Long, long term real estate investment prospects

Browsing through Moomin's blogroll, a post from Climateer Investing to a Nature article about the next supercontinent caught my eye. Looks like my home and investments properties in NSW will still be prime real estate in 250 million years, as this is one of the more temperature zones projected to exist in the future supercontinent ;) (And my properties may closer to 'absolute water front' within 1,000 years if the Antarctic ice sheet melts away faster than expected causing sea levels to rise by up to 65m - but although the floating Antarctic ice sheets might melt within 500 years, the 1.9km thick icecap on the continent would take a lot longer to melt away, even if temperatures rose significantly above zero in Antarctica).

I am a long term investor, and even contemplate wealth transfers and family trust structures that could last hundreds of years, but looking 250 million years ahead seems silly even to me.

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Net Worth - SEP 2023

Chart updated to end of September in sidebar.

Stocks/cash increased $784 (+0.37%) to $211,211. This was unexpected given the generally terrible month for the stack markets (Dow Jones down -3.27%, S&P 500 down -4.64%, All Ords down -3.86%). So I can only attribute this to my brilliant trading/stock picking (or sheer dumb luck).

Retirement savings (SMSF etc) decreased by -$66,709 (-4.20%) to $1,522,844 in line with the market trend and our asset allocation. We have about $77K sitting in cash (ANZ V2 savings account), so we might add this to our investment in Vanguard High Growth Fund once the transition from retail fund to online ETF investment is completed later in October.

Est. of Home valuation (my half) increased by $6,374 (0.61%) to $1,054,479. 'Other real estate' (my 'lake house' and the investment apartment) also increased over the past month by $17,854 (0.87%) to $2,078,388.

The outstanding balance of the investment property mortgage remains at $999.993 during the 'interest only' period of the mortgage. I have about $131K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) decreased by -$1,641 (-4.43%) to $35,426.

Overall, NW decreased by -$43,338 (-1.10%) to $3,902,355 during September. Looks like I won't become a quadrillionaire this year.

The tenants of my investment apartment paid 4 weeks rent during September, but as a lump sum at the end of the month (in arrears), rather than weekly in advance (as required by their lease agreement). So the managing agent lodged the NCAT lease termination application with the NSW Civil and Administrative Tribunal.

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Rental Investment Property update

The managing agent submitted the NCAT (lease termination application) form (costing me $60) last week, as the tenants had still not been paying their rent weekly in advance as per the lease agreement. It wasn't quite as bad as I had thought though, as they had paid four weeks rent in one lump sum last week. So they are currently only one week in arrears, but not complying with the terms of the lease. We'll see what the tribunal determines - if they agree to start paying the rent each week and catch up on any rent that is owing over a reasonable period of time, the tribunal is likely to not terminate the lease. Hopefully the proceedings might encourage the tenants to start paying their rent weekly, as my biggest concern would be if they vacated the property without notice and were owing a month or more of rent in arrears. The two week rental bond is meant to cover any damages beyond normal 'wear and tear', and isn't sufficient to cover a substantial amount of unpaid rent. Then again, my landlord insurance does (theoretically) provide some cover for unpaid rent, but making an insurance claim is bound to be time consuming and tedious.

If the lease was terminated the managing agent would charge me another one week of rent as a fee for finding new tenants, plus any advertising costs. So it would be best from my POV if the tenants simply start paying their rent on time.

ps. After chasing up the local and international payroll/HR departments of the company I work for, they finally processed the PAYG tax variation approval from the ATO. So I will now have slightly more after-tax 'take home' pay each fortnight rather than having to wait until lodging the annual tax return to get a large tax refund. This is good, as the extra income can sit in my mortgage offset account at an effective pre-tax interest rate of 6.29%, rather than have the ATO holding onto my tax instalments for more than a year (and not paying any interest) before providing a tax refund.

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12% solution 'superhero' portfolio and 'moomoo' trading account - end SEP 2023 update

The "12% solution"" recommendation email from David Alan Carter for the end of September was for

60% SHY (or cash) + 40% JNK (or SHY or cash)

So I will liquidate the 12% solution portfolio holdings when the US market opens and move to cash for this month.

David Alan Carter's monthly "12% solution" update email reported the YTD performance for 2023 so far as being +16.1%.

Overall my 'superhero' trading account was down during September - from $2,162.41 to $2,056.81

My other 'moomoo' trading app account (where I try to read the entrails of technical charts to make profitable 'long' positions on the index trading VAS ETF) managed to be slightly up during September despite VAS and the markets being down - from $5,179.63 to $5,200.38. This month the movement was entirely due to my trading performance. My overall trading result is now a 43% win:loss ratio, with four stop-loss trades losing an average of $61.53 per trade, and three take-profit trades gaining an average of $84.87 each. The win:loss ratio is still quite good (but still way too early to draw any conclusions), and the average realized losses moved closer to the planned (-$50) target, and the winning trades getting closer to the planned ($100) target. 

Compared to the 'benchmark' of the S&P500 index my 'trading' was quite successful during September. My overall yield is +2.03% while the S&P 500 during the same period is -6.41%. The 'plan' is to open a long position when the market seems to be in the early stages of an upward trend, and take a profit (or roll-over the position and reset stop-loss and take-profit alert settings if the trend is holding) when the price target is reached, or close out when the stop-loss is reached. Setting the take-profit to be a 1% gain while the stop-loss is set at a -0.5% loss, should result in profitable trading *if* I have winning trades close to 50% of the time. Of course, the take-profit trigger being twice the stop-loss trigger as a percentage change means that the stop-loss would be triggered more often than the take=profit trigger, if my reading of the trading entrails doesn't avoid opening positions when the market is about to start dropping. We'll see how things play out over coming months.

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Rental investment property blues

Apparently the tenants for my rental apartment have not paid the rent since 24 August, so the managing agent issued a termination notice with termination date 22 Sep (today). If the tenants don't pay the rent that is due, or vacate (give possession), then an application will be lodged with the relevant government tribunal (costing $60) and the case will be addressed in a couple of weeks. We'll see what happens. The tenants could catch up on the owed rent, or could move out and hand the keys to the managing agent, or not do anything -- in which case the application will be heard in a few weeks' time. The tribunal might terminate the lease (in which case the tenants should leave -- but sometimes you have to get the local council 'sheriff' to notify them the move out of the premises). Or the tenants might claim difficulty paying the rent and seek some sort of 'arrangement' to slowly catch up on the owed rent -- which can then drag on for a long time (and the tenants eventually move out owing even more in unpaid rent). Or the tenants could pay the owed rent the day of the hearing, in which case the application is dismissed (and often the entire cycle of falling behind in rent repeats).

In my previous experience having a rental property, it is quite common for tenants to move out without notice when they are many weeks behind in the rent, leaving a mess that needs cleaning up, damage to be repaired, and a two week 'bond' that doesn't even cover the cost of repairs and cleaning, let alone the amount of unpaid rent that is owed. The tenants then often move interstate (or in this case possibly overseas) and you can never recover the owed rent. Then you often have the property vacant for another couple of weeks while looking for new tenants (and paying for advertising etc).

One has to take the 'long view' with such things - otherwise you worry about having to make mortgage intereest payments on a $1MM mortgage at 6.29% while not getting any rental income, and also having to pay strata levy, insurance, council rates, utilities etc.

