Sunday 31 May 2009

Fee rebate received from YourShare

I signed up with one year ago. Sure enough a cheque for just over $480 arrived last week, along with a comprehensive statement showing all the fees and commissions that YourShare had received from my nominated financial products. Having YourShare as the nominated 'adviser' on my loss of income insurance, margin loan accounts and managed fund investments has had no impact other than my receiving half of the commisions rebated to me. If the total annual fees and commissions eventually exceed $4,000 I'll get back 70% of the amount above $4,000.

There is another company that offers a similar fee rebate service, but it charges an annual fee, so it isn't as useful for investors with modest portfolios. Some financial planners (such as Count Wealth accountants) offer 100% rebate of the up-front application fee for managed funds, but they don't rebate any of the trailing fees (except in exceptional circumstances - Count did rebate the trail on my son's managed fund investment).

Overall I can recommend YourShare to any Australian investors that would like to get some of their trailing fees back each year. If you fill in the online application form, please consider inserting my reference ID: YS3442 on the form. If your rebate exceeds $250 I'll get a $50 referral bonus (paid from YourShare's part of your trailing fees).

Update: The founder of YourShare, Paul Brady, phoned me out of the blue to say thanks for the mention! He also pointed out that another major benefit of YourShare is that you get 100% of any upfront application fees rebated. While you can also get up-front fee rebates from some discount stockbrokers (eg. Commsec) and the Count Financial planner service, they don't rebate any of the ongoing trailing fees. YourShare also rebates the up-front fee for new insurance policies, which others don't offer. In fact, I'm in the process of getting some quotes for personal injury/accident insurance for myself and the kids via YourShare.

Subscribe to Enough Wealth. Copyright 2006-2008

Another tale of financial woe from a retired sports star

In yet another example that being a successful sports star doesn't mean you'll be set for life, Australian tennis star Mark Philippoussis (nick-named 'the scud' for his fast service), is at risk of losing the bay-side Melbourne house he shares with his mother after falling behind on the mortgage payments. One has to wonder why he would even have a $1.3 million mortgage, since the retired 32-year-old Davis Cup player earned more than $8 million on the court and millions more in sponsorships. His comments reveal that, like many young sports stars, he had acted as if his income during the peak earning years would last forever:

"Money came in left, right and centre; you just thought that's how it was for everyone and that's how it will always be," he said.

Perhaps the fundamental financial rule for such high-income, short working-life, sport stars should be "spend less than you'll earn ON AVERAGE during you lifetime". Saving 10% of a million dollar annual income could give a false sense of fiscal responsibility if you can only earn that much until you turn 30. Spending $900K per annum is profligate if you average annual income until 65 will be a much more modest $200K a year.

For us mere mortals, the lesson to take on board is that you can't count on your current income level lasting until retirement. Quite a large proportion of worker's will suffer long periods of un-employment or ill health - so we should ensure our financial plans allow for such set-backs, and include adequate amounts of insurance for illness, disability or loss of income.

Subscribe to Enough Wealth. Copyright 2006-2008

Wednesday 27 May 2009

Me and the Rich 200 List

The SMH has a summary of the latest BRW "Rich 200" Australians List. Aside from the sad, sad news that the number of Australian billionaires has dropped from 38 last year to only 28 this year, my main interest in this story was to see how the GFC had affected the "cut off" to get on the list of 200 wealthiest Australians. Last year the cut off was A$200 million, whereas this year it had dropped to "only" A$150 million. A plot of my personal net worth vs. 1% of the Rich 200 cut off shows a remarkable correlation between my net worth and the amount of wealth required to make the BRW's list of the 200 Australians.

If anything, my NW was slowly creeping up on 1% of the "cut off" level (one of my long term targets) up until the onset of the GFC. Since then my NW may have dropped back relative to the cut off - although it's hard to be sure until next year's figures come out (the cut off figure is a bit rubbery and probably doesn't correspond exactly to 31 Dec each year). As a relatively large part of my annual net worth increase comes from saving a large proportion of my salary income, I suspect that my ROI is lower than the increase in the Rich 200 cut off. That's probably due to my asset allocation being overweight residential real estate compared to the asset allocation of the richest 200 Australians.

