NOTE FROM PEARLER: we do our best to share general resources so you can do your own research. When it comes to tax, this is personal to your investing and financial position. We are not a tax advisor, and don't have any information about your personal situation. This does not constitute financial advice and we would urge you to speak to your financial adviser and/or tax accountant for further information.

You've been diligently saving and investing throughout your working years. And now it feels like it’s time to bid farewell to the 9-to-5 grind. But what happens when you're finally ready to retire and sell your investments?

It's a golden moment that can bring both excitement and a touch of uncertainty. You may be wondering how to navigate the selling process, make the most of your investments, and retire early in Australia .

In this episode, we answer these questions and more. We touch on why to sell, how to sell, tax considerations, and how to successfully execute your FIRE (Financial Independence, Retire Early) strategy. Throughout the episode, we also share our personal experiences selling our shares, lessons learned along the way, and how we’re planning to achieve early retirement.

Reasons to sell shares

Whether you’re new to long term investing or a seasoned investor, there are several reasons why you might want to sell your shares. Pearler has discussed in this article how to decide which shares to sell and a few strategies to do it. For now, let’s explore some scenarios in which selling shares can make sense:

1. Changing your investing strategy: If you've been investing for a while, you might want to try different opportunities. Selling your shares lets you move your money around based on your new plan.
2. Letting go of losing shares: If you have shares that are consistently not doing well, it might be time to sell them. You can then minimise your losses and reinvest your money into better opportunities.
3. Realising a profit: When your shares have appreciated in value, selling them can allow you to cash in on the gains. It's like reaping the rewards of your wise investment decisions.
4. Simplifying and consolidating investments: It's great to have different investments, but sometimes it can become too much to handle. Selling some shares can make it easier to manage and keep track of them.
5. Meeting short or medium term goals: If you have certain money goals, such as saving for a house or a car, selling shares can give you the money you need. It's a practical way to meet your objectives.
6. Transitioning into retirement: As you get closer to retiring, you could sell some of your shares to support yourself after you stop working. If you sell strategically, you can add to your income and enjoy a comfortable retirement.
7. Giving yourself a pay rise: Selling shares can also be a way to increase your income. You can sell some of your investments and get a pay raise as a reward for your long term investing efforts.

How do you sell shares in the sharemarket?

Selling shares requires a broker to facilitate the process, so let's walk through the steps together. To begin, log into your brokerage account. Once you're in, you can submit the number of shares you wish to sell and the price at which you'd like to sell them.

Now, here's where things get interesting. You have a couple of options when it comes to placing your order. You also need to keep an eye on the fees and understand your tax obligations.

1. Market order versus limit order

First, there's the market order. This means you'll sell your shares at the best available price in the market. It's like going with the flow and getting a fair deal based on current market conditions.

On the other hand, we have the limit order . With a limit order, you specify the exact price at which you want to sell your shares. It gives you more control over the selling price, but keep in mind that it may take longer to execute if the market doesn't reach your desired price.

2. Selling triggers a capital gains tax (CGT) event

Once you've made your decision and finalized the sale, you'll receive a notification confirming the transaction. Exciting stuff, right? But hold on – we need to talk about taxes.

Selling shares triggers a capital gains tax (CGT) event. The good news is that if you've held those shares for more than 12 months, you might be eligible for a 50% discount on the CGT you owe. We actually cover this topic in detail in our episode on investing admin , so we recommend giving it a listen.

3. Understanding brokerage fees

When you sell your shares, your broker will most likely charge you a transaction fee. This fee can either be a flat fee or a percentage of the value of the shares you've sold. Episode 8 of GRSC details the different fees and their costs, which could depend on the type of broker you’re using.

Here's a pro tip: percentage-based fees may be more cost-effective for smaller trades. However, when you're selling a significant portion of your portfolio, these fees can quickly add up and eat into your profits. It's smart to think about how much fees might affect you, especially if you're selling a lot.

Two ways to live off your investments

Many of us want to reach a point where our investments can sustain our lifestyle. So imagine you have $1 million in investments, and your annual expenses amount to $40,000.

