Financial independence down under
Main reason I started this blog was that there was not much of content about Australians attempting FIRE. Most of the things and rules from USA applies down under as well, but there are some major differences which I would like to mention here. There are couple of blogs on FIRE in Australia, but it seems that many of these bloggers are still working on their journey to FIRE. I am not sure how long I will be in this position but we are currently retired (I was 43 and my wife 45). We will be doing in future some paid work, but mostly because we like getting paid. Anyway, lets get to few Aussie specifics of FIRE from our point of view. Please note that many values in this article will change and please do your own research to verify the information as I am not a financial advisor.
Housing prices (especially Sydney)
This point will be hard to understand for any readers except from Hong Kong and Vancouver. Sydney has third least affordable housing in the world after the above mentioned cities. Medium house price is A$1mil (US$0.7mil). Do not expect to find many houses for this price at less than 30km from CBD. On my commute of 21km to city I used to spend 2.5h in the car each day. Australian dream is is to own the house. It used to be free standing house on 1/4 acre (1000 sqm) but these days is hard even to own an apartment. Standard here is to pay 20% cash deposit. You might be approved for loan even with 5% deposit but in that case it is necessary to pay close to $20k mortgage insurance on the top of other purchase costs especially stamp duty which in Sydney could be again $40k on average home.
Ownership rates and population growth
Australians always wanted to be homeowners. For example many countries in Europe have home ownership sitting on 30%. In Australia it is close to 70%, though the percentage is dropping especially thanks to affordability. Australian house prices do not usually fall excessively (at least not in capital cities where almost 90% of people live) as everyone considers it great investment, so there is a multiple pressure on supply. Population growth is solid at least compared to western world.
Especially due to migrants (I am one of them), people like to purchase rental properties as the investment for their retirement and on the top of it large amount of population hope to become homeowner. Also we can add popularity of Australia in many Asian countries which causes large flow of funds into our real estate as reasonably safe investment. Canada has very similar problem when small country (by population) is very popular place to invest from overseas.
Tax
Then there is favourable tax treatment of the housing investment clearly pushing house prices. Currently under negative gearing arrangement most of losses from housing investment (usually when interest and other costs are higher than rent received) can be offset against the salary income effectively decreasing tax payable on your income. Another property investment tax perk is halving of the capital gains for property held more than a year, which effectively sometimes halves tax paid on these gains. There is also land tax exemption for primary residence. Further upwards price pressure on property is caused by main residence value being exempt when asset testing is performed for the general government pension (currently mostly at 67). This causes retirees to keep high value primary residence instead of downsizing or renting due to this exemption.
Practically it is possible to say, if anyone pays off the house in Sydney, he made it very far in FIRE world. There are many places in Australia, where you can buy house for under $300k, so the difference of $700 can support you on the way to FIRE.
Shares
Major Australian share index ASX 200 has the dividend yield running close to 4% and including the capital gains 7% over the long periods. In USA dividend yield is going around 2% for the major share indexes. That makes it easier use shares for funding of the living expenses as not as many sales have to be done in the retirement and one can mostly live off the dividends. Disadvantage of this is that in the accumulation phase all this dividends are generally taxable income so the tax has to be paid annually on dividends (even if we reinvest them) which is cutting our retirement pie.
Franking credits are another Australian specialty. To limit double taxation of profit in the hands of the company and then individual who receives the dividends, the certain share of tax paid on the company profits is attached to the dividends as franking credits. This treatment decreases tax payable by the individual receiving the dividends with the franking credits attached.
Halving capital gains for assets held over a year generally applies to shares as well which cuts tax payable on shares sold and held more than a year.
Another thing which should attract investors attention is significant concentration of investments in banking and mining which can enhance the ups and lows of the economic cycles.
Superannuation and pension
From discussing the shares specifics, we can follow to another Australian specific which is superannuation. Currently most of the employees receive 9.5% on the top of their pay as superannuation. This should help them to build up retirement nest egg to retire usually in their sixties. This is very different compared to the defined benefit pensions which are now becoming rare and which give employees reasonable certainty of the income in retirement based on their years served and salary received. Governments and companies are passing risks of the variations of the retirement income on employees.
