More Thoughts on Remote Working during the COVID-19 Crisis

It has been a few months since the COVID-19 crisis has hit, and as a result of this crisis, I have settled into working from home. I’d like to describe my experience working from home from my parents’ home for the last few months.

Disadvantages of remote work

First of all, I find I have been quite busy. I would often either wake up early or work into the night in order to get work done. It seems there is more work to do when working from home. There are definitely advantages of working from home, but there are definitely disadvantages, the main disadvantage being that it is more difficult to work with others. For example, when you’re in an office, you can walk to someone’s desk and talk to them about something, but in a remote environment, you need to e-mail or call them, and they may not respond to your e-mails or calls. Furthermore, when I am in the office, I can walk to someone’s desk. If they are on the phone, it is clear they are busy, so I can walk away and come back at another time. However, when working remotely, I am more reluctant to ring someone because I have no idea what they are doing. They might be in the toilet or they might be changing their baby’s nappies, so there is this fear that I may intrude on their private lives whereas at work the expectation is that you work at work so you have no private life at work. Working from home does not seem to work well for “fast-paced” work where quick communication is necessary, especially when there is a deadline looming.

Advantages of remote work

There are advantages of remote work. In my opinion, there are more advantages than disadvantages. If I had to choose between working at home or working at the office, I’d prefer working at home, but ideally I’d prefer to have both options. There are some tasks I’d prefer to ask colleagues to come into the office to do, and there is also better socialisation in the office. For those who do live by themselves or who do not have too many friends outside of work, the office becomes the source of friend and family.

For me, the key benefit of working from home is I save a considerable amount of time not commuting. You don’t need to drive or take a train to work, which benefits me greatly because it takes one hour for me to get to work, which means I get two extra hours per day to sleep, exercise, read or watch Netflix. Another benefit is that you don’t need to worry about what you wear. When you go into the office, you need to dress correctly. However, when you work from home, you can wear anything. You can just put on sweatpants and a hoodie or you can stay in your pajamas. Even if you are on a Zoom call, you can turn off the video or you can position the camera so your clothes are off the screen.

Another benefit of working from home is that you don’t need to concentrate in meetings. This might sounds bad, but there are many meetings where you can safely turn off video and audio and do your other work. You can dedicate half your attention listening to the meeting (in case you need to speak) and the other half doing your other work.

Something I have noticed ever since working from home is that I am signing up to many webinars. Back in the office there are plenty of optional training sessions that I do not sign up for because I simply don’t have time. If I needed to get off my desk to go to one hour of training, that is one hour I would not be working. I only go to those training sessions that are mandatory. However, since all these training sessions are now online, they are quick and easy to sign up for, you can listen to them while doing your other work, and if something urgent comes up at work, you can simply and easily leave the webinar without any embarrassment or shame. As a result, I have gone to many webinars and feel I have learned a considerable amount about many different topics, from HR all the way to finance, retirement planning, etc.

Another benefit of the COVID-19 crisis is the amount of money I have saved. I don’t drive much, but in the last three months I have not driven at all, so I have saved a lot of money on petrol. Even when I have the option to drive short distances, I prefer to walk instead because I spend so much time indoors that I want to walk more to be outdoors. (When you drive, you are indoors.) I also never eat out, go to cafes, etc. Any socialising needs to be online, so it is free. I watch Netflix rather than go to the cinemas. Basically everything is done at home or online, which is much cheaper than “going out.”

I am still working from home and I have no idea when I will be going back to the office. I have heard that many organisations have asked their workers to come back whereas others are providing staff with the option to work from home or not. In my opinion, the best approach is to permanently give staff freedom to work from home or come into the office, which is what Twitter has done.

Impact on the property market

The impact of COVID-19 on the property market is very unclear. There is a considerable amount of stimulus being applied to prop up not just the property market but also the stock market. That being said, if remote working becomes the norm, there is no advantage of working near the city anymore. This means I can live in the outer suburbs without worrying. Even if it takes me two hours to commute into the city, if I do so rarely, it’s not a problem. This means the cost of putting a roof over your head goes down considerably. It costs about $1600 per month to rent a one-bedroom apartment in the city, but in the outskirts of the city it costs about $1000 per month, so automatically you save $600 per month. Using the 4% rule, this means you only need to save $300k to pay rent forever (rather than $480k).

The frugal non-consumerist post-COVID lifestyle

Based on quick calculations for a single childfree person living in an Australian city, COVID-19 has reduced the cost of living by about one-third, from $3500 per month to about $2111 per month. Once again, using the 4% rule, this means you only need about $633k to retire rather than $1 million.

