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Friday, 20 October 2006

Setting My Financial Goals

I feel I am tracking nicely towards achieving a comfortable retirement, and have sufficient insurance in place to cover the usual "worst case" scenarios (death, T&PD, long-term partial disability). I also don't have any short or medium term "wants" or "needs" to use as short-term goals. Therefore the financial "goal" I've set myself is simply to achieve annual target values for my net worth.

I've based my projections of annual net worth targets on my current savings rate (36% of my gross salary), current net worth (should hit AUD$1M sometime in 2007), desired retirement pension (100% of my present salary, inflation adjusted), and what I hope is a realistic rate of return (9% pa) based on my continued use of gearing to a 50% LVR (100% gearing) and "aggressive" asset mix with a 50 year investment time period. I've also assumed that the relatively "low" inflation rate of the past decade (averaging 3% pa) will continue. For interest I've also projected outcomes if I attain a slightly better average rate of return, or inflation averages more than 3%, or I spend more than $80K pa during retirement.

Plugging these figures into an excel spreadsheet I get the following scenarios.
Baseline assumptions for Goal:
avg ROI 9.0%
avg CPI 3.0%
retirement @ 65
pension $80K in '06 $
end balance is at age 94
Model Results:

----model parameters--- RESULT
SCENARIOS earning CPI pension end
rate rate amount balance
9.00% 3.00% $80K $16,575,706
10.00% 3.00% $80K $27,887,622
11.00% 3.00% $80K $45,667,238
12.00% 3.00% $80K $73,398,333
higher 9.00% 4.00% $80K $ 9,143,582
inflation 10.00% 4.00% $80K $16,014,005
11.00% 4.00% $80K $26,875,435
12.00% 4.00% $80K $43,885,456
higher 9.00% 3.00% $90K $15,809,024
pension 9.00% 3.00% $100K $15,042,342
spending 9.00% 3.00% $110K $14,275,660
9.00% 3.00% $120K $13,508,979

ANNUAL GOALS in order to achieve planned outcome:
contribute $30K pa net to savings each year, indexed to CPI
achieve avg total return of 9% (eg. 8.2% ROI with 50% LVR at int rate of 7.4%)
Other assumptions in my planning:
I've assumed a 0% tax rate on my earnings. This is partly to simplify the calculations, but also is a reasonable approximation as my primary residence and superannuation savings have 0% capital gains tax rate under current tax rules. My annual investment income is effectively nil as I use the tax deductible interest on my gearing (margin loans and investment property loans) to effectively "convert" investment income into unrealised capital gains.

I have sufficient medical coverage through the Australian "Medicare" system, which subsidises visits to the doctor, pharmaceuticals and public hospital care. We also have basic private hospital cover in case we require any elective surgery (eg. hip replacements, heart bypass etc.), and because if I didn't have basic private hospital cover I'd have to pay the same (or more) as a tax surcharge.

As I'm currently already funding my own part-time post-graduate studies, I expect to be able to cover the costs of my two sons' education costs up to a first degree at university. It helps that our free public primary and secondary education system is quite good. One or both of my sons might qualify for entry to a selective high-school, or may get an academic part scholarship to a private high school. Our universities currently charge around 50% of the "full cost" - so a basic 3-yr business or science degree costs around $25,000 if you live at home.

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