No answers but just wanted to say thanks for the great content Dave!
February 1, 2022
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Welcome to the latest round of Strong Money Q&A!
If you’re new here, think of this like us sitting down having a cuppa and I share my thoughts on a bunch of different questions.
Today’s questions centre around the following topics…
Friendly disclaimer: Remember, this blog isn’t personal advice. I’m not an expert on investing, tax, or anything really. Do your own research before making financial decisions.
I work for the state government, I’m 50 years old, and I have about $300k in super. Should I focus on super and put my $25k per year in there each year, or should I put some aside for investing independent of super?
I also have a mortgage of $260k and $30k in an offset account. I don’t know what to focus on to build wealth and independence. Pay off the mortgage? Max out super? Or start investing on the side?
Great question, and a common dilemma for people in this age bracket. I wrote a post about this a while back: Mortgage, Investing or Super – Where Should You Focus?
If I was in this position, I’d probably pay off mortgage. This results in much lower expenses, which creates more freedom by itself. It also means less investments needed to live off later.
Once that’s paid off, I would then add more to super, and consider if I could work only part-time to still achieve that. There’s obviously a balance between building wealth to have more money later, and working less to have more freedom now. We each have to decide what works best for us.
Either way, by age 60, you should be in a pretty comfortable spot and your super would be much larger. At this point, it’d be easy to semi-retire and start a transition to retirement at about 60, knowing you also have the pension if needed later on.
Hi Dave. I have a curly one for you that I’ve been wondering about for a while. How do index ETFs work in practice as open-ended structures when the companies they hold are closed ended?
Take VAS for example. How can Vanguard infinitely create more units in VAS when the companies they invest in (BHP, CBA etc) have a finite number of shares available?
I have VAS in my portfolio, and I get the theory of indexes and ETFs, but I’m afraid I don’t really understand how they work in practice and what Vanguard actually purchases and how they are owned inside VAS.
Great question. I can’t profess to know the finer mechanics of how Vanguard manages its inflows and outflows in practice, but here’s my basic understanding:
There is so much buying and selling that takes place each day on the market – millions of shares – that there’s always more than enough for Vanguard and other index funds to scoop up and buy shares on our behalf to create new units of VAS (for example).
In reality, there might be more to it than that – like explained here – but overall, that’s how it works. In theory, if nobody decides to sell on a particular day, then I couldn’t tell you what happens!
That’d be a question for Vanguard around how they operate when volume is extremely low. It’s also worth keeping in mind, there is plenty of buying and selling of the Vanguard units themselves each day. So there’s actually two layers of liquidity instead of one, and there’d be many days where no new units are created.
ETFs are a pretty efficient and nifty invention, even though they are a little complicated. I don’t worry about any of this mind you, given our investments are overwhelmingly driven by the underlying companies rather than the technical operations of the fund itself.
If any readers have a more succinct (or more accurate!) way to explain it, do share. Hope that helps and sorry if I’ve put anyone to sleep!
Dave – I’m loving the blog and podcast!
I’ve got a question about the upcoming changes to Aussie tax rates, and the impact on FIRE investment/income strategies. As I understand, the Stage 3 changes are due in 2024, where everyone earning from $40k-$200k will have a marginal tax rate of 30%.
I understand it could potentially be reversed, however would love your thoughts on this, in particular:
— DSSP/BSP: You previously noted that these plans are of most benefit to people with a marginal tax rate over 30%. For anyone earning under $200k after the Stage 3 changes, would DSSP/BSP options be of limited benefit?
— Franking credits: At first glance it looks like the changes could significantly boost the amount of franked investment income that you could receive before you owe any additional tax? Does this make dividend investing more attractive than the ‘draw-down’ approach, particularly for those who will end up receiving higher passive incomes in the long term?
— Franking credit refunds: Most people will have an effective personal tax rate of under 30% after Stage 3. So presumably most people would be eligible for franking credit refunds? Eg. a person earning $160k of fully franked dividend income would likely have an effective tax rate of around 25%, making them eligible for a $5k-$10k franking credit refund.
