Sunday, 13 October 2019

How much tax does superannuation really cost the government?

An article in today's SMH reports that $800b is now in the superannuation accounts of those of retirement age (over 65), which has meant a reduction in reliance of the age pension. Instead of the cost of the age pension rising from 2.9% of GDP in 2001 to a projected 4.6% by 2040, it is now projected to actually fall to only 2.5% by 2038. However, it is also reported that the cost of the concessional tax rates applied to superannuation means that it is costing 1.9% of GDP, which according to the Grattan Institute will rise to 3% of GDP by 2060.

However, while the age pension is a real cost to government, the cost of the concessional tax rate applied to superannuation is not as high as generally reported. Why? Because calculations of the 'cost' of superannuation assumes 'all other things being equal' ie. If someone with taxable income in the top (45%) marginal tax rate has SGL and salary sacrifice contributions into super taxed at 'only' 15%, this is costing the government 30% in tax concessions. However, the reality is that if superannuation wasn't available, those in the higher tax brackets would simply use other means to reduce their tax liability. The projected 'cost' also does not take into account planned changes to the higher tax brackets in 2024-25.

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Thursday, 3 October 2019

Diet week ending 29.09.19

Last week my cough persisted (it is only clearing up now) so I didn't do any fasting days, and indeed I didn't even follow my standard meal plan and I snacked quite a lot on confectionery and chocolates when I wasn't feeling well. So my average daily calorie intake for last week was quite high and I put back on most of the weight I had managed to shed.

This current week (so far) has also not been very good, diet-wise, and I've only got back onto my standard meal plan today (so no fasting days again this week). I'm also going back up to the lake house this weekend to visit my parents and collect DS2 (who was staying with them for the first week of the school holidays), so the coming weekend will involve several large home-cooked meals. But I'll do my best to avoid any more junk food/snacking during the weekend.

Next week I'll get back to following my standard diet plan, and also have a couple of fasting days  provided my cough has cleared up completely and I'm feeling 100%.

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Wednesday, 2 October 2019

Where to with regard home loan interest rates?

Recent interest rate cuts to 'historic lows' in Australia, combined with high property prices (especially in Sydney and Melbourne) have lead to a lot of speculation about how low interest rates will drop (after yesterday's 0.25% cut I've seen some pundits predict a further two cuts by the middle of next year), and when/if rates will increase again -- and by how much.

This is an especially hot topic amongst comments regarding property prices and loan affordability. Many comments are along the lines of 'prices are too high, and will drop 40% or more' -- which reminds me a lot of Dr Keen's prediction about a '40% fall in property prices) back in 2008. Many of the comments also assume that the current low interest rates are an aberration, and that home loan mortgages *must* rise substantially -- which will lead to mortgage stress and potentially a significant rise in mortgage defaults.

While home loan interest rates are certainly very low and can't fall much further (given that RBA cuts below 0% would be ineffective, so the focus would shift to QE instead. and that banks set home loan rates which also reflect non-zero deposit rates and their admin/overhead costs), this doesn't mean that home loan interest rates must rebound. After all,taking a really long view, current home loan interest rates are back down to what was considered 'normal' prior to WWII.

I've cobbled together a couple of historic charts of Australian average 30-year home loan interest rates below, and extended it to include recent rate changes. This chart shows that the current home loan interest rates might actually be 'normal' for an economy with low growth rates and inflation, and little prospect of major rises in productivity (unless AI turns out to have as big an impact as computerisation and robotics had in the 1970s-2000s).

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Tuesday, 1 October 2019

Net Worth: September 2019

My NW increased by $33.6K during September (1.45%) mostly due to the gains in the local and global stock markets flowing through to my geared share portfolio and also our SMSF investment. Our house valuation was slightly lower, based on sales data for our suburb, whereas the overall Sydney market has shown a rebound in property values (likely due to the two interest rate cuts by the RBA in recent months).

