Why delay retirement?

The other part of Moomin's question about my budget review post was why I don't retire now, since I can afford to?

There are basically two main reasons:

1. I don't mind working - the job is moderately interesting, moderately easy, and moderately well paid. Of course there are aspects of the job I find tedious, difficult or annoying (on occasion), but nothing to the extent that makes mee feel like sending in an "I quit!" email to my boss. And I suspect I would find retirement a bit boring. Once you have enough saved up to retire whenever the urge takes you, continuing to work can seem less onerous (paradoxically, having FU money reduces the urge to say FU -- a lot of office politics and incompetent co-workers become rather amusing when you can take it or leave it).

2. There are financial benefits to working (no surprise there!). This can be considered in two parts - the impact on my financial situation when I do retire (and during retirement thereafter), and the impact on my non-retirement investments (my 'estate' or 'net worth'). This impact can be larger than some might intuit, so I did a quick spreadsheet model to illustrate an example (of the retirement income part).

Scenario: Currently aged 65 with a superannuation balance of $1.2MM. Can either retire in 12 months (just before turn 66), or keep working for a few more years.

Assumptions:

All figures in current $ (ie. real (inflation adjusted) returns, salary increased with cpi, etc.

Current salary is $120Kpa and will remain constant (cpi increases only) until retire

SGL rate is 12% of salary, and is taxed at 15% going in to super

At age 65 can rollover the super accumulation balance into 'pension phase' which will have a 0% tax rate on earnings or capital gains within super, and the pension payments are not taxable income. (This might be easier to do with an SMSF than if you are in a retail superannuation fund).

The pension payments received while still working are the min required withdrawal rate, and are fully recontributed into super as an undeducted contribution (ie. the TSB remains below the TBC).

The super investments have an average real rate of return of 8% (you can comment about how totally unrealistic this assumption is!)

From retirement onwards the annual tax-free pension withdrawn from super is set for each retirement scenarui ti be a constant amount that will completely exhaust the super balance at life expectancy (age 87).

Modelling results:

As shown below, if retire at the end of year age 65 the super could provide theoretically provide an annual income each year of $128Kpa during 22 years in retirement (ignoring variability of returns, sequencing risk, lifespan uncertainty/longevity risk, legislative risk/changes to tax-free pension rules etc.)

Delaying retirement for one additional year would mean an extra year of SGL contributions, and the pension paid out during that year would have been recontributed as an NCC. So the super balance would have benefitted from an extra year of contributions and one less year of withdrawals, and the money that would have been withdrawn and spent can instead remain invested in super and enjoy 22 years of tax free compound growth. This increases the annual retirement income by 10.9% while reducing the years spent in retirement by only 4.5%.

Every extra year of working and delaying retirement reduces the number of years that will be spent in retirement, but boost the retirement income available each year during retirement. On the graph this appears to be a very simple trade-off between years of retirement and retirement income during retirement, but the decrease in years in retirement is linear, while the increase in retirement income is an exponential curve.

So, delaying retirement to age 71 would result in a 27% decrease in years of retirement, but a 90% increase in annual income while retired.

The big questions (with unknown answers) are:

* how many of those retirement years will be 'go-go' (healthy and active), 'slow-go' (healthy but less active), and 'no-go' (inactive and/or with health issues)? The 'lost' retirement years due to delaying retirement are all some of the 'go-go' years, so if you want to spend the first few years of retirement doing international travel and heliskiing NZ and Japan or trekking up to Machu Pichu, delaying retirement might not be such a good idea. Then again, you might not have the retirement income to fund the 'go-go' years if you retire too soon.

* how much do you need/want in retirement? There isn't much point working to have a bigger retirement income if you don't need/want the extra retirement income (but you may also be happy to use any 'surplus' retirement income to add to your estate/NW during retirement -- depends on your goals in retirement.

* longevity - planning for a life expectancy of 87 is just a wild guess. If you die at age 73 then working until age 71 might seem like a poor choice to those who survive you (but you won't be around to care). Then again, you might live to age 104 like my great-grand-Aunt, and enjoy 'go-go' retirement until age 100 or so. In which case retiring at 65 and expecting to only need retirement income to last until age 87, and to only have ten years or so of 'go-go' years, might result in relying on the Age Pension or selling other non-retirement assets during those 'extra' years. You probably won't complain about still being around in your 90s, but a decision to retire at age 65 might look sub-optimal in retrospect.

There are also some ancillary benefits of retiring a few years later and with a higher super balance - purchasing a lifetime annuity provides more feasible to secure a larger fraction of the desired retirement income, reducing longevity risk quite significantly for every extra year of work.