Would be great to get your insights! At the very least, the lower tax rates should mean that most people will have some additional income to invest for FIRE!
Excellent questions. Firstly, tax changes are mildly interesting but should only ever be considered in passing.
As you mentioned, things can change so it’s not an area to invest too much thought or emotion into. To your questions…
1. Yes, it appears that the new tax rates would diminish the benefit of using BSP/DSSP offerings in the future. There’s no tax saving if you’re paying 30% or less.
2. Yes, it also means that you could earn higher dividend income before tax is payable. But this also benefits people selling shares to create income, and even those living off rental income etc, given lower tax rates.
3. Yep that sounds about right. You’d receive franking refunds up to a much higher amount of income than currently, which means higher net income in retirement for those with large Australian dividend streams with franking credits.
All in all, it’s a positive outcome for savers, investors, retirees, everyone really. Well, that’s if it goes through! I might wait until 2024 before mentally locking in those benefits. Best not to bank the gains before they’ve happened 😉
Hi Strong Money. Love your work and podcast! Any chance of doing a post around investing for kids?
I know people always crap on about trusts, but surely there is a better way. Thanks.
Thanks! Honestly, I may be an outlier here, but I don’t see a lot of value in investing for kids in any special way.
The easiest way is just to open a brokerage account (still in our name) and invest with the kids in mind. Later on, simply gift them the money. If kids own investments and earn more than $416 of income, the tax is enormous, so obviously that’s not a great option.
If someone already has a trust, or a complicated financial picture and may benefit from a trust anyway – say as a business owner or high net worth individual – then sure, it could be worthwhile.
But for most situations, I think it’s better to keep it simple and either add it to your portfolio as a separate holding that you mentally allocate to them, or open a new account to invest with.
Hi Dave. I have an 18 year old son and he has a few grand saved up to invest. We want to invest it ASAP.
I am teaching him about investing, focusing on long term returns after inflation and costs. I think your methodology is a great start. I have followed your thoughts on LICs and index funds.
If you were 18 and you were going to start your investing life with what you know now, how would you do it and what vehicles would you invest through? What steps would you take?
Great to hear you’re getting your son to start investing, that’s fantastic!
(Usual disclaimer: these are just ideas, I’m not telling you to invest in anything specifically, do your own research etc.)
What would I do? Well, I would keep it super simple! Open a low cost brokerage account (I like Pearler but any of them are fine), and start buying!
Investing in a single diversified fund is enough for now and is the easiest option, especially since the dollars are small. But also see what your son likes the idea of too (this is the key to hooking him on investing!). Whether it’s an Aussie fund or a US fund or maybe even an all-in-one fund would be a good fit like DHHF or VDHG.
Don’t overthink it. Just pick something simple and get him started. The magic ingredient is of course saving, so that’s where most of the focus should be.
As the dollars get bigger, he can think about investing in other stuff if it seems appropriate. But in the beginning, just choose one fund to build up. All the best!
Hey Dave, big fan of the blog and the podcast.
I have a question regarding why you regularly invest each month? Not why you dollar-cost average, but rather why the monthly frequency?
I know this is likely dependent on individual circumstances, but I thought it would be interesting to hear your thoughts about the trade offs between brokerage fees and earning returns.
Well my thinking is that every couple of months feels too far apart, and honestly, I’m not that patient! On the other hand, every week or fortnight tends is maybe too often when it comes to brokerage fees.
So monthly just feels like the goldilocks frequency, not too often, but not too seldom. Having said that, I will sometimes do multiple purchases in a month if there’s more cash than expected, so I’m not religious about it.
There’s actually a calculator which shows you the optimal investing frequency based on the numbers you plug in if you want to play with that.
Perhaps surprisingly, the difference over time is almost nothing! So I would go for the option that you find the most motivating or enjoyable! 🙂
Hi Dave. Love the blog and your FIRE & Chill podcast. I listen to them at work to keep me motivated on my journey to FI/RE!
