Sitting Down with Strong Money – Your Questions Answered #10

Welcome to the latest round of Strong Money Q&A – where I answer a bunch of juicy questions sent in by readers.  

These posts are to simply provide more thoughts on certain topics or situations that don’t really require a whole blog post.

And by sharing my answers with all of you, instead of one-by-one, it’s better value for everyone!

In today’s post we discuss:

—  Cashing out $20k from your Super fund.
—  Mortgage funds for high monthly income.
—  How index funds re-balance.
—  Short-term investments.
—  Investing for children.
—  Downsizing for FI.
—  How to track spending.

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.

 

Question #1

With the recent announcement by the federal government allowing Aussies to take out up to $20k of their super tax-free over the next 2 financial years, it got me thinking…

Would it be wise to take the $20K out of super and add it to my FIRE portfolio, so it can start contributing to my passive income pre-retirement?

I’m 37, so retirement is still a ways off.  Also, my super is invested 100% in shares (40% Aussie/60% international).  The only issue I see is the potential tax increase on any earnings given that super is capped at 15%.  Is there a benefit to doing this or should I just leave it in there?

 

Strong Money’s Answer:

It’s an interesting question.  I’ve even wondered this myself!

As you say, the downside is your money will be taxed at a higher rate, but the upside is the access and total control much sooner.  It’s really a personal choice at the end of the day.  

An extra $20k isn’t going to make a huge difference either way.  But if you wanted to access every dollar possible sooner, and aren’t really factoring super into your early retirement plans, then I can see the reasoning there too. 

Sorry for the non-answer, but I think both points are valid.  And just to be clear, most people shouldn’t even consider this unless they’re about to declare bankruptcy!  Those of us in the ‘retire early’ space are a different breed – where it’s strictly about moving cash from one investment account to another.

 

Question #2

I’m a follower of your blog (you recently featured another question of mine).  I understand you have some funds invested with Ratesetter. 

I wanted to gather your thoughts on the Trilogy Monthly income fund and how it compares to Ratesetter as a capital stable investment.  It has similar returns and its unit value has remained stable at $1 whilst paying high monthly income.

 

Strong Money’s Answer:

To be honest, I haven’t really looked at Trilogy or other mortgage funds much at all.  It does seem like a somewhat similar choice to peer-to-peer lending (higher risk, higher yield credit).

It’s been around a long time, so it gets a tick for longevity.  Part of me wonders why the yield is so high if it’s lending to property investors (unless it’s a riskier subset of investors than the banks will lend to?).

In this area, at least I can at least understand how Ratesetter can yield more – people are often borrowing cheaper than from a bank, because it’s in the area of personal loans/car loans/etc where banks often charge 10% or more!

I also can’t seem to find the default/arrears rate.  The fund says it “hasn’t missed a distribution”, but that’s not quite the same as “investors have received 100% of principal and interest due since inception” as with Ratesetter.

It could be fine, and the yield figure may be after arrears, but they don’t spell that out.  I’m guessing there’s no provision fund to cover future losses, so if defaults ticked up it could perform worse than Ratesetter in terms of missed interest or even capital losses.

Not saying it’s a terrible option – just some comments based on a quick look and without knowing much about it.  And as you mentioned, I have some funds on the Ratesetter platform, so I’m probably biased.

For those that are curious on how it works, I’ve written about peer-to-peer lending with Ratesetter here.

 

Question #3

I have a question in regards to how an index fund like VAS (Vanguard Aussie shares) returns investors capital back to them when it has to sell, to keep in line with the index?

I’ve googled the crap out of it and am getting nowhere.  I understand that being a trust structure they must pass on capital gains when assets are sold, but I’m struggling to see how it would affect my holdings.

 

Strong Money’s Answer:

By their nature, broad market index funds like VAS, don’t regularly have to buy and sell holdings to keep in line with the index.  This is a common misconception.

As companies grow and shrink in the index, they grow and shrink in the fund as well – no need for VAS to do anything.  That’s because each company started at the same weight as the index.

Let’s say CBA falls in value and BHP rises in value.  The index fund does absolutely nothing, and the value of those holdings change inside the fund, making them bigger/smaller automatically.

The only reason holdings change is due to companies being merged/bought-out, or falling out of the ASX 200/300 index, at which point they’re replaced with another company which enters the index.

On the odd occasion there will be some capital gains from these events that gets passed on to shareholders.  But for the most part, the index isn’t doing much, and therefore has very low turnover and is quite tax efficient.