Finally, the modelling doesn't include the impact of working a few more years on accumulation and growth of non-retirement assets. For example, while working a significant fraction of my salary can continue to flow into non-retirement savings such as adding to my Investment Bond and to my investment property offset account (so there may be no net mortgage balance by the time I retire). Whether or not this is any incentive to work a few more years depends on what your financial goals are.

Some scenarios:

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Needs vs Wants

Moom's comment re my budget overview made my do a quick recalc and double check of my figures vs moomin's budget breakdown for last FY

My figures seem pretty much correct, although I count my investment property expenses and loan interest as part of 'savings' as it is basically the cost of holding the investment property, so is effectively spending current income to purchase a future CG benefit (which will get taxed at 50% of tax rate that would apply to income).

My tax deductible investment expenses are 31% of gross income (vs. 5% for Moomin) which (in conjunction with lower gross income and a progressive tax scale) accounts for my tax expenditure coming in at 18% of gross income vs 26% for Moomin.

Spending on 'needs' (housing, food, healthcare etc) is roughly comparable - except that my employer pays for our life insurance and private healthcare, and we have paid off our home mortgage, and I spend a lot less on transport as I work from home FT these days.

The biggest difference seems to be in the spending on 'wants' (3% vs 23%) which is mostly due to either big ticket items that I don't have  any use for (private school fees and childcare) or don't want (travel, mail order and restaurant meals). As with all 'wants' this comes down to perceived utility - I did a lot of international travel in my teens and twenties (as my dad was an international airline pilot) so don't feel the urge to do expensive international trips these days. DW and DS1 did go on a trip to China earlier this year, and DS1 did trips to the US and Japan, but I've already been around the world multiple times so no longer have any 'wunder lust' left (I might use my QFF points for a return trip to NZ next year to walk the Routeburn track with DS1 -- but a hiking trip using frequent flyer points won't blow out my 'travel' budget either).

And DW and I had decided a decade ago that selective HS was likely to be as good for DS1 and DS2 as a private HS education would have been. Apparently the ACT doesn't have any academically selective high schools (probably not in keeping with the more socialist overall electorate in a territory with an outsized public service and government sector compared to other regions of Australia).so in the ACT this expense may fall into the 'needs' category rather than 'wants' given the general standard of non-selective public high schools these days?

Spending on knick-knacks (mail order) and dining out are probably the only two obvious categories where I choose to spend disposable income on investments rather than lifestyle. As I have coelliac disease and our kids both have lots of food allergies, eating out was always more of a nuisance than an enjoyable experience anyhow. DW does spend quite a bit on eating out with her friends (I think), but as we keep our finances mostly separate, this doesn't appear in my budget. And I already have a garage full of unused hobby stuff (HO trains, scuba and ski gear, plastic models in original 1980s boxes etc) and a farm shed full of unused boat, hovercraft, kayak, windsurfer etc. etc. so I hardly need to buy any more 'stuff' ;)

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Budget overview

I decided to do a quick review of my overall budget, to see if anything needs adjusting.

My overall expenditure breakdown is as shown below:

About 25.6% of total income goes directly into savings and investments via automatic monthly savings transfers and super contributions.

Another 37.4% of my total income is used to cover the investment property holding costs (mortgage interest payments, rates, insurance etc.)

The overall income tax is lowered by the investment property being negatively geared - with the property expenses and depreciation exceeding the rental income.

Around 21.4% of total expenditure is on "needs" - consisting of 9.9% going towards food, 8.7% towards housing and 2.8% towards healthcare. The housing costs are the rates, insurance, electricity and water and any repairs etc. for our home and the lake house. It is fairly low as we don't have a mortgage on our home or the lake house. The healthcare costs are my gym membership and any fitness equipment purchases, medicines, and medical expenses not reimbursed by Medicare. I haven't included the cost of our private health cover as the premiums are paid by my employer.

Spending on "wants" is only 4% of the total budget, with 1.6% being 'transport' (the running costs (insurance, registration, servicing and petrol) for my Jaguar) and 2.4% being spent on 'entertainment' (internet and mobile phone plans, Amazon Prime, gifts, eating takeaway etc.).

Everything is quite 'steady state' at the moment, so I expect this to remain pretty much the same expenditure pattern as long as I continue working full-time (another 5-10 years or so). When I turn 65 I will move my super into 'pension phase' and the tax-free pension payments will go into the investment property mortgage offset account, so I should have enough there to clear the investment property mortgage when I retire (if things go according to plan).

