We Invest Using the Share Market, Not Property
29 Sept, 2024
Over the last few months, I have consolidated our investments down to just two:
US 500 ETF
High Growth KiwiSaver
You can read about it here: Portfolio Rebalance: We sold $103,000 of investments!
This week, I wanted to show how our US 500 ETF investment is tracking, especially now that this is our only one. And explain how we will use it to provide income for retirement. I also have a quick update on our KiwiSaver.
I mainly wanted to share this because investing in KiwiSaver and an Exchange Traded Fund (ETF) provides an alternative to investing in rental property, something we have never wanted to do.
This blog explains how Jonny and I (aged 51 and 50) invest, that investing this way grows our wealth, and how we see our investments providing us with long-term, easily accessible income.
KiwiSaver - High Growth
The graph below represents both our KiwiSavers combined balance which is now over $200,000. We joined KiwiSaver on Day 1 in 2007. Collectively, we contribute money via voluntary and employee contributions. We invest about $290 monthly from those two sources, enough to meet the minimum contributions. In addition to our contributions, we also receive employer contributions and the government $521 each year. We invest the minimum because we are also investing elsewhere (the minimum alone won’t give us enough retirement income). We are in a High Growth, low fee (.25%) KiwiSaver fund with provider Simplicity*
*Compare my fund with yours at Sorted Smart Investor. Read more that I have written about KiwiSaver HERE.
The graph represents both our KiwiSavers combined balance which is now over $200,000.
We are 14+ years away from turning 65. Based on my calculations (I’ve used the projections offered by my provider), our combined balance should reach $500,000 by then. I think it will grow higher than that because they base their projections on a rate of return of a low 5.5%. Time will tell. We will stay in a high-growth fund well beyond the age of 65.
How will we use KiwiSaver?
One day, when we turn 65, we will work out the shortfall between our income and expenses and use KiwiSaver to cover that gap. For example, if we spend $5,000 a month but only earn $4,000, we will sell $1,000 a month of our KiwiSaver to top us up.
It is relatively straightforward.
S&P 500 ETF Fund (Ticker code USF)
Our second investment is a Smartshares US 500 ETF (USF). I track the performance of this investment using Sharesight. Thank goodness. I used to try to track it using a spreadsheet, and it was a complete disaster. Their math is better than mine.
Each month we contribute about 35% of our take home pay to these two investments, or more if we can.
I have a Sinking Fund bank account that I automatically draft $400 a week into. If I have any surplus funds, I will also transfer them into this account. I make sure I budget enough money to both invest and live. Then, I make a single monthly purchase into my ETF. When my transaction statement for that purchase is emailed to me, I forward it to Sharesight, who updates my portfolio. They track all share market fluctuations, dividend reinvestments and purchases or sale of units in the fund. The key to Sharesight is that the price is different every month when I buy, which impacts my return. They do all the calculations and give me accurate total returns.
Because I have a refer-a-friend (affiliate) code with Sharesies, any money I receive is also invested in a Smartshares US 500 ETF via Sharesies. It’s the same fund, and I’m just using a different provider to buy it. Because I can connect Sharesies with Sharesight, these trades are automatically updated in my Sharesight portfolio, which is super helpful.
My Sharesight screen showing the performance of our Smartshares US 500 ETF
As you can see, year by year, our investment grows. Unlike owning a rental property, I know the value of our assets at all times and the income they can generate. If I chose to, I could sell a portion and have the money in my bank within two days.
Our S&P 500 ETF grows because it tracks the trajectory of the top 500 companies in America. This graph shows performance since 1996:
Our intention with this investment is to keep contributing each month and build it as high as possible. Our rough math is that for every $100,000 we have invested (in both KiwiSaver and ETF), we can harvest 4%, or $4,000, of after-tax income each year. I wrote this blog post about how our investments gave us a $20,000 passive income in 2024: Applying the 4% Rule. We are selling!
Quick math!
If you have $500,000 invested, you could draw an annual passive income of $20,000.
So:
$600,000 = $24,000
$700,000 = $28,000
$800,000 = $32,000
$900,000 = $36,000
$1,000,000 $40,000
$1,500,000 = $60,000
When we are ready to retire, we expect to sell off a small percentage of our total investment value once a year and move that money into our bank account. The 4% Rule is more of a guide than a firm rule, and in some years, we could sell a little more, sometimes a little less, depending on how the share market is performing. This will provide a year's worth of income, which we can “pay” out to ourselves weekly.
We may also preload three years of income in our bank account to cushion ourselves from share market volatility, but I’ll think about that closer to the time. Authors Mary Holm and Martin Hawes discuss having this cash buffer when you retire.
Early Retirement
Jonny and I have zero intention of working a full-time job up to the age of 65, and we currently both work part-time. We are inching closer to making having to work optional. We kōrero about work quite a lot and have concluded that we may always work a little and make some income. How so? Simply because ways to make money keep presenting themselves to us, and if it's something we enjoy doing, we say yes. For example, Jonny was offered a short-term graphic design job, which he decided to take. I was offered the chance to write an article for a company, and I jumped at the opportunity as I knew I would enjoy it.
Ultimately we will get our investments to a point where we do not have to accept any work, but a little extra income is always likely to find its way to us.
The next big step
Within the next few years, we will downsize our home, buy a smaller, cheaper one, and invest the freed-up equity into our ETF fund. So, although our combined investment balance is just over $500,000 now, expect to see a big jump when that happens. With continued contributions into our funds, plus a cash injection from the sale of our home, I expect to get our investment total close to a million dollars in the next few years, which would give us a passive income of $40,000 a year, give or take. Downsizing our home is a big part of our financial plan.
Quick math!
Our home is valued at $1,000,000 (optimistic guess). We have invested $500,000 (approx).
Our home cost us $10,000 in rates, insurance, upkeep, electricity, etc, in the last 12 months.
Our investments paid us $20,000 in the last 12 months.
If we flipped this script and our home was worth $500,000, and our investments $1,000,000, our house expenses would be similar, but our investment income would be $40,000.
We have a good net worth, but it’s currently located in the wrong places! Our plan is to change this.
A simple way to invest
We continue to simplify our money. And our wealth still grows.
What I most enjoy is that this form of wealth-building has very few moving parts. Instead, it relies on our regularly contributing money from our take-home pay into a share market that rises over time. Slow and steady will win the race, and I’d rather build an investment up than pay one down. I know the value of our investments at any moment, and I see the income they can provide my whānau.
No real estate investor can ever do this.
If investing in the share market is a new concept for you, take an hour to watch JL Collins explain his book The Simple Path to Wealth in a talk he gave at Google in 2018. Or search for his book title in your podcast app as he has been interviewed countless times. I have his book if you would like to borrow it.
Our investments are still building, but we have a plan, and anyone who has followed The Happy Saver for a while has watched our plans evolve over time. We are creating an income source that will replace the money we currently earn through working, and I clearly understand how much we need as income. We are not there yet, but we are certainly heading in the right direction.
Watch this space.
