Can my investment windfall let me take more time off work?

Last year my family sold our home in Sydney and moved to Adelaide. We are now in the fortunate position of being debt free on our home, because of the difference in house prices, and have approximately $350,000 invested. The kids have settled into school here, and we don’t expect to return to Sydney.

The investment has performed really well this year, and so I’m wondering if I need to keep working full-time? How should we arrange things so the investment portfolio can cover some of our costs and I can cut back on work to spend more time with the kids?

Congratulations on your successful move. Hopefully, the transition from NRL to AFL hasn’t been too traumatic.

With no mortgage repayments to fund each month there’s certainly validity in questioning whether you need to earn as much income as you have in the past. And as you highlight, there is also the potential for your investment portfolio to help contribute to household expenses.

Using your investment income so you can work less and spend more time with your family can be a smart move.Credit: Simon Letch

There are a few things I suggest you consider.

Firstly, the past year has been extraordinarily good for investors. Share markets have produced fantastic returns, and even conservative investments like term deposits have produced income well above what we’ve seen over the past decade or so.

It’s important to realise however that these returns are not the norm. In considering how much you can rely on your investment portfolio to meet household bills, I encourage you to be very conservative.

I’m going to assume that the bulk of your portfolio is in shares, perhaps via ETF’s or similar. Shares pay dividends, usually half-yearly. On a company by company basis, dividend income will bob around a bit, though if you invest via a fund, or have a well diversified portfolio, this will get smoothed out.

One way to achieve your objective would be to have all dividend income from your portfolio paid out to you. Because of its infrequency and lumpiness, it’s likely not suitable to meet your grocery bill. But it could be good to cover the annual family holiday for instance.

Dividend income is only part of the return you get as a shareholder, though. There is also an expectation that over time you get growth in the value of the shares as companies reinvest profits and grow.

In the case of US shares in particular, this tends to be the bulk of your return. For you to use some of this growth to help meet your living costs, you will need to sell down investments. This has capital gains tax consequences that need to be considered.

If your investment portfolio is managed on an administration platform, it may be that you can set up a regular withdrawal plan, where a fixed amount per month is paid out to you, with the administrator selling down whatever is required from the portfolio to make that cash payment.

Via this mechanism, you get a reliable income stream from your investment that could work well in facilitating you reducing your working hours. Just be aware that the monthly income paid out to you will occur regardless of what happens to the investment.

In periods where markets decline, your portfolio will reduce because the value of the shares has fallen, but also because you are selling down to facilitate your monthly drawing.

Ideally, get some financial modelling done to test the long-term impact of your reduced employment on things like superannuation savings.

Paul Benson is a Certified Financial Planner at Guidance Financial Services and host of the Financial Autonomy podcast. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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