In the 'long run' rental income should cover *most* (or a large part) of the holding costs, the net negative cashflow and depreciation should provide some tax relief, and the eventual capital appreciation (after paying capital gains tax) *should* make the investment profitable in the long run.

ps. My application for income tax variation (based on the expected net loss from the investment property this financial year) was approved in August, but had not been applied by my employer's payroll department as of last week -- so I had to check with the ATO that the variation approval had been sent to my employer (it had) and then try to contact the payroll department (in HR) to find out why my withholding tax had not been varied yet. I still haven't received an update regarding the 'ticket' I had to lodge (other than an automatic response that it had been received), so I have no idea when my take home pay will start to reflect the reduced withholding tax rate of 11% for the remainder of this financial year.

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Simple Financial Lifecycle Illustrator

A Simple Financial Lifecycle Illustrator that you can play around with.

All figures are in current $ terms.

Enter the average after tax (take home) salary, age start and end full time employment, percentage of salary saved. It is assumed that all savings are available for retirement income, and that the amount of take home - savings = budget (both while working and during retirement). Then enter the inflation-adjusted after-tax rate of return (eg. If invested in index stock funds within superannuation, where the tax rate is 15% and the inflation rate was 2%, then an average return of 11% becomes 9% after adjusting for inflation, and 7.65% after tax).

Playing around with it lets you see the impact of changes to savings rate, retirement age, asset allocation (ie expected average return) and so on. It is a very simplistic model, as assumes the entered values are the average for the entire timeframe and doesn't allow for sequencing risk of any variability, periods spent working part-time etc.

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Transition to retirement plans

I currently plan on sticking with my current full-time employment (barring any serious health issues or being made redundant) for another 8 years or so -- which would bring me to age 70. When I turn 65 I will be able to transfer my SMSF accumulation account balance into 'pension phase', which will mean (under current tax law) that the earnings and capital gains be taxed within the SMSF at 0% rather than the normal 15% tax rate on earnings (and 10% on capital gains). Based on my current SMSF balance, 10% SGL contributions and roughly 6% real rate of return, I should be close to the TBC (transfer balance cap) of $1.9MM at age 65. I might use $100,000 or so of the TBC at age 65 to purchase a deferred lifetime annuity to commence payments from age 85 -- which should provide an annual inflation-adjusted income of about $21,500 pa from age 85 onwards (which would cover around half of my budgeted living expenses). This should be sufficient to ensure I have sufficient retirement income even if sequencing risks adversely affects my SMSF balance (e.g. if there is a major market crash just after I retire and switch from making contributions to making withdrawals).

The mandatory minimum drawdown rate from an SABP (Simple Account Based Pension) for someone aged 65-74 is 5% pa, so a $1.9MM account balance in pension phase would require $95,000 tax exempt pension payment to initially be made each year. As I plan to be still working FT to age 70, the entire pension income can be used to quickly pay down the balance on my investment apartment loan while I am still working (and working on my PhD).

The investment apartment should become cash flow positive after a few years of paying off the mortgage principle using my SMSF pension income.

Once I retire from FT employment I plan to continue working PT as a financial advisor for up to decade (depending on how I feel at the time). The SMSF pension should be sufficient to cover living expenses and pay off the remaining investment property loan fairly rapidly, so any additional income earned as a financial adviser when 'semi-retired' will be available for investment (probably into my investment bond).

Then when I eventually fully retire, my financial planning business *might* be able to be sold for around 3.5x annual revenue, but I can't really estimate what that might be, Once I completely stop work the SMSF pension should be considerably more than I require, so I will probably invest any surplus income. As the SMSF pension is tax exempt, I will be able to earn up to $45,000 pa from personal investments, rental income etc. and stay within the 19% tax bracket. The net rental income from the investment apartment probably won't be quite this much, so I can probably invest some amount in my own name, then, once the taxable income gets over $45,000, I will direct any surplus income into my Investment Bond account, where it is internally taxed at up to 30% (probably around 20% due to being invested in the tax optimised funds).

The SMSF balance should continue to grow as long as the minimum drawdown rate remains below 8% (the 9% withdrawal rate kicks in at age 85), after which the pension payments will have increased to an extent that it starts to erode my SMSF account balance. The increasing surplus of pension payment compared to my budgeted living expenses (around $40,,000 pa) will be invested in the Investment Bond (and can be withdrawn tax free at any time if I require some additional income during retirement).

I doubt that my SMSF balance will be depleted during my lifetime (longevity risk), but in any case my existing deferred lifetime annuity will commence making pension payments of about $40,000pa (indexed to inflation) from age 99 onwards, so I won't have any financial concerns if I happen to live as long as my great Aunt (who made it to 104).

I did a rough calculation of how my NW has tracked over the past 20 years or so, adjusting the monthly figures to constant 2022 $ terms using the RBAs annual cpi index data, and also adding in the 'deflated' value of the lake house property I was given in 2014 for the prior year figures. I have been savings/investing around $25K pa over this period, and using an average rate of return (after tax) of 6% produces a 'projection' curve that tracks pretty closely to my actual NW. Based on this I should have around $10MM NW by the time I fully retire, and as the required retirement income will be negligible ($40K pa is only 0.4% of $10MM) my NW should continue to grow somewhat in line with this 'projection' even during my retirement. Of course any prediction extrapolating several decades into the future is likely to be nowhere close to reality.

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12% solution 'superhero' portfolio and 'moomoo' trading account - end August 2023 update

The "12% solution"" recommendation email from David Alan Carter for the end of August was for

60% MDY + 40% JNK

So I will have to update the '12% solution' component of my superhero portfolio by selling the QQQ holding and replacing it with MVV.US (MDY.US is not available in the superhero platform). I have placed a 'market' order to sell QQQ which should get filled tonight, and I will then reinvest the proceeds into MVV (I am not sure if the proceeds from the QQQ sale will be immediately 'cleared' and available to reinvest).

David Alan Carter's monthly "12% solution" update email reported the YTD performance for 2023 so far as being +21.5%.

My overall 'superhero' trading account was up slightly during August - from $2,149.11 to $2,162.41

My other 'moomoo' trading app account (where I try to read the entrails of technical charts to make profitable 'long' positions on the index trading VAS ETF) was also slightly up during August - from $5,072.30 to $5,179.63. Although a large part of that increase was due to the value of the 'free' shares allocated to the account as a 'new account' bonus. My actual trading result was a 50% win:loss ratio, with two trades losing an average of $73.94 per trade, and two trades gaining an average of $73.25 each. The win:loss ratio was quite good (but with such a small number of trades it is way too early to draw any conclusions), but the realized losses were higher than planned ($50) due to missing one 'stop loss' alert on opening, and closing out the position well below the 'stop loss' target price. I also closed out one positive position too soon, as it was my first trade and I got nervous and wanted to crystalize a 'profit'. At least I improved my trading discipline during the month, with the deviation of trade price from target decreasing from $0.92, to $0.62, then $0.26 and finally $0. The final 'trade' was actually to reset my existing position with new 'stop loss' and 'take gain' alert levels when my profit target was reached. As the chart seemed to show the up trend was being maintained, I decided not to close and reopen a position, but simply do a 'paper trade' and keep the position open but treat it as a new position.

Compared to the 'benchmark' of the S&P500 index my 'trading' seems to have been reasonably successful during August. Even if my account goes down in value, the trading is still a 'success' if it goes down less than the relevant benchmark. I'll see how this looks after a year to two of 'trading'. The dollar amounts involved are relatively trivial, but it gives me something to play around with while my superannuation and real estate investments just sit there and do their thing over several decades.

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Net Worth - AUG 2023

Chart updated to end of August in sidebar.

Stocks/cash increased $4,918 (+2.39%) to $210,527.

