On board today is Vince Scully, better known as the Life Sherpa and Author of the popular book the Latte Fallacy which aims to dispel many common personal finance myths (just like that ordering a latte or smashed avocado will stop you owning a home). Vince is a licenced financial advisor, and with over 40 years experience in the industry he has only just recently reached preservation age and is set to retire.
This episode forms part 2 of the Superannuation two part series
“When it comes to retirement, the check for the undertakers should bounce”Vince Scully
Vince and I chew the fat on wealth, Financial Independence, Retirement, and how superannuation fits into the picture. Superannuation is a pretty massive topic, so Vince and I tackle it from a few different angles – including;
- Discussions on the evolution of Super
- When and where it may or may not be appropriate
- The different types and structures of super available (industry funds, Wrap accounts and SMSF),
- The effect of fee’s on your super performance
- Insurance within your super,
- Annuities and how they can fit into your retirement, and
- sensible asset allocation for your super.
We look at the four important focus areas and decisions you have to make when selecting your super, and explore the trade-off of the tax benefits of super versus the flexibility of other investment structures. We also cover some interesting and important wealth topics such as home ownership, car loans and the concept of Human Capital and why early retirement might not be such a good thing.
Because it is such a big topic and I had such an awesome time chatting to Vince, I have broken it down into two parts. I didn’t want to cut too much away on the editing room floor, because there are so many gems in here and actually to produce this took over four hours of interviews.
Superannuation with Vince from Life Sherpa
- Check out Vince’s book the Latte Fallacy
- Don’t think of just returns. Think in terms of Risk Adjusted Returns over time, or return per unit risk. In the short term, defensive assets are low risk. However in the long term, defensive assets are incredibly high risk. In fact the riskiest thing you can do in the long term is not invest in shares.
Quick Super facts
- Super taxed at 15% on contributions (up to the concessional cap)
- Super taxed at 15% within the fund (although your total tax payable can be less depending on what actually happens within the super account)
- CGT rate within super for assets held more than 12 months is only 10%.
- Maximum concessional contribution (15% ingoing tax) $25K per year
- Maximum non-concessional contribution (fully taxed at your marginal rate) – $100k per year. Above $100K you will be penalised with a further 47% Tax
- Maximum balance cap $1.6M for a tax free pension phase account
- Aim for 100 months of living expenses in your super account at retirement as a benchmark for a good place to be – this provides around 60% of your pre-retirement income.
Vinces Approach to debt
- Red rebt – High interest rate corrosive loans due to living above your means
- Amber Debt – Home loan and Car loan – loans to spread the cost (amortise the cost) of enjoying these items across their lifespan
- Green Debt – Investment loans – loans to pay for assets that appreciate faster than loan interest)
Vinces Wealth strategy
- Build an emergency fund
- Pay off any ‘Red’ debt (credit card, personal loan) – High interest rate corrosive loans due to living above your means
- If you have one – pay down your ‘Amber’ debt (home loan) until you are comfortably below an 80% LVR and thus have flexibility to refinance to the best deals
- Invest outside of super to build wealth flexibility and options (because if you put it in Super – for all intents and purposes it is GONE until preservation age)
- Ramp up your superannuation contributions to take advantage of compounding in a low tax environment
Vince on Investing $10K for ten years;
Vince war gamed three scenario’s for investing $10,000 over a ten year period into the three most commonly asked ‘vehicles’ and came out with some interesting answers.
1. Pay off home loan – saves you a total of $11K in loan fees (which should be grossed up as this is post tax – equivalent to about $14K or $24K in total equivalent growth) – with full flexibility and access to it immediately (if put into an offset)
2. Invest into an index fund outside super – grows into $40K – full flexibility with access to it immediately (subject to market fluctuations of course which could go up or down)
3. Invest into an index fund inside Super – grows into $77K – But no access to it until preservation age – the least flexible of all scenario’s
Vince’s Top financial tips
- You should have a combination of some growth and some defensive assets. For most young people, the balance is probably somewhere between 90:10. Adding some low risk Australian government bonds has a non linear effect on risk adjusted return (return per unit risk). The switch from 80:20 to 90:10 is larger than the switch from 90:10 to 95:5.
- Vince suggests you need to carefully consider the following six areas;
- How you prepare for the unexpected
- How you prepare for retirement
- Where you live
- What car you drive
- How you make a living
- Who you marry
3. Visit a financial advisor as early as possible. $500 might sound like a lot but in the grand scheme of things it is a small price to pay
- Wrap account with BT Panorama
- Primarily in Index funds from a mix of Vanguard, BT and Black Rock
- 50% international exposure
- 10% gold ETF
Vince’s top Books
The defining decade: Why your 20’s matter by Meg Jay
Vince recommends everyone should have a read of this, not just young people
Your Money or Your life by Vicki Robins
Vince likes Vicki’s concept of money being time units, and uses this book frequently with his clients. Vince recommends trying to find the original copy. Check out my detailed review of Your Money or Your life HERE
Index Funds: The 12-Step Recovery Program for Active Investors by Mark Hebner
Captain FI 0:05
Ladies and gentlemen, this is your captain speaking. Welcome aboard Captain thought the Financial Independence Podcast.
Good day, welcome to an episode of Captain FI, the Financial Independence Podcast where I open the copy for some of the best and brightest in personal finance, as well as those who’ve reached or are on their way to financial independence.