Subscribe to Enough Wealth. Copyright 2006-2009

Sunday 24 May 2009

This and that

DS1 competed in his first Judo tournament today. There were only three competitors in his age/weight category, so he only had two 1.5 minute bouts - winning his first bout and losing the second in a close contest. The competition was held at a nice venue at the Sydney Olympic Park, and only cost $10. On the downside, weigh-in, getting organised, and the competition took four hours - so there was a lot of waiting around involved, which DS2 found boring after a while.

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DS1 had broken his clarinet (again) at the end of last term, so I gave him my clarinet to use for his practice and at school band. He managed to break the ligature on my clarinet after taking it to school for two weeks, so I had to buy a new ligature at the music store yesterday - $30 for a small bit of plastic strap and a thumbscrew! I keep threatening to deduct the repair costs from the money he earns busking with his recorder, but so far I haven't actually made him pay for anything. At nine years of age it seems a bit harsh to take money off him for being careless.

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Centrelink has sent us a form to update our income estimate for the new financial year starting 1 July. Under the new rules any net investment losses (such as resulting from a negatively geared rental property or using a margin loan to invest in the stock market using borrowed funds and paying more interest charges than are received in dividends) are added back in when calculating "assessable income" to decide if/how much government benefit we should be paid. DWs income will rise slightly as her superannuation salary sacrifice will now be included in her assessed income. My income estimate will rise considerably under the new rules as I have negatively geared stock investments and make large pre-tax contributions into superannution (although next FY my salary sacrifice amount will be severly reduced under the new $25K cap on concessionally taxed superannuation contributions). We're unlikely to receive much in the way of Family Tax Benefit payments after 1 July, and I expect that will also mean we no longer get any childcare rebate. I have no idea how I can accurately estimate my income for 2009/10 before the 15 June deadline - our company doesn't even announce the pay rise for the new financial year until just before 30 June, and I have no way of knowing what stock dividend payment and margin loan interest payments will be next year. I'll probably just assume a 4% pay rise (the most we can expect without a promotion, based on the current AWE data) and that I have no net investment income. Any net loss from my geared share investment portfolio is likely to be offset by the net income from our rental property. If our estimated income turns out to be too low we will eventually have to repay any excess benefits we've received, which I'd prefer to avoid. On the other hand, overestimating income might result in us not receiving childcare benefits that we should be entitled to - as far as I know you have to claim childcare benefits within a few months of making a childcare payment, and any under-payment won't be "topped up" after our tax return is finalised in October 2010.

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As the recession continues to worsen in Australia, people at work are starting to wonder about their job security. With unemployment still around 5% and predicted to rise to around 8.5% in the next few years, odds are that most of us will probably be OK. However, you never know if your company will be one of those that slashes it's workforce, or goes out of business entirely, so everyone is understandably nervous. My immediate boss was retrenched last December, which left me as the only internal audit/QC resource with extensive knowledge of our systems and processes. Hopefully this makes my job somewhat secure - but you can never be certain.

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The two main supermarket chains are slugging it out with competing rewards programs. Both Coles and Woolworths offer 4c/L fuel discount coupons if you spend more than $30 in one transaction. Woolworths had been sending occasional email offers of higher fuel discounts - for example a 15c/L discount if you spent $300 with them in one week. To counter this Coles has introduced a gift card offer for a limited period - if you spend over $30 in a transaction you accumulate points that count toward the value of gift card you will receive at the end of the promotion period. It's quite clever marketing as the cumulative value of the points, and the minimum required to be eligible for a gift card, means that many customers may prefer to shop at Coles instead of Woolworths during this promotion period.

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I arranged the transfer of $500 each into the superannuation accounts of DS1 and DW (from their savings accounts). That brings their total personal, after-tax contributions into their super accounts to $1000 each this financial year. They should each be entitled to receive the government's $1500 co-contribution. I also contributed $1000 after-tax into my SMSF this year, but I probably won't get any co-contribution - I think salary sacrificed income is included when deciding if you're within the co-contribution cap.

Next year the co-contribution has been reduced to a maximum $1000 match if you contribute $1000 post-tax into superannuation (and are under the $38K cap for maximum co-contribution).

Subscribe to Enough Wealth. Copyright 2006-2008

Tuesday 19 May 2009

A dollar spent is a calorie burned?

