{"id":2082,"date":"2016-11-16T23:14:25","date_gmt":"2016-11-16T23:14:25","guid":{"rendered":"http:\/\/www.prosolution.com.au\/?p=2082"},"modified":"2018-03-08T17:17:19","modified_gmt":"2018-03-08T07:17:19","slug":"why-is-it-wrong-to-invest-for-income","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/why-is-it-wrong-to-invest-for-income\/","title":{"rendered":"Why is it wrong to invest for income?"},"content":{"rendered":"

The goal for most investors is to accumulate enough wealth so your investment assets generate sufficient passive income to meet living expenses. If this happens, it is no longer necessary for you to work for an income and you then have complete discretion over what you do with your time. Wouldn’t that be wonderful!<\/p>\n

However, an error which many investors make is that they invest for income when they begin their investment journey. This is a slow and very inefficient way to achieve financial freedom. Using a golfing analogy, it\u2019s akin to teeing off with a putter \u2013 you will probably get to the green eventually however it will take you too many shots.<\/p>\n

Instead, a more efficient way to build wealth is to do it in two steps. Firstly, you need to build your asset base. Then, when you have a strong asset base, you can tilt your asset allocation towards income. It\u2019s easy to develop a retirement strategy for someone with a net worth of $4 million (invest it in cash at 3% p.a. will generate $120k p.a.). It\u2019s a lot harder to do it for someone with $400k.<\/p>\n

The make-up of the total return is important <\/em><\/strong><\/p>\n

The problem with investing for income initially is you lose a lot of your return each year in tax. If an investment pays me $10,000 in income, I\u2019ll probably pay $4,000 in tax and have $6,000 left over to reinvest. Whereas, with capital growth, you don\u2019t pay tax until the investment is sold so you get to reinvest the full $10,000. The chart below demonstrates the impact of tax on two investments that provide the same total return of 10% p.a. \u2013 option 1 has more income and option 2 has less income.<\/p>\n

Comparison\u2026 more growth versus<\/em> less income <\/strong><\/p>\n

\"invest-for-income\"<\/a><\/p>\n

Your options<\/em><\/strong><\/p>\n

Many people that consider investing in either shares or property are unsure how to compare the two. Assuming you adopt the right strategy, I think it\u2019s reasonable to expect comparable overall returns from either shares or property. However, the difference is the amount of income.<\/p>\n

Property will typically provide 30% of its overall return in income (e.g. 3% income and 7% capital growth) whereas with shares, it\u2019s likely to be 50\/50. For example, this ASX200 index fund<\/a> has delivered a total return of 8.78% p.a. over the past 5 years. The current income yield is 4.44% p.a. meaning just over 50% of the total return has income.<\/p>\n

I\u2019m not pro-property and anti-shares <\/em><\/strong><\/p>\n

Quite the reverse. I believe that we must diversify amongst various asset classes because no one can predict which asset class will perform the best in the short run. Therefore, if you spread your wealth across various asset classes, some will win, some will lose but in the long run you\u2019ll smooth your return and do very well. In that regard, shares play an important role:<\/p>\n