Get a and welcome to the Captain FI podcast. Today we are completing leg two of our two legged journey on superannuation. On board again, we have Vince Scully, otherwise better known as the life shuba to continue our chat about wealth, financial independence, retirement, and how superannuation fits into your financial picture. Now, it was a pretty mammoth effort on the first leg. So I would recommend that anyone listening today actually go back and refresh themselves on part one of the discussion, which will then logically flow into this episode.
Vince Scully 1:27
So we talked about as delegation being number one, transparency mean number two, and then structure is number three.
And that is
they normally invest in. So they, the manager will generally allocate almost all of the money to a thing called a PST or pooled superannuation trust, and they will employ managers to manage that money. Ah, now this is going this is going to answer my next question. Because when I was delving into the hostplus, PDS,
Captain FI 2:19
I found the paragraph, I think it was 5.3. And it was actually what kicked off you and I having this discussion in the first place, which was how is the bloody money invested?
Vince Scully 2:31
Yeah. Now, I don’t think this is necessarily saying anyone’s doing something dodgy. It’s a consequence of how you manage $70 billion for hundreds of 1000s of people. The way they have to do that is they will in because none of these funds actually work. Very few of these funds actually manage the money themselves, they will employ an asset consultant. And there’s a handful of them to select managers. And then they will engage those managers and say, Here’s $500 million. And here’s a mandate that I want you to invest in accordance with, so let’s give them a set of rules. And those rules might say, well, I want you to invest only in shoes that are in the ASX 200. And don’t invest in alcohol, as an example, but there’ll be a set of rules that the manager has to comply with. And it will usually also require them to be fully invested. So there’s no market timing generally. So even if a manager believes that the basic tune is going to tank tomorrow, they still have to be more or less fully invested. So that mandate will then dictate what they’re to do. So they’ve been given X dollars. And they will have a mandate to invest it in. So they’ll have taken their $70 billion, whatever it is, and divvied it up among maybe two dozen managers. There’s a limit to how many they can manage. You’ve just think about the administrative overhead in handing the money over meeting with the consultants doing the research. So there’s a finite limit to how big you can meet chunks you can divide it up into, and obviously once those chunks get so small, the relative return doesn’t really, you know, so if if you gave someone if you’re running a $70 billion fund and you give someone $10 million, no matter what they do with that $10 million, it’s not going to really change the overall return. Right. So you need to do this in big chunks. And they will set these mandates in place and they will get reviewed annually or quarterly based on performance. Or whatever the acid consultants think. And so that decision is made independent of your decision to take the Australian shares box. Obviously, they want to generally line up with their expected flows. But these decisions are made ahead of time. And they’re not changed every day. So when you rock up with your $10,000, and say, I want this invested in Australian shares, hostplus, don’t tap there, or the fund manager on the shoulder and go, here’s another 10,000 for you. Because they’ll have agreed that we look here’s 100 million to manage in so there is a almost certainty that the precise allocation of the fund will not line up with the sum of the options made by the individuals. And that’s where these ranges come in. So the actual allocation will move around based on people’s behaviour. So if anyone if you assume it doesn’t precisely line up now, there’s got to be some method of divvying up the actual returns. So let’s assume that they have lecien was the equities, then the sum of the decisions people have made?
Well, somebody is going to regret a return that doesn’t look like precisely like Ozzie equities. And there’s no disclosure as to how that divvying up is actually done. I suspect that the balanced Fund, which is the one that appears in all the lead tables, is the one that’s going to get the good end of that deal.
But we just don’t know, there is no statement as to how that allocation is done. So your allocation, if you said I want 100% of the shares or 50% of the shares, there’s no flexibility in it. So how are they going to give you that return? If they haven’t actually got those issues? The answer is we just don’t know. And that disclosure is unique. Even though this problem is not unique. I haven’t seen that paragraph in any other
fund. I would challenge most people to read that paragraph and go, what does this actually mean for me?
There’s a former High Court Justice guy called syringe nice Mason, who said in one of his judgement that the most effective form of concealment is full and detailed disclosure. And I think he was absolutely right, in this case that that paragraph says, identifies the precise problem. But in a way that the vast bulk of people reading it would not know what it meant.
Captain FI 8:02
Well, it confused the shit out of me.
Vince Scully 8:04
I’m not surprised.
Captain FI 8:05
I, you know, I thought I had a bit of a rough grasp on money, but apparently not. I actually, yeah, I took to the internet.
Thankfully, people like yourself and actually had a another, a mathematician, actually.
Well, she actually went right out of her way to message me back. And we spoke back and forth in detail about paragraph 5.3. And, you know, it turned out she really knew what she was doing because she’s, you know, a PhD in statistics. So definitely qualified to be commenting on this, more so than I am. But the vast bulk of members aren’t PhDs in statistics, or qualified advisors. And I must admit, I have test drove the paragraph with a whole bunch of advisors.