The past couple of years haven't seen much progress towards my goals of increased net worth and reduced weight. I think I can claim force majeur regarding my failure to reach my NW targets, but I have also failed to loose any weight over the past couple of years and that's entirely my fault.

I recently started taking prescription medication for high blood pressure (not that it seems to be doing much good so far), so I REALLY need to get serious about shedding 20-25 kg and getting down to my 'ideal weight' (based on BMI). I've managed to go 'cold turkey' and cut out all confectionery for the past week, but the trick will be to stick to my health eating plan from now on. Based on previous experience I'm better at sticking to my CRON (calorie restriction with optimal nutrition) diet plan if I also get into the habit of doing regular aerobic exercises.

The weather has been pleasant enough to go for a brisk 30 min walk every lunchtime for the past week, but I need to supplement that with some resistance training and add an aerobic exercises that I can do indoors at home in the evenings. So I bought a magnetic rowing machine at Aldi yesterday and will assemble it tonight. The machine only cost $199 and seems to be good quality, so it may work out to be good value in the long run. I had been thinking about making casual visits to the Gym at UTS (University of Technology, Sydney), but although I drive past UTS on the way home from work it doesn't have free parking nearby. Casual visits would cost around $10 each, so the rowing machine will 'pay for itself' if I use it regularly at home instead of going to the gym two or three times a week.

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Tuesday 12 May 2009

A margin call from Comsec Margin Lending

As feared, the wind-up of the Commonwealth Diversified Share Fund has resulted in me getting a margin call on my Comsec margin lending account. I had expected it might happen when the CDF shares ceased trading on 18 May, and had phoned the Comsec help desk about this last week. They didn't call me back as they had promised, and yesterday they changed the margin value of CDF shares from 70% to 0% without any warning, resulting in a $30,000 margin call.

I managed to get through to Comsec this morning (after being on hold for ten minutes) and they confirmed that I had to meet the $30,000 margin call by 2pm or they *could* sell off some of my shares, although they couldn't even confirm which of my share holdings would sold (apparently it is "random" - although I find that hard to believe). I don't want to sell my CDF shares as they are trading very thinly and at a 10% discount to NAV since the announcement of the fund termination. I also don't have the required amount of cash sitting in my credit union savings account so I had to hunt around for a quick solution.

I initially thought I could take advantage of the 6.9% balance transfer offer Citibank sent me last week, but the funds transfer into my margin loan account could take up to five business days, so it wouldn't prevent Comsec selling off my shares. Instead I had to redraw $30,000 from our home loan account and transfer it into my St George Portfolio loan account, from where I could BPay the funds to Comsec. It took another two phone calls to Comsec to get the BPay details to make the payment, and then to provide them with the St George BPay receipt number to prove that I had met the margin call before 2pm.

I then applied for a Citibank Redicredit $50,000 balance transfer into my St George portfolio loan account. When the funds arrive I'll repay the $30,000 into our home loan account (after checking there are no excess repayment penalties on that account), and the remaining $20,000 will reduce my Portfolio Loan balance. I'll keep those funds available for future investments.

When the CDF fund pays out the realised NAV amount to unit holders on 18 June I'll use the money to pay off the Citibank Redicredit debt. As I'll only be using the Citibank loan for about four weeks, the interest cost will end up being around 0.53% of the total amount borrowed. That is a lot less than the 10% NAV discount if I sold the CDF shares. Of course that calculation ignores any gain or loss in NAV from now until the fund termination date of 1 June.

Since both Commonwealth Diversified Share Fund and Comsec Margin Lending are owned by Commonwealth Bank, I'm extremely unimpressed by the level of customer service provided by Comsec. Providing me with the information I requested last week, or at least providing some advance notice that CDF margin value was going to be changed to 0% on 11/5, should have been the minimum level of customer support.