 

Question #4

We’re going to buy our first home when my partner goes back to work in 2-3 years.  We have decent savings, but I don’t want to put it in the bank for 2-3 years.  So, what’s the best option for a 2-3 year investment?

At first I was thinking about Vanguard Balanced ETF, but also considering AFIC.  Wouldn’t AFIC be safer due to its stable dividend?  I can contribute at least $25k per year to either plan.

 

Strong Money’s Answer:

Whoa, steady up there!  Well done on your saving.  But 2-3 years is MUCH too short of a timeframe to invest in shares, even a balanced fund in my view.  You really need 10 years or so. 

The answer is, no AFIC wouldn’t be safer even though it has a very stable dividend history.  Because if the market falls 30-40% as it did recently, AFIC falls too, equally ruining your home-buying plans.

You want to make sure your cash is there when you need it to buy the house, so I would keep this money in a high interest savings account.  Unless of course you’re very flexible on timeframe and will simply wait it out if you get a bad run of returns in the market – then shares are okay to consider.

 

Question #5

I was wondering, what’s the best option for saving and investing for a child?  I’m thinking about Vanguard High Growth fund (VDHG) or Vanguard Aussie Shares (VAS).

I’ll invest gradually each quarter for 18 years in the name of my wife (she has lower income) and we’ll reinvest dividends.  I even think about education funds because it seems they are tax effective, but fees are higher and the money can only be used for education.

 

Strong Money’s Answer:

From those options, I would probably go for one of the Vanguard ETFs, and invest in the lower income earner’s name.  This will be tax effective, very low cost, and maybe even result in franking credit refunds. 

I’m 99% sure both of these Vanguard funds offer dividend reinvestment plans (DRPs), but if not, you can simply receive the dividends and add it to your quarterly purchase.  This also gives you complete control with no middle-man, unlike an ‘education fund’.

 

Question #6

Some people in the FI community include their home and super value in their outcome of when they’ve reached FI. 

In my personal situation, I own my $1m house, have $350k in Super and $100k in shares.  In my mind, I’ll only reach FI when I generate income from shares, and don’t include the assets which I need to live (my home). 

However, I am thinking of down sizing to a $600k home and investing the leftover into shares, to achieve more dividend income.  What are your thoughts?

 

Strong Money’s Answer:

Great question!  Honestly, if you can downsize that would using your wealth much more efficiently.

That extra money from downsizing would make a huge difference in the amount of passive income you’re generating.  Therefore, it has a huge difference in the level of freedom you have!

I would definitely do this, as you can still have a nice place to live for $600k!  So the only real difference is you’ll have much more dividend income too.  Win, win!

 

Question #7

Hi Dave, thank you so much for your amazing content!  So inspirational.

I just have one quick question and I wasn’t sure where to post it.  What are you using now that the TrackMySpend app has stopped?

 

Strong Money’s Answer:

Thanks for the kind words!  Lots of people ask this, which I find surprising.  The truth is, I’ve never used a spending tracker app of any kind.  Here’s what I do…

Once per week, I check our account and manually enter the transactions into different categories on a very basic spreadsheet I have.  That’s it.  Literally numbers in a column.  Just like you see in our household spending reports.

Doing this once a week makes sure there’s not many transactions to go through and is easy to remember.  The funny part is, I’ve only started doing this since starting the blog just to know exactly how much we spend, so I can share it.

On the way to FI we just kept a running estimate (which turned out to be pretty accurate).  No budget of any sort – we simply buy what we need.  Obviously, we do buy unnecessary stuff too, but not a lot. 

The most effective budgeting tool is developing the habit of questioning most spending outside groceries.

I find this to be simpler and more powerful than having a dedicated budget or setting up half a dozen unnecessary buckets, for example.  But don’t tell anyone, the Barefooters will come after me 😉

 

Notes

I hope you enjoyed this Q&A session!  Another great blend of reader questions this time round. 

Do you have any thoughts on these topics?  Let me know how you’d answer these questions in the comments below!

And if you have a question you’d like me to answer, you can get in touch through my Contact page and I’ll do my best to get back to you.  Thanks for reading!

34 comments

  1. The person in question 6 is in a very fortunate position. I would definitely downsize to the most modest house my ego could tolerate and invest the surplus into a low fee, dividend producing fund. You could pretty much hit FI straight away as long as you keep your spending down. You could access your Super at age 60…. Wonderful. I’m envious …

    1. Very fortunate indeed! I think lots of home-owning Aussies could downsize (if they wanted to), put their equity to better use and enjoy greater freedom as a result!