Retirement savings (SMSF etc) decreased by -$7,149 (-0.45%) to $1,589,553

Est. of Home valuation (my half) increased by $17,879 (1.74%) to $1,048,105.Conversely,'other real estate' (my 'lake house' and the investment apartment) decreased by -$20,825 (0.54%) to $2,052,532. 1

The outstanding balance of the investment property mortgage is $999.993. The bank credited a small adjustment, so the loan balance decreased to slightly below the $1MM. I have about $136K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $1,077 (2.99%) to $37,067.

Overall, NW decreased by -$4,093 (-0.10%) to $3,945,693 during August. With a dip at the start of the month being recovered by month's end

The tenants of my investment apartment paid 6 weeks rent during August, so have basically caught up with their arrears. So I am glad I told the managing agent to not proceed with a lease termination notification unless they fell more than two week's behind again. The managing agent has a bit of a conflict of interest in this matter, as a change of tenants means I would have to pay one week of rent as a fee for finding a new tenant and additionally pay for some 'advertising' for new tenants (which is basically advertising for the management company paid for by their clients!).

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How the Age Pension Asset Test is designed to penalize the average Australian couple if they make additional super contributions

Based on 2019 statistics, the average man aged 60-64 and approaching retirement had a superannuation balance of $178,800. And the average woman aged 60-64 and approaching retirement had a superannuation balance of $137,050 (due to having contributed less into superannuation over their working lives and, possible, the fact that women typically have slightly lower financial risk tolerance that men, so may have their super invested in slightly more conservative asset allocations, providing lower yield and lower volatility).

So, for a 'typical' homeowner couple the average combined superannuation balance just before retirement would have been around $315,850.

Assuming they only had $30K of personal assets (car, jewellery, furniture etc.) in additional to their family home and superannuation, they would have become eligible for the full Age Pension at age 67*.

Assuming they have put their superannuation into an account based pension when they retired, their superannuation in pension phase would provide some retirement income. For simplicity I have assumed the minimum withdrawal rate (which is 5% for someone aged 68).

The amount of Age Pension they receive would be the standard rate for a homeowner couple of $1,604 per fortnight (as at March 2023) as long as their Age Pension was not reduced due to the Assets or Income tests. Generally (due to deemed income rates being fairly modest, and most retirees not earning much other income) the relevant test that will start to impact the amount of Age Pension entitlement is the Assets Tests. The family home is exempt, but other financial assets (such as superannuation) and personal assets (such as cars, jewellery, furniture etc.) are all counted for the Assets Test.

Lets assume this 'typical' homeowner couple has $30K of personal assets. Now, the Age Pension Asset Test threshold (where the Age Pension starts to reduce by $3 per fortnight for every additional $1,000 of assets) is $451,500 for a homeowner couple. So the couple could own their principal residence, have $30K of personal assets (car etc) and have $420,000 combined total superannuation and receive the full Age Pension ($41,704 per year).

Now, the general 'rule of thumb' for a homeowner couple to have a 'comfortable' retirement is their income in retirement should be around $70,000 per year. So, the Age Pension alone won't provide a 'comfortable' retirement for a retired homeowner couple.

But having some superannuation pension will boost their total retirement income -- up to a point.

The sad reality is that every $1,000 of superannuation balance for the couple over $420,000 would reduce their Age Pension entitlement by $3 per fortnight ($78 per year). But if their extra $1,000 in superannuation will only provide an extra $50 of income (at the 5% withdrawal rate), they would actually see a reduction in total retirement income of -$28 for every extra $1,000 they have accumulated in superannuation during their working lives!

This 'penalty' for having more than the average amount accumulated in superannuation will continue to impact as long as you have any entitlement to a partial Age Pension. Once a homeowner couple had total assets over $986,500 they would not receive any Age Pension**, so having more superannuation would provide more retirement income as they would not be any Age Pension left to reduce!

Overall, the interaction of the Age Pension asset test and combined superannuation balance on total retirement income for a homeowner couple is shown below. The orange horizontal stripe shows the $70K pa needed for a 'comfortable' retirement for a home-owning couple. The blue arrow points to the average combined superannuation balance at retirement age of $315K, and that for combined superannuation balances over roughly $450K up to $900K having accumulated more in superannuation will actually mean you end up with less total retirement income (Age Pension entitlement plus minimum withdrawal from superannuation in pension phase).

The graph might not be 100% correct (it is based on a quick review of the Age Pension Asset test rules - for accurate calculation of Age Pension entitlement you have to consult Centrelink -- which makes planning and modelling such interactions quite difficult, even for financial advisers), but illustrates the general interaction of Age Pension entitlement and having accumulated more than 'average' in superannuation.

One interesting thing to note is that while the Age Pension and asset test threshold are generally indexed, the 'average' superannuation balance will be increasing at a faster rate, due to the increase in SGL contribution rates in recent years. So more and more retirees are going to find that they would be better off (in terms of total retirement income) by withdrawing some of their superannuation as a lump sum and spending it!

Of course this could quite easily be fixed by eliminating the 'dip' in total retirement income by simply changing the rate at which Age Pension entitlement is reduced for every extra $1,000 in assets above the Age Pension asset test threshold. Reducing it from $3/$1000 to $2/$1000 would replace the 'dip' with a 'flat spot' between $420K and $1MM combined super balance. And anything less than $2/fortnight reduction for every extra $1,000 in assets would mean that it was actually worthwhile accumulating some extra superannuation to provide a boost to retirement income...

I doubt that there will be any 'tweaking' of the Asset Test to eliminate this 'feature', as most Labor voters would not be affected (as they are likely to end up with below average superannuation balances), and the more affluent Liberal voters will likely never be entitled to receive any Age Pension, so don't care. So, as usual, it is the 'middle class' earning around the average income and retiring with around the average superannuation balance that would be most affected.

PS. It isn't actually as simple as this analysis suggests - you would also have to take into account the benefit of tax savings due to making additional concessional superannuation contributions (eg. via salary sacrifice) and so forth. So whether or not aiming to end up with a higher than average superannuation balance will depend on individual circumstances. You can also alter the scenario by using some superannuation to move to a better 'principle residence' (that is exempt from the asset test) in retirement.

*Yes - there are a lot of more detailed eligibility conditions (eg. being an Australia resident, year of birth etc) but I am only doing a simply illustration for a 'typical' case here.

** Unless they are legally blind (less than 6/60 vision in both eyes, wearing corrective lenses), in which case the Age Pension (blind) is not subject to the Asset or Income test...

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Our SMSF Performance vs Index (Industry Funds)

Inspired by Moomin's post of his SMSF monthly performance compared to comparable Uni/PS super funds (unisuper and PSS(AP)) where he and Moominmama might otherwise have their superannuation savings, which was in turn inspired by an AFR article by Tony Boyd comparing his SMSF's performance to a relevant index of industry super funds, I decided to have a look at how our SMSF has perforned over the past decade compared to the Index of industry super funds reported in the AFR article.

Our results have been quite comparable to industry fund returns overall, but with slightly better net returns in the worst years - especially in FY2022 when my/our decision to tactically adjust our asset allocation for several months (to a more conservative stance) when the Covid-19 pandemic was just starting to spread globally, helped mitigate the impact on our retirement savings.

Overall our SMSF has a slightly higher average net return for the past ten years compared to an index of industry super funds - 8.70% vs. 8.05%. The extra 0.65% doesn't seem like a huge amount, but compounded over many years such increments in annual performance will have a significant effect on the final outcome. I plotted a bar chart of our SMSF annual net return vs. the Index, with the baseline set at roughly the average inflation rate over the past decade (to show the relative inflation-adjusted average return of our SMSF vs the Index).

