Created new QSuper account with the intention to setup a Lifetime Pension when I retire

An article in yesterday's 'Money' column in the SMH about a new retirement income product from QSuper they call a 'lifetime pension'. It is quite similar to a standard lifetime annuity product (such as is available from Challenger) but with a few attractive features for me:

* it will pay a fortnightly pension for life (although the income amount isn't guaranteed like in a standard lifetime annuity).

* the underlying investment is a 'balanced' growth option, rather than the usual mix of fixed interest investments normally underlying a lifetime annuity. Theoretically you are exchanging the certainty of a fixed income rate (that can be indexed to CPI) for a variable income rate that is affected by the performance of the underlying 'balanced growth' investment pool. The old risk-return trade off.

* the income rate is adjusted annually based on how the investment pool has performed compared to a 5% benchmark net return. So if the return is more than 5% the pension rate will increase, but if the pool returns less than 5% net return the pension rate would decrease slightly (to prevent to pool being exhausted).

* while there is no fixed lump sum death benefit (life insurance), there is a guaranteed death benefit that corresponds to your initial investment minus the sum of income payments received - so you (or your estate) would be guaranteed to get you initial investment back even if you die a few years after taking out the lifetime pension

Currently for a 60 year old investing $30,000 (the minimum amount) into a lifetime pension the first year income stream would be $1,849. You can't invest in a lifetime pension until you reach a superannuation condition of release, such as being over 60 and stopping work. And the lifetime pension is purchased using superannuation money (such as in a QSuper accumulation account).

I decided to open a QSuper account (it took literally two minutes to enter my details, address and TFN to open the account online) and I'll initially make a $100 monthly after-tax contribution (I already make the maximum before tax contributions via SGL and salary sacrifce of $25K pa, but I can also contribute up to $100K pa of after-tax contributions, at least until I hit the $1.6m total super balance cap).

I've selected to invest the QSuper accumulation account in a 50:50 mix of the Australian shares and International shares investment options, as this corresponds to my normal 'aggressive' asset allocation, and these options have a low total fee of around 0.24%, which is similar to the fees our SMSF pays for the Vanguard High Growth Fund. As there appears to be no minimum fee (or fixed weekly admin fee) for QSuper, it should make any difference to my total superannuation fees whether I am invested 100% in our SMSF or have a small amount invested in QSuper as well.

I'll probably end up accumulating around $100K in the QSuper account, so that when I retire (possibly at age 70) I can put that amount into a lifetime pension paying around $7,529 pa in the first year (the initial income payments increases slightly for each year older you are when you take out the lifetime pension). If I waited to take out the lifetime pension until I turned 80, for example, the initial income rate would be $10,834.

This is a lot lower than the initial payments (from age 95) would be if I took out a $100K deferred lifetime annuity from Challenger when I am 60 (with a 35 year deferral period), if I chose the option of not having any death benefit (which risk getting no repayment at all if I died before the deferral date). So I might end up taking out a combination of a $100K lifetime pension from QSuper and a $100K deferred lifetime annuity (with no death benefit, and deferred until age 95) from Challenger. The remaining amount of super (below the transfer balance cap) would stay in our SMSF and transfer into retirement phase, so I could adjust the annual pension payments (subject to the mandatory age-based minimum percentage) and take out lump sums as needed.

Given my great-Aunt is currently still alive at age 105, and two of my grandparents lived to 94, having some component of my retirement income stream guaranteed against longevity risk seems prudent.

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All Ords expressed as ounces of gold (in AUD) price, and compared to DJI

I found some monthly data for the Australian All Ordinaries index since 2000, and for the average monthly spot gold price expresses in AUD. A plot of the All Ordinaries index expressed in ounces of gold shows when the Australian stock market is overpriced compared to gold (eg. the index costs more than 6 ounces of gold) and vice versa (eg. the index costs less than 4 ounces of gold). Assuming one had a portfolio consisting mostly of the All Ords Index and Gold bullion (eg. 95% stocks, 5% gold), this plot could suggest when it might be prudent to go 'overweight' in stocks (eg. early 2008 and 2019 during market 'crashes') and when it might be prudent to shift to being 'overweight' in gold (eg. during 2004-2007).

Assuming one's long term asset allocation was, for example, 90% stocks and 10% gold, this might mean increasing gold to 15% allocation, or decreasing to 5% allocation, to slightly boost long term returns and reduce volality.

I also plotted how the All Ordinaries index performed compared to the US Dow Jones index since 2000. It shows that the Australian stock market was expensive compared to the DJI in 2007, but has not seen the massive increase that the US market has experienced since 2015. This explains why the US market seems 'fully priced' at current levels compared to gold, whereas the Australian market still seems to be reasonable value (at least in comparison to the price of gold).

Of course comparing the stock market indices to bullion prices doesn't preclude the possibility that BOTH stocks and gold could be simultaneously in a bubble - for example if the world was awash with capital looking for somewhere to invest at a time of no/low returns on cash and fixed interest investments. 

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Stock market and gold bubbles - is comparing stock indices to the gold price a useful dynamic asset allocation tool?

