Until yesterday DW and I were working for the same company, having both started there about 18 years ago. Then yesterday DW was 'offered' a redundancy package. Not much choice in the matter as it was presented as a fait accompli, with her current role being no longer required, and there apparently no other 'fit' found for her. At least the redundancy package was 'generous', adding up to almost 2 years worth of salary and DW was happy enough to sign and clear out her desk the same day. Personally I'm not overly impressed by the 'generosity' of the package, as the 3 weeks x 10 years of service (the maximum counted for redundancy payouts in this state) is pretty much a requirement under state laws, and the payout for unused accumulated annual and long service leave is also mandatory. And the four weeks pay in lieu of 'notice' is also fairly standard, as very few companies these days want workers to stay at work during the required 'notice' period, as they are afraid of disgruntled, laid-off employees getting up to mischief or their presence (dead man walking) being 'bad for morale'. All-in-all the only generous aspect was a couple of extra weeks payment 'ex gratia'.
As DS2 is starting school at his new 'OC' school today, DW is quite happy to be out of work and able to meet him after school. She isn't sure if she will do a TAFE course, have a go at starting up a home business, or just spend more time gardening. Whether or not she 'needs' to get another job will largely depend on whether or not the rental income from her 'off-the-plan' investment unit turns out to be sufficient to cover the interest payments on the 'portfolio loan' (against our home equity) that will be used to pay for the unit upon settlement this coming May-June. As I pay all the household bills her lack of income won't have any immediate impact. In the longer term, if she doesn't get another job she will end up not having as much as expected in her superannuation account to fund her retirement, and she also won't be able to pay down much (any) of the loan balance. If Sydney real estate prices continue to rise over the next decade or so that won't be much of an issue, but if there is a slump in prices she might end up owning a home unit that is worth less than her mortgage...
Of course DW getting laid off immediately made me wonder how secure my own position at the company is - but there isn't really much point worrying about it unless/until it happens. At the moment my role seems fairly secure, but that can easily change, often as a result of decisions made 'behind closed doors' that one is blissfully unaware of until the axe falls. It did prompt me to do a quick spreadsheet model of how I might be tracking with regards to funding my retirement if I was laid off tomorrow, and comparing it with the likely situation if I was laid of next year, or the year after, and so one...
It turns out that, making some reasonable assumptions regarding ongoing contributions rates while I'm still working, and the likely future rates of taxation and earnings on our superannuation investments (I've taken the average rate of return for the past ten years as a 'guesstimate' of possible future returns, given that this is lower than average rate of return for the past three years, or over the entire period of available data), I could 'retire' tomorrow and get a sustainable retirement income of around 80% of my current 'take-home pay' if I sold up my stock portfolio, paid off the margin loans, and added the net amount to my current superannuation balance. This 'sustainable' model assumed that I had to re-contribute around 2% of the fund value every year to allow for inflation, and that the balance of my superannuation account would be run down until there was no residual balance at age 100. (While that may be an optimistic lifespan, my paternal grandparents both lived until 94, and my parents are both alive and well and in their 80s). It also assumed a low rate of tax on superannuation 'pension' payments, which of course is subject to legislative risk.
If I do manage to keep my job for at least another couple of years my sustainable retirement income rises to around 100% of my current 'take-home' pay rate, and working any longer would mean that either a) I can fund a higher rate of 'pension' payments out of my superannuation during retirement, or b) I will be likely to end up with some residual balance, or c) my desired rate of pension will be sustainable even if investment returns are worse than expected, or if there are a couple of years of poor investment performance immediately after I 'retire'.
Of course even if I get laid off tomorrow I could probably find some gainful employment until my intended retirement age - either at some other job (probably involving more work for less pay), or possibly by getting qualified as a financial planner and having a go at starting my own financial planning business...
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Tuesday, 31 January 2017
Wednesday, 25 January 2017
Bonus and taxes
My first salary 'bonus' is due to be paid early next month, and the HR department sent out a reminder to make any nominations to 'salary sacrifice' the bonus into superannuation be COB today, as any 'salary sacrifice' arrangements must be done prospectively, not retrospectively (after the income has been 'earned'). At face value it obviously makes a lot of sense to receive the bonus payment into superannuation (paying 15% contribution tax) rather than receiving it as a salary payment and paying income tax on it at a marginal rate of, say, 37%. On a 5% bonus for a $100K salary, the tax saving achieved via 'salary sacrifice' could be $1100. Looking at it another way, that means the 'after tax' bonus amount would be nearly 35% greater when paid into superannuation compared to taking it as a cash payment.