The net performance difference is likely due mostly to the average industry or MySuper fund charging around 1.08% admin/mgmnt fee (which is about half that charged by retail super funds), whereas the admin/mngnt/audit/ASIC fees on our SMSF was around $1,300 with the total SMSF fund balance (me, DW and DS1 accounts) of roughly 1,950,000 - or 0.06%. So the industry funds (runs by professional fund managers) might be producing about 0.35% better net returns (before fees) than our trustee-managed SMSF, but after adjusting for the admin/mngnt fee impact we end up around 0.65% ahead.

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Net Worth - JUL 2023

Chart updated to end of July in sidebar.

Stocks/cash increased $23,402 (+12.85%) to $205,509 - but this was largely due to my adding another $5,000 from cash by setting up my new Moomoo trading account.

Retirement savings (SMSF etc) increased by $37,830 (2.43%) to $1,596,702

Est. of Home valuation (my half) increased by $13,215 (1.30%) to $1,030,226. So the general improvement in Sydney residential real estate market has finally started to be reflected in the sales prices achieved in our suburb.

Other real estate (my 'lake house' and the investment apartment) increased by $11,125 (0.54%) to $2,073,359

The outstanding balance of the investment property mortgage remains at $1MM (the loan is 'interest only' for another 4 years 7 months). Interest rate is currently 6.29% after the RBA hit 'pause' on the overnight cash rate hikes while they wait and see how inflation and economic activity responds to the series of rate hikes done so far. Inflation seems to have peaked and is (slowly) trending down, and the inflation surge has not (so far) been passed on in full to wages. So the RBA may not need to raised interest rates further (unless the inflation rate trend towards the target 2%-3% 'band' doesn't proceed rapidly enough for the RBA).

Other assets (my online depository bullion account and Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $794 (2.26%) to $35,990. Bullion prices recovered part of the losses suffered the previous month.

Overall, NW increased by $86,366 (2.24%) to $3,949,786 during July. This is another new 'all-time high' for my NW estimate.

The tenants in my investment apartment have slowly fallen two weeks behind in their rent -- so the managing agent will see if they will agree to a plan to start making some extra payments to slowly get back up-to-date with the rent arrears. Otherwise a notice to terminate the lease will be issued (costing $60). I'd prefer the tenants remain, so hopefully they were just falling behind by the allowed 14 days and will at least pay their monthly rent in full from now on. Issuing a notice is often rather pointless, as if the tenants make a payment to reduce the arrears to less than 15 days at any time during the next two weeks the termination notice will be invalidated. And if they then fall behind by 15 days again, a new notice would have to be issued. This cycle can continue for months... Alternatively, tenants will sometimes vacate without giving notice when they receive a termination notice -- often meaning they are a month behind in rent before the managing agent and landlord finds out. This means that the two weeks 'bond' money is insufficient to even cover the unpaid rent, let alone cover the cost of repairs to damage the tenants may have caused. Theoretically the unpaid rent and any costs for repairs could be sought from the ex-tenants, but this is often difficult and financially not worthwhile. If the current tenants move out, hopefully it won't take too long to find new tenants (the rental market is fairly tight in Sydney, with vacancy rate still quite low at 1.7%) for the current rent (since rents are currently trending upwards in the suburb).

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12% solution superhero portfolio - end July 2023 update

The "12% solution"" recommendation email from David Alan Carter for end of Jul was an unchanged recommendation from last month, I.e.:

60% QQQ + 40% JNK

So I was able to leave the '12% solution' component of my superhero portfolio unchanged this month (which saves on trading costs)

Since I bought on 12 Jul the price changes for the current components were:

QQQ 1.07449 units @ $372.2696 [=> $383.68    +3.06%

JNK 2.88576 units @ $92.1768  [=> $92.75     +0.62%

Total gain for the (partial) month was $($12.26+1.65 ) = $13.91 on the initial ($400+$266) = $666.00  investment, so 2.09%  so far. As the initial investment wasn't made at the start of the month, this isn't a monthly return figure. In future I'll report monthly performance and a cumulative return.

David Alan Carter's monthly "12% solution" update email reported the YTD performance for 2023 so far as being +22.5%.

Since 2008 the '12% solution' has produced a total cumulative return to the end of July 2023 of 582.0% compared to the S&P 500 Index cumulative return of 326.7% for the same period.

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Another dabble in trading

I was browsing through Youtube videos (anything to procrastinate working on my PhD literature review or making cold calls to find prospects for my financial planning 'business') and came across an interesting talk about trading psychology by Dr David Paul. Despite being 4 years old, it still had some good point about needing to stick with a simple trading strategy, execute the plan with discipline, and use careful money management to ensure the position size is in line with the amount you have available to put at risk.

He gave a simply example of a bet on a coin toss where the payoff for a win is $2 for a $1 bet, and if you lose you forego the $1. Now, despite a 'win' paying out twice as much as a 'loss' (so the expected average return is positive), you can easily go broke due to a random string of losses. If you start playing you will have a 25% chance of having two losses in a row, a 12.% chance of three losses in a row, and 6.25% chance of four losses and so on. So, if you play this 'game' long enough, you are quite likely to encounter a string of 10 or more losses. Since each loss costs you $1, you should not play the game if you only had a 'kitty' of, say, $10 (you can no longer play if you run out of money, despite there being a positive expected return in the long run). A similar situation arises if you engage in card counting to make money playing Blackjack at Casinos -- despite have a positive expected value (EV) in the 'long run', you have to start off with a large enough 'bankroll' compared to the bet size.

So, armed with a reminder of how important trading discipline and money management is for a 'day trader' I decided to dabble again with a bit of trading for fun. This time I decided I'll simply take long positions on the Australian share market when there seems to be a positive run. I opened a new trading account with Moomoo (since they were offering a few months of 'no fees' for a new account, plus a random draw of some US shares as a bonus if you deposit some initial amount and keep the balance for a month or so. I funded the trading account with $5,000 and bought 54 VAS for $90.96 at the open (the fact that the US market had been positive overnight also seems to improve the odds that the Australian market will open on a positive note -- and my order was filled before the major up-tick happened (probably due to the staggered open used for Australian share trading?). For my $5,000 'kitty' I should close the position when I either make 2% ($100) for a 'win' for when I have lost 1% ($50). So I have set alerts to notify me if the price of VAS rises above $92.78 or drops below $90.05. If I manage to 'win' roughly half the time I *should* end up making some profit (how much will depend on trading costs in the long run I suppose).

I'll track how things go for the first 30 or so trades, and see if I manage to stick to my 'trading plan' (and can sell close to the trigger prices). I'm still trying to decide if I might not need to actually close my position if I 'win" as long as the overall market trend still seems to be positive at the time. Instead I could just close my position 'virtually' (on paper), and set the new price alerts as if I had just bought the stock at the new 'entry price'. Not sure if my logic is correct about that, but I'll see how things work out in practice.

As I am only risking a $50 loss on each bad trade (assuming I can close out close to the trigger price if there is a market crash!) it would take a long time to lose my entire $5,000 'kitty' if things go horribly wrong. I do a monthly update on how my 'day trading' is working out.

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Updated Supehero 'fun' trading account to include 'The 12% solution' monthly trades

I decided to transfer A$1,000 into my superhero trading app and convert it and some residual A$ cash balance into USD. A$1,009.79 ended up being US$666.19 after conversion, so I had US$666.83 available to trade (I also has some residual USD cash sitting in my account). I used this to purchase the '12% solution' position recommended in David Alan Carter's 1 July email.: 60% QQQ and 40% JNK.