You have two options to cover the retirement costs.

Method 1: Selling off investments

You can sell $40,000 worth of your investments annually to pay for your expenses. Again, selling your shares will trigger a CGT event. The exact tax implications will depend on your overall income and marginal tax rate. Consulting a tax professional is advisable to ensure you consider all relevant factors.

Method 2: Living off dividends

Alternatively, you can rely on the dividends generated by your investments to sustain your lifestyle. So, what are dividends? These are periodic payments distributed by companies to their shareholders.

Let's see how it works:

A. Dividend Yield:

The dividend yield is the percentage of your investment that you receive as dividends each year. For example, if your $1 million investment has a dividend yield of 2%, you would receive $20,000 in dividends annually. If the dividend yield is 4%, you'd receive $40,000 per year.

B. Choosing ETFs with higher dividends:

There are types of Exchange-Traded Funds (ETFs) that are designed to provide higher dividend returns rather than long term capital growth. Consider exploring these options if you prefer a focus on dividends. For instance, as of May 2023, the VAS ETF offers a dividend yield of 5.43% and may also provide franking credits, which can boost your overall return.

Choosing your retirement strategy

When choosing between living off dividends or selling your shares someday, it's important to think about your situation. If you're young or have a high income, prioritising capital growth might be better because of the CGT discount for holding investments for over 12 months.

Also, as your income may go up in the future, you need to consider your marginal tax rate. Since dividends are taxed as income, a higher tax rate could reduce your overall returns. We suggest keeping this in mind when figuring out the best way to live off your investments.

How to use the FIRE Method to retire young

Dreaming of retiring early and enjoying financial independence? You're not alone. Many individuals are adopting the FIRE (Financial Independence, Retire Early) strategy to make this dream a reality.

Now, we do want to acknowledge that achieving FIRE requires a certain level of privilege. Not everyone has the same opportunities when it comes to investing. However, even if early retirement isn't your goal, we can still apply some of the principles to improve our financial situation.

So, how does this FIRE thing actually work? How can someone really retire forever in their 30s?

Let's break it down:

1. Understanding the FIRE Method

The FIRE method revolves around two core aspects: high savings and investing rates, coupled with a frugal lifestyle. The goal is to build up a large investment portfolio that generates money without you having to work for it. Then you retire sooner than usual. In episode 5 , we explore some long term investments you can add to your portfolio to achieve this goal.

2. The Magic Number (25x Your Annual Expenses)

Let's bring it back to our example. If your annual expenses amount to $40,000, you'll need 25 times that to achieve FIRE, totaling $1 million. The idea is to build an investment portfolio worth 25 times your estimated yearly expenses. Simple maths, right? If you aspire to live off $80,000 annually, you'll need to double that portfolio to $2 million.

3. The 4% Rule to Sustain Your Lifestyle

According to the Trinity Study , if you withdraw only 4% of your initial portfolio annually, you can sustain your lifestyle for a long time. The beauty of this rule is that it considers inflation, adjusting your withdrawal amount each year.

For instance, if your investments generate an average return of 7%, you can withdraw 4% of the return. The remaining 3% covers inflation and allows your portfolio to grow over time.

4. Taking high inflation and future sharemarket returns into account

Although the 4% rule is a helpful starting point, it's important to be cautious. This rule may not account for periods of high inflation like the one we're currently experiencing. Also, while historical sharemarket performance shows promising annual returns after inflation, future gains are uncertain. Use the figures we show you as a helpful guide, but exercise conservatism.

5. Embrace saving and investing every dollar

One of the core principles of the FIRE movement is prioritising savings. Invest every dollar you can, aiming to accumulate enough wealth to generate substantial passive income. The more you save and invest wisely, the closer you'll get to financial independence.

Disclaimer: Treat the information we provide here as a general overview or quick guide only. The FIRE method requires careful consideration and personalised financial planning. Consult with a qualified financial advisor before making any investment decisions.

