Ask Paul: I'm 26 and financially planning for my 40s
I'm 26 and earn $100,000-plus, of which I dollar-cost-average about 10% a month into a portfolio of exchange traded funds (ETFs).
It consists of around 70% S&P500/ASX300 indexes, 15% small caps, 5% emerging markets and 10% in a couple of thematic exchange traded funds following industries I believe are set for high growth in the next 10 or so years.
However, as I get into my late 40s to 50s I want to pivot from a high-risk/growth strategy to more of a passive income strategy.
What's an efficient way to make this transition without triggering a tax event from selling down my higher-risk ETFs, which (I hope) would incur CGT?
Would it be better to do this incrementally as I get closer to this stage?
I already salary sacrifice into super, as I love the tax benefits, but I want my share portfolio to assist me with income during the pre-retirement stage of my life. - Jack
Ahhhh, thanks Jack. A chance for me to display some of my ancient wisdom. Mind you, my wife, adult kids and mates reckon my wisdom is marginal at best and tainted with rose-coloured glasses.
But after reading about the ups and downs of humanity over some 7000 years of recorded history, I reckon there is some realism in believing that humans, a remarkably resistant lot,
will continue to find a way to thrive.
Where history is clearly on my side is aging. We don't need to go far back in history, just 160 years or so, to find that women in our longest-living countries had an average life expectancy of 32.
Our forebears back in only 1908 chose a male retirement age of 65 to be eligible for the age pension. Why, because men died on average at 65? Nope, men died on average at 57.
The whole idea was a financial safety net for the very few males who made it to 65. A chardonnay retirement was not something that was considered just 125 years ago.
With continued huge advances in medical science, we don't need Albert Einstein to tell us that, on average, life will be long for your age group.
I am hoping that in your late 40s to 50s you will be in good health and looking at another 40 or 50 years. With long periods of time like this, I think you will maintain a growth strategy. I'm 68 and my wife, Vicki, is a similar age. Our money is invested in growth portfolios, not dissimilar to yours now, including a thematic tilt. Ours is to medical health for pretty obvious reasons.
At 68, statistically one of us should live more than 20 years, more than enough time for a long-term, growth-style investment strategy.
About the only change we have made is to a higher percentage of companies paying fully franked dividends. With the 50% tax discount on capital gains, I am pretty ambivalent to growth or income returns, but very interested in total returns. If we need to sell down a small part of our portfolio on top of the 4% or so we receive in dividend income, so be it.
In your shoes, I'd just plough ahead and look at your 40s when you get there. That is my plan for my late 70s - to get there first. After some 50 years of investing, I notice that my returns from a diversified growth portfolio average, after tax and costs, close to 8%. That has kept us above inflation and, as I wind down my work, a nice income stream.
My question for you, though, is to also look at your super. Sure, accessing it is eons away for you, but a super fund taxed at 15% on its income is a real wealth creator.
I should finish by saying that at 26 my sole asset was a Datsun 1000, which I sold for $300. I had a good job, but converted my income into beer and travel. I did improve my financial management as I got older!
You are doing really well. I'd keep doing what you are doing. Spending less than you earn is the key.
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