I’m 30 years old, single, no kids, and also from Perth. I work full-time and have a good income. I have a negatively geared property that has had poor-to-average performance in terms of capital growth.
My idea is to sell this property and break even, maybe even have a small debt owing on the loan. Once that’s paid off, start putting that $470 per week mortgage money into my snowball of stocks. My question is what would you do in my position?
Awesome to hear it gives you motivation! Extra points for listening at work, haha 😉
For the property, it depends. If it’s not costing much, I’d maybe hold onto it till the Perth market improves (which it absolutely has since this question was sent in!).
If it’s not costing much to hold and there’s no equity in the property, then there’s really no opportunity cost to hanging onto it. Especially since this wouldn’t really affect your ability to invest into shares in the meantime.
But if it’s costing a lot and becoming a source of frustration, then I would consider selling. You mentioned $470 per week, but that seems extreme so I’m not sure this is an accurate number of what the property is costing you.
It’s worth remembering that if your out-of-pocket cost is high because you’re paying extra principal on your mortgage, then at least you’re building equity which you can recoup when you do sell (unless prices fall).
I hope you enjoyed this Q&A session. I find it truly awesome that this blog is managing to have incremental effects on people from such a wide age-range.
Just in this post alone, we spoke about investing for children, teenagers getting started, and those heading towards traditional retirement age. And that’s outside the big bulk of readers which sit in the 20s to 40s group!
If you have a question you’d like me to answer, send it through via my contact page and I’ll do my best to get back to you.
Thanks for reading. Now it’s your turn! How would you answer these questions? Do you have some additional thoughts for our readers? Please share in the comments.
No answers but just wanted to say thanks for the great content Dave!
Question 1s dilemma, Agree with Dave about it being a great question also!
Noel Whittaker addresses something pretty similar [a 200K PPOR debt/home loan at retirement] in his book ‘Retirement Made Simple’ [available at http://www.noelwhittaker.com.au for $29.99 when I just checked].
An example of Noel’s thinking can be found on page 250 under the heading ‘Paying off your home at retirement’. He uses a couple of pensionable age on a part age pension and with 600K in super and the affect of drawing down a lump sum of 200K to pay off the mortgage on retiring, including the beneficial affect this has to them of increasing their part age pension as a result of their sole other asset [super] being reduced [assets test and how if affects eligibility for the pension]. Noel sums up by acknowledging there are numerous factors to consider with any strategy, including age of intending to retire and a lack of access to super until preservation age [currently 60 years for the reader].
Noel’s book might be a ‘solid investment’ for Reader 1 or indeed anyone close to retirement age with similar concerns or just wanting to further their ‘financial’ knowledge relating to the topic of retirement . Financial advice in relation to reader’s 1 really quite complex question when you delve into the options might also be beneficial to them.
Oh, the obligatory disclaimer. I have no relationship in any form to Noel Whittaker [other than having this book and having read it cover to cover!] and I am also not in the financial services industry.
Hope this helps.
Thanks for the link about How ETFs are created. I found this interesting, I had never had considered this before.
Also regarding ETF units, even though it may seem there is limited liquidity in ETF units on the ASX, there is a market maker (or AP) who is required to step in and buy/sell the units as required if there are no buyers/sellers available in the secondary market.
Also the market maker can create/redeem the ETF units in broker parcels. For example, see the VAS broker basket: https://www.vanguard.com.au/adviser/products/en/detail/broker-basket/etf/8205/Equity/CRRD/B42HLD6/5. My understanding of this is the market maker creates/redeems ETF units in batches of 20,000 units, which contains 644x A2M, 573x ABP, etc. You can understand how this process keeps the ETF unit price closely aligned with the underlying NAV, because when margin opens up (e.g. the VAS price goes up higher than NAV), this creates an incentive for the market maker to buy the underlying securities, convert to ETF units and sell those for a profit margin, tending to bring the ETF unit price down again. And vice versa when the ETF unit price falls relative to the underlying NAV.