However, the individual decision regarding whether to 'salary sacrifice' the bonus isn't so simple. For example, DW is on a lower annual salary package, and only works 3 days a week, so her marginal tax rate would be 32.5%, and not 37%, which makes the tax incentive to lock away this money until retirement a lot less enticing. She also has a large settlement payment on an investment home unit due in the middle of this year, so any additional amount she puts into superannuation via salary sacrifice would add to her mortgage balance.
Even in my case I can't simply nominate to 'sacrifice' the entire bonus amount into superannuation, as I already have a sizable 'salary sacrifice' arrangement in place, and the 'cap' on concessionally taxed superannuation contributions might come into play. For my age group, the 'cap' this financial year is $35K (it will reduce to only $25K from 20017-18 onwards unless there are further changes announced in the May budget), and I already have around $9.5K of SGL contributions and $19.2K of existing 'salary sacrifice' arrangements. This would mean that around $6.3K more could be 'sacrificed' into superannuation this financial year without exceeding the 'cap'. However, I have to allow for the possibility of a small increase in SGL contributions during the remainder of this financial year if I happen to get a pay rise (annual salary reviews are also being announced next month - just after bonuses get paid out), and there was a monthly employer contribution deposited on 1/7/2016, so I have to allow for the possibility that the contribution for June 2017 might get deposited at the end of June, meaning 13 monthly contributions falling into this FY.
Finally, my employer is also reimbursing small amounts for the monthly admin fee and insurance premium that gets initially debited from my superannuation account (~$85 per month), but the reimbursement payments get processed several months after the original debit transactions. There was a delay in the initial reimbursement payments (eg. a debit processed last FY (on 3/3) was eventually reimbursed via an additional employer superannuation contribution this FY (on 17/10), and there are currently two reimbursement payments being deposited each month in order to 'catch up'. So there *might* be as many as 18 lots of ~$85 deposited this FY, Which means allowing for another $3.8K or so that *might* be deposited this FY and count towards the 'cap'. So, the maximum amount of bonus I can 'salary sacrifice' and be reasonably certain that I won't exceed the 'cap' on concessionally taxed contributions is only $2.5K. In the end I decided to request that $2K of any bonus amount be paid as 'salary sacrifice'.
Next FY I'll have to reduce the amount of monthly 'salary sacrifice' due to the decrease in 'cap'. I probably won't bother to allow for any bonus to be processed via salary sacrifice next year.
Subscribe to Enough Wealth. Copyright 2006-2017
However, the individual decision regarding whether to 'salary sacrifice' the bonus isn't so simple. For example, DW is on a lower annual salary package, and only works 3 days a week, so her marginal tax rate would be 32.5%, and not 37%, which makes the tax incentive to lock away this money until retirement a lot less enticing. She also has a large settlement payment on an investment home unit due in the middle of this year, so any additional amount she puts into superannuation via salary sacrifice would add to her mortgage balance.
Even in my case I can't simply nominate to 'sacrifice' the entire bonus amount into superannuation, as I already have a sizable 'salary sacrifice' arrangement in place, and the 'cap' on concessionally taxed superannuation contributions might come into play. For my age group, the 'cap' this financial year is $35K (it will reduce to only $25K from 20017-18 onwards unless there are further changes announced in the May budget), and I already have around $9.5K of SGL contributions and $19.2K of existing 'salary sacrifice' arrangements. This would mean that around $6.3K more could be 'sacrificed' into superannuation this financial year without exceeding the 'cap'. However, I have to allow for the possibility of a small increase in SGL contributions during the remainder of this financial year if I happen to get a pay rise (annual salary reviews are also being announced next month - just after bonuses get paid out), and there was a monthly employer contribution deposited on 1/7/2016, so I have to allow for the possibility that the contribution for June 2017 might get deposited at the end of June, meaning 13 monthly contributions falling into this FY.
Finally, my employer is also reimbursing small amounts for the monthly admin fee and insurance premium that gets initially debited from my superannuation account (~$85 per month), but the reimbursement payments get processed several months after the original debit transactions. There was a delay in the initial reimbursement payments (eg. a debit processed last FY (on 3/3) was eventually reimbursed via an additional employer superannuation contribution this FY (on 17/10), and there are currently two reimbursement payments being deposited each month in order to 'catch up'. So there *might* be as many as 18 lots of ~$85 deposited this FY, Which means allowing for another $3.8K or so that *might* be deposited this FY and count towards the 'cap'. So, the maximum amount of bonus I can 'salary sacrifice' and be reasonably certain that I won't exceed the 'cap' on concessionally taxed contributions is only $2.5K. In the end I decided to request that $2K of any bonus amount be paid as 'salary sacrifice'.
