/investments and don’t spend much, so we manage okay without working full-time.”
This helps it sound like you’re not saying “I’m rich,” which unfortunately is what the average Aussie hears with any statement like this. Instead, they’re more likely to think you’re just a regular person with some savings.
Regardless, some people will still think certain things about you for being different. That’s just the way it is when you’re not a sheep! In that case, let them be the ones who feel uncomfortable.
Thank you for all your work – it’s a great guide for people at every stage of an FI journey. My question is about asset allocation.
My partner and I are aiming at a dividend-based income in retirement. But we’re about 10 years away. We have decided to focus on growth with the plan to re-balance the portfolio gradually towards income as we approach our portfolio goal.
However I haven’t seen others do it this way, as they tend to go for their income-focused portfolio early and just reinvest the dividends. Why is that?
We do reinvest the dividends we get, but it isn’t our focus. We would rather get the greater overall growth now. Is there something I’m missing?
Appreciate the kind words, and the good question!
Growth first, then income later sounds super logical, and it is in theory. But in practice it’s less simple. Here’s a few things to consider…
— Growth first likely means mostly international shares. Though as I explain in this post, there is no tax savings from this approach. Despite the common assumption that dividends are taxed highly, in Australia this isn’t the case. Net returns are not hurt by our higher dividends. In other countries it’s different.
— If planning to switch assets later to higher income shares (likely Oz), this could be tricky. At that time, international markets might be down while Aussie market is doing fine. Plus, international shares are affected by currency movements, which could also have an impact. Unlucky timing here is an extra risk to your FI date.
— Further to the above, selling down a portfolio later to switch assets will likely mean a decent tax bill to pay. This hit to your net worth isn’t ideal obviously.
Typically, it makes more sense to create the portfolio you want to have in retirement, so there is no worries around the above issues. It’s just simpler and easier to manage.
Combining both Aussie and international shares will result in a still-decent income stream which should also have decent growth over time. But there’s generally no right answer with these things, so find whatever works for you.
As a young investor (28), I’m aware that it’s better to have my superannuation in a high growth or aggressive investment option. The expected returns in the long run are higher and I have a long time to ride out any market volatility.
At present my superannuation is in a balanced investment option, so I’m looking to move into a more aggressive option. However, I’m unsure how this will affect my current super balance when the market is so volatile.
If I move to a more aggressive investment option while the sharemarket is lower, does this effectively work like investing in the sharemarket and my current super balance will purchase more shares now
than it would have when the market was soaring?
I’m not worried abut short term losses in my super balance as I know I have a long time to recover until I retire.
In my view, it makes perfect sense for someone young to have a more aggressive investment option in super, like high growth or mostly shares. Like you say there are many decades to recover any losses and let compounding work its magic.
And yes, by switching to a high growth fund now from a balanced fund, your super fund will be forced to buy more shares to adjust to your new target portfolio which is now more aggressive.
Hey Dave. I’m interested to know your thoughts on the FANG ETF for more exposure to these tech and industrial companies?
I’m not really a fan to be honest. For a few reasons…
This ETF is still pretty small at only $40m. If it doesn’t become popular then this fund could shut down as it won’t be worth running for the fund manager.
The fund is extremely concentrated. It’s really a bet on 10 tech companies – which is fine, but I don’t really bother with things like that.
If you want to bet on tech/innovation, I would just buy a US index fund or a global index fund, which holds all the major tech companies anyway in a much lower risk, lower cost, more diversified way.
Think about it. If tech continues to be an increasingly dominant sector which hugely outperforms and these companies take over the world, that will be reflected in a US or global index fund anyway. All without the need to place a strategic bet.
Do you think the government will get rid of franking credits due to the massive debt it will have after the covid-19 problem?
I’m sure they will be trying to get money any way they can to pay off debt. If so, how do you think it will affect the value of LICs?
Interesting question. So far, ScoMo has said he’s not considering that. But who knows, things can change quickly. There’s no way to know what taxes will be increased or changed in the future. It’s simply too hard to say.
Remember, with government bond yields at less than 1%, the government can take on more debt and have absolutely zero problem paying for it.
So I think the worries about government debt are often overblown. Also, Australia has lower government debt than most developed countries around the world.
If franking was removed, then all Aussie shares would probably take a hit. Companies which pay large fully franked dividends, including LICs, may get hit a little more.
But in the run up to possible changes, it’s likely that most companies would aim to pay out extra franking credits again like they did before the last election. So the affected shares might even go up before they eventually lose popularity.
It’s all just speculation at this point. If those LICs then traded at a discount, would you consider that good or bad? Different people see it differently.
Losing franking credit refunds for Aussie investors would really be just losing the icing on our cake, so to speak!
