The journey to Financial Independence comes with many things to learn along the way.

To help simplify tricky questions and clear away confusion, we’re running an ongoing Q&A series.

We hope these discussions provide you with insights to further your thinking as you progress towards your goals.

Just so you know, in many cases there’s often not a “right” answer, so be sure to think carefully how to adapt any information to your own unique circumstances. Or, reach out to a financial professional to provide your with personal advice tailored to your needs.

If you have a question you’d like answered, feel free to leave it in the comments below, or post it on the Pearler Exchange.

In this Q&A session, we’re tackling:

• Can I rent while living off ETFs?
• REITs versus LICs
• If I move overseas, does investing in Aussie shares make sense?
• US versus global markets
• Should I shift money to super near retirement?
  

Can I rent while living off ETFs?

“Real estate agents ask for payslips and bank statements before renting out a property. After FIRE (assuming I won't have a salary), is it still possible to rent by showing ETF investments that I own? If not, wouldn't that mean we need to own at least one property before early retirement?”

Great question to consider. This is something I’ve dealt with personally.

If you can show the real estate agent that you receive enough investment income to pay rent, that should be fine in most cases. Just explain you live off investments and earn $X per year.

Having said that, you can greatly improve the strength of your application by having a decent amount of cash in the bank. This puts agents/owners at ease because they can see you're someone who's good with money, and even if the investments don't do well for a period, you have a bunch of cash to keep paying rent.

At the end of the day, it's up to the owner of the property whether they choose your application over someone else's. In that sense, we can't control everything. But I would say the cash makes a big difference if an owner/agent seems unsure of your situation.

As a rental property owner, I’ve rented to someone who wasn’t working. I had no issue with this as they had a substantial sum of money in the bank. You could also offer to pay some rent in advance to reduce the owner’s risk, which is a gesture that can help.

I've applied for a rental while not working and it was fine, as we could show assets and income. But in a hot market where there aren't many rentals, it’s possible they choose someone who has a more ‘normal’ situation (full-time workers rather than an investor).

That’s simply because the FIRE situation is unusual – which is silly, but that's how people's minds work sometimes.

And remember, at any time in the future, if you decide renting isn’t working out, you can always sell shares to buy a home. So that option is there.

You’ll likely end up in some sort of paid work, whether you plan on it now or not. It’s just what usually happens. So this will end up helping with either rental applications or buying a home.

Sure, property prices may go up over time. But chances are your wealth may as well, and possibly at a faster rate. You don't need to own a property if you don't want to.

REITs vs LICs: how do they differ?

Real estate investment trusts (REITs) and listed investment companies (LICs) are both listed investment vehicles that people turn to for income. But they differ in many ways that are important to understand.

First, strategy. LICs can be focused more on either growth, income, or a balance of both. It depends on each LIC and its own strategy.

REITs are mostly income focused, because commercial property as an asset class is. But they aren't all high yield. Some will focus on buying high quality assets in prime locations (more expensive, lower yield) where they expect a strong increase in income over time.

They may also buy lower yielding assets that have the possibility of being redeveloped to create much higher income in the future. Each REIT has its own strategy and focus.

Individual REITs often focus on one type of commercial property: retail, office, etc. This means an investor can select which type of real estate they’d like to invest in. The downside is less diversification if it doesn't turn out well given exposure to only one or two individual firms. If debt is mismanaged, it can severely damage the value of a real estate trust.

LICs have more diversification than REITs, given they usually own 30-100 companies in different industries. However, that's less diversification than an index fund like VAS or IVV, for example.

Assessing the value of an income-focused asset like a REIT is often done by looking at the cashflow it produces (yearly dividends and the portfolio's income). Look at the annual reports where they also disclose the NTA (net tangible assets), which gives an idea of the net value of the portfolio.

Whether looking at a REIT or LIC, I would look at the dividend history; how reliable it's been over time; the value of the assets right now; and an assessment of what might happen over the next 10 years.

You’re definitely guessing to some extent, and remember that 'the market' is pretty good at valuing these things. By that I mean the current value is probably somewhere close to fair value, give or take, since analysts are constantly scouring the market looking for undervalued shares.

There’s a lot to unpack (more than we can fit here), but dive into each share’s company reports on their website to learn more about whichever one you’re considering. And remember, reach out to a financial professional if you need help figuring out what's right for you.

If I move overseas, does investing in Aussie shares make sense?

Interesting one. There’s a few ways to look at this.

If it’s a permanent move overseas, then I can understand why this question is being asked. It often won’t make sense to invest heavily in Australia if you’ll be living in another country anytime soon. But depending on if this move is is a permanent move or a temporary one, it's best to talk to a tax accountant. They can help you navigate the confusing world of resident verses non-resident considerations, and cover what you need to know once you leave the country.

Most overseas residents tend to invest in a globally diversified portfolio. Something like a combination of VTS (US shares) and VEU (everywhere else excluding US).