How is this possible? Because you no longer need to live near work, you can minimise costs by moving to the outskirts of the city, which should halve your rent. I am assuming the cost of a one-bedroom apartment in Melbourne CBD vs a one-bedroom unit in the outskirts of Melbourne (e.g. Frankston). Because you are not going out at all but eating at home all the time, this should halve your food costs. You also don’t need a car because you can walk, bike or take public transport everywhere. Assuming all other expenses stay the same, this cuts costs by about one-third.

Expense ItemMonthly Post-COVID CostMonthly Pre-COVID Cost
Rent$1000 $2000
Food$311 $600
Car$100
Other$800 $800
Total$2111 $3500
Estimated monthly cost of living pre-COVID and post-COVID. “Other” includes electricity, internet, streaming services, etc.

In my opinion, one of the benefits of the COVID crisis is that it has forced people to live a non-consumerist lifestyle, which may result in many people realising that they are able to retire early if they want to. You don’t necessarily need $1 million to retire because living in isolation has taught you that you only need about $650k to retire.

In my opinion, a post-COVID lifestyle presents an opportunity to live more environmentally sustainably. A lifestyle with less car use, less overseas travel, less “going out” and more bike riding, walking, having meetings online, etc are better for the environment. I also think that caring for the environment can help you save more money because it provides extra motivation. For example, I am driving less today not only because I save money driving less but also because I am starting to feel very guilty driving a car. This extra guilt helps to discourage me from driving or travelling or going out to restaurants.

What about the economy and personal finances?

There is a considerable amount of uncertainty about the future of the economy. Some believe there will be a V-shaped recovery whereas others are expecting a W-shape or even an L-shape. Regardless of what letter of the alphabet the stock market resembles, I am not too concerned because I have diversified my portfolio to include not just equities but also bonds, gold and even cryptocurrency.

Another benefit of the COVID crisis is that interest rates have fallen. The interest rates on my CommSec margin loan as well as NAB Equity Builder have both fallen (5.6% and 3.9% respectively). As I have explained in other posts, debt can be positive because you are able to deduct interest expenses. Many people invest with debt when buying a property, and they deduct interest expenses. It is possible to do the same with ETFs, but in my opinion the main benefit of holding debt to buy shares rather than property is that stocks or ETFs can quickly and cheaply be sold to extinguish the debt whereas a property is very expensive to sell. For example, if I borrowed money to buy ETFs and suddenly wanted to retire early, I can sell ETFs and with the proceeds I can pay off all my debt. However, if I borrowed to buy a property and suddenly wanted to retire, selling a property to extinguish the debt would cost me about $30k in real estate agent commission.

Another benefit of ETFs vs property is that you can avoid or minimise capital gains tax. If you own an investment property with debt on it and you suddenly retire, you need to sell it to pay off the debt. Selling it will trigger capital gains tax. For example, suppose you buy a property for $500k and it increases in price to $1 million. Then you sell it but need to pay CGT on the $500k price rise. However, the benefit of ETFs is that you don’t have to sell all ETFs at once. Suppose you purchase $500k in ETFs and it rises to $1 million in price. Rather than sell all the ETFs, you only sell half thereby realising only $250k in capital gains. Then you sell the other half the next year thereby maximising the amount of capital gains subject to lower income tax rates. This works in Australia because capital gains tax is based on the progressive income tax rates. Under the Australian income tax system, income (including triggered capital gains) under $18200 in the financial year is exempt from any tax whereas any amount above that is subject to tax. So if you sell a property and realise $500k capital gains, then only $18.2k of that is exempt from tax with the rest being subject to tax. But if you sell half your ETFs in one year and the other half the next year, then $36.4k is exempt from tax. ETFs are highly divisible, which allows this, but property is not. You cannot sell half the house and then the other half the next year.

Because I have invested in a range of different ETFs, if I needed to retire quickly and needed to extinguish the debt, I would simply sell an ETF that has made large gains and then offset these gains by selling off a different ETF that has made losses. The losses and the gains would roughly cancel each other out, which means there is little capital gains tax to pay. Any existing capital gains can be left untriggered. ETFs allow you to control your capital gains and therefore your capital gains tax.