I ended up purchasing 1.074449 QQQ for US$400 and 2.88576 JNK for $266.00 with a 'market' order overnight. I will buy and/or sell the required positions at the start of each month per the '12% solution' recommendations and we will see how it performs over the next few years. At least trading the required US stocks using Superhero will not incur brokerage each month, which was the reason I gave up my previous attempt to track the '12% solution' portfolio previously (trading costs were making the small positions unviable).

Currently my overall Superhero App Portfolio is:

code              value             units                         daily change   overall change

USD        $  0.83

QQQ                   1.07449 units    +1.26%

JNK                   2.88576 units    +0.92%

CORN                  5.0124  units    -3.19%

WEAT                 14.75716 units    -3.52%

ITA                   3.17325 units    -0.63%

Overall USD holdings $246.92                          -0.32%

AUD       $  0.00

RBTZ                  19.0000 units    +0.00%

Overall AUD holdings $1,242.69                        +3.34%

For NW estimate I will just track the value in AUD and USD at the end of each month and use google to get an approximate AUD value for the USD holdings (unfortunately Superhero only provides exact FX conversion values (including FX fee) when you have some AUD or USD cash in the account to convert (min $100 amount).

The USD holdings CORN, WEAT and ITA are intended to be 'long term' (I expect them to rise more than inflation over the medium to long term) while the '12% solution' portfolio holdings will be traded each month as required. The AUD holding in RBTZ is also intended to be a long term play.

It will be interesting to see how this portfolio performs over the next 5-10 years, although whatever the 'performance' is, the trivial amount at risk will make the end result immaterial from my NW POV.

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Can (almost) anyone get rich?

Can anyone (at least those living in a developed country, and of average intelligence and reasonable health) get rich during their lifetime? And without doing anything exceptional/unique, or getting 'lucky'? I think the answer is yes. Although it does take a reasonable amount of effort and discipline.

As a thought experiment, consider an 18 year old who starts saving $5 each and every week, and invests in a basic 'growth' index fund. S/he might have to start off saving up cash (or putting it in a no fee online savings account) and then starting to invest via a no/low cost investment app like Superhero (no inactive account fee and $100 minimum initial investment and $0 brokerage for Australian ETF purchases, such as VDHG) or Vanguard Personal Investor ($500 minimum investment, or $200 if done via an automated savings plan).

Such an investment might earn an average return of 9.45% (the actual average total return for the last 10 year period = although past performance is not a *reliable* indicator of future performance) which, after adjusting for inflation (lets assume it averaged 2.25%, although it is quite hard to predict the future) and a 32.5% marginal tax rate (although it is hard to predict future changes in income tax legislation or tax rates) for the average Australian average salary of $90,800, would produce an average real after-tax return of 4.2%.

This would mean the $5 weekly saving/investment could grow to $38,400 (in today's dollars) by age 65. Not rich, but not bad for a modest $5 per week.

If this person actually put in a bit of effort they could probably manage to save $500 per week without too much difficulty. Sure, they might not be able to buy the latest model iPhone, eat out every day (eg. might have to 'brown bag' their lunch), or buy a new car every few years using a car loan, but $500 per week would be in the realm of possibility for many people. If they wanted to.

So, at $500 per week, this hypothetical 18 year old would end up with $3.85 million by age 65.

Sort of similar to my situation.

I started out attending public (state) high school in 1972. I did some casual work at a market garden on weekends in senior high school, earning 60c per hour (the equivalent of $5.50 per hour in today's money, adjusted for inflation from 1974 to 2022 - see https://www.rba.gov.au/calculator/annualDecimal.html) and then changed to better paid work as a night fill packer at the local supermarket for minimum wage while in year 11 at high school. My major financial achievement in high school was to end up with $100 in my St George Credit Union savings passbook by the time I started university ($532 in today's money). I then spent a few summer vacations working in the 'lacquer room' (wonderful acetone headaches!) of a pencil factory while at university, before getting a job as a new university graduate in 1984 for $25K pa ($90K in today's money).

Unfortunately I spent most of the $10K I'd saved up by the time I graduated from university ($30K in today's money) on a 10" Meade telescope (which I still own) and a Pentax MX SLR camera and some lenses (which I still have, but later upgraded to a Nikon DX digital SLR) - I should have spent the $10K on Microsoft shares when they floated in 1986 for US$28 (although it was very difficult and expensive to trade US shares in Australia back in the 1980s!). A $1,000 investment in Microsoft shares made in 1986 would be worth $3.23 million today. At the time I thought the Microsoft IPO was overpriced! D'Oh!

I've always saved around 25% of my salary (sometimes a bit more, sometimes a bit less), and never earned much more than the average Australian wage (my peak salary was probably about ten years ago - I've had salary increases below CPI and well below AWOTE increases for the past decade or more). And should end up with around $4.5 million by age 65. Pretty much where you would expect to end up by saving around $500 per week...

Now, $4 million or so probably isn't really "rich", but it's good enough for me. And most 18 year olds would probably be quite happy with the idea of ending up with $4 million if only someone could tell them how... Although they would probably dream of getting this amount and retiring by age 30.

But the reality is most Australians will actually end up with a lot less. The average net worth of Australians at age 65 is only about $1 million ($350K in super, a house worth $575K (on average), and about $50K in household items).

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FY24 PAYG tax variation

Now that I know the current recurring expense and income for my investment apartment (and making the assumption that interest rate remains unchanged, rent remains unchanged and 100% occupancy, rates etc don't rise -- all of which are assumptions likely to underestimate actual loss, given that it seems likely that rates etc. will rise with inflation, occupancy can only be less than 100%, not more, and that interest rates are more likely to rise a little more during this FY), I was able to lodge my PAYG tax variation for the 2023-24 tax year. The figures submitted were:

gross rent:       $44,200

Interest:                  $56,610

rates/insurance:           $ 2,867

agent mngt fee:            $ 2,563

depreciation:              $19,153

land tax/strate levy:      $ 5,536

net loss:                  $42,529

Based on my marginal tax rate being 32.5%, this will reduce my annual taxable income by $42,529 and my tax liability by $13,822. So I should see an increase in my bi-monthly take-home pay of around $575. That will help meet the cashflow requirement for servicing my investment loan interest payments.

Hopefully by the time the interest only period on my loan ends in 5 years the rent will have increased more than the expenses (strata levy, insurance, land tax etc. Not by enough to cover the principle repayments, but by then I will be able to transfer my superannuation into 'pension phase' and the minimum annual pension payments should be more than sufficient to cover the loan repayments and possibly pay off some of the outstanding loan principle while I am still working full-time.

The reduction in tax rate from 15% to 0% on my SMSF balance when in pension phase should offset about 1/4 of the required pension payments, so won't affect my super balance at retirement too much. And will be offset by having increased equity in the investment apartment when I retire.

If I can pay off the investment property loan when I retire, the net rental income should be around $33K pa (in today's money). As my SMSF pension income stream not be taxable income, there should be very little (around $2,800) income tax due on my overall income stream during retirement (assuming current tax rules still apply).

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Investment Property FY2023

I've started working on the figures I'll need for completing my 2022-23 FY tax return. One of my new items for this year's return will be my investment apartment. The purchase was settled in late Feb and I was able to rent it out immediately. So for FY23 the relevant figures are:

Settlement date: 24 Feb.

