Random Post #6 – What would I do if I lived in Australia?

Given that lately a lot of my friends have been relocating to, or moving back to Australia (both Australians and Singaporeans) – I have been thinking about what I would do in terms of investment if I were to move back to Australia with my family.

When I was 30 years old, I left Australia with a chip on my shoulder as I was paying a huge amount of tax for what?

Now that I’m married with two children, maybe there would be more tax breaks available to me? Probably, but also probably not a huge difference in the scheme of things. (Singapore is very generous when it comes to baby bonuses and tax deductions for working mothers – just to be clear that is for my wife, not me).

Anyway, that aside – what would I actually do?

If I had a decent sized mortgage paying 5% interest, would I try and pay that back as fast as possible?

Or would I put as much into Superannuation as possible to enjoy the lower 15% tax rate payable on those contributions?

Then there’s property versus shares. If I had surplus cash, what should I invest in? According to this SMH article, equities have outperformed property over the last 10 years quite soundly, however property has slightly outperformed equities over the last 20 years.

equities vs propery

I am not a fan of negative gearing on property as I believe it’s an unfair system where non-investor tax payers are subsidising those making property losses on paper, but whom will probably benefit from capital gains in the future.

Ultimately I would probably do what I’m doing today – invest in a few select ETF’s that give me a broad range of diversity. Vanguard Australia offers a lot of very attractive ETF’s with low fees and excellent returns over the last few years.

vanguard australia

It’s hard to ignore the results of property returns in this chart – if I was going to invest in property this is how I would most likely do it; a) for liquidity, and b) for ethical reasons (I don’t think you’ll be enjoying any negative gearing on this type of product).

In regards to tax efficient investing – this is what Vanguard themselves have to say about the matter – https://www.vanguardinvestments.com.au/retail/ret/education/inv-library/tax-effective-investment-strategies.jsp

Which is also mirrored by SPDR in more detail.

So to summarise – what would I actually do? Actually I’m still not sure, maybe it depends on what your cash balance is at the time.

For example, if I had a home loan of 500K and was paying 5% interest over 25 years my payments would be $2,922.95 a month. If I was taking home let’s say $10,000 a month between myself and my wife, that would leave us with around $7K for all other expenses and any left over could be invested – either directly, or into Superannuation. Let us say we have $3000 a month for investment or early mortgage payments.

If I had no other savings at that point in time – it may be best to pay off the mortgage as quickly as possible to avoid paying as much interest on the loan. Let’s do some calculations: (I am shocked by this result, I hope my math is correct!)

Loan extra payments

So the above table shows that we are making $36K of additional payments each year, and we manage to quickly pay off our loan after just 10 years. Not bad. As soon as we have quickly paid off our loan, we invest that exact combined sum ($71,476.23) into our investment plan and expect 9% returns each year. At the end of 25 years, we own our house and we have $1.168m worth of investments. Seems okay right? WRONG!!

This is what it looks like instead if we start investing immediately:

Loan no extra payment

At the end of the 25 years, not only do we own our house but we also have $3.323m in investments! Over two million more dollars!

Holy moly, I am completely shocked by this result. I thought that paying off your loan fast was a good thing? It appears that this is only the case if interest rates are higher that what your investment can return, which historically has been very rare. If I am wrong about this someone please comment and let me know!

Now all this is not taking into consideration taxation on dividends, franking credits, or capital gains tax. But even if it were, I doubt very much that tax will have much of an impact on that two million dollars.

Now to really summarise.

  1. I would get some tax/professional* advice to make sure my calculations are correct.
  2. If correct, regardless of my debt situation, I would always be putting my savings into low-cost ETF’s. (Unless interest rates were exceptionally high).
  3. I may consider putting more into Superannuation funds that allow you to purchase low-cost ETF’s. This will help reduce the amount of tax paid on your investments. These savings compared to the top marginal rate are significant and are likely to account for more than 2% a year. This is a lot over the long term. The downside – this money is locked in until retirement age – so be very careful with this and make sure you won’t be needing that money beforehand.
  4. For property, at this point I would still only purchase my primary residence. This is my own personal choice though. Over the last 20 years property and equities have made similar returns. (I think the property bubble has finally peaked, but I have been saying that for 15 years now).

See you on the flip side!

The_Itchy_&_Scratchy_&_Poochie_Show_64

*By tax/professional advice, I mean independent and fee based advise. Not advice from the “professionals” at your friendly bank/insurance company that want to sell you some expensive financial product!

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2 Comments

  1. MH,

    Robbo told me to add an old bastard’s perspective.

    I’m certainly no guru, and I’m definitely not formally qualified in either finance or tax, however I think I’ve got ‘life’ qualifications on my side.

    In your example above, don’t forget that if you don’t pay the extra $36K each year off your mortgage (i.e. you choose the option of paying your mortgage over the entire 25 years) you pay an extra $250K in Interest over that period, and remember, you have to pay your marginal tax rate on most of the investment earnings (which are positively geared) so your $2M extra is suddenly looking closer to $1M extra, and your calculation is based on your ability to earn 9% cumulative every year for 25 years – I haven’t seen that happen too often ! As a comparison, most major Australian Retail Super Funds have only averaged about 4.5% nett over the past 25 year period. (and that’s only because the last 3 years have been pretty solid)

    As its often said’ If something looks too good to be true, then it probably is !!’

    In my view, it all comes back to how long you want to invest for – this is a major determining factor in what type of investment you need to choose. Over a 25 year period, depending upon economic conditions (eg. interest rates and unemployment rates – in Australia and overseas) you need to remain flexible with your investments, to give you the best chance of achieving your goal. The trouble is – its always easy to know when to buy into something – the challenge is knowing when to get out – and none of us ever get that right.

    I agree with your comments re; paying off your loan – you should never do this if the differential between the mortgage rate and the investment rate is significant – providing your future income is somewhat secure.

    I know lots of successful investors, and every single one of them have taken a ‘hit’ or two or three along the way. No one gets it right all of the time – Its all part of life’s great learning curve.

    So be careful – simple spread sheet calculations can lead you astray if you’re not careful.

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