My NW data for this month includes a $1m increase in 'other real estate' as an asset, and a corresponding increased liability of approx. $1m in 'other mortgages' - this is due to my purchase 'off-the-plan' of a one bedroom apartment in a high rise apartment development (88byJQZ) in St Leonards. I paid the initial $5K 'holding deposit' using my 'portfolio loan', so that debt has actually been reflected in the net value of my 'Stocks' position, leaving $995K liability. When the balance of the 10% deposit gets paid when I exchange contracts this month, the 'other mortgages' figure will reduce to $900K (that balance will fall due when the apartment construction is completed and 'settlement' occurs - currently scheduled for Q1 2023), and the full $100K deposit amount will be reflected in my 'portfolio loan' balance as I am using that to pay the deposit. This will reduce the net value of my 'Stocks'  portfolio by $100K, which is a bit misleading, so I may do an ongoing adjustment to the portfolio loan figure and include the $100K 'deposit' amount as part of the 'other mortgages' figure.

I'll probably also add the stamp duty (payable 3 months after exchange of contracts) as part of the 'valuation' of my apartment, as this will probably be similar to the price differential for a completed unit compared to 'off-the-plan' pricing. In the unlikely event that the apartment development does not complete, I should get my deposit refunded and also be able to claim back the stamp duty payment.

Hopefully the property market 'correction' in Sydney is indeed over, and between now and settlement in 2023 the valuation of my apartment will have risen (so it shouldn't be a problem getting a mortgage for the balance due on settlement - I will have paid a 10% deposit, and banks usually prefer to only lend 80% of valuation).
As with all geared investments there are several risks in making this investment, including:
* property prices may not appreciate, or may decline (as was the case during the recent property slump) - but historically St Leonards has enjoyed an average gain around 6% pa. I've calculated that I would make some gain as long as prices appreciate by at least 2%pa during my holding period (10-15+ years).
* I may not be able to arrange finance (a mortgage) when the development is completed in 2023 and I need to 'settle' the balance. This seems unlikely as I have another unencumbered property that could be used as collateral for the loan. But if I am no longer employed it may be more difficult to obtain a mortgage.
* Interest rates may increase substantially - currently investor mortgage rates are around 3.5%-4.0%, and interest rates are currently being reduced. On the other hand, interest rates are at historic lows, so a substantial rise in interest rates is a distinct possibility in the medium-long term.
* I may not be able to achieve typical rental returns ($560/wk for a one bedroom apartment), or may experience high vacancy rates. However, as a new, 'luxury' apartment on the 39th floor with views towards the city, harbour, and harbour bridge it should be relatively easy to rent out and obtain above average rent.

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Friday, 27 September 2019

Is China still a 'developing' country or is it a 'newly developed' country?

Recent speeches by Trump and Morrison claimed that China is no longer really a 'developing' country, but a 'newly developed' country. The implication being that much of the 'special treatment' it obtained in relation to international trade and climate change should now be wound back.

But is China now a 'developed country' or is it still 'developing'?

A couple charts suggest that it is indeed now a 'developed country':

1. Urbanization.

While still less urbanized that the US, Europe or Australia, China is now at a similar level of urbanization that Europe attained by the 1950s - which suggests that on this measure it is already 'developed'. And it looks to be on track to be just as urbanized as Europe and the US within a decade or so in any case.

2. Per capita GDP and electricity use

While China already uses as much electricity per capita as the UK (which accounts in large part for its massive increase in carbon emissions since the Paris agreement was drawn up), it still lags far behind the US, UK and Japan in terms of current GDP per capita. On the other hand, China's GDP is already around that was enjoyed by citizens of the 'developed world' back in the 1950s. So although it can be argued that China is still a 'developing nation' relative to the affluence of Western nations, in absolute terms it is already a developed country (unless we choose to believe that the US, UK and Europe were NOT really developed countries back in the mid 20th century?).

Of course aside from not being a 'developed' nation, another argument put forward for why China should not need to curb carbon emissions as much as 'developed countries' is the notion that it isn't just a country's current emissions that should be taken into account, but also the cumulative emissions of a nation. While this seems reasonable on an equity basis, the reality is that global warming is being driven to catastrophic levels by the rate of current emissions - the impact of emissions prior to 1970 on the global climate just wasn't all that significant.