Pro-rata days for FY2023: 127/365 (used for calculation of purchase costs that can be claimed over five years)

Items paid at settlement that are deductible this FY:

Council Rates:           $621.37

Water Rates:             $151.23

Land Tax:                $1,104.11

Strata Insurance:        $654.28

SUB-TOTAL:                              $2,530.99

Items paid at settlement that are deductible over 5 years:

Doc Processing fee:      $100,00

Property Search fee:     $47,40

SUB-TOTAL:               $147.40        

    pro-rate for FY23:                  $10.26

TOTAL                                   $2,541.25

Mortgage Interest paid:                 $17,133.82

Interest rec'd (on deposit etc)                                $1,754.61

Rent Received ($850/wk)                                        $12,750.00

Rent Expenses:                          

Letting fee:            $935.00

Insurance:              $411.00

Letting advertising:    $220.00

Managing Agent fee:     $701.25

Managing Agent Admin:   $44.00

NBN rebate to tenants:  $150.00

Strata Levy:            $2,118.20

Water rates:            $320.99

TOTAL                                   $4,900.44

Depreciation (DVM) FY23:                $9,276.55

TOTAL:                                  $33,852.06             $14,504.61

Net LOSS FY23:                          $19,347.45

Tax refund (@32.50% marginal rate):                            $6,287.92

Now that I know the current figures for insurance, strata levy, rates etc. I will be able to estimate my expected tax deduction for FY24 and submit a PAYG withholding tax variation form so I pay less tax out of each pay, rather than receive a large tax refund. This will help improve the monthly cash-flow situation. The variation takes about 4 weeks to process, so I should try to get it done this coming weekend.

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Net Worth JUN 2023

Chart updated to end of June in sidebar.

Stocks/cash increased $1.018.(0.56%) to $182,107

Retirement savings (SMSF etc) increased by $55,928 (3.72%) to $1,558,872

Est. of Home valuation (my half) decreased by -$5.183 (-0.51%) to $1,017,011. Again this month Sydney real estate index rose overall during May, so market weakness must still be specific to the Northern Beaches part of Sydney.

Other real estate (my 'lake house' and the investment apartment) increased by $2,302 (0.11%) to $2,062,234

The outstanding balance of the investment property mortgage remains at $1MM (the loan is 'interest only' for another 4 years 8 months). Interest rate is currently 6.29% after the most recent RBA overnight interest rate hike flowed through to bank home loan mortgage rates in full.

Other assets (my online depository bullion account and Perth Mint, and the bullion value of my gold and silver proof coin collection) decreased by -$1.560 (-4.42%) to $35,196. Silver and Platinum prices have seen a significant drop during the past month.

Overall, NW increased by $52,505 (1.38%) to $3,863,420 during June. This is a new 'all-time high' for my NW estimate, which seems a bit surreal given the war in Europe, high inflation, rising interest rates, economic woes in Germany, Sth Korea, China etc..

ps. I also have about $86K worth of accumulated unused annual and long service leave, which will be paid out upon retirement if not used, so I should theoretically include that somewhere in my estimated NW calculation. I only check my outstanding accumulated leave balances every couple of years, so it isn't something I want to recalculate monthly just to make my NW estimate slightly more precise.

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EOFY review - me vs 'Mr Market' and 'the Rich'

I won't be able to calculate my monthly updated NW estimate for June until early next week, so I spent a little bit of time updating some comparisons I had previously made of my NW performance vs the ASX200 index (monthly adjusted close values from yahoo finance) as a proxy for 'Mr Market' and vs 'the Rich' (the cut-off amount in AUD used for the annual AFR (previously BRW) Australia 'Rich 200' list), To be able to compare these figures I have divided to 'rich list' figure by 200 (my 'stretch goal' was to eventually reach 1% of the cut-off, but I seem to be stuck at about 0.5% for the last few decades), and to plot the ASX200 figures on a secondary axis. All plots are linear and start from 0, so the trends should be comparable.

The green line is the ASX200, the blue line is my monthly NW estimate, and the red line is monthly interpolation of the annual Rich 200 list cut-off.

My total portfolio performance is broadly in line with the 'rich', although my exposure to equities and use of gearing (via margin lending) up until the GFC meant that I was outperforming 'the rich' right up until the GFC gave me a real world lesson in the risks of using gearing.

The sudden increases in my NW estimate in Mar 2014 and Feb 2023 are due to receiving my hobby farm/lake house as a gift (early inheritance) from my parents in 2014, and then updating the estimated valuation for that property in 2023 (when I settled on the purchase of my investment apartment and decided to include monthly updates of all real estate values in my NW estimate).

One other notable thing is that my decision to shift all our superannuation investment from the 'high growth' option to a more conservative option when the Covid pandemic first broke out in China, and then move it back to our long-term asset allocation when things had settled down, was one of my (rare) better investment decisions.

When I can move my superannuation into 'pension phase' at age 65 (to reduce the superannuation tax rate) I'll use the mandatory minimum annual pension distribution to pay off my investment apartment mortgage while I'm still working. Current 'plan' is to keep working full-time until about 70 (by which time I should have completed my PhD and built up some clientele for my financial planning business) and then work part-time for as long as I feel like it (possibly until 80ish) and then sell off business for whatever it is worth (currently the standard for financial planning businesses seems to be about 4x annual revenue). This might provide another 'uptick' to my NW graph (but the business may end up not being worth anything).

How my NW tracks will mostly depend on how the stock and property markets perform over the next few decades (and if I stay healthy and employed).

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Superhero portfolio starting to pick up

My 'play' actively traded account with superhero has finally started to perform more in line with my expectations - finally WEAT has started to appreciate and my investment in RBTZ is still in the black and *should* perform OK in the medium-long term. I might xfer another $1,000 into my superhero account to invest per the monthly '12% Solution' recommendations of David Carter. Once I convert the funds into USD in my Superhero account it should not cost anything to make the monthly portfolio reallocation trades to track the '12% solution'.

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SMSF tax return for 2022 lodged

eSuperfund finally got our SMSF annual financial accounts and tax return for 2022 finished in early June -- not sure why is wasn't able to be completed prior to the standard 'due date' of 15 May 2023, but eSuperfund requested an extension from the ATO to 30 June 2023 and managed to get the tax return finalised and the financial statements audited by 6 June. After all three SMSF trustees (myself, DW and DS1) had reviewed and electronically 'signed' the lodgement approval, the SMSF tax return was lodged on 12 June. The SMSF was due to receive a tax refund of $29,878 - mostly due to having paid provisional PAYG tax each quarter due to realizing capital gains when we switched our asset allocation a couple of times during the first year of the pandemic. As we hadn't realized any capital gains in FY2022 the ATO had to refund the PAYG payments. The tax refund arrived in the SMSF bank account a few days ago, so we now have more than enough cash in the SMSF bank account to pay DW's annual minimum pension payment in July. She doesn't currently need the pension income (as she has started working full-time again), but having moved her superannuation into 'pension phase' when she was retrenched and initially decided to retire a couple of years ago, she is now required to make the mandatory minimum pension withdrawal each FY. She will use the pension payment to pay off some personal loan debt she had accrued while she was working in a part-time position for two years (about 6 hrs/wk) prior to getting her full-time position.

Looking at the financial accounts, our SMSF annual after-tax returns for the past few years have been:

2011FY    +9.65%

2012FY    -4.54%

2013FY    +21.54%

2014FY    +14.92%

2015FY    +12.15%

2016FY    +4.03%

2017FY    +10.42%

2018FY    +11.59%

2019FY    +9.17%

2020FY    +7.15%

2021FY    +19.26%

2022FY    -8.98%

Overall I'm quite happy with how our decision to invest via a low-cost SMSF using mostly the Vanguard High-Growth Fund as our asset allocation has worked out.