Some people say that an easy way to avoid CGT is to put your money into your principal property of residence (PPOR), which is exempt from CGT. However, this does not work. When people buy an property, there is a reason why investors prefer to put a tenant into it even if doing so removes CGT exemption. It is because putting a tenant into a property provides the landlord with rental income as well as the ability to deduct expenses. The gains from the rental income and interest deductions is greater than the loss of CGT exemption. If this were not the case, there would be no investment properties because landlord would put any extra money into their main residence rather than invest it in a rental property. This means it would be impossible to rent because no landlord would put money into rental properties because the tax advantages would be greater for main residence. The government must provide rental property investors greater tax benefits for rental property compared to main residences otherwise the rental market would not exist. That rental income and tax deduction on expenses from owning investments is greater than CGT exemption on a PPOR is the key factor that justifies “rentvesting” but that is a topic for a separate future post.

Am I close to retirement?

There are two main reasons why I would feel uncomfortable retiring today. One is that I have quite a bit of debt. Of course, I can sell assets to pay off the debt, and some of my investment income can be used to meet the debt repayments. However, I feel reluctant to do this. Part of me feels that I should pay off more debt or at least generate more dividend income to meet all debt obligations.

Another reason why I am reluctant to retire is because a substantial amount of my personal wealth is in my superannuation fund, which I don’t have access to until I am 60. This means that if I retire now, I will need to implement the “two bucket system” and run down my non-super bucket that will tide me over until I have access to my super, which will help me pay off my debts. If I implement the “two bucket system” right now, I’d be living a very frugal lifestyle with a pre-super safe withdrawal rate of about 2 per cent rather than 4 per cent. I want to build up more wealth in my non-super bucket that will tide me over until 60.

New podcasts and website

While under lockdown, I have been listening to many podcasts. A recent podcast that I highly recommend is FIRE and Chill which discusses personal finance in Australia.

Another website that I find useful is the Nomadlist FIRE calculator, which helps you determine which countries you are able to retire in based on your net worth. The most expensive city to live in is New York, so if you have enough net worth to be able to retire in New York (about US$1.1 million), in my opinion you are effectively financially independent. However, what this site teaches you is that even if you have low net worth, there are many countries all around the world where the cost of living is low, which means you will be able to retire very quickly. Many people assume that they need to live in expensive cities e.g. Sydney, Melbourne, New York, London, etc. However, the world is enormous and there are so many places where it is cheap to live. For example, in Liverpool, UK you can live off US$500k. In Davao, Phillipines you can live off US$250k. Looking at sites like this is a strong motivator because as my net worth grows, I am able to tick off cities around the world where I am able to live. The ultimate achievement is ticking off on New York because then you’d have the safety and security of knowing you can retire early in the world’s most expensive city.

Reaching Financial Independence under Australia’s Superannuation System and the “Two Bucket” Method

There is a controversy within the Australian financial independence and retire early (FIRE) community about whether to salary sacrifice into superannuation while you are young to get the tax benefits. (For international readers, “superannuation” or “super” is the Australian version of the American 401(k) or IRA, basically a retirement fund.)

When you salary sacrifice into your super fund, the money going in is taxed at 15% rather than your marginal tax rate. For example, if you are earning $100k per year, your marginal income tax rate is 37% so there are large tax savings to be made if you salary sacrifice into super.

However, there is a downside because you do not have access to this money in your super fund until you are 60. For many young people, this is too far away, so they’d rather take the money now.

In my opinion, if you earn under $37k, there are insufficient tax benefits to warrant salary sacrificing into super, but once you earn over $37k, additional income will be taxed at at 32% and 37% so you should be salary sacrificing.

The table below shows that once you earn over about $18k, additional income is taxed at 19% so the reduction to 15% is hardly worth it, but once you start earning over $37k, there is quite a large gain from salary sacrificing.

Australian income tax rates for 2018/2019 and 2019/2020 (residents)

Income thresholdsRateTax payable on this income
$0 – $18,2000%Nil
$18,201 – $37,00019%19c for each $1 over $18,200
$37,001 – $90,00032.5%$3,572 plus 32.5% of amounts over $37,000
$90,001 – $180,00037%$20,797 plus 37% of amounts over $90,000

There are many arguments made not to salary sacrifice into super, and the most common arguments are provided below.

You may need the money while you are young e.g. to raise children, so you should not lock your money up in super

It is important to realise that there is a limit to how much you can salary sacrifice into superannuation. The amount your employer contributes plus the amount you salary sacrifice cannot exceed $25k, so even if you are salary sacrificing into super, there is still money you are not investing in super, so you are likely to have money outside of super to cover any unforeseen expenses.