It's a bit like a group of shipwreck survivors adrift in a lifeboat that was slowly filling up with water due to a couple of passengers that had been pouring cups of water into the boat for the past day. It is only after the other passengers also start pouring water into the boat and the water level starts rising noticeably faster does everyone realize that if they don't stop pouring water into the boat it will sink. Does that mean that only the passengers that had been putting water into the boat all day should stop? Or does everyone need to stop in order to save the sinking lifeboat?

Of course China has a vested interest in continuing to be considered a 'developing' country, and the developed nations has a vested interest in China no longer being afforded any 'special treatment'.

A final chart of GDP growth rate also seems to indicate that China may be leaving the era of  'developing' and is now joining the club of mature, developed economies (that have lower, sustainable growth rates):

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Wednesday, 25 September 2019

What caused, and what will fix, global warming?

With global warming the current 'hot' topic, I though I'd (again) post my observations about the cause of global warming, and how it can (or can't) be fixed.

1. Cause.

Well, as they say, 'the science is in' and the answer is increased atmospheric concentrations of 'greenhouse' gases (CO2, methane, CFCs etc.) causes a larger 'greenhouse effect' and increases global temperatures. In fact this was already an established fact when I studied environmental chemistry back in the early 1980s. There was a bit of debate about the cause(s) of the increased levels of CO2 in the atmosphere, and how big an impact it has on climate, but it turns out that the obvious cause (us) is also now pretty much beyond doubt. Unless of course you're a climate change 'skeptic' that chooses not to allow evidence to affect their chosen/indoctrinated beliefs (similar to flat-earthers, moon landing skeptics, and, funnily enough, religious 'believers') - so you pretty much have to accept that global warming is artificial, and not a natural variation in climate. So it isn't magically 'go away' unless we do something about it.

But the key driver is actually the sheer number of 'us' on the planet. It was fine for a small percentage (a few hundred million people) to want/have cars, energy-intensive (industrial) jobs, and all manner of labor-saving and entertainment electrical devices, but when you combine a natural desire for nearly everyone to achieve similar living standards with an massive increase in the total population, the problem becomes much more intractable.

It is interesting to simply compare global greenhouse gas emission levels with global population - it can be seen that from 1850-1980 the correlation was obvious and unbroken. It is only from 1980 onwards that there has been some slight reduction in the trajectory of carbon emissions compared to population. Unfortunately any reduction in per capita emissions has not been enough to solve the problem of increasing population. I've added the black line showing (roughly) where carbon emission levels would have gone (simply driven by increasing population and development) if not for the mitigation achieved so far (more energy efficient technologies, non-fossil-fueled energy sources etc.).

2. Solution?

Well, as can be seen from the population chart, population growth rates peaked in the 1950s, and are slowly trending down towards a projected 0.1% by 2100 (still almost twice the rate of about 0.04% that applied prior to 1700 - before infant mortality rates plummeted). So, in the very long term, stabilizing global population would stabilize carbon emission levels even in the absence of any per capita reduction in carbon emissions. And, if/when the entire world is developed, with high living standards, literacy levels, and gender equality, fertility rates might even drop below replacement level globally, allowing the global population to slowly decline to a more sustainable level (2 billion? 5 billion? 10 billion?). Unfortunately, the global population at the time of the Paris Climate agreements was around half what it will be by 2100 -- so the global average per capita emission level will have to be halved simply in order to 'tread water'.

But as global population will continue to rise for many, many decades, the only way to address global warming is to reduce per capita carbon emissions by a massive amount. Enough to more than offset the increasing population. Comparing per capita levels for different countries reveals a number of things:

1. Developing countries (China and India especially) are rapidly increasing per capita emissions towards that of developed countries. Combined with substantial (and growing) populations, these countries need to be able to achieve development without hitting the same levels of per capita carbon emissions of the USA. So, building a whole lot of fossil-fueled power stations and providing the population with petrol-powered cars isn't really sustainable. China already has higher per capita emission levels than Europe. So, while developed countries have been cutting their per capita emissions, the global average per capita emission level hasn't changed very much:

2. Developed countries that are a) large and b) high per capita emitters, need to initially reduce their per capita carbon emissions towards 'best practice' amongst developed countries.