Vince Scully 8:59
And I’m not sure that everyone really got the point. I had a lengthy discussion with one of the top superannuation lawyers in town on this point. And she was intrigued as to why they disclosed It was very few others do, because many of the other big funds will do exactly the same thing. So this is not someone at hostplus doing anything illegal or nefarious. It’s just a consequence of the structure and trying to make a an old pooled fund behave like a choice platform. So I’m being negative. But for me, this is a deal breaker, I would not put my mother into this fund. Well, so having got the right asset allocation, with the right level of transparency in the right structure. Now let’s look at fees. And obviously, low fees are generally better than high fees. Although some asset classes just cost more than others. So bonds typically cost more to manage than equities. infrastructure costs more to manage than ordinary shares. Real Estate costs more to manage private equity costs a lot more to manage. So you got to be careful as to what you’re getting for it. I mean, there are a few so called zero fee funds. Where that’s achieved by investing heavily in cash. So sure you’re saving fees. But you’re just not getting the return you want. There are also some funds that achieve it by using derivatives, which Warren Buffett called weapons of wealth described, mass wealth destruction or something. But the cost of buying a derivative isn’t a cost that gets disclosed in the management fee. So if you are running a fund, and you do a deal with an investment bank, and you say, I’m going to give you $100 million of cash. And I’m going to swap you the return on these cash for the return on the ASX 200. Less point 5% you’ve now got 100% equity fund with a fee of zero, but you’ll still end up with the index minus point five, but the disclose fee is zero. Whereas if you contrast that with Satan to the counterparty, go and invest this in the ASX 200, and I’ll pay you 10 basis points. The investor is point 4% better off, but the fee will be point 10.1 instead of zero. Again, not to just anyone’s doing anything illegal or naughty. It’s just that how the disclosure system works, that you don’t count the cost of the investment that you would pay if you bought it directly.
Captain FI 12:05
Okay, so the point here is that fees aren’t necessarily phase. That’s right. And this comes back to my transparency point.
Vince Scully 12:11
So if you look at the rest, zero, so called zero fee fund that’s constructed using derivatives, things called total return swaps. And it will show zero fee. But that’s not to say, there are no costs. And again, for me, that’s a deal breaker.
Captain FI 12:30
Now I hear the word swap hybrid derivative and immediately that God raises My God.
Vince Scully 12:39
Do you know anyone who’s watched The Big Short? Yeah, should rightly, and that that movie, having lived through most of them is remarkably close to the truth. It hasn’t been dramatised that much. And I mean, there are places for these things. So if you go and buy some overseas bonds, you will want to potentially swap the currency back. That’s a derivative. But it’s being used to manage risk, rather than to create an investment that didn’t otherwise exist.
Captain FI 13:22
Putting all of this together leads for fear for your average punter. All considering, I guess some of the benefits of these, you know, you mentioned the big six, yep. Fun. You know, they it’s an easy way. They’re my super certified, they offer you some insurances. How do you weigh up which fund is the best and versus going off and using a wrap fund, just get yourself
Vince Scully 13:48
the direct exposure well to just deal with insurance for a moment. Because that does muddy the waters a bit. When always say that you should never let the insurance tail wag the investment dog and my superfan has to at least offer default cover. And for many people, like about a quarter of the workforce. These default insurances in your super fund is the only place you can buy super fast or buy insurance, either because of health or what they do for a living or what they do for hobbies. So if you’re a I suspect if you’re Yeah, climbing cellphone towers and fixing them, you’re going to struggle to get insurance or if you’ve got a pre existing condition, you may very well struggled to get insurance. But for everyone else, buying insurance in your Superfund could very well lock you into an underperforming fund in the future. So you might get insurance today. And in 10 years time your health has deteriorated. And now you can’t move, because this is the if you move insurer, you will get a pre existing condition exclusion. And therefore you’re stuck in this fund. So for most people, if you can actually get insurance elsewhere, and the majority can, you should do so. Firstly, because of that potential login. And the other major reason is that the default insurance in your Superfund is a contract between the Superfund and the insurance company. And the terms and conditions that will change over time, because the superfans all go and tender that contract out. And they’re incentivized to buy the cheap option. Because most people look at the price, not the quality. You make some interesting points about the house plus insurance in your article, which has a number of occupational exclusions, and that will be about managing the cost. And maybe you’d say, well, that’s fair, because if you did include those people, it would increase the price for everyone. And maybe that’s not fair. So because they can change. And those changes can mean that, in some cases, if you weren’t working on the day, that the change happened, you might suddenly find your current, you might find that they changed the definition of what disabled means. Australian super changed the definition recently. Which meant that much fewer people would qualify as being totally and permanently disabled. And you may find that if you’re no longer working for a member employer, you may not be able to keep your insurance. So for example, with rest, if you’re not working for a employer who’s a member of rest, contributing sgc for you, you don’t get to have insurance coverage. So if you can, you should look to having a insurance policy of your own, which will usually be medically underwritten, which means the insurer will have a look at how you are today and make you an offer, taking that into account. And all of those policies are what’s known as guaranteed renewable, which means that once you’re in, they can’t reach make your cover worse than you got. Which means that if you take it out, when you’re 25, and healthy, and 40, you get cancer, they can say actually, we’re not gonna cover you anymore, or cancer is now a pre existing conditions, so you ain’t going to get cover for it in the future. So all of those things mean that a retail policy will be a better product. It may be more expensive, but not always.
But you know, why are you buying insurance, you buying insurance to cover the risks that you couldn’t possibly afford to save enough money to cover? And anyone who depends on their paycheck to pay the bills, needs income protection, and you can still use your super to pay for it. But you can then move it as you change superfunds. So I would discourage unless you’re one of those people who can’t get insurance elsewhere. I wouldn’t be using that as a way to pick a Superfund and it does get muddied. Yeah, the big thing is that if you read anything about this in the in the media, they’ll say the two things you need to look at insurance and fees. Actually, that’s number four and number five in my book.
Captain FI 19:27
So that’s another another latte fallacies,
Vince Scully 19:30
although that’s not actually one that made it into the book. That’s not one of the 17 myths in the book.
Captain FI 19:39
Okay, so, again, it comes down to price.
