Author Topic: Early retirement  (Read 54004 times)

Patrick

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Re: Early retirement
« Reply #45 on: October 27, 2015, 11:10:11 am »
This thread speaks directly to me in discussing my present dilemma of trying to rebuild a portfolio, having recently sold (ie "locked in losses") a heavy exposure to resource shares in Aug (plus a couple of winners which suddenly looked expensive... not a proud moment).

Should I be focusing on growth or dividends? The instinct to "swing for the fences" to recoup my losses has finally been tempered by weeks of indecision (ha ha)  - although growth remains my bias, while keeping 3 years living expenses aside (by way of introduction, I lead a lifestyle remarkably similar to Mr Dividend)!

To sum up points already made, peace of mind will cost you either way: lost opportunity costs on the cash set aside, or lower capital growth. I have put some money into the DivTrax ETF which seems to strike a middle ground... comm on its way Patrick!

Unfortunately as may have been pointed out, dividend income is a more tax efficient income stream than selling shares, at least within 3 years - as you'd be regarded as a trader and taxed at your marginal rate. Then there's stockbroker fees...

Any further thoughts from the community would be welcome.
Mr Div was actually the first one to highlight DIVTRX here, so send him your cheque. GCR is right, it's all relative to your situation. If you do decide to go see a financial adviser, make sure you pay them by the hour, and not a % fee, otherwise you WILL get screwed in the long term.

With some reading though, you could pick up pretty decent knowledge, which is quite satisfying.

Are you also no longer working? How did you manage that?

Ron

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Re: Early retirement
« Reply #46 on: October 27, 2015, 12:49:17 pm »
*Ah, just picked up your reply now Patrick. Yep, will probably have to speak to someone I can trust, but folks around here also seem to know a thing or two - and it's gratifying to know there are/were others in a similar situation.

THANKS for your thoughtful response gcr - your points are all very fair and valid. I guess a financial advisor would be my next stop, but I know there are some pretty astute forumites here who I'm sure would be able to provide some direction as well with level-headed, common sense advise - based, of course, on my particuar circumstances, which I'll detail below. Right now I'm going in circles with conflicting thoughts, which of course only increases my anxiety (beer helps though). Obviously any advise will be treated as just that; I realise that all paths carry risks, especially in these markets. Ok here's my situation.. I know people will scoff at my tight budget but Mr Dividend's earlier post has provided some encouragement!

I'm 46, unemployed, live alone and lead a frugal lifestyle, but probably not frugal enough. I'm debt free, own my home & an investment property which brings in a rent of R5700pm. My expenses come to R13 200 (no medical aid etc), leaving a shortfall of R7 500. I have savings of R1 200 000 & that's it. It's sitting mostly in my broker's account earning piddly interest until it's told where to go, but it includes positions in Satrix SWX (50G); Coreshares Div Aristocrats (130G); Discovery (75G) & Balwin (25G).

I know that any advise will be accompanied by cold hard figures that will be discouraging but I'm inspired by folks like Mr Dividend who's been able to make ends meet by building a dividend portfolio. Seems that this is my best option? The alternative is to bank, say, 4 years expenses to account for market volatility, which will allow a wider scope of investment - ETFs like the Indi25 but particularly international ETFs like the dbx trackers, and perhaps an asset manager like 36One to manage the rest?

Extra income - when my tenant's lease expires in 5 months I'll move there and rent out my current home which should bring in an extra 2000. The investment property's yielding 6% after expenses (based on worth of about R620 000) and will probably sell it, especially if things go horribly wrong. I'd get more for my current home but would hate to let it go. And my boet may be able to pay me 2000 pm in the new year to help him out a bit - so that R7 500 shortfall will be reduced by 2 to 4 grand.

So that's my life as it stands. Decisions, decisions. Again, any broad, or detailed advice based on these figures would be most appreciated!

Fawkes85

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Re: Early retirement
« Reply #47 on: October 27, 2015, 01:19:16 pm »
Ok. My situation is much different from yours. I am 30 and I have a job where I manage to save good money. The fact that you own two homes where you do not owe any money and have savings much more than mine would indicate that you are more experienced and knowledgeable than me. So clearly we are in different positions thus my opinions might not necessarily appeal to you but here are my thoughts:

Ever considered selling that second house and investing in a high dividend yielding REIT instead? At current prices TEX has a dividend yield of 9%. And the upside of having your money in a REIT, as opposed to an investment property, is that you have fewer expenses. I am sure with your current investment property you have expenses such as property tax/levies, homeowners insurance, maintenance fees, etc. With your money in a REIT you will not have any of those expenses which will mean you get to keep more of that 9% dividend as opposed to the income you get from your current investment property.