3. After that, the 'developed' countries (including, by then, China) will need to get their per capita emissions to a much lower level than what is currently 'best practice'. While there are some constraints (not all countries can rely on geothermal power like NZ or Iceland, and not all developed countries want to incorporate nuclear power in their energy mix like France) improved renewables technology should make it possible for developed countries to decrease their per capita emissions significantly in the next few decades.

Unfortunately improved per capita emissions in the already developed countries can't solve the problem. Getting to 'zero emissions' in the UK or EU will be helpful, but this will be overwhelmed by the population growth and development effects of China and India. It is even more important for the developing countries to be aiming for per capita emission levels significantly lower than those achieved by current 'developed' countries. The following chart doesn't make this seem too likely - China, while still only 56% urbanized already has higher per capita emission levels than the EU (which is 74% urbanized). As India increases urbanization (from its current level around 34%), it is also likely to overtake Europe and the USA as a source of carbon emissions.

Although it is now, apparently, a climate 'emergency' the most obvious (and effective) means to slow the rate of global increase greenhouse gas emissions (actively working towards ZPG and slowing the rate of development in underdeveloped countries) are 'off the table'.

Incidentally, although Australia's CO2 emissions per capita are very high and need to be reduced, our total emissions are relatively small - so even heroic reductions in Australia's per capita emission levels would have negligible impact on global warming.

The current debate regarding 'what to do' about climate change seems to be a nonsensical reversal of the 'pareto principle'. Rather than focus on actions that could/should be taken to impact on 80% of future increases in carbon emissions, the focus seems to on actions that can only have a trivial impact on the total level of global carbon emissions...

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Diet week ending 22.09.19

Was going well until last Thursday when the slight cough I had developed on Tuesday progressed into another bout of the 'flu. So I decided to give up on the fast day in the afternoon and had some dinner and snacks. Then from Friday to Sunday I was fairly sick, so I did less walking than usual and also ate 'ad libitum' - which for me means have three healthy meals but then also snacking on some confectionery and/or chocolate. So the weekly daily average for week 38 ended up close to maintenance caloric intake, despite the week including a day and a half-day of fasting.

Daily averages:

This week I've been feeling a lot better, with the cough slowly clearing up. And although I ate three meals on Monday and Tuesday, I've at least slowly cut back on the snacking. Today I'm planning on sticking to my usual 'non fasting' daily food plan (no snacks/junk food) and might do a light workout in the gym on the way home.

Tomorrow is normally scheduled as being a day of fasting (every Tue/Thu is my plan until I get down to my ideal/healthy BMI), but as I've still got a slight cough I'll instead have a normal lunch and a light dinner tomorrow rather than fasting.

I'm taking the boys up to our hobby farm this coming weekend, and DS2 will be staying at the farm with my parents next week (the first week on his school holiday). My mum usually cooks large dinners while we're visiting, so I'll have to resist the urge to overeat (and also avoid having any snacks while I'm there, or during the four hour drives there and back).

Next week (assuming my cough has cleared up completely by then) I'll get back to fasting every Tue/Thu and going to the gym on the way home from work on Mon/Wed. I also need to try to increase my daily step count to the recommended minimum (10,000/day) and start doing a 5BX exercise session every the evenings before showering. The 5BX routine starts out incredibly easy, so its simply a matter of building this into my nightly routine until it becomes a habit again.

My long term weight chart shows how my weight has been slowly going higher over the past twenty years, despite many periods of a year or two where I've managed to reduce my weight by 5-10 kg before putting it all on again. My weight when I finished high school was 78kg (a BMI at the top end of the 'healthy' range) and was already in the 80s (overweight) by the time I graduated uni, so I definitely have a tendency to overeat and/or snack on junk food whenever I'm not consciously keeping track of what I eat. You'll notice that I've generally been recording my weight while its been going down, but then it has (generally) gone up while I wasn't monitoring it. There are a couple of periods where my weight has been increasing despite recording it regularly - which is a case of where I had 'good intentions' but didn't actually get around to changing my behaviour. (For me, keeping a food diary is a necessary but not sufficient condition to actually reduce my weight!).