Vince Scully 19:43
Yes. And ultimately, as I said, this is complicated. This is, you know, one of the six big decisions you’re going to make in your life that will determine your success with life and money. Now those six decisions which are really around You know how you prepare for the unexpected? How you prepare for retirement, where you live, what you drive, how you make a living, and who you marry. And the first four of those generally shouldn’t be done without financial advice. Unfortunately, financial advice in this country is difficult to find stuff that’s not tainted by being provided by a bank or an insurance company, or is affordable. So to find, you know, 80% of Australians have never seen a financial advisor. And biggest reasons. I don’t know how to find one, I’m not sure I really trust them. And they don’t look after people like me. And nothing could be further from the truth in terms of the need for financial advice. And when we know that financial stress is the biggest financial problems, the biggest cause of stress in the country, most people live paycheck to paycheck. And yet, I’ve seen this over 35 years, the effect that a little bit of advice can have on that is just huge. And that sort of, that’s why I set up liveship in this industry has been very good to me. But not enough people are getting it. So you might say, Well, look, I’ve only got $10,000. In my super, do I really need advice? Well, that’s the time when it makes the biggest difference. Because once you set it on the right track, you can, to a large extent, take your hand off the throttle, and let time and risk do its job. And but you know, finding, finding advices a bit of a problem. And I don’t think the government really thought about this when they decided in the early 90s to say Actually, let’s now make every, every one of these 25 million Australians and many fund managers to look after their own retirement. And we were set loose on a it was now at a $3 trillion pile of cash without the tools to navigate that route. And we’ve just spent an hour or so talking about some pretty fundamental things where people in the media have spruiked a particular option. And $2 billion of Australia’s retirement savings flowed in that direction. Without any consideration of the points that we’ve just talked about.
Captain FI 23:04
So how do we what do we do with this information, though, ensnare? So now that we sort of understand a bit more about those four pillars? And guess the fifth being insurance? How do we piece that together to find a good fund? Yeah.
Vince Scully 23:21
With great difficulty, if you want to do this yourself. And that’s because you know, for all the reasons that we’ve just talked about. Now, this may sound self serving, but you really should get advice. I don’t care whether you get it from from me or from someone else. But we will do it for $499. And that will go in review where you are. Look at your risk goals and objectives and recommend the fund and deal with all the all the paperwork. But I think the important point is that you get advice and advice from someone who’s not got a vested interest in which funds you choose. So have you gone ask your the advisor at Ozzie super or somebody who’s licenced by industry financial planning. They’ve obviously got a vested interest in Yes, you should invest money in Super. In fact, you should invest more money into it. You should salary sacrifice. Oh, and you should put it in my fund. Yeah, that’s like walking into a, a Ford showroom and expecting the dealer to say, Look, my II drive less than 5000 kilometres a year. Why are you just going to go get membership. He may very well tell you that cheapest Ford that he’s got, or the Ford that’s most suitable for you. But he’s not going to tell you actually maybe you should you just get to go get membership. And that’s a problem in the way the industry is structured in Australia. But being purely self serving I’d love you to come to us at lunch shopping. And we will charge you a flat $499 for a piece of advice that would set you on the right road. And you do the earlier you do that, the better. Because as you would know, life gets in the way, and you take your first job out of uni or out of school. And often that’s seen in retail, or hospitality for a lot of Australians. And you end up with in the industry fund, or the default fund that that first employer had, because you’ve got no idea and rightly so because nobody reads 150 PDS is for pleasure. Make one’s hard enough, but either read 150 of them. And
Captain FI 25:55
well, I’m just struggling with one paragraph.
Vince Scully 25:57
Yeah, precisely. So, yeah, it’s not easy. And that was what I set out to do having been influential eyes looking after people who already had lots of money. And the difference that I made by getting them one or 2%, a year, better return wasn’t going to change their lives. But when you’re dealing with people who are in their 20s 30s 40s, in the starting starting adulting, there coupling, nesting and parenting, you can make a huge difference to their life by the right piece of advice at the right time. And most people don’t have the time to focus on these things. So as you go into your first one, then you start, you might go overseas for a few years, although no one’s going overseas right now, you might change jobs a few times, and you get to 30. And suddenly, you’ve got to use pay and your super fund. And now it’s pretty material. And now it really matters. But if you can, you know, once you get to that sort of 10 or $20,000 balance $500 advice will go a long way.
Captain FI 27:20
Well, yeah, I’ve seen the examples. And as you mentioned, right at the start of the episode, with the example of what do you do with your $10,000 putting into the super can make a huge difference. I’ve seen that your fees can obviously make a massive difference as well like talking in the hundreds of 1000s of dollars
Vince Scully 27:42
and more so now than they used to I mean, back in the 80s. When I when I started in this industry in London, the government regulated brokerage. So there was a fixed price, every broker in London charge you the same price, because the government regulated the price of brokerage. And it was something like 1% to try it. What is it today? 95. Yeah, and but back then returns were higher, because inflation was high. So if you were paying 1% and earning 15. Well, 1% didn’t really matter too much. But if returns are now five to 10 1%, pretty material. And you know, we would do, a lot of our members would pay point three, eight on their super fund, which is in many cases less than the fixed dollar 50 a week, this whole movement around fire, that it’s got people thinking about it, and engagements the first step. And once you actually start to think about it, I think when we were talking off air before we started 30% of Australians don’t even think the soup is their money. So you’ve got to get over that step. And then go well, actually it is my money. And this is going to pay me to live for half of my adult life potentially. And two thirds of the amount I’m going to spend in retirement comes from returns. So it really matters. I’ll say it again, two thirds of what you spend in retirement comes from returns not contributions. Yeah, how they changing. One 1% a year makes a material difference. A Vanguard for example, who you would expect to be on the side of the individual advised by individual investor. they reckon that a good advisor can potentially add 3% a year in returns. Much of that through going through the four things that we talk today and behaviour management. That, you know, when you’re starting, what matters is how much you put in. But very quickly, the returns started to take over. And that’s what matters. And the only thing that drives returns is risk. Now, that’s not the time that more risk gets more return. But if you want more return, you have to take more risk. And you need to understand the difference between higher returns and better returns.
