Saturday 17 February 2024

Deferred Lifetime Annuity Annual CPI adjustment

I logged into my Deferred Annuity account to check if the annual cpi adjustment had been made. The purchase date (after a bit of a delay processing my initial online application) was 6 Jan 2023. The initial $10,000 purchase was for a lifetime annuity with the monthly payment start deferred until age 99 (I initially picked 100, but it turned out that 100 was maximum allowed age for the first payment date, so I had to start receiving payments prior to age 100). The annuity has no spouse benefit and no cash-out option, so it will be (is?) worthless (to me) if I die before 6 Feb 2062. But I still thought it was worth a gamble as my great-aunt lived to 104, my parents are both alive (in their 90s) and two of my grandparents lived to 94. And who knows what medical advances may extend healthy lifespan during the next 40 years? Life expectancy in Australia has been increasing by 3 months per year since the start of the 20th century, although maximal lifespan hasn't been increasing as much (generally maxmimum lifespan seems to be limited to around 110 or so except in very exceptional cases).

Anyhow, the initial monthly payment amount was $3,722.92 ($44,675.04 pa) and is supposed to be indexed annually to increase with the official CPI figure. The new monthly rate is now showing when I log into my online account - as $3,922.99 ($47,075.88 pa) which is in line with the September Quarter 2023 annual cpi rise (5.4%). I had expected it to increase by the December Quarter figure, which just came out as being 4.1%. So I am glad that the increase used the September Quarter figure (which was the latest one available as at the anniversary date).

One positive thing about having a deferred annuity that will provide enough to cover my basic retirement income needs from a fixed age (99) is that I *could* calculate my retirement savings to be fully consumed by that age ( the old "die with zero" retirement spending strategy), without any concern that I might 'outlive' my retirement funds. But it isn't really an issue for me, as I expect the initial minimum withdrawal rate of 4% from age 65 when I move my SMSF account balance into 'pension phase' will be more than enough to cover this (while I am still working I will either recontribute this 'pension' payment into my QSuper account (I want to build it up to $600K by age 70 so I can purchase a 'Lifetime Pension' from them - which should provide around $44,416 (with no spouse benefit option selected), and/or use it to pay off my investment property loan while I am still working. The QSuper Pension isn't indexed to inflation, but does have an annual adjustment based on how the underlying Balanced Investment Fund. The past 10 year average performance has been 7.5%, so this *should* mean an average annual increase of 2.5% over the past ten years. During that period inflation averaged about 2.7%, so the adjustment may be roughly in line with cpi during my retirement.

Basically the $600K Lifetime Pension purchase at age 70 should cover my minimum retirement income needs in perpetuity, so any payments I receive from age 99 onwards from the Deferred Annuity would simply be a bonus. I would have to live to at least 101 to get a decent ROI on the $10K Deferred Annuity 'investment', but the ROI would become very impressive if I lived as long as my great-Aunt ;)

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Thursday 15 February 2024

Another attempt at lifestyle change

One of my most frequently failed goals is to shed the extra weight I've had since high school, and to make regular exercise a part of my daily routine. I was slightly overweight in high school (78kg) and not very active (although I did do some soccer, judo and comp tennis, and did my bronze medallion and bronze cross lifesaving qualifications). I gained weight during university, and then slowly put on more weight over the years, despite being interested in healthy eating (CRON) for longevity and did some occasional activities (SCUBA diving, skiing, hiking etc.), but not part of a daily routine.

There have been several times when I've stuck to my 'healthy eating' plan for 6-12 months and gone regularly to the gym, but overall the weight slowly increased over the years of having a sedentary office job and not much interest in exercise for fun. (having extremely bad eczema getting 'hot and sweaty' was never a fun time for me). My last serious attempt to reach my 'ideal' weight (around 75 kg) and go regularly to the gym three times a week was well underway just before Covid began. Then the combination of occasional 'lock-downs', gym closures and working from home undid all the good work in fairly short order, and it has been a struggle to get back into the routine of sticking to a meal plan and doing regular walking and gym sessions.

So, this week I began a '90 day challenge' via the Pro Physique 'New Year New Start Transformation Challenge'. Paying $50 to join up and posting a (very embarassing) photo for 'day 1' was a good motivation to get started again -- and this time it will have to be for the rest of my life. No more snacks and lollies for me!

Anyhow, my basic 'plan' is:

<1,800 kcals/day -- and using 'intermittent fasting' to not eat after 7pm then delay 'breakfast' until noon. Having a 'brunch' instead of breakfast and lunch helps keep the total daily calories in check. I'm also aiming for >100g protein/day, and <15% fat, but need to replace some more carbs with protein to meet that target.