  2. One way to look at question 1 is a de-risking strategy. Super is a high risk option because it carries a lot of sovereign risk – that is to say the investments in super depend on the good will of governments and super funds to pay when you retire – they can and do change the rules all the time. They also carry a lot of regular risk (I might not make it to 65).

    Taking money out of super now is a way to de-risk that. Any warnings you read in the paper about $20k today will hurt your retirement by $60k or whatever figure assume that you take the cash and spend it on a new SUV (which is obviously a terrible investment) or you know, if you were actually laid off and spend the money on living expenses. If you just take the cash and put it in the same investment vehicle (i.e. shares) you are looking at a much smaller downside (basically it is the difference in tax rate between 30% and 15% on dividend income over the life of the investment). In return you gain complete control and de-risk the investment – so if the Govt decided to move the goal posts in the future you will be protected (Broke government have a habit of tapping any large pot of cash they can so Super is really a bet that current taxes will be lower than future taxes — if you believe this I have a bridge to sell…).

    If you invest in growth stocks (that do not pay dividends) then there is actually no downside anyway because there is no cash flow and only capital gains. To me, withdrawing super is a no brainer.

      1. Yes, it’s not a free for all… there are certain criteria you need to satisfy to access your super early. I’m not one of them, so no choice to make for me. But if I could, I would for the reasons Mike has outlined above.

    1. Interesting thoughts Mike. I think a lot of people share your views on the future risk/likelihood of super being mucked around with in the future. The control aspect of having the cash now definitely has value!

    1. Thanks for your input 🙂 I’ve only briefly looked at those and wasn’t totally sold so didn’t feel comfortable making the suggestion.

      1. I’m with SMA on this one :o)
        All earnings in an investment bond are taxed at the corporate tax rate of 30%. They can be tax effective for investors if they have a marginal tax rate higher than 30%, however you also have less control. Also, CGT discounts don’t apply to capital gains realised within an investment bond structure, so the after-tax return rate is reduced.

  3. With Q2 I echo Dave’s musings about how, given a lot of mortgage rates are under 3%, Trilogy are generating returns over 6% unless they lend on riskier securities or borrowers.

    1. Personally I’d be wary of mortgage funds that lend money to people the banks have rejected. If Trilogy and LaTrobe Financial are offering 6% returns then they must be lending at say 7%. Who would take out a mortgage with a 7% interest rate? Somebody who the main banks have turned down… High risk of defaults. Caveat Emptor… You may as well invest in a low fee LIC with exposure to the main banks.

    2. They could also be lending to people who are refinancing loans that are for lower amounts than the banks’ minimum lending amount (often $150k minimum). Even though, technically speaking, you can borrow the minimum and just not draw it all down, seeing a ‘minimum amount’ figure on bank websites could be enough for people who have smaller current mortgages to eliminate them as an option.

  4. Hi Dave
    Thank you so much for all your infos,because of your positif comment on RateSetter I am investing also with this platform,now I would ask you if you could provide an exemple how you do a spread sheet with shares and with RateSetter,do you need to record everything or just the funds you invest in,the profit you make and the expenses?
    Thank’s for everything again
    Gerard

    1. Hey Gerard, glad you like the blog! I don’t do much with spreadsheets to be honest. For tax time, with shares I use Sharesight to keep track of dividends etc. which is free to use up to 10 holdings. And with Ratesetter, you will be sent an end of year summary after the end of financial year, which you can use for tax.

      Any other expenses like phone/internet etc. I just usually estimate at the end of the year (as a percentage of how much I used those things for investing vs personal use), and it usually isn’t much, I just write it down by hand – no need for any fancy spreadsheets 🙂

  5. Q5 another option is to buy AFIC using a minor share trading account and turning on DSSP. If done correctly, the shares can be transferred to the child ‘off market’ when the child turns 18 CGT free.

    1. Ah yes, good idea Firefly. Although not sure on the tax rate of the wife in that question – if she’s paying less than 30% then obviously better to invest in her name, not use DSSP and get franking credits refunded.

  6. Love your Q&A,
    I would love to see you and a few other excellent writers on the panelist of ABC Q&A. The country needs some good sound realistic financial information, right now. Perhaps you could approach them with a relevant topic??

    1. Thanks for your support RetroMum! I guess that would be possible, has never crossed my mind to be honest.

      I guess the issue is that most of what we’re talking about would probably be considered ‘unrealistic’ by the masses and the crowd would turn into an angry mob, so bringing in people one by one and spreading the message the way we do, may be more effective? Not sure on that one, but it’s an interesting thought.