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Monday, 23 September 2019

Buying an investment apartment 'off the plan'

They have been excavating the foundations for a new high-rise (150m/47 stoery) apartment block nearby where I work since before my employer moved offices to St Leonards in June last year. I decided to look up what was being built there ('88byJQZ') and found out that while the initial release of apartments 'off the plan' was done when the project was announced in Feb 2018, a third 'phase' (or tranche) of units had only been released for sale a few weeks ago.

As the Sydney property market appears to have (maybe) finished its 'correction' during Q2 2019, and there has been a massive drop-off in new developments now planned/getting approved, I've decided it might be a reasonable (good?) time to invest. The new apartment block is close the the St Leonards train station (which is five stops from the Sydney CBD) and will also be close (~250m) to the new Crows Nest Metro train station that is due to open in 2024 and will be only a few minutes from Barrangaroo Metro station and the CBD.

I enquired about available one-bedroom apartments, and this release offers a selection ranging from $780,000 for one on the second floor (with 'views' of the other 26 storey apartment block that is also under construction), up to $1m for a one-bedroom apartment on the 39th floor that has views from the balcony towards the Sydney Harbour Bridge and parts of the harbour and CBD skyline (and probably also some distant views of the Pacific Ocean). While it is a one-bedroom apartment, the apartment I was interested in also has an extra 'study' room located where the elevator shaft for floors 1-26 is located on the lower levels. This increases the apartment's floor area and provides a 'spare room' that could be used as a home office, nursery, or overnight guest accommodation. I decided on buying that unit and paid the $5,000 'holding deposit' while my solicitor reviews the contract.

The required deposit will be $100,000 (10%) which I'll fund out of my existing, undrawn 'portfolio loan' account (secured against our home equity). The apartment block is due for completion in Q1 of 2023, and which time I'll need to arrange an interest-only investment loan for the balance ($900,000) due at settlement.

At current interest rates, average rents for one-bedroom apartments in this suburb, and the estimated costs (management, rates and strata levy) this investment unit would produce a negative cash flow of around $15,000 pa. As this would be negatively geared, the impact on my 'after tax' cash flow should be considerably less ($10,000 pa or so). The average rate of price increases for units in Sydney over the past 25 years has been 5.9%pa, which would equate to around $59,000 of unrealised capital gains pa. Any eventually capital gains would (under current rules) be taxed at half my marginal tax rate (and if I sold the unit when I am retired, my marginal tax rate may be considerable lower than my current marginal tax rate).

Of course, the actual outcome will depend entirely on future (unknown) changes in the main risk factors:
- will Sydney property prices continue to rise over my investment time-frame of 9-16 years?
- will prices drop again/more? By the time of settlement (2023) when I need to arrange a mortgage?
- will prices drop over the 9-16+ year period that I intend to hold onto the investment?
- if so, will the rise be the 'typical' gain of 5.9%pa of the past 25 years? Or more? Or less?
- can the average rental be achieved? Will this new, 'luxury' apartment rent for more than the average? - will there be a high vacancy rate and/or pressure to reduce rents (there are a couple of other high-rise apartment blocks currently being completed in the area, or due to start construction)
- will the current (historically low) interest rates persist? or will my mortgage costs rise significantly?
- will I be able to fund the negative cash flow out of my employment income? (ie. will I be retrenched before my planned retirement age?)

Many of these factors are unknown but have significant downside risk - for example the global economy appears to be slowing, as does the Australian economy. Whether or not that results in recession, higher unemployment, and lower real estate prices is impossible to predict. As is the likelihood of significantly higher interest rates (at the moment we still seem to be in period of declining interest rates). Or lower rental returns and/or high vacancy rates.

I've done some rough calculations of possible outcomes assuming typical rates of rent increase (3%pa), current interest rates (4-5.5%) for my portfolio loan and the required mortgage, and price rises ranging from 2%pa-8%pa. At a 'typical' rate of price growth (6%pa) over 9 years I would end up with a capital gain of around $500,000 (assuming current interest rates, low vacancy rates and achieving 'average' rental rates that increase by 3%pa). If price rises averaged 'only' 2%pa over the next 9 years (eg. a double dip slump in property prices in the next couple of years if Australia has a recession, followed by economic recovery and return to 'typical' rates of property price rises) I would still make a small profit over 9+ years. Indeed, even assuming 2% average price rises over the next 9 years, and interest rates rising 1% I would still end up slightly ahead.