Do daily walking (around the house) of at least 10K steps/day. Doing a short stint every hour as a break from staring at the computer screen is good - but I just need to remember.

Go to the gym for some weight training 3x per week, and do '5BX' at home on the 'rest' days. I had been going once a week to the gym, so this week I'm adding in a second session, and will start three sessions a week from now on.

I'm expecting to be able to lose about 10kg during the 90 day 'challenge', and should be able to get down to my 'ideal weight' by the end of this year. Looking at my weight over the past 20+ years it is certainly 'doable', but the trick will be to stabilize once I hit my 'ideal weight'. I have a bad habit of going back to 'ad libitum' eating with a lot of junk food and lollies as soon as I stop focussing on tracking my food intake and exercise is minute detail.

ps. There is a correlation between my wt and nw, but correlation is NOT causation! Both are simply due to time/age.

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Wednesday 14 February 2024

Why the first $1X is the hardest - further musings

Many people (including myself) had written (or done youtube videos) about why 'the first $100K is the hardest', and Charlie Munger famously said that investing your first one hundred thousand dollars is the most difficult part of creating wealth. It all boils down to the effect of compound interest, which according to Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

But the effect of compound interest isn't restricted to the first $1 million -- it works exactly the same regardless of the order of magnitude (multiples of $10 million, multiples of $100 million, multiples of $1 billions etc.)

I did a quick excel illustration of this, using a fairly typical savings/investment rate of $10,000 pa and an after tax investment return of 7%pa. Of course achieving a 7% return is easier said than done -- using a tax efficient vehicle (eg. superannuation or 401K) is important for 90% of the population aspiring to their first $1 million, and explains why 'the rich' tend to relocate to a 'tax haven'. And to have any hope of getting 7% real returns you would have to be risk tolerant and accept considerable volatility (eg. invest in equities rather than bonds or cash).

The results show that while earnings and savings rate are important while you are accumulating multiples of $100K (or even more so if aiming for multiples of $1K or $10K), income becomes largely irrelevant once you are past your first $1 million (hence the real reason why 'the rich get richer' without seeming to have to do any personal exertion -- unless you are at the very top of a lucrative career (eg. movie star, sports no.1 or similar) once you have a few million invested, your personal income is irrelevant).

The number of years to move from your third million to fourth million is practically the same number of years needed to move from your third $100 million to fourth $100 million, or from your third billion to fourth billion...

It also shows why nearly everyone is on a lifelong struggle to aspire to become a 'millionaire' -- as we are nearly all starting from $0 at age 20ish, and can aim to save and invest 10%-30% of somewhere around average income during our working lives (of 40 or so years). And why anyone born with a 'silver spoon' (eg. a $1M trust fund or seed capital provided by a wealthy family) will either blow the lot or be a financial success even if they do nothing but leave their investment sitting in an index fund and earn enough to pay the bills.

Unfortunately most people either just earn enough to 'get by' (often relying on welfare to make ends meet) and don't save anything at all, and a large percentage of those that do earn more than average income just increase their spending ('lifestyle creep') rather than boost their savings and investment rate. This is why despite the 'magic' of compound interest, the median net worth of households in most countries has 'flat lined' over many decades, rather than increasing exponentially.

It doesn't bode well for 'closing the gap' between the 'top 1%' (or 10%, or 25%) and the 'average' person. Compulsion (such as the Australian Superannuation Guarantee Levy) is about the only way to 'force' most people to accumulate wealth during their working lives -- and most people prefer to have the 'choice' to spend their earnings as they see fit -- even if it results in perpetual financial struggle for most people.

Mathematics is a cruel mistress.

ps. One thing I do find odd is that the exponential growth of wealth seems to break down once you get to billionaire status --rather than continuing to grow exponentially, it seems to transition to a linear growth rate beyond a certain point. I can't imagine that lifestyle/expenses can continue to rise exponentially, so it seems more likely that beyond a certain point it gets more difficult to find suitable investment options (or perhaps the mega-rich just become ultra-conservative and invest mostly in cash and bonds once they have a billion or more?).

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Tuesday 13 February 2024

Annual salary review and bonus

Another year, another pay rise lower than inflation, not to mention in comparison to the rise in AWOTE (average wage). I received a 2.5% pay rise, same as last year. Considering inflation was 4.1% in 2023 and 6.6% in 2022 that means my salary has decreased by 5.3% in real terms during the past two years.

Fortunately at the stage of working life I am happy enough to just earn enough to pay the bills while SGL continues to slowly add to my retirement savings, and my investments can be left to (hopefully) slowly grow.

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