Futhermore, when most people invest outside of super, they lock the money up anyway, e.g. they buy and hold ETFs or invest in property. It is true that ETFs and property can be sold to be used for necessary expenses, but there is a hassle involved, especially with property. There are large transaction costs involved in unwinding these investments including but not limited to capital gains tax. The only truly liquid asset is cash, and most people hold small amounts of cash to meet day-to-day expenses because they are aware that they can get better returns elsewhere, so why not apply the same principle to supernanuation and lock it up for the tax benefits?

Another consideration is that money locked up in super is still accessible in dire situations e.g. if you are bankrupt and living on the streets, you are able to access money in super via “hardship provisions.”

Another perspective is to look at money locked up in super as an argument for it rather than against it. Many people recommend getting an investment property as an investment because the compulsory monthly mortgage repayment provides “forced savings.” Since property is difficult and costly to unwind, this prevents the average person from raiding the piggy bank to pay for frivolous costs. Super can be seen as the ultimate form of “forced savings” because you cannot access it unless you are 60. Good money management is mostly psychological. Cash in your wallet is as good as gone because there is very little preventing you from spending it at the shops, but money in super is the other end of the extreme, and buying and holding shares or property are in the middle.

Forcing yourself to save money via a mortgage or superannuation is very useful for those who lack self-discipline, and while it is easy to think of yourself as being self-disciplined, most people are not.

Money outside of super can earn more than money inside super. Super is invested in shares and is therefore risky so you should leave money outside super and invest it in safer investments e.g. property.

This is a common argument given, that money in super is invested in shares, and most people perceive shares to be risky, so it is better to not invest in super and invest in property, which is perceived to be safe.

There is so much wrong with this idea. Firstly, most super funds invest not only in shares but also e.g. bonds and listed property. Furthermore, anyone can use a self-managed super fund (SMSF) to invest in almost anything, including Australian residential property (e.g. via BrickX).

Using an SMSF, it is possible to e.g. invest in residential property and even to leverage investments e.g. via internally geared ETFs. There are even margin loans designed for leveraging into super e.g. Nab Super Lever.

Another false assumption is that property performs better than shares. Many equity indexes perform just as well as property if not better. For example, looking at the historical performance of properties on BrickX, the best performing properties average 8% per annum capital gains, but the net rental yield of these properties is about 1.5% per annum. Historical performance of the STW ETF, which tracks the ASX200 index, as of July 2019, according to Bloomberg, also shows 8% per annum capital gains over five years, but the STW ETF also provides 5.93% dividend yield as at writing this, and that is not counting franking credits. If we look at equity indexes such as the S&P500, then performance is even better for shares. One could argue that other equity indexes have not performed well or that particular shares may not have performed well, but the same argument can be levelled at property. The 8% performance for property was plucked from the best performing properties in BrickX. Had you invested in other property, you would not have achieved these results. Furthermore, investing in shares allows you to easily diversify via index funds, and many super funds use either index funds or their active management policies require them to diversify globally, so you are getting instant diversification, but if you buy one house, you are not getting any diversification at all, which is a huge risk.

Furthermore, the argument that shares are riskier because they are more volatile is also false. The reason why stock prices move up and down quickly is because shares or ETFs are listed on the stock exchange. The price is disclosed whenever the market is open, which is every weekday. However, we only learn about the price of property when we buy or sell it or when we have an auction, and this happens very infrequently, e.g. every ten years. If there is an auction for a particular house every single day, there will be price volatility. Because there is not an auction every single day, this hides the volatility, but it doesn’t mean it doesn’t actually exist.

The fact that house price volatility is hidden also hides losses very well. For example, one of my friends had a mere $10k in his superannuation fund, and during the GFC his balance went down by $4k. He was so freaked out seeing the balance in his fund reduce so much so quickly that he withdrew all the money. He is an old man, so he is able to do this. However, this friend also owns a property that is valued at about $1 million, and in the recent 2017 and 2018 property price declines in Australia, the valuation of his property using CoreLogic data shows that his property went down in value to $800k, so basically $200k was wiped out, and he didn’t seem fussed at all. When my friend saw $4k wiped out from his super fund, he saw the balance go down instantly. He saw the market gyrations on the financial media and the stock market charts in free-fall. A mere $4k loss was enough to freak him out. However, when $200k is wiped out from his property, he doesn’t bat an eyelid. He knew in general that property prices were going down, but there is no dramatic price charts, and it is often uncertain to really know how much your property is worth. Most people have no idea. This story illustrates how irrational most people are with regards to property vs shares.