I'll be able to transfer my SMSF account from accumulation into pension phase when I turn 65 in a few years from now -- which will reduce the tax rate applicable to the bulk of our SMSF from 15% to 0%. I'll then have to also commence making the minimum 5% (for age 65-74) pension payments out of my SMSF pension account each FY, but as I'll (probably) still be working full-time I'll be able to use the tax-free pension income to start paying off my investment apartment mortgage.

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Net Worth MAY 2023

Chart updated to end of May in sidebar.

Stocks/cash increased $282.(0.16%) to $181,089

Retirement savings (SMSF etc) decreased by -$12,169 (-0.80%) to $1,502,944

Est. of Home valuation (my half) decreased by -$14.251 (-1.37%) to $1,022,194. Again this month Sydney real estate index rose overall during May, so it must be specific to the Northern Beaches part of Sydney.

Other real estate (my 'lake house' and the investment apartment) increased by $1,426 (0.07%) to $2,059,932

The outstanding balance of the investment property mortgage remains at $1MM (the loan is 'interest only' for another 4 years 9 months). Interest rate is currently 5.79%.

Other assets (my online depository bullion account and Perth Mint, and the bullion value of my gold and silver proof coin collection) decreased by -$352 (-0.95%) to $36,756.

Overall, NW decreased by -$25,064 (-0.65%) to $3,810,915 during May.

Not a particularly exciting month's performance, and the prospects for the next financial year are not looking very encouraging at the moment. Inflation is remaining stubbornly high in Australia, so there may be additional interest rate hikes before this cycle has peaked, which will subdue and delay any recovery in property prices. And several of the major economies are not looking very positive - China, Japan, Germany - so the global economy and Australia's export-focussed economy may be weak during 2023/24 FY. I'm guessing my NW will remain fairly flat (or decrease somewhat) over the next 12 months, which would be a decrease of 5%-10% in 'real terms' due to inflation.

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Bought some RBTZ for my Superhero portfolio

My 'play' portfolio (where I dabble in a bit of 'active' stock/fund picking -- and usually get it wrong) hasn't performed particularly well since I started trading last year. The portfolio is down 4.64%, and would have been a lot worse if I hadn't closed out my SQQQ position in January. The agriculture produce ETFs haven't done as well as I had expected -- with CORN down 2.52% since I bought it in August '22, and WEAT down by a massive 23.94% in the same period. The only investment that has made a slight profit is the iShares U.S. Aerospace & Defense ETF (ITA) which has gained a modest 3.26%.

The Superhero account had USD$164.89 (proceeds from closing out the SQQQ position, and some minor dividend payments) cash doing nothing, so I decided to speculate on and AI ETF. My initial pick was the THNQ ETF, but that doesn't appear to be availble to trade using the superhero app, so the next best ETF I could find was RBTZ which is an Australian Betashares ETF. So I transferred my USD available funds back into AUD, ending up with A$248.62 available to invest. (The foreign exchange fee was about 1%). I've placed a 'market' order to purchase RBTZ, which will be filled when trading resumes. Last price for RBTZ was A$12.59, but the price I get could be higher or lower than that. Overall my portfolio in the Superhero trading app is:

The price of RBTZ has already shown a spectacular rise over the past 8 months, so I might just be getting in before a major correction, but this sector does seem to have considerable potential in coming years.

BTW, if anyone is thinking about opening a trading account with Superhero, using this link with provide a bonus of $10 worth of Tesla shares if you deposit $100 within 30 days of opening the account: https://superhe.ro/r/ralph4993

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Australian retirement expectations

An interesting article in The Inside Adviser based on some consumer research by Vanguard Australia.  It found that working age Australia's would like a retirement income of $99K and retirement age of between 59.5 (18-34 year olds) to 61.5 (35-54 year olds), where those actually approaching retirement (age 55+) expect to retire at age 64.9 on average. And those already in retirement have a more modest retirement income expectation (only $68K).

The article indicates that this discrepancy may be due to several factors - such as unrealistic expectations, lack of clarity regarding wants and needs during retirement, concerns about cost of living increases (eg recent rent increases) etc.

I suspect there may simply be uncertainty regarding tax imposts during retirement. For example, if you make $99,000 a year living in Australia as a wage earner, you will be taxed $24,622. That means that your net pay will be $74,378 per year, However, under current legislation, self-funded retirees receiving a pension income stream from superannuation in 'pension phase' would not pay any income tax on that part of their retirement income. From 1 July 2017, the total amount of super you can transfer into a tax-free retirement account is capped. This is called the transfer balance cap and is currently $1.7MM. The general transfer balance cap is reviewed each financial year and indexation occurs in line with the consumer price index in $100,000 increments, so is expected to rise to $1.9MM from 1 July 2023. If you're drawing a retirement income stream from your super, then the investment earnings are exempt from tax, including capital gains. This tax exemption on investment earnings also applies if you commenced the income stream due to permanent incapacity.

Of course the is legislative risk associated with superannuation (just look at recent proposal to increase tax rate on 'earnings' of superannuation amounts above $3MM), so younger retirees may not be counting on receiving any superannuation pension income 'tax free' in future.

In any case, having expectations of high retirement income levels and early retirement age may not be a bad thing if it encourages saving for retirement -- it is probably better to be able to retire earlier than expected and with a higher level of retirement income than having to work longer than desired and/or ending up with insufficient retirement income. However, if the higher expectations don't lead to taking action to meet the 'requirements' it is simply setting oneself up for disappointment. I doubt that most people bother evaluating whether or not they are 'on track' to achieve their retirement expectations. They simply pick a figure and hope for the best.

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Net Worth APR 2023

Chart updated to end of April in sidebar.

Stocks/cash increased $4,760.(2.70%) to $180,807.

Retirement savings (SMSF etc) increased by $27,822 (1.87%) to $1,515,113.

Est. of Home valuation (my half) decreased by -$18.137 (-1.72%) to $1,036,445. Overall Sydney real estate index had not dropped during April, so it must be specific to the Northern Beaches part of Sydney. RBA is 'expected' to keep interest rates on hold for another month, waiting to see the impact of the previous rises on household spending (mortgage repayments take a month or two to reflect changes in the overnight cash rate), The monthly estimate of 12-month inflation rate for Australia has dipped to 6.3%, lower than the 'consensus' forecast of 6.5% and significantly lower than the inflation rate figures for Jan (7.4%) or Feb (6.8%). This is the third straight month of decreasing annual inflation rate, and the lowest monthly figure since May 2022. If inflation keeps trending downwards it could be approaching 4% by the end of 2023 and interest rates could remain on hold for the remainder of this year. The 'big four' Australia banks are predicting either one more 0.25% rise (CBA) before interest rates peak, or that interest rates have already hit their peak for this tightening cycle. The banks are predicting between one and four 0.25% rate cuts to follow in 2024 (but such 'predictions' are incredibly unreliable). My guess is that rates may remain on hold until inflation approaches the 3% upper bound of the RBA target band (2%-3% inflation), and that real estate prices in Sydney may be flat for the next couple of years (which would mean a further 5%-10% decline in real terms),

Other real estate (my 'lake house' and the investment apartment) decreased by -$25,176 (-1.21%) to $2,058,506 reversing the estimated increase of last month. 

The outstanding balance of the investment property mortgage remains at $1MM (the loan is 'interest only' for 5 years). Interest rate is currently 5.79%.

Other assets (my online depository bullion account and Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $1,146 (3.19%) to $37,108.

Overall, NW decreased by -$9,587 (-0.25%) to $3,835,979 during April.