Captain FI 30:35
Okay, so Vince, you said earlier, you had your self managed super fund as a result of your business and that you were in the process of unwinding that. Now bearing in mind that personal finances super personal, it’s might not be appropriate for other listeners, but how do you personally invest your superannuation, now that your SMSF is wrapped up,
Vince Scully 31:02
while I’m in the process of wrapping up, so I’m transferring it to bt panorama, which is one of these replicates. And it will be invested primarily in index funds. From a mixture of Vanguard, bt, and BlackRock and a little bit of, and some ETFs. So I, I’ve got about 10% of gold 10% of my portfolio is in gold, which is one of those things that, you know, doesn’t generate an income of itself, but it does provide quite significant smoothing benefit, because it’s negatively correlated to a lot of other things. So when gold goes up, the Aussie dollar often goes up. And it often goes up when shares go down. So it provides a lot of smoothing, even though Warren Buffett thinks it’s a barbaric relic. But he does, I can show you that the graph is a well here’s what happens when you put 10% gold into a portfolio. It I’m probably 50% invested offshore. I have a relatively low allocation to defensives sitting around the 15% mark. And obviously, a hard a large chunk of my personal wealth is tied up in there in the luxury business.
Captain FI 32:36
So when you say defensive, does that include the gold? Or is that
Vince Scully 32:41
I would consider? I would consider gold to be defensive in that context.
Captain FI 32:46
Yeah. Okay. Cool. Well, that’s, I think that’s a really great insight for people, especially given that, you know, as you said, your age now having just reached preservation age, do you see yourself shifting towards more defensive or income focused investments as you get older?
Vince Scully 33:06
Yeah, I mean, one of the things that I’m a big fan of ease, and this may sound a bit old fashioned is I’m a big fan of annuities. For the subject depends on how much you’ve got, but an annuity is a takes away the how long you’re going to live risk. Which, for many of us, that’s actually the big risk. The two big risks you got to manage after you retire, what the actuaries call longevity risk. I mean, only an actuary could think of having a long and happy life as being a risk, but it is a risk. Obviously, the longer you live, the more money you need. And you’ve got to plan out that spending allowance factor you don’t actually know when you’re gonna have to spend your last dollar. Yeah, my, my, my first boss said that when it comes to financial planning, The Undertaker’s check should bounce. And no, we don’t do checks anymore. But that will be the headline.
Captain FI 34:20
That’s the I think we’ve got the we’ve got the headline for the, for the for the, the article, Vince, that’ll be the top quote, The the check for the undertaker should bounce.
Vince Scully 34:30
Now obviously, it’s practically impossible to target that. But annuities are one ways of doing that. And we’ve now got these things called deferred annuities, which is a really smart thing and that is, if you let’s say you retired 65. You can actually put some money into what’s called a deferred annuity which will be annuity but it will start when you turn say 82 and I picked 82 because that’s actually the expected lifespan so half of people Die by 82. And so that allows you to spend your money between 65 and 82. without having to worry about how long you’re going to live, and then at 82, the rest of it will kick in, and you’ve covered the rest of your life. And the reason that works is because so many people, people don’t like annuities, because they’re relatively low return, because they have to be invested very conservatively. And the insurance company has to make a profit on predicting when you’re going to die. And, you know, we know, we know with great certainty, when people on average will die. So if you take enough people, you can be almost dead certain, if you pardon, if that’s unfortunate. When on average, they’re going to die, it’s impossible to predict for an individual. But for the population as a whole, we know this with great precision. So by having started at two, you’re actually picking up again, acute word that actually is use called morbidity credits, or mortality credits, which is really the guys who die before they get to or subsidising your life after it. So it can be a really attractive way of getting rid of that uncertainty about how long am I going to make this money last, the alternative is to focus on things like the so called 4% rule, which is not actually a rule, and it’s not actually 4%. But it’s a good way of thinking about it. And that’s really just a back calculation that says, look, we don’t know what order these returns are going to come in, and we don’t know how long you’re going to live. But over the last 80 years, if you’d withdrawn 4%, you would never run out of money. Now that was based on the US. And it was based on not paying tax. And it was in a period when we had 20 years of rapid inflation. So who knows what it is in the future. But it’s a good way of thinking about it. And in practice, most people will adjust their spending when markets do different things. So the thought that someone’s going to take out 4% indexed to inflation, regardless of what the market actually does, is simplistic, and people just don’t behave that way. And what you find is that your expenses are high, early in retirement, when you do all those things that you always wanted to do, then you slowly lose your ability and desire to actually do them. So your expenses fall, and then they rise rapidly in the last couple of years. Because you spend a tonne of money on medical matters. So but it’s a good way of thinking about how much might I need to not have to worry. And if I spend $40,000 a year, a million dollars is going to be pretty close. But it’s not a it’s not Newton’s fourth law of thermodynamics. It’s a good indication. And it’s just a handy rule of thumb.