That is basically what I am doing now. For a large part of my life I have always wanted be invested in real estate. But the more I looked into buying the less sense it made to me because, even if I rent it out, I will get so little in return after all those expenses. Then I found out about REITs and I started looking into them. What sold me on them was when I compared being invested in a REIT as opposed to be buying a flat I was looking at. It was a small bachelors flat which I could have bought for R450 000 (yes I know that is not all that expensive but it was in my small hometown and not in the city). I would have been able to rent it out for R2500 at best which would have given me an annual income of R30 000. But after all the taxes, insurance premiums and possible maintenace costs I reckoned I would have eared closer to R24 000 for the year. But if I took that same R450 000 and invested it in a REIT such as TEX which paid a 9% dividend yield I would have earned R41 500 per annum before income tax deductions being made. Income tax deductions of course being the ONLY expense. The winner for me was clear.

The only downside to a REIT over buying an investment property is of course the fact that the stock exchange is more volatile I guess. But let's be honest, as 2008 showed so can owning property be.

EDIT: Also dividends can come down or be cut etirely whereas I guess you can control the rent of a property. But then on the flip side you can be without a tenant for months and not get an income either.
« Last Edit: October 27, 2015, 01:29:31 pm by Fawkes85 »

Samurai

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Re: Early retirement
« Reply #48 on: October 27, 2015, 02:00:43 pm »
Dont know how relevant my contribution will be as I'm still slaving away all day, hopefully FI by my late 40's with one of those russian brides.

Have to agree with REIT's as they pay decent dividends and you wont have the hassle of fixing small problems on your property or dealing with late payers. Also REIT's like Growthpoint can offer good hedge value, seeing as they own a portion in Growthpoint Australia.

Try this website its american but some princples stay the same,  http://www.dividendmantra.com/
« Last Edit: October 27, 2015, 02:29:17 pm by Samurai »

gcr

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Re: Early retirement
« Reply #49 on: October 27, 2015, 02:28:25 pm »
Just a thought as I have not studied what is or isn't in TFSA - but can you buy into a REIT type account through the TFSA. If permissible you may then reap the benefit of a decent dividend income and then also get a tax break.
Maybe someone who is familiar with TFSA could comment
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Fawkes85

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Re: Early retirement
« Reply #50 on: October 27, 2015, 02:31:46 pm »
As far as I understand only ETFs are allowed in TFSAs. So what you can do is buy into the PTXTEN or the PTXSPY. Both those ETFs are only invested in REITs but their dividend yields are not much to write home about.

Patrick

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Re: Early retirement
« Reply #51 on: October 27, 2015, 02:54:39 pm »
Try this website its american but some princples stay the same,  http://www.dividendmantra.com/
I quite like Dividend Mantra, and think Jason is a great guy and excellent writer, but his investments have done worse than the S&P 500 over time, so he would actually be wealthier now without putting in all that effort... The same holds true for Donald Trump. Apparently if he invested his inheritance in the S&P500 and sat home watching Jerry Springer he'd be twice as wealthy as he is now! But yeah, great blog, and a great way of thinking about building wealth.

As far as I understand only ETFs are allowed in TFSAs. So what you can do is buy into the PTXTEN or the PTXSPY. Both those ETFs are only invested in REITs but their dividend yields are not much to write home about.
Don't buy PTXSPY, it's got a TER of 0.58% when you can get the Stanlib SA property index which does exactly the same thing and has a TER of 0.36%. The difference in fees gets taken off the dividend payout, so the stanlib sapy will pay you more.

Problems like this really interest me Ron. I've seen too many people I know get retrenched and end up literally having to beg at their families door for a place to sleep and some food to eat. So for the last 10 years or so, I've often played a game of what if I lost my job now.

My retiring at 40 blog post is pretty much the way I would handle it if I was in your situation: http://investorchallenge.co.za/can-you-retire-by-40/

I would try and do is reduce costs though. Housing is probably sucking up the most of your cash, would you consider taking a housemate, or renting a room somewhere? Depending on the circumstances, I'd even live on a cheap boat, or even in a van, but I'm extreme that way.

If I wasn't sure my money would last forever I'd also pick up an easy, fun job. I used to be a barman when I was a student, and even then I could make R5k a month, and that was 15 years+ ago.

Orca

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Re: Early retirement
« Reply #52 on: October 27, 2015, 03:26:49 pm »
Living off dividends is not as tax efficient as living off the occasional sale of high growth stocks. Patrick with his clever calculator has proven it on this thread already. :TU:
For the next 4 months you pay 15% withholding tax on divies. Thereafter it could be 25% putting it in line with the rest of the western world.
Normal tax on Capital Gains would be under 13% but very likely closer to zero.

Our living standards differ but if I were in Ron's shoes, I would pay off any debt asap then sell both properties. This would give him R2,7m in cash. Owning primary property is not an investment but a standard of living expense.

With R2,7m invested in no more than 2 ETF's, you could live very comfortably. The 4% rule is in my view a figure applicable to investments in cash and bonds or for people living in emerged market countries. I would raise that figure to 7% for emerging markets with no holdings in cash and bonds.

I have been retired for close on 2 years and despite the expense of setting up a new home in a different country plus 1 flat market year, my portfolio has grown by R400k.
Ron is alone and I have a wife and we both have private medical insurance.
I started here with nothing and still have most of it left.

Mr_Dividend

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Re: Early retirement
« Reply #53 on: October 27, 2015, 03:31:44 pm »
Hi Ron - I always like these real world examples!