I haven't taken into account the modest price differential for completed apartments compared to their 'off the plan' price (often around 10%) - due to people preferring to purchase a home that is ready to move into. Hopefully that builds in a small 'buffer' in my projections.

Of course the 'worst case' scenario is fairly dire - for example a severe recession with property prices dropping, lower rental returns and high vacancy rates, and/or higher mortgage costs. We'll see how things turn out - this feels a lot more like a speculative gamble than an 'investment', but I suppose that is always the case when you head off towards the pointy end of the return-risk relationship...

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Friday, 20 September 2019

Climate change 'strikes'

Apparently, having just voted in the LNP (conservative) government in Australia, and with both major parties supporting coal mining, the most effective thing people can do to attack the climate change 'emergency' is to have a day off work/school and wave some placards around.

The funniest thing about these hordes of people gathering to protest human greenhouse gas emissions is that the rise in greenhouse gas emissions since the 1880s has been driven mostly by the inexorable growth in the human population.

Just do a back-on-the-envelope calculation of what global emissions and the temperature rise would have been if population was still at 1880s levels...

I also wonder how many of these people are actually paying the few dollars extra that would be required to get all their domestic electricity consumption provided by renewables? As with most things, many people will cry out for action, but generally only if someone else pays for it - either via taxpayer funded schemes or by costing someone else their job.

It will also be interesting to see how many people protest in the countries that have increased global emissions the most in the past few decades - since 2005 US emissions have declined by 758 million metric tonnes, the EU by 770 million metric tonnes, while China has increased their emissions by 3 billion metric tonnes, and India by 1 billion metric tonnes.

It's not a coincidence that the underdeveloped countries with huge populations that are trying to 'westernise' their economies and living standards are the ones currently driving the world towards temperature rises above the 2 degree 'crisis' target. And it also shows the futility of making heroic cuts in carbon emissions in the developed countries when this is being overwhelmed by rising emissions in the developing countries.

Yes, the rich nations with already high living standards can best afford transitioning to non-polluting energy sources, and should lead by example (and pay the 'sunk costs' of developing the required technologies). But if this truly is a 'climate emergency' the most significant change that could avert a climate disaster would be to ensure that developing countries only develop via non-polluting energy sources, rather than simply pushing ahead with economic growth at any cost (on the back of fossil fueled energy supplies).

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Tuesday, 17 September 2019

Progressing with my uni (and other) studies

A new uni semester (Q4) has just started. This semester I'm doing the 'Superannuation' subject. Browsing through the modules it all looks quite familiar, so I *should* be able to get another HD in this subject. So far I've completed four out of the twelve subjects required for the Master of Financial Planning degree, and have gotten two HD's (in Communication and Ethics for Financial Planners, and Investment Planning,) one D (in Financial Planning), and a Credit (in Commercial Law).

My GPA for 2019 (so far) is 6.0 which is just at the cut-off for getting onto the annual "Dean's List". Either a D or HD this semester will be enough to get on the Dean's List for 2019, but I'd prefer to get an HD this semester, as it will improve my chances of getting a university medal when I graduation.

My GPA overall (so far) is 6.25. To graduate 'with distinction' I'll need my GPA to be above 6.00, and for the Dean's Medal award at graduation I'll need a GPA above 6.00 AND be in the top 2% of my 'cohort' (which I think will be all the postgrad students graduating from the school of business that year). Hopefully I can get mostly HDs and Ds for the remaining subjects and get my final GPA to  6.50 or above. It's hard to know exactly what GPA will be sufficient to make it into the 'top 2%'.

This semester I also want to finish off the specialist courses in Margin Lending and SMSF that I'm doing with IIT, and also finish off the ADFP I'm also enrolled in with IIT. So I'll be quite busy studying for the rest of this year. Next year I'll only be doing my WSU studies, so it should be a little bit easier to ensure I get as many HDs as possible. Once I've finished the Masters degree I then plan on doing my CFP (the Masters degree will give me credits for three of the four required CFP courses) and to enrol in a PhD in Financial Planning. We'll see if things go according to plan...

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