Sunday, August 10, 2014

Retirement 101

OMG this stuff does my head in! I've spent an unbelievable amount of time trying to work out whether I can financially survive for the next 50 years without being a part of the paid workforce and I think I have at last come to a conclusion. The answer is yes, but.....

In order to survive I want to have a passive income, i.e. money from somewhere that doesn't require me to put in my labour to get it. From investments for instance.

I am completely uninterested in becoming a professional blogger or digital nomad. It just looks like too much hard work! I want to travel, take photographs and write about it for fun, not to make a living. I don't want to be forced into spending hours in front of a laptop merely to make ends meet. Not for me I'm afraid..

Having not had kids or a particularly flash lifestyle (ahem: a few years doing expensive dive holidays in exotic locations on liveaboards??) and a reasonably well paid career, I've managed to acquire some investment properties and pay off my primary residence. This is a good thing, because having debt in investments in Australia means you can reduce your marginal tax rate, effectively getting the government to contribute to paying off your loan.

That's all very well when you have an income and are paying tax, but once you stop working, debt is not a good thing at all. So the debt has to go, meaning selling off my investments. Preferably at a profit.

Unfortunately, that's when the tax man decides to put his hand out and take a little back again. Oh well, he did kind of help me in the first place....

Not all my investment properties have increased in value, in fact two out of three have reduced in value since I purchased them. This isn't really a big deal because one of them gives me a good income, and if I'm no longer paying interest on a loan (currently at 5.2%) this one property can give me enough income to pay all my fixed costs for the investment property and for my personal property, and maybe one day appreciate in value (wishful thinking??). Which means all I need to find is spending money. For food and discretionaries, and that's before factoring in renting my home out and going travelling...

So how to go debt free? First: sell the loser. That's the other property, the one that's devalued since purchase, and doesn't bring in enough income to cover expenses. I have almost paid this property off and after reducing the loan to $15,000 I am just starting to come out ahead. I made $72 on this property last financial year!!

The ATO allows you to offset a capital loss against a capital gain, so this property has gone on the market with the aim of selling it. I don't care how much of a loss I make, because this little baby is an albatross around my neck. Until it's out of the way I can't move forward. I'm pretty hopeful as the real estate agent is both pragmatic and keen to get a sale. And my tenants have looked after the place so well it's like a show home. I have truly been blessed with great tenants.

Once the albatross is gone, I can spend the next few months reducing my debt further. Yes there's still a lot of debt left. But my original plan of retiring in January, mid way through the financial year, doesn't benefit me at all. Because of a potentially huge capital gains tax bill from property number 3.

Property number 3 is the money tree. The house in Sydney I purchased before the boom, which is worth over 4 times what I paid for it. Sydney prices are ridiculously overvalued but when you're the owner of a nice little property in the Inner West, commanding a nice little income as well, you don't complain.

Only problem is that the income won't pay off the debt. It'll service the loan and give me enough to live on, but there's no room for debt reduction. I can't have it both ways...more's the pity :(

When I sell Sydney I make a massive profit, which is when the ATO sends in it's bouncers to politely muscle everybody out of the way and sweep up the spoils. Although I can reduce my tax burden by deducting the capital loss from the albatross, then reduce by 50% (the ATO is actually quite generous) I still end up in the highest marginal tax bracket for the financial year. Yeah, it's a tidy profit I'm telling you...

If I sell in a year when I'm also working that impacts my salary and how much I'm taxed as well. The thought of my salary increasing two tax brackets to the highest marginal tax rate is not a pretty thought at all! No-one wants to pay more than they have to, so if that means working an extra six months until the end of the financial year and then selling the nest egg, then I guess I'll grin and bear it. The added bonus of this plan is I get to reduce my debt even more :)

So: June 30, 2015 is my last day of work. This time I mean it. After that I'll be living on a minimal income until I sell my Sydney property, leaving me debt free and giving me enough savings to provide not just the spending money but extra to invest for more passive income.

And then the tax man can have his pound of flesh.

I'll be swanning off somewhere by then so as if I'll care, and my agonising over budgets will be a distant memory. However, getting to the bottom of this dilemma, perusing my book keeping over the last 2 years since I started tracking my income and spending on Excel spreadsheets, has allowed me to understand just how much I need to survive. To be able to factor in a ski trip to NZ or a backpacking trip to SE Asia. Or just living at home tending the vege patch. It's been extremely liberating, and although there's been a lot of anguish and fear about the unknown, I think I can finally say I'll be able to make the leap. Sure I'd like to do it in January, but those extra six months can make a huge difference to the bottom line.

This time it's for real. Well, once the albatross gets off my back....

1 comment:

  1. The albatross sold easily within 10 days of being on the market. Even got my asking price. One less headache, and a lot less debt. YAY!