The truth is, after moving outside Australia and possibly being a tax resident elsewhere, there's basically no benefit to having a large stake in Aussie shares.

Your expenses won't be in Aussie dollars, so you don’t need to own shares or other assets in AUD. You also won’t get the benefit of franking credits. If you choose to own VEU, you’ll still own a small amount of Aussie shares (but not much).

Overseas investors usually still own a little bit of Aussie shares inside a fund like VEU, which has exposure to the ASX in proportion to our market size relative to the rest of the world (which is tiny).

What about if you plan to move back to Australia later? Even if you think this might happen, then it's a trickier conversation. And it's one that's best had with a financial professional based on your personal situation.

Reason being, it could be expensive (tax wise) to change the portfolio around multiple times to align with new living arrangements. So if this is the case, I would try to find some sort of middle-ground or balance that you're happy with, regardless of where you'll be living. This way, you get a diversified portfolio while minimising the need to change it around in the future.

Important note: if you end up becoming an overseas resident for tax purposes, the ATO deems you to have sold your shares, thereby creating a CGT event. Be very careful creating a large portfolio in Australia if you plan to become an overseas tax resident in the future.

US shares vs VDHG

Some people see the performance of US shares and think: “Why would I invest in anything else?”

I understand this sentiment. But when considering whether to invest in US shares or a more diversified portfolio (like VDHG or DHHF ), it's important to compare the two options properly.

You need to understand the pros and cons of each so you can make a well-informed decision.

The first thing to understand is that a US index fund (like IVV) will give you access to only the US. In contrast, a diversified 'all-in-one' fund like VDHG or DHHF gives you access to a globally diversified portfolio, including Aussie shares.

If you want to bet on the US outperforming the rest of the world's markets over the long run, then a US ETF will be suitable. The downside with this approach is it lacks diversification. There's a risk that the US could perform worse than other markets over time.

I know this seems hard to believe when looking at recent history. US companies are strong and dominant today, with a seemingly ever-increasing presence in our lives. But this doesn't necessarily mean they will have the best performance going forward.

US shares are also typically priced higher because of the above. Higher valuations can impact future returns for shareholders, because higher growth is already expected and 'priced in'.

Also, while the US has had excellent performance in recent decades, since 1900, the stock markets of US and Australia have actually performed roughly the same at around 6.5% per annum after inflation.

With a diversified portfolio, the main downside is it will never shoot the lights out in a given year. There will always be a certain market which will outperform from one year to the next.

Every market has periods of strength/weakness relative to the others. Sometimes the ASX will be the strongest, sometimes the US, sometimes Asia, UK or Europe.

Having exposure to multiple markets has the effect of smoothing out returns, and can give you a more consistent and reliable long term outcome.

At the end of the day, nobody knows which markets will perform best over the next 50 years. And although that’s an unsatisfying thing to accept, it tells us that diversification is a good idea.

Ultimately, you need to invest in a way that makes the most sense to you. Be aware of the risks, and understand that the future may look different to what you expect.

Migrating money to super near retirement

“What are your thoughts on shifting money into super as one approaches 60, to move more of your wealth into a lower tax environment?”

I think putting as much as possible into a more tax-friendly environment when you are closer to access is a great idea. But it really depends on your personal situation, so it's best to chat to a financial professional to get personal advice.

Obviously, you’ll need to be mindful of the limits, taxes, and changing rules to get the money in there in the first place – and then of course the rules around getting your money out. But it makes a whole lot of sense to lean towards super as a vehicle for investment if you’re anywhere past 50.

Before 50, you may have other priorities like getting rid of your mortgage so you can semi-retire. Super may still be part of your plans, depending on how much you want to work between your current age and super access.

In my unusual situation of being ‘retired’ in my mid 30s, I see super as somewhat of a backup plan or ‘bonus’ wealth. It ticks away in the background, and I’m happy to have it, but I don’t contribute to the fund at the moment.

I still focus my investing outside super for now. But I can imagine that will change at some point. If I end up in a higher tax bracket and/or have surplus wealth that I don't mind giving up access to, then I’ll likely begin contributing to super again. This will almost certainly be true as I get older and closer to the access age.

So while the potential tax savings are impressive, it's not just a numbers game. It’s also about priorities, goals, overall wealth position, preferred lifestyle, desire for control, and how one feels about super in general. Plus it's worth noting that super rules can change, so it's something to consider.

Don’t let anyone tell you it’s a ‘no brainer’ to always focus on super first. It can be for many people and their situation, but that doesn’t mean it is for you.

Final thoughts

I hope you enjoyed this Q&A session, and these answers gave you food for thought.

Remember, if you have a question on a topic you’d like some more information on, feel free to post it on the Pearler Exchange. They’ll be answered by fellow investors in the community – like myself, someone more knowledgeable, or one of the Pearler team.

You can also post a question down in the comments selection and we’ll cover it in a future Q&A article.

Until next time, happy long-term investing!

Dave