XBenX said:
*Capital erosion allowed (but preference is for this to not happen)
*Timeframe - Immediate income for XX years
*Waiting for discussions on what passive means
For me passive means NOT IP - it means blue chip shares or Listed property trusts (LPT).
1) Buy $2M basket of LPTs yielding 7.5% to 9% - distributions are partially tax deferred - so only pay tax on part of the income
2) Set up margin loan for $2M so max gearing is 50% (most LPTs allow 65%-70% gearing)
3) Assume LPT distributions increase at CPI or 3%pa
4) Assume margin loan interest is 8%pa
5) If/when distributions don't cover income requirements transfer funds from margin loan a/c.
6) Never sell shares - never pay CGT.
7) When tax bill arrives pay it from margin account (effectively use it as a LOC)
8) Capitalise margin interest on margin loan a/c
9) The increase in distributions will eventually pay off all the tax & interest accumulated in the margin loan and gearing will stay below 50%.
10) Capital will not be eroded.
11) This assumes the requirement for $200Kpa does NOT increase with CPI.
An alternative to this is put 15%(ish) into a cash account (earning 5% ish) and drawing down on that instead of setting up margin loan.
A lower risk alternative - don't borrow at all - sell enough shares annually to cover the shortfall in income (& pay tax). Hopefully, they've increased in value enough so next years distribution is slightly bigger. In a perfect world the yr 1 shortfall would be $30K (assuming a yield of 8.5%), so sell $30K of shares, in theory they will have risen 3% (or CPI), so they will have gone up $60K. This may erode capital, but should last for 20 yrs or so.
All of the above scenarios depend on tax rates, %age of LPT distributions that are deferred, CPI, interest rates etc.
They may be considered fairly low risk ways of earning a passive 10% net over a long period without eroding capital.
A higher risk way -
1) Buy $2M basket of blue chip shares, preferably high yielding with reasonable growth, banks, LPTs, Telstra, retailers - yielding approx 7% gross, and with an allowable gearing of 70%.
2) Set up margin account for $4M, so gearing is max of 66%
3) Let dividends pay part of margin interest - let the rest of the interest get capitalised.
4) Use margin account for living expenses - like a LOC. Keep good records.
5) Rely on growth in shares to keep to LVR down to below 66%
6) Never pay any tax, unless dividend income exceeds margin interest payable.
7) Increase margin loan as required.
Assuming stocks return 11%pa including dividends, this will have a max gearing of under 70% before it starts to reduce the margin loan.
Another alternative - buy $4M shares with 50% gearing, and let the dividends pay off all the interest. Draw down on margin account for living expenses. Hopefully the shares will grow faster than you can draw down living expenses and keep the gearing low.
The bottom line is - play with Excel and make reasonable assumptions.
KJ
Of course, none of this is advice.