Generally these 9.5% is supposed to help you to build up the retirement nest, individuals can make extra contributions which are often favourably taxed as is generally the pension income from these funds after reaching the retirement age (usually 60). But if the investments do not perform as expected or the contributions are insufficient, retiree has to bear these risks. Luckily for Australians, we have modest general pension paid by government to retirees over 67. This general pension is income and assets tested.
Salaries
Great news for Australian FIRE community is that our average salaries are in top ten in the world. Obviously as mentioned above our housing is too one of the most expensive in the world. On the top of it thanks to, in my view, limited competition, we pay very high prices on groceries, energy, cars and many other items especially compared to USA. But as I came from eastern Europe I can definitely appreciate these high wages. It is possible to cut many expenses (especially housing, grocery and transport) through various “hacks” and then we can achieve very high saving rates. This is much harder to achieve in eastern Europe with their mostly low pay.
And of course it is necessary to avoid lifestyle inflation as your salary goes up. In our case we realised that used cars, furniture and appliances are ok even in your late forties. Not only OK. You are saving yourself money, environment and paying someone who needs to offload these goods.
Health insurance
Another good news for Aussie FIRE devotees is that you do not really need private insurance. Medicare covers all citizens and includes most of basic treatments and lot of medication comes under this scheme, which makes it reasonably priced. So far the main thing missing from Medicare in my view is dental services where most of the people have to pay full cost (crown about $2000!). That’s the reason why we had some dental work done in the Czech republic and Thailand which was usually about 1/5 of the Australian price. No complaints there especially when savings covered most of the holiday costs.
Geography (size, climate, beaches, lakes, deserts, mountains)
Not many western countries have the size and geographical variety of Australia. Everyone can have what they like. Live next to rivers, lakes, ocean or mountains (sometimes all of the above), in the hot climate or moderate as in Tasmania, dry as some outback places or with tropical rains as in Northern Queensland. Once you don’t need to live in the capitals due to working arrangements (if your job is location independent, you own a business in some smaller place or you are now FIRE and don’t need to work) the housing costs can be quite reasonable for Australian standards. Though generally do not expect to pay less than $400k for a house walking distance to the beach which is still quite a bit.
Multiculturalism
About 30% of Australians were born overseas. Number would be much higher if it counted Aussies with overseas born parents. Reason is that this beautiful, rich and safe country is so attractive for migrants for last couple of centuries. There are currently large communities of Chinese, Italians, Koreans, Indians, Srilankans and other minorities which contribute to the incredible culture mix of this great nation. I got here also from far away Eastern Europe. My birth country is very beautiful, but I adore Australia for so many reasons that I made her my home. I believe many other immigrants would have similar stories to mine. People feel attracted by many things mentioned above. Geography, weather, low unemployment, healthcare, working conditions, high salaries, beaches and safety would be the main ones.
Travel
Well most of the people who want to be financially independent would like to travel more. One aspect with travel in Australia is it is generally more expensive than in the US. I noticed for air travel many of the US FIRE hopefuls are using various points programs, which are generally not available in Australia. Main reason would probably be that we are too small, not so attractive market. Distances to fly are quite huge. It takes about 4 hours to fly from Sydney to Perth. Flights to Europe are generally 22 hours flights while to US it would be commonly 15 hours. Ignoring the discomfort of these long haul flights, then there are costs. Competition is not the same as in the US and for example for domestic flights generally compete only 2-3 airlines.
Overland travel is not cheap either. Main reason for this would be price of fuel (higher than US but lower than Europe), prices of cars and caravans and accommodation. For a cottage in the caravan park in season you can pay $200 a night and often you need to book certain amounts of nights way ahead.
So unfortunately whoever would like to travel more when they have a extra free time, will have to budget bit extra.
University education
There are many good universities here down under. Lots of foreign students from all over the world comes here to study. Costs are high as most of the things here. One main difference to many countries is the way how the studies are paid for. Most of the citizens can get loan from government with reasonable interest rate which will be paid off once this person starts making certain level of salary. This is not as good as many European countries where most state universities are free, but much better then for student to get a commercial loan or parents to pay for it and guarantee with family house or so.
These are major points influencing FIRE in Australian conditions. I believe FIRE here is as desirable and simple as in the US or other western countries. Some aspects of FIRE might be here simpler but other more difficult.