Captain FI 38:32
Okay, that’s a that’s a really good point. And, you know, for most people that following the captain five blog, I’ve got a annuity Fund, which is through my super. And that’s basically through through my job. And, you know, that kind of takes for me a lot of the risk out of those later years.
Vince Scully 38:55
And for most people, the age pension forms the same purpose that if you were to go and buy an annuity, equal to the age pension, it’s gonna cost you close to a million dollars. Well, so it’s a very valuable tool. And, you know, I see so much stuff in, in the media and on the internet, saying, Oh, you don’t want to end up in the age pension, you’re actually this is a million dollar asset that you got. So it needs to be part of your plan. And and that’s why you might you’ll often find that your allocation to growth, assets can rise as you get older. So you want to be you want to have a few years cash coming into retirement. Because that’s your risky, risky period. Your biggest risk is sort of five years before time to five years after retirement. Because that’s when you got the biggest amount have money in your pot. So you can’t really afford to get a bad year in those periods that periods. So, yeah, so if you retired in 1969, or whenever the late 60s, bust was, you would have had problems. But if you’ve got enough cash to keep going at that point, and then as you get older, you’re going to draw down on your money and the value of this annuity being the age pension starts to rise, then you can actually afford to crank up your risk in your actual money. Well,
Captain FI 40:39
that’s certainly how I personally balanced my understanding of risk reward is that I honestly live on a shoestring budget, and it’s, I’m not a miser, I’m not just this asshole that you know, collects cans at work or anything, I just don’t tend to smoke those Cuban cigars and drink red champagne. I’m more than happy drinking my ld $3 bottle of wine, which I think’s pretty good. By the way,
Vince Scully 41:07
I’ve got a really good Tempranillo. It’s called El Toro Metro, which I assume means the metro ball. But it’s like nine bucks. And it’s one of the most enjoyable ones I’ve drunk. I mean, I’m a bit of a, I do enjoy my wine. And I’ve got a wine fridge and my garish but fat $9 bottle is just great value.
Captain FI 41:35
What will exactly and a huge, I guess a lot of people within the fire community, they, they are able to live similar lifestyles. And when I look at this traditional concept of risk, risk return, it almost seems from a behavioural point of view, if we can really sort out our spending and our behaviours. Like that’s where you’re getting most of your, your yield, like your most of your, your risk reduction. Because if I can live off 21, the moment I’m living off $30,000 a year in Sydney. And as you mentioned, you only need a few years worth of cash, well say three years, that’s under $100,000. Whereas I know some people that literally, they’re earning $200,000, but they’re spending $210,000 a year. So they’re going backwards, absolutely. So their level of risk that they can accept, in that they need that income is a lot different to mine. And so I kind of that’s how I sleep really well at night, being close to 100% equities. Because I just go well, you know what, if the market implodes, that’s fine, I don’t really need the money, and I’ve still got dividends, and I’ve got this passive income from other sources. So I’m not, I’m not totally freaked out about that. So, you know, potentially, lowering your cost of living and looking into something like an annuity as well could be a better way to
Vince Scully 43:06
free that balance between how much of my income Am I going to spend now, and how much we’re going to spend later, we started saying that everyone has to reach fi at some point. And it’s about converting human capital into financial capital. And the question is how fast you want to do that, the faster you do it, the less you get to spend. But the more time you get. But whether you then go the next step and say, Well, now that I’m fine, I should now re retire. And that decision is the tricky one. Because if you’re 35, and you’ve achieved five and you’re making an average of save 80 grand a year, the decision to stop your human capital working is a million dollar decision. Yeah, and you’ve got to say, I’m now gonna toast an acid worth a million dollars. What am I getting instead? So you need to be retiring to something rather than retiring from something. So if you’re retiring because you don’t like your boss, or you don’t like your job, toasting a million dollars could be a really expensive way of fixing that problem. And so I do a lot of work with them members around this whole time life trade off. And the concept of what is enough is critical to them. And jack Bogle book enough is actually an interesting one on that and he’s less of an ad for Vanguard then the little book of investing but but the three there’s three components to enough in my book. And that is enough money to sleep at night, which is what most people in the fire movement think about. And then enough purpose to get you up in the morning, which is the bit that a lot of people miss out on. And then enough joy to sustain you through the day. And that’s where the extreme frugality bit starts to cause issues, especially if both partners aren’t perfectly on board. So if you, if you calculate your fine number, based on extreme frugality, you will then effectively condemning yourself to the same level of frugality for the rest of your life. And that may be what you want. But, you know, as I said, the decision to retire early for many people is a million dollar or more decision. And I’m not sure that most people know that they’re getting a million dollars of value in return.
Captain FI 46:09
So it’s a trade off. Yeah.
Vince Scully 46:12
And I try to be different for everybody. And I’ve had two goals in retiring early. And the first one lasted three months. And the second one lasted two years. So
Unknown Speaker 46:25
and the thing that was like you
Vince Scully 46:26
love your job? Well, the thing that was missing was purpose. And I got caught up in creating something that is not a luxury that everyone has. But, you know, on the other side, I see a lot of early 30 lawyers who, you know, they’re on the partner track. They’ve been paid a lot of money since they graduated, they’ve worked really hard for it. But they built up a lifestyle to go with that. income, and they find they’re now trapped in a job they may or may not like. And so unpicking the what matters for them is pretty tricky.