Next FY I'll have to reduce the amount of monthly 'salary sacrifice' due to the decrease in 'cap'. I probably won't bother to allow for any bonus to be processed via salary sacrifice next year.
Subscribe to Enough Wealth. Copyright 2006-2017
Took up part of my Santos Share Purchase Plan entitlement
I decided to purchase $5000 worth of Santos shares under the SPP that closes next week (31 Jan). The issue price will be around $4.00. As I also have some long crude oil CFDs, I'm obviously punting on the oil price going back up a bit in future. My current holding of Santos shares is around $15,000 market value, so this will increase my investment in Santos by around 1/3. While the oil price has fluctuated wildly over the past 30 years (from below $20 to over $140!), there seems to be some support around the $40 mark, which corresponds roughly to a Santos share price around $4.00. So, overall, it seems that the downside risk is for the share price drop to as low as $2 (or the company to go broke in a period of prolonged low oil prices), whereas a continuation in the current rise in oil prices (if there is stronger global growth in future) could see oil hit $60-$80 again, and the Santos stock price rise to $6-$8 again. While this share purchase is a bit of a gamble, as the amount only represents about 1% of my geared stock portfolio, and 1/4% of my net worth, so either outcome won't have a big impact on my net worth.
The top chart below shows the crude oil price (http://www.macrotrends.net/1369/crude-oil-price-history-chart) over the past 30 years, and the bottom chart is the Santos stock price since 1988.
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The top chart below shows the crude oil price (http://www.macrotrends.net/1369/crude-oil-price-history-chart) over the past 30 years, and the bottom chart is the Santos stock price since 1988.
Subscribe to Enough Wealth. Copyright 2006-2017
Buy, Sell or Hold? Who knows...
With the recent run-up in the US stock market, my boss has recently been moving his (and his parent's) investments out of equities and into 'cash'. He claims he moved out of equities and into cash in early 2007, so perhaps he knows what he's doing? However, while the US market certainly looks similar to the pre-crash phases seen in the dot-com bubble from 1996-2000, and the 'frothiness' seen in 2006-2007 just before the GFC, the Australian market looks quite unremarkable at the moment.
So, I'm not about to liquidate my stock portfolio (in fact I recently bought $10K worth of the Vanguard Australian Shares Index ETF (VAS)). However, if the US stock market does suffer a large 'correction' in the next year or so the Australian share market may well drop a bit also - but I'll probably view that as a buying opportunity. Looking at the graph comparing the All Ords and the S&P it is clear that the long-term trend (at least in Australia) has been for a fairly steady rise over the decades, but that there have been many substantial deviations both above and below the trend line. If you are heavily into stocks, deviations well above the trend line are probably a good opportunity to reduce exposure to equities (or at least reduce gearing), and deviations substantially below the trend line are good times to move any available cash into equities. Bearing in mind, of course, your personal risk tolerance and chosen long-term asset allocation.
However, human nature dictates that many people will be tempted to start investing in the market during bull runs, and then move into cash after a stock market crash - exactly contrary to what logic dictates.
Subscribe to Enough Wealth. Copyright 2006-2017
So, I'm not about to liquidate my stock portfolio (in fact I recently bought $10K worth of the Vanguard Australian Shares Index ETF (VAS)). However, if the US stock market does suffer a large 'correction' in the next year or so the Australian share market may well drop a bit also - but I'll probably view that as a buying opportunity. Looking at the graph comparing the All Ords and the S&P it is clear that the long-term trend (at least in Australia) has been for a fairly steady rise over the decades, but that there have been many substantial deviations both above and below the trend line. If you are heavily into stocks, deviations well above the trend line are probably a good opportunity to reduce exposure to equities (or at least reduce gearing), and deviations substantially below the trend line are good times to move any available cash into equities. Bearing in mind, of course, your personal risk tolerance and chosen long-term asset allocation.
However, human nature dictates that many people will be tempted to start investing in the market during bull runs, and then move into cash after a stock market crash - exactly contrary to what logic dictates.
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