My 2c

Firstly, it would help if you could trim your expenses a bit - what, you eat cavier for breakfast, lunch and supper??  :))  I also second selling your second house, for the same reasons, but you say the investment house is R620K, I am guessing the house you are in would go for a bit more? Taking a stab in the dark, lets say R800K. So all up you would have around R2,1mill to invest. So 7% would get you R12,250p/ and 6% R10500 - this of course is not including tax.

6% is nice and easy, guess around 50% REITS/ 50% Div Stocks: 7% and you probably going to be around 75% in property, but still doable.  You cannot really buy ETF's for this - the dividends just are not there. Lot's of smaller REITS give excellent dividends so it becomes a bit of a balancing game - couple that I like and own, arrowhead, sacorp,TWR, TEX, Fairvest, Safari, accelerate - others are Rebosis, Delta. Decent dividend paying stocks (look at the special dividends as well) AVI, MMI, BTI,VOD, most financial/banks/insurance.

And of course, do not forget the overseas REITS and get yourself hedged!

Would only use TFSA for stocks and save 15%, use the REITS for your income cap (R73K) -

The nice thing about the dividend method is you do not really worry about what the value is (as you have no intention of selling) you just keep an eye on the dividends and make sure they are increasing - generally at around 10% , so you should have more to play with year to year. And you will never run out as you not selling the capital. It would make me mad having to decide when and how many shares I need to sell as well as watch my "stache" fall in a falling market. But each to his own, I am a bit of a worrier, so this method suites me down to a T. I do have a small account (under 10%) with my more speculative shares.

Fawkes85

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Re: Early retirement
« Reply #54 on: October 27, 2015, 05:31:01 pm »
Thanks for the vote of confidence. And Mr_D was right. You should definitely also look into international REITs or REITs with international exposure. My personal favourite is RPL. They payout their dividends in GBP so as they steadily increase their dividend payout it is compounded be the Rand's steady decline against the Pound.

Must give you a word of caution though. Be sure to look at a REIT's balance sheet before you invest. I have looked at pretty much every single REIT listed on the JSE and the majority of them have more liabilities than they have assets. So they pay out great dividends but they are seriously in debt. They have more debt than they should be having. And considering, as an investor, that you are an owner in the company that debt becomes your debt. This is just my personal preference, but I avoid investing in companies who are in the red on their balance sheets like I avoid shaving more than once a week. I hate debt and that is why I don't have any in my life. I understand that companies will always have debt and there is no avoiding it but I expect them to keep it under control and live within their means. A company with so much debt indicates poor management to me. Especially when they continue to payout high dividends while finding themselves in such a situation.

That is why I am invested in TEX and RPL. They have their balance sheets under control. Or at least they did the last time they released their financial statements. RPL will be releasing their full year results tomorrow so we will see if I still like them then.

Best of luck to you and I hope you get this sorted.
« Last Edit: October 27, 2015, 05:32:46 pm by Fawkes85 »

Fawkes85

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Re: Early retirement
« Reply #55 on: October 27, 2015, 06:01:01 pm »
If by two ETFs you mean PTXSPY and PTXTEN I guess the PTXTEN is the better one. It has equal weightings which from what I hear is best. It has also had good performance since inception.

Ron

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Re: Early retirement
« Reply #56 on: October 27, 2015, 06:19:01 pm »
Sorry Fawkes, the enquiry was directed at Orca; he mentioned 2 ETFs but perhaps just making a broad point. Would be interesting to hear recommendations though. By the way my figures presume I get the asking price of my property, who knows may be too optimistic once agent's taken their cut (add to long list of disadvantages to REITs). Oh, and hold onto my part-time job, but can't be too pessimistic. Pretty tight though, gotta admit.

jaDEB

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Re: Early retirement
« Reply #57 on: October 27, 2015, 06:49:24 pm »
No, apologies, I am saying you are doing the right thing. And it is interesting what you are doing, once again did not intend to insult you. 
jaDEB

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Orca

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Re: Early retirement
« Reply #58 on: October 27, 2015, 07:28:35 pm »
@Ron. The favorite ETF's on this forum are STXIND and DIVTRX. (so far that I see).
The STXIND has the top 25 Co's and weighted by market capitalization.
The DIVTRX has about the same number of Co's but the management chooses Co's that keep increasing their dividends.
Co's that keep increasing their dividends are normally the ones that are growing from strength to strength and have good fundamentals and management.
I will post some charts here for comparison. Although my favorite one is DIVTRX, it is only a year and a half old and STXIND is skewed by the developments with SAB that has a heavy weighting in it.   
I started here with nothing and still have most of it left.

Orca

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Re: Early retirement
« Reply #59 on: October 27, 2015, 07:51:22 pm »
Here is a 5 year chart of STXIND (shaded) compared to PTXSPY and PTXTEN. I could not include DIVTRX due to it being only 1.5 years old.
The STXIND has gained twice more than the other 2.
« Last Edit: October 27, 2015, 07:54:18 pm by Orca »
I started here with nothing and still have most of it left.