Captain FI 47:15
You might write write another book, but the Lloyd, it might be called the Lamborghini fallacy. That’s true. So, I want to, I want to, we got to wrap up soon. But I want to ask you a bit more about your book, because obviously, we’ve talked a little bit about it. And you just mentioned the three pillars of enough. But I thought was really cool, would you? You know, and I guess it’s pretty cruel to ask you to try and summarise things, but specifically about financial independence. Are you talking about your eight steps? Yeah, would you be able to, to touch on those eight steps, please the eight steps.
Vince Scully 47:57
And this is not rocket science. But the eight steps is we start off with the three foundation steps, which is spend less than you earn, build an emergency stash and pay off your debts. So far, so good, then we have the three protective steps. And these are not naturally intended to be done in order the three steps in our prepare for the unexpected, which is really about, you know, understanding what risks you’re facing in life and how you should manage them. So obviously, emergency stash insurance, savings. Then sort your super, which is all those things that we talked about today, which is really about if for most people it’s find it all rounded up, invest in the right allocation and keep your hands off. And then when you get round to it, put some more money in and then the the sixth protectors that six of the third protectors that the sixth overall ease sought your paperwork in, which is really around decluttering and around making sure that you’ve got all those important documents like will power of attorney, guardianship your kids. prenup if that’s what you do, and instructions as to what you’re making sure that someone can pick up the pieces of your financial life if you are not there to do it. I mean, would you rather know where to find all of your where all your money is and what you want done with it if you couldn’t make the decision yourself
Unknown Speaker 49:44
Captain FI 49:46
luckily for me there I actually read a bit before investors email about this. So I have I have actually got everything in one place and I have got I have Got the fireproof safe. I’ve been teased about that in the past. But it’s it is there ready to go, she’s
Vince Scully 50:06
got the key, he’s also about decluttering. And I must admit I am, I was a serial offender in this, I never delete an email. So I have hundreds of 1000s of emails in my archive. I use never before digital bills came along, I never threw out bills. So when I, after my divorce, and I’m packing up the family home, I actually threw out over 20 years with a credit card statements. So I had my first credit card statement that I received, after I graduated in this file, it was all perfectly filed, you could find it, use chronological order neatly filed. But there was a lot of it. And now with digital bills, I just feel so liberated. And then the final two, which are the exciting bits is buy and pay off your home and invest your surplus, and the home is actually quite an important part. Because it’s about it’s, it’s not so much investment, I don’t like to think of the family home as an investment. But it is a good indicator of success with money. And it’s because we are all we all come to adulthood short real estate, in the sense that we have to have somewhere to live. And you can choose whether to buy that on the spot market by renting. Or you can buy it on the fixed market by buying. And when you buy it on the spot market, over time, the cost rises. In generally, it keeps pace with wages. So rentals rents generally rise with wages. Whereas on the fixed market, you might pay 25 or 30 years rent to buy. But after you’ve used 30 years of rent, it still has a value. Now whether the value is more or less than you paid for it is, yeah, who knows. But you’ve actually locked in that cost. And by the time you get to a year sort of 10 or 15, the variable cost will be higher than the fixed cost over any time period you can pick. Now that’s not an excuse to go and buy the biggest house you can afford. It’s about buying the right amount of house fuel position. And one of the you know, along with too much car too much houses the other big creator stress that I see. And then of course investing is about that, when I take the bit of my income that are not consuming today. Where do I invest it. And that will be a combination of the three things about your paying off your home. Investing assets, super investing in Super. And what you do with that depends on the goal you’re trying to achieve. So if you’re if you’re 25, and you want to open a yoga studio, well, you’re gonna have some money for that you need some equipment, you’re going to need some rent, probably you’re going to need to build a survive when you give up your job. You need to spend some money on advertising. And you’re going to need to do that in the short term. So that’s a different pool of money than the I’m saving money to pay for my kids education. One has a flexible timeframe and the other doesn’t. So your kids not going to change what year they starting use seven just because the stock market had a bad year. So what you do with the money is based on the goal and your time horizon. And when it comes to investing, there’s only three levers you can pull how much you put in, how long you’ve got, and what return you get. And you can arbitrary choose all three. So that’s that’s the balls of the meat of the book. And that’s what we do here at live Shepherd that we do individual topic advice. So you can pick from our menu and say, Look, I want some insurance advice, or I want some investment advice or on some super advice. Or I want help paying off my home loan. I want help buying investment property, all of those individual topics you can pick off but it’s all delivered within this overall framework. And the book goes through each of those in obviously more detail than I’ve just done here. But starts off with the big fallacies. Yeah, all the things that your parents have told you, which may or you read in the paper, which may very well have been true 2030 years ago.
Yeah, so when I graduated in 1983 by the biggest African possibly afford sort of made sense. Because inflation was high. So when you got 15% inflation in interest rates or 11, sort of makes sense to have the biggest asset you didn’t get your hands on. But today, your wages growth is flat, inflation is low. So it makes sense. Yeah. And the giving up your morning coffee is, you know, another one of those. That’s not what’s making the difference between success and failure with money. And in fact, if whether you buy coffee in the morning, makes a difference to your budget, then something else shoot is hugely wrong. Yeah, and why make 365 decisions when you could make one, so get the big six, right, the way you live, what you drive, how you prepare for the unexpected, how you prepare for retirement? How you make a living and who you marry, get the six Raj, and you really don’t have to worry about with you have smashed avocado on Saturday morning, or a lot.