      1. Plus, a one-hour (or whatever it is) snippet of FI/RE doesn’t do the subject justice. I’ve been reading and researching everything I can for over five years on this topic and still finding new nuggets of info. It’s almost as divisive as climate change and that discussion / debate will probably still be ongoing decades from now…

        SMA is doing a great job of taking this to the masses. A bit like the spread of the virus, get it over R1 and it’ll take care of itself. Dave’s definitely doing his bit!

    1. “To be published by The Conversation you must be currently employed as a researcher or academic with a university or research institution.”

      LOL not even close 😉

      I’m really grateful that you guys think highly of my writing, we may just have to stick to sharing with family/friends/groups for now!

      1. I bet some of your readers (ahem!) are academics employed by Universities… Perhaps a jointly-authored essay? 😀👍

  7. Hi Dave — re Q1,
    Unless it is possible to access the $20K as the cash component of your super (which I don’t think you can) why would anyone want to cash out shares and move it after the recent large fall in price? You’d be selling those shares at a reduced cost/share and realising a loss. For example, my super is 100% equities (two index funds in Hostplus) and a bunch of that would have been purchased when prices were a lot higher than they are now. Cheers

    1. Yes, but if you’re going to purchase shares with the $20k then you haven’t ‘lost’ anything… you’ve just shifted an inaccessible asset (in some cases, inaccessible for many decades) to one that’s accessible now. That has appeal for lots of people, including me. My super balance is ridiculously high and I’d love to access some of it now.

      1. There is also a thing called tax loss harvesting https://www.investopedia.com/terms/t/taxgainlossharvesting.asp which might happen in this case – the super fund can realize a loss then carry it forward to offset future gains. So making a capital loss on paper is not always a bad thing. Of course you should always talk to a professional about these things, but you do bring up an interesting point, Scott :-).

        1. From what I’ve read, most if not all super funds are taxed on a top level basis, so one person’s tax losses are spread across the tax payable on the whole group’s future earnings. This is why it seems amazing that we’re ‘allowed’ to switch our investments tax free – tax is simply realised across the fund level, not the individual level. Unless of course someone is using the ‘direct’ option and picking their own specific investments, then tax seems to be tailed to the individual.

    2. Exactly as Chris has said – you’re not losing anything, simply turning it from an inaccessible investment, to an accessible one. You may be hooked up on cost basis/purchase price/etc as we’ve spoken about before – the loss has already occurred, so the same dollars will be invested even if you move the money from one account to another.

  8. We have decided to access my wife’s super and take the $20k over the next three months, she only has $28k in there and is 48. We don’t need to the money at all but just want the flexibility of being able to have in our hands before preservation age (whatever that may be the government decrees in the future) and invested our way. Luckily she lost all her hours due to COVID so gives us an eligibility clause.

    She only earns around $20k a year anyway so tax difference is negligible at worst, but we get to compound with our LIC shares as we see fit

    Wish I knew about FIRE 30 years ago, I would have lived my life so differently and be long retired now… as it is our numbers say we should be self sufficient when I’m 59 (currently 53)

    Still may be able to bring that forwards a year or two if we smash our savings rate for the next three to four years.

    1. Jeff, now that’s an idea… any ideas of how to go about it…. hosting etc..
      I’m a bit old school tech wise… lol

  9. Interesting read Dave.
    In relation to Q1…one thing not covered is this, if I’ve understood all the factors.
    I write it as an example.
    1) pull out $10,000 from super due to covid, which has no tax implications that I can see.
    First you got to meet one of the requirement e.g. drop in hours etc
    https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/early-access-to-your-super/#Compassionategrounds
    2) dump $10,000 back into super, post tax.
    Cap for post-tax, or “non-concessional” contributions is currently $100,000 per person
    However, I claim a tax deduction on these contributions
    Meaning, contributions will change from non-concessional (post-tax) to concessional (pre-tax).
    Which means they are subject to contributions tax at a rate of 15%, rather than the marginal tax rate.
    NOTE: this is capped at $25k including whatever your employee contributes. So $25k – $10k = 15k max contribution be employer. If you go over $25k you will be slugged another tax.

    How much do we stand to gain?
    Approx $2000, maybe.

    Ideally, we would generally salary sacrifice pre-tax, but not enough time by the 30th/6.
    Possible option for 2020/21

    Hope that tracks.

    1. Hey Brad. Yeah that may well work, have heard of such an idea, though it’s probably not in the spirit of the rules and is a little questionable. Some people are probably planning that as we speak.

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