Wednesday 19 April 2023

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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Tuesday 18 April 2023

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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Monday 3 April 2023

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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