Understanding your super and when you can use it

Now, if you are employed, chances are you already have a super account set up. It's that magical place where your employer contributes a percentage of your income. But have you ever wondered when you can actually use it?

Well, the good news is, you have a few options:

1. The first way you can access your super is when you turn 65. That's right – even if you haven't officially retired yet, you can start withdrawing your super once you hit that milestone. It's like a financial reward for all those years of hard work.

2. But what if you want to retire earlier? That's where preservation age comes into play. Preservation age is the age at which you can access your super if you're retired.

Here's the thing: your preservation age depends on when you were born. It can range anywhere from 55 to 60. If you're curious about your specific preservation age, the chart below from the Australian Taxation Office (ATO) website is a great resource to check out.

When the time comes, there are three ways you can receive the money from your super:

A. The first option is receiving your super as an income stream . This means you'll get regular payments, kind of like a salary, to support your retirement lifestyle.

B. Another option is taking your super as a lump sum . Imagine a one-time payment that can help you kickstart your retirement plans, whether it's traveling the world or pursuing a lifelong dream. Keep in mind that taking a lump sum means you'll need to manage and budget that money carefully to make it last.

C. And guess what? You don't have to choose just one option. You can actually combine both income stream and lump sum withdrawals to create a retirement strategy that works best for you.

How much super do you need to retire comfortably?

A previous article actually answered this question before, but we’ve done some digging to share new insights with you.

The Association of Superannuation Funds of Australia (ASFA) has come up with retirement standards that give us some benchmarks. These standards outline the super balance you need for a comfortable or modest retirement.

Let's take a closer look:

• For a comfortable retirement , you'll need a super balance of around $595,000 if you're single.
• For a modest retirement , a super balance of approximately $100,000 should suffice.

Curious about how these standards are calculated? ASFA has a detailed budget breakdowns in their retirement standards. It's worth a read because it sheds light on what exactly a "comfortable" lifestyle entails. The numbers might surprise you!

For example, their definition of a “comfortable” lifestyle assumes you have your own home and good health. Interestingly, their budget only includes one overseas trip every seven years.

Now this is where planning for retirement ahead of time comes in. We can’t stress this enough. Many people incorporate their superannuation savings into their FIRE strategies, while others do not. If you're thinking about retiring early—before reaching the super preservation age—then you need to plan for the gap.

Should you include super in your net worth and FIRE strategy?

When calculating net worth and planning the journey to FIRE, a question often comes to mind. Do we include super in our net worth? Should we include super in our FIRE portfolio?

Some argue that since super is locked away until retirement, it's better to exclude it in both equations. Others believe that super should indeed be included in your net worth and FIRE strategy.

Why include it? Super is still your hard-earned money. Just because you can’t touch your super until retirement age doesn’t mean you should ignore it. If you have enough in your non-super portfolio, it doesn't matter that you can't get to your super until you're a certain age.

The way Tash sees it, including super in her net worth makes sense. Even though she won't be able to access it for another four decades or so, she still wants to keep track of it. She gets excellent tax benefits from her super, and thinking about the long term is important for her too.

Ana is on the same page. She includes super in her net worth calculation as well. However, when it comes to her FIRE strategy, her game plan is to figure out when she can retire prior to being able to access her super.

Actions of the week

Alright, let’s get practical! Here are a few action steps for you to consider:

1. Take a look at where your super is invested. Make sure it fits with your long term financial objectives. You may want to get help from a professional if necessary.
   
2. Assess any exit fees , if you decide to exit your brokerage or investment platform. These fees can be quite hefty, so knowing the numbers will help you make better choices.
   
3. Now, for those of you who are feeling a little more adventurous, we have a bonus tip for you. Calculate your FIRE numbers , if you love the idea of retiring early and comfortably. It might just inspire you to supercharge your savings and investing.
   

Now, let's hear from you! We'd love to know about your retirement plan and when you envision yourself retiring. Share your thoughts and dreams with us. And as always, we'd love for you to tune in to the full episode, where we go into even more detail.

Happy investing!

Tash & Ana