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Adjusting retirement account DRP to slowly increase allocation to cash

Apart from a temporary change from the normal long-term asset allocation of our SMSF I made on Feb 6 2020 (going 'risk off') we tend to stick to our allocation of practically 100% invested in the Vanguard Diversified High Growth Fund and have all bi-annual distributions reinvested. However, DW had to start taking the minimum required annual withdrawal after retiring and moving her SMSF account into 'pension phase'(she later decided to do some part-time work, and eventually returned to full-time employment) so our SMSF has sometimes not had enough cash sitting in the ANZ V2 bank account to make required ATO tax payments on contributions and fund taxable income, and also make the required minimum pension payments to DW. DW and DS1 are both making SGL and SS contributions into the SMSF, but my super contributions all go into my employer super fund (as the fees are subsidized and I receive company-funded life and TPD insurance cover) although the bulk of my TSB is sitting in our SMSF.

So far we have solved this cashflow problem by making 'ad hoc' unit sales within the SMSF to provide sufficient cash when needed, but with the stock market seeming relatively high (see chart below) and a persistent risk of a global and/or local recession due to various factors (inflation and resulting higher interest rates, Russo-Ukraine war and potential expansion to involved other states, prospects of China invading Taiwan and triggering a regional conflict etc.) we have decided to rescind the DRP election and instead let future distributions be paid out as cash into our SMSF's V2 bank account. This will provide enough cash for DW's minimum 4% pension payment in July/August from the June fund distribution payment, and will then slowly move our asset allocation more towards cash when the Dec distribution payments occurs at the end of 2023.

When I turn 65 I will also be able to move my SMSF balance into 'pension phase' even if I don't stop work or change employers, which will reduce the income and CG taxes paid by our SMSF, but would require a significant amount of cash available each year to make the minimum pension payment. So we may move our SMSF back to DRP in future, but might stick with distributions being paid into the SMSF bank account for quite a while.

If the markets drop into an obvious 'bargain' range in future we can always make an ad hoc purchase of additional units using whatever 'spare' cash is sitting in the V2 bank account.

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What is the Age Pension worth?

There is a lot of focus on how much superannuation people save up to fund their own retirement (to a greater or lesser extent). And quite a bit of angst around the fact that high income individuals get more benefit from superannuation tax breaks than lower income individuals, and that, on average, females have lower superannuation balances than males of the same age (although, as with the 'wage gap', this disparity largely disappears once all relevant factors of personal choice are adjusted for e.g. time spent in full-time employment, type of employment etc. e.g. a female mine worker than has worker full-time since age 18 will end up with a higher super balance than a male 'home-maker' that decided it made sense for him to work a casual job three days a week while his partner worked full-time).

Anyhow, for many people their retirement income will not only be provided by their superannuation balances, but will also include a partial or full Age Pension income stream. For a single person, the full amount of Age Pension (excluding minor additional payments that might also be received) is $971.50 per fortnight ($25,259 per year). The maximum amount might be reduced (to a 'partial pension' amount) if the thresholds for assets or income are exceeded.

For a single homeowner, the assets threshold to receive a full Age Pension from age 67 is $634,750. And for a single non-homeowner the assets threshold is $859,250. Since the average superannuation balance of Australians aged 60-64 in 2016 was $214,897 most Australians reaching retirement with only their home and superannuation balance would receive the full Age Pension.

So, how much is the Age Pension worth as an asset for retirement? Currently the life expectancy at age 67 (when Age Pension commences for those born after 31 Dec 1956) is 16.5 years for a male and 18.9 years for a female (so there is gender-based 'life expectancy gap' of 14.5% that is not due to any 'lifestyle choices' -- but no-one seems to care about that gender discrimination). So, for the average male entitled to receive the full Age Pension from age 67 he will receive $416,773 if he lives to average lifespan. As the Age Pension is generally indexed to CPI increases, this can be taken as a rough 'present value'. For the average female, the total value of Age Pension received will end up being $477,395.

So entitlement to receive the full Age Pension is roughly equivalent to a lump sum payment at retirement of around $416K - $477K. Not too shabby compared to the average superannuation balance at retirement.

To purchase a lifetime annuity providing the same amount of income as the Age Pension would cost around $536,626 for a female aged 65, or $504,575 for a male aged 65.

So, whichever way you look at it, the full Age Pension has a value of approximately half a million dollars.

Aside from the assets test, there is also an income test applicable to eligibility for the Age Pension. Unearned income of up to $4.940 is allowed before the Age Pension will start to be reduced (by 50c for every extra dollar of income per fortnight). For the 2023FY this was temporarily boosted by an additional ~$4K to $7,800. In addition, income from 'personal exertion' (e.g. casual work) of up to $11,960 pa is not counted towards the income test.

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Net worth: MAR 2023

Chart updated to end of March in sidebar.

Stocks/cash increased $26,214 (17.50%) to $176,047. Mostly due to receiving a $30,000 rebate (discount) on the investment unit purchase price after settlement (this had been negotiated when I paid the deposit on the 'off-the-plan' apartment back in 2019). $95.696 of this figure is cash sitting in my mortgageg offset account (which doesn't earn interest but reduces the loan balance used to calculated the monthly interest charged on my investment property loan).

Retirement savings (SMSF etc) increased by $18,493 (1.26%) to $1,487,291.

Est. of Home valuation (my half) decreased by -$7.774 (-0.73%) to $1,054,562. The real estate market seems to be levelling off, although stabilization of prices and any future increases will depend on how inflation moderates during the remainder of 2023 and into 2024, and therefore the timing and scope of any further RBA increases to the overnight cash rate (which flows on to mortgage interest rates).

Other real estate (my 'lake house' and the investment apartment) increased by $24,604 (1.24%) to $2,083,684 although this figure is a bit 'rubbery' as my estimated of the apartment value is similar to what the agent said recent similar apartment in the tower had sold for, but is much higher than the valuation the bank obtained when approving my mortgage. And the 'lake house' is intended to pass on to my sons eventually, so the valuation isn't really relevant in terms of 'financial assets'.

The initial investment property mortgage remains at $1MM (the loan is 'interest only' for 5 years). Interest rate is currently 5.79%.

Other assets (my online depository bullion account and Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $3,045 (9.25%) to $35,962.

Overall, NW increased by $65,582 (1.73%) to $3,845,566 during March.

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Another monthly RBA meeting, another interest rate hike

The RBA decided to raise interest rates by another 0.25% on March 8. I had hoped (due to my vested interest in interest rates due to my mortgage) that declines in US inflation and energy prices (and some signs of inflation having 'peaked' in Australia) might make the RBA 'pause' for a month or two, rather than keeping hiking until the 'inflation dragon' is well and truly dead. A forlorn hope.

I can understand why the RBA wants to make sure inflation doesn't "get out of control" as the 1970s proved that once high inflation is built into employee expectations a cycle of wage rises (and the industrial action required to get them) can become entrenched. But higher household indebtedness levels probably make the Australian economy a lot more sensitive to relatively small interest rate rises than in previous decades, and there is little evidence of a break out in wage growth as yet (possibly due to much lower levels of union membership now compared to back in the 1970s, and legislative changes that have made many of the industrial actions that were used to pursue wage claims illegal).

What I don't understand is why the RBA has shown such a sustained reaction to inflation being above their 'target' range of 2%-3%, but showed practically no response at all for many years when inflation persisted to remain well below this target band.

There also seems to be a significant difference in how quickly the RBA will increase rates compared to have quickly it will lower them. Combined with the 'lag' of at least a quarter after a trend in CPI becomes evident before the RBA changes tack, and there seems a real risk that rates could be held "too high for too long" and push Australia into a recession.

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