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US election 2024

What can I say? I'm fairly conservative but some things just seem way too strange to ignore...

ps. I put a $5 bet on Nikki Hailey before Trump won the Republican party nomination (which I guess is now a write-off, unless something very unlikely happens in the next 3 months), so I've now put $5 on Harris as plan B. If I lose that $10 bet I suspect there will be more things to worry about during the next four years. Glad I live on the other side of the world.

pps. Apparently Vance isn't dumb (no comment re Trump) but he is certainly a bit weird.

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Bike Update

Apparently you get what you pay for. LOL ;)

The cheap $129 Repco Blade 26 66cm Men's Mountain Bike I bought online from BigW turned out to be the colour I preferred (black with green highlights), which was a bit lucky as there are blue and green varieties sold by BigW and when you order online for 'click and collect' pickup it is a random selection (although you could swap for the other colour if there was floor stock available in store). I noticed that there was a slight indent/damage/tear in the cardboard box the bike comes in, but it didn't look too bad so I decided to take the one that was ready for collection -- although I had seen there were two other green ones also available in boxes in the floor display, so I should have asked to swap for an undamaged box. D'Oh!

I unpacked and assembled the bike yesterday. Only needed to insert and fasten the handle bars and seat, and adjust the bell and reflectors on the handle bars. Then screw on the two bike pedals. And finally insert the front tire (which came deflated to make it easier to squish to get it past the brake calipers) and tighten the nuts and then pump up the front tire (the rear tire was already pumped up, but probably needs the pressure checked before I ride the bike). I did manage to get the front tire put on incorrectly, despite double checking which was the correct 'direction of rotation'. Putting the front wheel on with the bike upside down managed to get me confused somehow, so when both wheels were on and I turned the bike upright I noticed that the front and back wheels had the 'direction of rotation' on the tires pointing in opposite directions!.Tip: when you put on the front tire, just check the direction arrow is pointing the same way as it is on the reat tire that comes pre-assembled.

Unfortunately although the assembly process was an easy 20 minute job (only needing the allen key/Phillips head screwdriver that came with the bike, and one small shifting spnner) the final step of pumping up the front tire proved to be a show-stopper. It just wouldn't pump up, and I could hear air escaping from the part of the wheel opposite the valve. After browsing google and youtube trying to work out if the bike was tubeless or had an inner tube (turns out it has an inner tube), I then had to remove the front wheel again, use a butter knife to carefully lever off the tire (I didn't have a bike tire lever handy), and listen to find where the air was escaping from the inner tube when I pumped it up. I found a small (<1cm) cut in the inner tube, possibly caused when the box was damaged (?) or maybe it just came like that from the factory? Anyhow, before driving back to the store I used the online customer service to lodge a complaint and request a suitable replacement inner tube set be delivered free of charge to my home. Unfortunately there was only the 'bot' customer service available on the weekend, so I'll have to wait until Monday to see if someone calls me, or ring up to check if they will be sending me a replacement part. I don't want to spend another hour driving to the store and back just to collect an inner tube set.

If I do have to drive to the store to collect the replacement tube(s) I will first check what size my wife's bike needs (she got a free bike from a friend that has flat tyres), and buy a suitable inner tube set for her bike while I am there.

Next weekend I'll be walking the City2Surf on Sunday, so I probably won't take the new bike out for its first ride until the following weekend, even if the replacement inner tube gets delivery during the coming week.

ps. I also have an old/new bike I bought from Aldi about five years ago and never used (had trouble adjusting the brake calipers correctly) and the tires had gone flat while it was sitting outside for years. Now that I've played around with removing the tire and replacing an inner tube, I might also remove those tires and check what replacement tubes are needed, and then clean up and fix that bike for DS2 to use. Not sure if the chain and gears on that bike are still OK though. I did a free 'bike maintenance' course run by our local council a few years ago, but have never really been much for playing around with car or bike mechanics (despite spending a decade as an experimental scientist for a mining equipment research company -- so I spent a lot of time fiddling around with minerals processing lab equipment, slurry pumps, and experimental chemical engineering setups). I don't enjoy fiddling around with bikes, but as a local bike shop would charge over $100 for a basic service, I'm motivated to do a bit of DIY. Probably a good idea to have a spare inner tube and know how to replace a punctured tube anyhow ;)

**** update ****

I phoned customer service on Monday to check if they were going to send a replacement inner tube, and after being on hold for five minutes the rep a) couldn't find the bot generated service ticket generated on Sunday (apparently the automated system doesn't *normally* generate support tickets?), then b) put me on hold to check with her manager - then came back and said I would have to pack up and return the entire bike and get a replacement. After double checking that I really couldn't just get a replacement inner tube, I gave up and decided to disassemble the bike, pack it all backinto the carton (with a few bits in a paper bag, as it wouldn't all fit back into the original box after the packing and cable ties had been removed during unpacking). I then spent an hour driving back to BigW to return the bike, explain the situation again to customer service, and then be given the choice of either just getting the inner tube replaced (!) or exchange the whole bike. Having brought the entire bike back to the shop (and not entirely sure some parts hadn't moved around in the box and scratched the paintwork while driving back to the store) I decided to just get a whole new bike. I assembled the replacement bike today and it all seems OK this time, so tomorrow I'll give it a short test drive and check everything works and is still tight after a short trip.

