Saturday 26 September 2020

Does the SGL need to increase to 12%?

There's a bit of a 'culture war' going on regarding when and if the SGL rate should increase to 12% on schedule, be brought forward, or deferred. Those on the left side of politics view the Australian Superannuation system as one of their great social reforms, although moving towards a self-funded retirement system was probably a demographic inevitability regardless of which side of politics was in power given the aging population was causing an increase in the ratio of pensioners to tax payers since the 1980s. As the introduction of the SGL was a Labor initiative, they therefore jump on any suggestion to defer the planned increase of the SGL rate as an attack on the Superannuation system itself ('mediscare' seemed to work, so expect a host of 'superscare' election ads if there is any delay to the SGL increase before the next election).

Those on the hard right of course hate the very concept of government mandated savings for retirement, as they would prefer people to be able to choose for themselves whether or not to spend current income or defer some of it for their retirement (then again, the far right is also against redistribution of income and welfare, so if left to their own devices, those without any retirement savings would presumably end up in poverty if they didn't save for their retirement).

Since we have a Superannuation system in place, and the rate is planned to eventually rise to 12%, the real question is whether the rate change should proceed according to schedule, or, due to the economic impacts of Covid-19, whether the rate increase should be brought forward or deferred.

The argument for bringing forward the SGL rate increase is that it would be a proxy wage rise, given that the SGL is employer funded. Given the current lack of wage inflation, an SGL increase is at least one way to funnel company profits into employees pockets rather than to shareholders (even if the employees can't access the funds until they retire). The original SGL was a trade-off of wage rises for superannuation contribution (at a time of high inflation and wage increases), so any SGL increase would theoretically result in a commensurate decrease in future wage rises. But in a time of negligible wage rises, an increased SGL contribution would initially simply be an additional cost to employers. Of course, there is the possibility that imposing an SGL increase on employers would therefore discourage employment, at a time when unemployment has increased due to the economic impacts of Covid-19.

The  argument for deferring the SGL rise is that people need as much current income as possible in the current economic environment, so it makes no sense to defer additional current income to fund retirement spending. And that this isn't the right time to impose an additional cost on employment when many companies are already struggling financially.

Of course the superannuation 'industry' is in favour of the SGL increase happening sooner rather than later, as SGL contributions add to the pool of retirement savings they can 'clip' for management and admin fees. And trade unions favour larger Industry Super Funds as they promote Industry Super as if superannuation is a worker benefit that is provided by the trade unions (union membership has been declining for the past few decades, so anything that makes trade unions seem more relevant to workers is vital to their continued existence).

However, looking at the SGL rate dispationately, the key question is whether an increase from 9.5% to 12% is actually critical to making Superannuation provide an adequate retirement income in the long term. It has been pointed out that currently 40% of retirees report that their superannuation doesn't provide an adequate income for a comfortable retirement, which is taken as evidence that the SGL rate needs to rise. But the reality is that current retirees did not accumulate their Superannuation at the current SGL rate of 9.5%, but for most of their working lives the SGL rate was much, much lower. SGL was only introduced in 1992 at of rate of 4%, and the rate has slowly increased over the years.

For example, looking at a 45 year working life (from age 20-65), those that retired in 2017 would have received SGL at an average rate of only 4.54%. Those retiring in 2018 after working 45 years had an average SGL contribution rate of 4.75%, and even those that retire this year after working 45 years only received an average rate of SGL at 5.38%.

So, even with the SGL rate at "only" 9.5%, twenty year old works will retire after 45 years after having received roughly twice the total SGL contributions of recent retirees. The actual impact on their final retirement balances will be even greater, as the impact of receiving 9.5% SGL in year 1 of saving for your retirement rather than in year 45 is much more than double due to the benefits of compounding for 45 years. So, while 40% of retirees may have inadequate Super balances at the moment, in future years the current SGL rate will already provide a much greater benefit at retirement age.

Overall, keeping the SGL at the current rate for a few more years will not have much impact on eventual retirement balances, but might assist with the recovery in employment rates over the next few years.

