Net Worth - AUG 2024

Chart updated to end of AUG in sidebar.

Stocks/cash increased $4,751 (+1.66%) to $291,570.

Retirement savings (SMSF etc) increased by $4,445 (+0.24%) to $1,857,921.

Est. valuation of our home (my half) increased by $22,672 (+1.92%) to $1,204,219. The 'Other real estate' (my 'lake house' and the investment apartment) also increased by $39,832 (+1.88%) to $2,160,222. The estimated valuations bounce around quite a bit from month-to-month depending on sales in the relevant suburbs, so I suspect the precision of these monthly figures is +/- 2%, and the accuracy perhaps +/-10% or more. But at least using a consistent methodology should provide a reasonable trend indication and magnitude of changes in valuation from year-to-year.

Other assets (my online depository bullion account at Perth Mint, and the bullion value of my gold and silver proof coin collection) decreased by $365 (-0.80%) to $45,278.

Overall, NW increased by $71,335 (+1.59%) to $4,567,224 during August. Tracking NW monthly changes often feels a bit like playing snakes & ladders or Monopoly. A lot of fun during the 'up' months, but not so much fun during rough patches.

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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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