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Net Worth - JUL 2024

Chart updated to end of July in sidebar.

Stocks/cash increased $24,483 (+9.33%) to $286,819.

Retirement savings (SMSF etc) increased by $62,340 (+3.48%) to $1,853,481. I am rapidly approaching the current $1.9M 'transfer balance cap' which sets the maximum amount I will be able to transfer into 'pension phase' when I turn 65. I have already 'used up' $10K of my cap when I bought my deferred lifetime annuity product (that will start paying out a pension income stream if/when I turn 99). So my remaining 'cap space' is somewhere around $1.89M (the exact figure is calculated by the ATO, as only the unused cap space gets increased in line with the transfer balance cap setting. Any superannuation above the TBC will remain in accumulation phase. The money in 'pension phase' will have 0% tax rate applied to earnings and capital gains, but is also subject to the age-based minimum annual withdrawal (pension payment) rates (eg. 5%pa for age 65-74). The money left in 'accumulation phase' will continue to have 15% tax rate applied to earnings and 10% tax rate on long term capital gains. It is still worth accumulating money into super beyond the TBC, as even in retirement my personal marginal income tax rate is likely to be more than 15%. It won't be worth accumulating more than the $3M threshold beyond which the extra 15% tax would apply within superannuation (but I am unlikely to surpass that threshold).

Est. valuation of our home (my half) increased by $8,551 (+0.73%) to $1,181,547. But the 'Other real estate' (my 'lake house' and the investment apartment) decreased by -$28,597 (-1.33%) to $2,120,390. Both properties saw a decline in estimated value (based on local average sales prices).

The outstanding balance of the investment property mortgage decreased slightly to $999,991 due to some minor adjustment/correction in interest charged by the bank. The loan is still in the 'interest only' period of the mortgage, with another ~3.75 years remaining of the 'interest only' period. I'm continuing to try to build up as much cash in the 'offset account' as possible, so when the loan transitions to P&I the increase in monthly payments will be somewhat mitigated. I think the P&I monthly repayment figure will be based on the remaining 25 year term and $1M notional loan amount, so the monthly repayments won't be reduced, but having a large balance in the offset account would reduce the actual amount of interest each month -- so the repayments would pay off the loan a lot sooner. When the loan transitions to the higher monthly P&I repayment schedule I will already be receiving the 5% minimum 'pension' payment from my SMSF pension phase account, so I should have plenty of cash flow to cover the repayments. When I retire and no longer benefit from the tax deduction provided by negative gearing I might either pay off the outstanding mortgage, or else sell the property (and have a CGT liability).

Other assets (my online depository bullion account at Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $2,742 (6.39%) to $45,643.

The new 16% withholding tax rate specified by the ATO per my variation request has been applied by the payroll department, so I will accumulate the extra monthly cashflow into my offset account during the year (and not get much, or any, refund when I lodge my tax return next year).

Overall, NW increased by $69,521 (+1.57%) to $4,495,889 during July. A pretty great start to the new financial year. Combined with the unexpected increase in employer-funded life and TPD insurance cover (theoretically worth up to $295K to DW in the event of my unexpected demise), it was a very positive month financially speaking.

ps. I thought I had ordered a very cheap electric bicycle online (only $290 for a Bopzin Ridstar Q20 1500W) last week, but then when I double checked on the shipping info page after placing the order to see what the delivery timeframe was, I noticed that the dealer is US-based and only ships within the continental US (D'Oh!). So I expect my order will eventually be cancelled and the paypal charge reversed off. As the cheapest electric bikes cost A$1K or more (and the max power allowed in NSW is 500W for an eBike) I have instead bought a very cheap Repco Blade 25 Mountain Bike from BigW. I don't expect too much for $129, but it was cheaper to buy a new bike than pay a local bike shop to replace the tires and my old bike and do a clean and service. And even a $129 bike should be good enough to get some exercise riding on the trails in our nearby national park. There is a nice 20km (each way) ride with some spectacular views:

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