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Tuesday 22 September 2020

2/3 through my Masters in Financial Planning degree

Last Friday I got my result for the subject I did in Q3 (Portfolio Management) - I got another Distinction grade, which was actually a bit disappointing as I need to pick up another HD this year to get on the Dean's List again in 2020 (I recently got the notification that I made it onto the 2019 Dean's List), and keep on track to graduate "with Distinction" next year. Unfortunately I only got a Credit for the subject I did in Q1, so I'll need to get another HD during 2020 to offset that result.

I'd gotten about 88% for the assignments and mid-term quiz (collectively worth about 55% of the course mark), so I must have only received a 'credit' grade on the final exam. Not entirely surprising as one of the six questions was about a theory we'd covered at the start of the course and I'd forgotten one particular definition (which was basically the question, worth about 20% of the exam!). There's nothing more annoying than sitting in an exam knowing that you've read about a particular piece of terminology, but not being able to recall exactly what the definition was. I was actually a bit surprised to find that question was even in the exam, as the final was supposed to only be on material covered in modules 5-9 of the course (as modules 1-4 were covered in the mid-term exam, and that definition was covered in module 2). I also probably didn't get full marks on a calculation question as I didn't have a calculator available during the online exam. Although the uni subject and exam guides had both said that any "non-programmable" calculator could be used in the exam, when I logged in with ProctorU to sit the online exam they told me that according to their exam instructions only a "financial" calculator was allowed, so I couldn't use my standard scientific calculator! I emailed and tried phoning the lecturer to clarify this, but couldn't get hold of him before the exam was due to start, so I had to sit the exam sans calculator. After I logged out of the exam session I was able to check my emails, and the lecturer had meanwhile responded that it would be fine to use by scientific calculator - D'Oh!

I was going to lodge a 'misadventure' form, but they all required supporting letters for broken legs, illness etc. and there was no form that seemed to cover "total stuff-up by the university and ProctorU" as an option ;)

Anyhow, I've decided to revert to only doing one subject in Q4 (I've been doing the normal one subject workload as a part-time student so far, but had initially enrolled in two subject for Q4 with the idea of finishing the degree by the middle of next year) as that will make it more likely that I can get an HD in Q4. The Q4 subject is 'Insurance' so I already know most of the material from my DFP and CPD studies, but the trick will be to put enough effort in to actually get an HD.

My main goals for the next few months are to: complete the Q4 subject with an HD grade (so I get onto the Dean's List for 2020 and get my GPA back up to the 6.0 minimum required to graduate "with Distinction" next year), finish off the two 'specialist' financial planning courses I'm doing (in Margin Lending and SMSF), and get one of the four ADFP modules completed by the end of this year. It would also be nice to get a paying financial planning client by the end of this year.

Next year's goals will be to: finish the MFP degree, finish the ADFP qualification, do the required TPB course to be registered as a financial (tax) advisor, and do the course required for CFP (I'll get a credit for three of the four required CFP courses for completing the MFP degree). I'll also apply to enrol as a part-time PhD student at WSU when I've completed the Masters degree. Looks like 2021 will be quite a busy year (aside from my full-time job).

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$50 bonus available to new accounts with peer-to-peer lender Plenti

I've invested a few thousand dollars with the Australian online peer-to-peer lender Plenti (previously known as RateSetter), mostly just to see for myself how peer-to-peer lending works. They currently are offering a $50 bonus to new investors that invest $1000 in the five year lending market and setup their account using this offer link. Their five year lending is currently offering investors around 6.3% pa interest rate.

Disclosure: I will also get a $50 bonus if anyone joins up using that link and invests $1000 in the five year lending market. Make sure you read the PDS. I'm not providing any advice about this product - I've invested a relatively small amount myself, but I can afford to loose it.

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Tuesday 1 September 2020

Net Worth: AUG 2020

My monthly Net Worth calculation has been updated in NetWorthShare as at the end of August. I've included a couple of miscellaneous accounts that I hadn't previously bothered including in the monthly calculations - a couple of savings accounts, the value of the IG and CityIndex share and CFD trading accounts, and my foreign share holding - to make the NW calculation more complete. However I am still recording the value of the Lake House 'at book cost' and the off-the-plan investment unit at 'cost' (deposit and stamp duty paid to date). My net worth figure increased by $51,254 (1.97%) overall, to reach $2,653,320.

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September "12% solution" portfolio changes

No trades required for the start of September, as the emailed recommendation is the same as last month: 60% QQQ and 40% JNK.

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