Aside from determining your risk tolerance, investment time frame, and hence a suitable asset allocation to invest in (preferably via low cost options such as ETFs and index funds), one of the few well proven methods to reduce risk (volatility) and improve performance (slightly) in your investment portfolio is to rebalance to your chosen asset allocation on a regular basis. Due to transaction costs (and CGT implications) this is often done annually.

Rebalancing will automatically sell off those assets (or asset class) that have done well, and buy more of those assets (or asset class) that have underperformed. While this is counter-intuitive (human nature, such as recency bias, prompts us to want to stick with 'winners' and sell 'losers'), it is usually a good strategy due to the 'bubbles' that regularly occur in various assets, and the tendency for those assets to subsequently suffer 'reversion to the mean'.

An extension of this might be to actually go 'underweight' assets (or asset classes) that have recently outperformed and go 'overweight' those assets (or asset classes) that have underperformed when you do your annual rebalancing. This isn't guaranteed to work, as your rebalancing period (one year) may not coincide with the duration of the various 'boom and bust' cycles experienced by various assets. That is, you may sell off outperforming assets and switch into underperforming assets too early in the cycle.

Therefore, it may be better to slowly adjust your asset allocations above or below your target (standard) allocation over several rebalancing periods - every year that an asset class is underperforming you would slightly increase its weighting, and every year that an asset class is outperforming you would slightly decrease its weighting. I don't personally do any rebalancing, as I mostly invest in diversified multi-index funds that are automatically rebalanced.

However, it might be interesting to see how such a strategy might perform over time. As an example, I came across a chart of the US Dow Jones index expressed as a multiple of ounces of gold. As gold is (theoretically) a hedge against inflation in the long term, such a chart should essentially show the real (inflation adjusted) returns of the stock market. The chart will also highlight when stocks are overpriced (a 'bubble') or when gold is overpriced. Hence if one had a portfolio consisting of the Dow Jones Index and an investment in gold bullion, it would be possible to reduce one's target asset allocation for stocks down when the stock index 'gold price' is well above the 'normal' range, and reduce one's target asset allocation to gold when the stock market is 'cheap' in terms of gold. It can be seen from this chart that seems quite clear when the stock market (DJI) was 'expensive' in terms of ounces of gold, and when it was 'cheap' (and hence either gold was in a bubble or the stock market was excellent value).

I'll look up some historic data for the Australia All Ords Index and the gold spot price in AUD and do a similar plot, then try out some weighting adjustment methods back-tested on the historic data. Hopefully adjusting the target asset allocation this way might boost returns and reduce volatility compared to using a fixed asset allocation (eg. 80% stock index and 20% gold) over the long term. From the above chart it looks like the typical cycles extend over decades, so this probably isn't something I can benefit from, but it might be useful to a young investor such as DS1. I'll see how the modelling results turn out. 

Incidentally, despite there being a lot of youtube videos about gold (and silver) being a great investment at the moment (due to the prospects for higher inflation resulting from the recent massive amounts of stimulus and effectively 'printing money'), and other videos (such as those by Harry Dent) stating that the stock market (especially the US) being in a 'bubble' and about to crash (40% by April, Dent was claiming back in Feb), the above chart doesn't show the Dow Jones Index being exceptionally expensive compared to gold,

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Found my gold coins

As mentioned previously, I've set up an online depository account with Perth Mint and will be purchasing $100 (-$0.50 transaction fee) of gold bullion each month which will be stored in their 'unallocated' holding. This will slowly add some 'precious metals' to my overall asset allocation and have no storage or insurance costs.

I thought I already had some gold coins that I purchased many years ago (I used to also have some gold and silver cast bars, but I had sold them off last time the bullion prices spiked up), so today I went on a 'treasure hunt' (actually I just looked around for the key to my electronic floor safe, as the battery for the electronic keypad was flat) to locate my gold coin 'collection'. Once I had the safe open I did a quick inventory of the various gold 'proof' and 'uncirculated' coins and put them into a spreadsheet to calculate their gold content (either .9999 or .916/22-carat) and gold value based on the current 'spot' price. Turns out I have about 9.9 troy ounces of gold (worth about A$22,800). A few of the proof coins are quite limited mintages, so might be worth more than their gold content alone.

The problem with having gold coins as an investment includes:

1. Insurance - my home contents insurance has a cap on the amount of miscellaneous 'collectibles' that are covered (eg. $5,000), and some insurance policies also only count currency "no longer in circulation" as a 'collectible'. Not sure where that leaves a 1980 uncirculated gold coin that has a 'face value' of $200 and is, technically, legal tender. Getting itemized cover for the coin collection would be expensive and difficult - aside from having to pay a higher annual premium for my home contents insurance policy, if a 'valuation' is required this can also cost quite a lot. For an 'investment' that often only appreciates in line with inflation, any holding costs can make them a poor investment over time.

2. Liquidity/trading costs - while it is fun to look up approximate valuations for specific coins by year and estimated quality, getting a professional appraisal can be expensive (for example Jaggards in Sydney charges $110 per hour, with a one hour minimum fee. And when it comes time to sell, a dealer will often pay significantly below the appraised value (they have to make a profit as a retailer). Selling at auction can be a bit of a 'lucky dip' in terms of what price may be realized, and there are associated costs which may be in the order of 20%-30%.

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