Month: October 2017

Why Retirement is Similar to Marriage

Within the financial independence community, there is a lot of talk about the date when you retire. Many people talk about having e.g. 4 years of work left before they save up enough money to retire.

However, I have heard of many people who retire who end up disliking retirement. Perhaps they realize that they don’t have enough money to to live the life they want to live. Perhaps they realize they are bored without a job.

The entire idea of having a fixed date at which you retire sounds very final and drastic seems very similar to marriage. When you marry someone, you bind yourself to being with someone for the rest of your life under threat of legal and accounting costs. The same applies to retirement. You bind yourself to not working under threat of having to apply for a job again.

What is the alternative to retirement?

Instead of retiring at a fixed point, a more flexible option is to experiment. It reminds me of a famous saying by Deng Xiaoping: “Cross the river by feeling the stones.” Rather than plunging into a raging river, it is better to cautiously and carefully feel for the stones as you cross. Deng used this principle to build modern China. It is always wise to try something at a small scale to see if it works before scaling it up.

An alternative retirement, in my opinion, is simply semi-retirement. Rather than quit your job, simply take a few months off to see how you fare during retirement. Another option is to reduce your hours and work part-time and to pursue projects that interest you rather than force yourself to do work you hate in order to get a promotion.

All this depends on how easily you feel you can find another job. If you have skills that are in demend and feel you can easily find a job again if you change your mind about retirement, quitting your job may not be a big deal. Nevertheless, when you are older, there is a degree of ageism in the workforce, so it always wise to exercise caution. Cross the river by feeling the stones.

 

BrickX and Shares vs Property in Australia

An online ad has recently made me aware of BrickX, which offers Australians the opportunity to buy “bricks,” which represent fractional ownership of residential real estate.

In Australia, many people are convinced that property is a great investment, but I have always believed that shares are better. In the shares vs property argument, most people claim that property is safer than shares, but there is no proof for this. The safety of shares depends on the underlying business. Shares are nothing more than ownership of some business. For example, if you own Commonwealth Bank (CBA) shares you own a portion of the CBA business, which entitles you to a portion of its profits in the form of dividends. If you own enough CBA shares, you can wield enormous influence by e.g. voting in directors. The bottom line is that shares are only safe as the underlying business. Residential real estate is also a business, but that business is houses. If you created a company, use that company to buy a house, and then list that company on the stock exchange, the shares for that company should in theory be exactly the same as directly buying residential real estate taking into account any costs of listing the company or any economics of scale gained.

The launch of BrickX allows people to buy residential real estate in a similar manner to buying shares.  The video below provides a perfect introduction to BrickX.

In my opinion, one of the main problems with residential real estate is that they provide very low yields, and a listing of the properties on BrickX clearly show this, with rental yields of around 1 to 3 percent.

brickxpropertydetails

Of course, someone could argue that even though rental yields are low, the historical growth of around 6 to 9 percent per year in capital gains is impressive. But it is not. For example, STW, an ASX200 ETF, has historically returned 9 percent per year over the last five years with dividend yield of 5 percent. Commonwealth Bank shares have returned 8 percent per year in capital gains with a whopping 7 percent dividend yield.

cbasharesasofoct2017.jpg

Not only are yield and capital gains better for shares, but there are huge tax advantages for shares versus property. The dividend yield of CBA and STW have franking credits baked in, allowing you to reduce taxes. Many people believe that property has an inherent advantage through negative gearing, but negative gearing is available via shares and ETFs as well. It is possible to negatively gear into the stock market. First-time buyers of property can get a first-home-owners grant, but property buyers must pay stamp duty. Those buying shares or ETFs do not pay any stamp duty. Furthermore, property buyers pay tens of thousands in real estate agent commissions as well as conveyancing. If you own an investment property you must pay land tax and capital gains tax. If you don’t own an investment property you don’t pay land tax or capital gains tax, but this doesn’t put you ahead because then your property becomes a PPR, which means you cannot rent it out, which is a loss. Not paying capital gains tax also doesn’t put you ahead compared to shares because shares can be sold in small amounts, which means that when you retire you can sell small amounts of shares so that any capital gains put you below the tax-free threshold, meaning you pay either nil or minimal CGT. Then there is the insurance costs, council rates, and general maintenance costs associated with property.