I’m looking at opening a brokerage account. Not sure if I should open a joint account with my wife or 2 separate ones.
We are constantly changing jobs so its unclear who will be earning more income in the future. What are the advantages and disadvantages of each?
Well, given your future incomes are unclear, you could open an account in either person’s name (or both). Then, once things become a clearer who is going to earn more for a long period, you could start investing more in the lower earner’s name.
Separate accounts mean you have more control once it becomes clear who’s going to earn more. But a joint account is simpler because there’s only one account to manage and you never have to bother trying to forecast/guess incomes in an effort to optimise the tax outcome.
But either way, I wouldn’t worry about it too much. Things could still change in the future even after you decide what to do! Both options are a win, because you’re getting started investing which is fantastic!
Hey Dave. I thought it might be interesting for millennials if you did a post about mindset. From a female perspective there is a lot of pressure to get married, buy a home, have a career, and have a family.
I just feel that the journey at this stage in life (I’m 30 soon) to retirement is just working full-time and slugging away until freedom. But the downside is that I’m putting off things that are really important to me.
My partner and I would have married years ago if weddings weren’t so expensive – we don’t want to spend our hard earned savings on one single day! We really want to have children too… soon!
Do you have any advice for how we can bring back the fun and stop obsessing over retirement? It seems like purchasing property gave you equity which you were able to leverage to invest in shares and retire sooner. What about those of us who have no assets and are starting from scratch?
How do you deal with such a long term strategy, when there are all these social pressures and real desires to do things in life that would bring happiness but detract from that goal?
Wow, lots of questions wrapped up here. Let’s unpack this a bit…
First, everyone’s journey is different. Try not to have expectations around what your journey should be. It’s your life – nobody else’s! So forget what others expect of you and do what makes sense to you!
You can definitely do those things and still create the life you want. Reaching FI might take a bit longer, but if you’re happier along the way, you won’t care! Here’s some things to consider…
Weddings aren’t expensive. Big fancy parties are expensive! So do you want to be married, or do you want to have a big fancy party? I’d try to have a small wedding with just the absolute most important people there and keep it simple.
Also, kids don’t cost as much as most people think. It’s parents who make kids expensive. Yeah I know, easy for me to say since I have no kids. Fine. Check out this article by Mr Money Mustache on this topic – “What is the real cost of raising children?”
On property – actually, I wish we never bought a single property. It didn’t help us the way you might expect. I wrote about this a while back in this post – “Our Adventures with Leveraged Property.”
Since that article, our remaining properties have done poorly. It was actually our ongoing savings that really saved us and which creates most of your wealth over 10 years in most cases.
Starting again, I would go 100% shares for simple, passive income with no bills, debt or headaches!
In practice, all this stuff is about one thing – prioritising. If having kids and being married are your number one priority right now, then go for it, while containing the costs.
From this point, you’ll be as happy as can be since your top priorities are sorted. Then keep your lifestyle moderate, while you continue saving a bit and enjoy time with your little one.
When you’re ready, you can start getting serious about your FI goals, by heading back to work and ramping up your savings.
A different option is to go for hardcore saving for the next 5 years. Then you could probably afford to just work part-time while also having a child. Maybe this sounds better? Semi-retirement can work for a lot of people!
Your investments will provide some passive income, you guys can cruise for a couple of years while the kid is young. Later you could increase work and savings to eventually be fully-retired if you like.
You’ll have to sit down and decide on your priorities and which approach to take. But you do need to prioritise, because you can’t have everything at the same time!
Once you work this out, you’ll find it much easier and the stress and FOMO should melt away. Remember, if the FIRE journey makes you miserable, you’re doing it wrong.
That last one was more of a case study wasn’t it?! Anyway, I hope you enjoyed this Q&A post.
Do you have any thoughts on these topics? Let me know how you’d answer these questions in the comments below!
If there’s something you’d like to ask me, feel free to send it through via my contact page and I’ll do my best to get back to you.
Please check if your question has already been answered by using the search function on this site, or typing it into Google. Often when I’m trying to find something I’ve already answered, it’s able to be found pretty quickly in Google.
Thanks for reading, and I’ll talk to you soon!
Quick comment on Black Lives Matter: I’ve been asked if I’m going to write about this or do a podcast with Pat on this topic. The answer is, no. First, we create finance content, and have no insight into racial issues. Nor can I pretend to know what it’s like to be on the end of racism. Next, everyone else is already talking about the issue.
So there’s nothing I can add other than the obvious fact that people should be treated equally and held accountable for their own actions, good or bad. We’re each responsible for the world we help create by the way we treat other people. Something to remember.
Video of the week: In this short clip from the latest podcast, Pat and I discuss how we each increased our incomes so we could save more and help speed up our progress towards Financial Independence…