The government may change the rules and start taxing your super heavily.

This is another common argument against superannuation, that if you put your money in super, it is at the whims of government legislation. Supposedly if your money is locked in super, there is temptation for the government to increase taxes on super or increase the age at which you have access to it.

However, the problem with this argument is that even if you don’t put your money in super e.g. you put it into property or shares outside of super, it is also at the whims of government legislation changes e.g. if there are changes in income tax, capital gains tax, or franking credit legislation. Government can change anything, not just legislation that impacts on superannuation but also legislation that impacts on funds held outside of superannuation.

The only way you can avoid the risk of rising taxation imposed by the Australian government is to move your money into offshore havens or to e.g. cryptocurrency such as bitcoin, ether, or monero. However, offshore havens are not immune from the risk of legislation change. If your money is held in e.g. Bermuda, who is to say the Bermuda government can’t change its legislation? Cryptocurrency is also not a foolproof tax avoidance mechanism since crypto is still subject to capital gains tax by the ATO. There are other risks with crypto as well because even if you avoid countries and government, arguably the country or government in a crypto investment is the community of investors or the miners and the legislation is the protocol that governs how the crypto operates, and this is subject to change by developers. A whole book can be written about this, but basically there is no way to avoid risk of changes in legislation negatively impacting investments unless you diversify.

Contributing to super prevents you from retiring early

This argument is somewhat true but not as bad as you may think. Basically if you salary sacrifice into super, you don’t get access to the funds until 60, so if you are putting a huge amount into super, you may have enough to retire early but you don’t have access to it, which means that effectively your early retirement is deferred. To take an extreme example, suppose you need $1 million to retire, and you salary sacrifice so much that you have $1 million in super but nothing outside of super (because you use all your cash outside super to spend on expenses). Then you cannot retire until you reach 60 even if you managed to amass $1 million in super by e.g. age of 40.

However, as I stated before, there is a limit to how much you can salary sacrifice into super. The employer contribution plus amounts salary sacrificed cannot exceed $25k per year, so more realistically the amount you save outside of super should roughly equal the amount going into super. Rather than reach the age of 40 with $1 million only in super, chances are you will have $500k in super and $500k outside super. The amount outside super will likely be in e.g. ETFs, shares, and property.

Early retirement according to the FIRE community relies on the “four percent rule” i.e. your annual expenses should equal 4% of your net worth. If you reach age 40 with $1 million in your super, you cannot retire early and spend $40k per year because you don’t have access to the funds, but if you reach age 40 with $500k in super and $500k outside super, you probably can. Simply take the age at which you can access your super and subtract it by your age. In our example of someone retiring early at 40, this means there is 20 years left before he or she has access to super at age 60, so the money outside of super of $500k needs to last for 20 years. The simplest way to make sure you don’t spend over $500k in 20 years is to apply a simple straight line calculation and divide $500k by the years left, so in this case $500k divide by 20 is $25k per year you should spend before you have access to your super fund. By the time you have access to your super fund, that $500k in 20 years should be about $2 million assuming 8% per annum growth, and this means by the time you reach 60 you can apply the four percent rule and draw down $80k from your super per year. This is what I call the “two bucket system” and it is briefly explained by Aussie Firebug in his Australian Financial Independence Calculator as well as Mister Money Moustache in his article How to Retire Forever on a Fixed Chunk of Money.

Of course, retiring early on $25k and then suddenly reverting to $80k after 60 is a very weird way of implementing the two bucket method because I use a straight line method to draw down funds before access to super and then after access to super I use the four percent rule. Ideally you should use the four percent rule both before and after age 60 and arrange it such that you run out of pre-super funds just as you hit 60. This requires a much more complicated formula that Aussie Firebug has worked out in his spreadsheets above, but I believe that using the straight line method before access to super is much easier. The straight line method ignores growth in the pre-super funds, and so it is very conservative.

If you salary sacrifice heavily and use the straight line method to draw down funds before access to super, you will likely push early retirement out a little. If you are not willing to do this eg if you are absolutely determined to retire at age 40, then one way to still retire early while also salary sacrificing into super is to temporarily retire in a low-cost-of-living (LCOL) area e.g. Southeast Asia and then come back to Australia when you are 60 to access your super and retire here. The benefit of this approach is to use geoarbitrage to get the most bang from your buck in a LCOL area while you are young but then come back to a welfare state to access generous healthcare systems when you are older. However, this will be the subject of another post where I speak in more detail about retiring in LCOL areas as well as the “two bucket” system.