Captain FI 56:12
Yeah, everything should really should fall fall into place. in aviation, we talk about getting maxed out, or decision fatigue or decision saturation. And it happens to me, it happens to everyone at some point where you just couldn’t be stopped making another decision. So yeah, I really like the sound of just sorting it out once sorting it out properly, and then giving yourself the freedom and the flexibility to to live your best life basically. So Vince, now we’ve talked about a couple of really good books. And you know, you mentioned a few great ones today. Is there any other particular books over your career in your life that have been really powerful for you? Oh, absolutely. If
Vince Scully 56:57
I reckon that every 20 somethings should read this book. There’s a book called the defining decade by an American psychologist called Meg J. And she works with young people. And this book is, she does it as a series of case studies of her obviously anonymized clients, but it goes through the big things that matter in your 20s. So the title of the book is, why your 20s matter really, and Iraq, I recommend that every 20 something reads that book. I just I read it. I found it at Gatwick Airport on my way back from the UK. And I read it between London and Dubai. So it’s not a big book. But I’ve seen it be life changing for young people. So anyone who’s got a 20 something. son, daughter, niece, nephew, or they’re in fact 20 something themselves, you should read this book. The other one, which probably a bit of a cliche, is your money or your life being What’s her name?
Captain FI 58:12
Oh, Vicki, Vicki Robin Robin. Yep, fantastic book. Yeah.
Vince Scully 58:18
It’s, I mean, it gets to being a bit woowoo in places, but it does encapsulate the, the everything you buy, is being paid for with minutes of your life. And in fact, we do an exercise with our members here. We get them to jot down how many hours they worked like all the time they spend to do with work, whether it’s taking the kids to daycare, yeah, entertaining, training, reading, commuting, being at the office, going to offsites, whatever, and how much they actually earned. And what they spent on it. Sorry, how much do you spend at childcare, how much you spend on sweets, and work out what your true return per hour of your life is. And then just keep that in mind whenever you go to spin something. So if you work at that you spin, you earn a net $20 an hour. Whenever you go to spend $20 Remember, you’re just spending an hour of your life. So I mean, it’s much easier to read than the original Walden which was written in the rain, the turn of the century, I think by Henry David Thoreau who came up with the original saying about the cost of anything is the amount of your life you have to give up to buy it. That’s a hard read. That’s it’s it’s not easy, an easy read, but it’s probably the original five book and But Vickie’s book is good. Although I must admit the rewrite with the foreword by mister money moustache is not quite as good. So if you can actually get your hands on the original you can buy secondhand ones on Amazon or eBay. The Originals actually better the rewrite i think is undone some of the good stuff. Then the the other investing book, which I think is a better book better read than bogles book. what’s called a little bit of common sense is
Captain FI 1:00:32
bogles book, The Little Book of Common Sense investing you,
Vince Scully 1:00:38
which is a 230 page advert for Vanguard. But this other book by Hebner runs a business called IFA, and it’s called 12 stages of the recovering active investor. I’ll send you the link, but it it’s based on the 12 steps of the Alcoholics Anonymous thing. And it’s just 12 steps in why you shouldn’t be an active investor. And I think it’s a better read than bogles book. If you want to read Bogle read enough. That’s a much more interesting read. index funds the 12 step recovery programme for active investors, bike or ATV with a foreword by the legendary Harry Markowitz, who everyone should know something about. Buddy, don’t try reading any of his papers. So they’d be my big tips. Definitely make j anyone who’s in their 20s should read this book.
Captain FI 1:01:43
It’s been a bloody mammoth, after it’s been awesome, I’ve learned so much, you are pretty much challenged. A lot of the things that I thought I knew particularly about super. I think I’m gonna have to go and rethink a few things definitely going to be having a big thing again about insurances outside of superannuation. Because Yeah, there’s, there’s certainly a lot to consider about super, which a lot of us don’t really know. And most of us just end up in about in the default my super funds and don’t really think about it. So
Vince Scully 1:02:21
can I say that? You know, that stuff, what you and a lot of people around the whole blogosphere, if that’s the right term these days, given it’s mostly audio and video, you know, what you’re doing to raise awareness of the role that money can play in our lives. Ease is fantastic. And I like the way you positively acknowledge that, yeah, you’re making it making this up as you go along. And it’s you’re documenting your learning. Because there is a lot of stuff on YouTube in particular, which is flawed at best and dangerous at worst. And there’s a lot of people who are singularly unqualified to be making the statements they’re making. And, you know, I think if I come back and write the 2030 version of the latte fallacy, there’ll be a whole nother whole heap of new new fallacies to be. But you know, it’s great that people can share their experiences. And the more we talk about this stuff, the better because it’s something we just don’t talk about.
Captain FI 1:03:35
And so look, it’s been a mammoth effort. I’ve actually, I’ve had a great afternoon chatting, right, I’ve learned apes. So thanks so much for taking time out of your busy day to have a chat to me and all the listeners. It’s been a blast. Thank
Vince Scully 1:03:47
you for having me.
Captain FI 1:03:47
I’ll be in touch. Thanks. Great.
Vince Scully 1:03:49
You have a great one.
Captain FI 1:03:51
Thanks for listening to another episode of the Captain FI Financial Independence Podcast. To read the transcripts, or check out the show notes, head over to www dot Captain fi.com for all the details. If you have a question for the captain, make sure to get in touch. You might even make it on the airwaves. You can reach me online through the captain fire contact form or get in touch through the socials. I’m active on Facebook and Instagram as well as a number of online finance and investing forums. And finally, remember the information presented on the show and the links provided for general information purposes only. They should not be taken as constituting professional financial advice. You should always do your own research when making any financial decisions and make sure it’s appropriate for your personal circumstance.