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Wednesday 6 May 2009

Revised my retirement projections

It looks like the Australian Labor government will slash the superannuation tax deduction available to "high" income earners in next week's budget. The rumour currently doing the rounds (it's an Australian tradition for the government to leak the budget bad news in the weeks leading up to budget night, so that only the good news items come as a surprise) is that the current $50K cap for salary sacrifice superannuation contributions (which get taxed at 15% rather than the tax-payers marginal tax rate) will be slashed to $25K for under 50s, and the $100K cap available for over 50s until 2012 (that was introduced as part of the "simpler super" reforms of the previous Liberal government) will be replaced by a $50K cap for over 50s. We'll have to wait for the May budget next Tuesday night to find out details such as whether or not these caps will be CPI-indexed.

There haven't been any rumours regarding the reintroduction of tax of superannuation pension payments, but I wouldn't be surprised if a Labor government introduces a progressive tax scale to superannuation pension payments in the future.

Anyhow, with the drop in value of my superannuation account since 2007, a lower expectation for investment returns in future (I'm now using 8% ROI for "high growth" investment option over the long-term, rather than 11%), and the rumoured changes to contribution limits, I decided to do some new projections of my likely superannuation accumulation until retirement age (65) and possible self-funded pension income to age 90.

According to my current projections, provided I work until 65 and make the maximum allowed salary sacrifice contributions, I should be able to self-fund a pension equivalent to my current gross salary ($85K) until age 90. IF my SMSF investments achieve an average 8% total ROI and inflation averages 3%.

I haven't bothered doing a Monte Carlo simulation of possible outcomes as I already know that a few years of below-average returns, or a lower average ROI, would slash the pension rate I could sustain until 90. Perhaps I'll get lucky and not live as long as my Paternal Grandparents (94). In reality I will attempt to compensate for periods of poor returns by "topping up" my SMSF account balance by making additional "after-tax" contributions.

I should still be able to achieve a comfortable retirement by making the maximum pre-tax contributions allowed under the proposed changes, but it will increase the risk of us suffering a drop in living standard during retirement if I have any unexpected set-backs (such as a lengthy period of unemployment). It's also unfortunate timing for us in that the $25K cap will only apply to me over the next three years (until I reach 50), which corresponds with the period before DS2 starts school. Aside from paying 15% more tax (30% marginal tax rate, rather than 15% superannuation contribution tax) on the extra $25K of taxable income (about $3,750), this change will probably also mean that we are no longer eligible for child care benefit payments or child care tax rebate (we currently get back about half of the $80 a day we pay for DS2's long day care), and that DW will no longer get any Family Tax Benefit payments (despite getting very little net income from working two days a week after taking into account the cost of day care). Total cost of this change to us will probably be around $8K pa - which seems rather harsh for a 'working family' with close to average household income.

It is also rumoured that the budget will disallow tax deductions for "hobby farm" losses against other income sources. As a partner in my parent's alpaca stud, this change would increase my annual tax bill by an extra $1K or so...

Despite a likely "horror budget" (from my point of view), it appears that the government is planning to run "temporary" budget deficits for the next 5 or 6 years. Unfortunately no one seems to have told the treasurer that the economic cycle is typically that long - so the NEXT recession is likely to put Australia into a permanent budget deficit. Since Australia is likely to change government after 2-3 terms anyhow, this probably doesn't worry the Prime Minister and Treasurer too much.

It will be interesting to see what impact an increase in the aged pension has on the projected long-term budget balance and required tax rate (as % of GDP), given the aging population and higher average unemployment rate likely for the decade or two. Perhaps We won't get an updated intergenerational report in this year's budget papers.

Subscribe to Enough Wealth. Copyright 2006-2008

Saturday 2 May 2009

Involuntary liquidations suck

Commonwealth Diversified Share Fund (CDF) has announced that they are going to wind up the fund and pay out the remaining investors. As I had been moving away from picking individual stocks and increasing my investment in CDF as a proxy for index investing in two of my margin lending accounts, this news was unwelcome. However it wasn't totally unexpected, as CDF had ceased issuing new units in 2002 and the annual reports since then had shown that some investors had been redeeming units rather than simply selling the online. But I didn't expect the fund to be wound up just yet.

CDF only makes up 4% of the total value of my leveraged equities account (as I had to keep the proceeds of selling stocks in this account over the past two years in the linked cash management account in order to avoid geting margin calls), so this change won't have much effect. But CDF shares make up 50% of the investments in my Commsec margin account. When CDF is liquidated I think I'll just use the proceeds to reduce my overall margin loan balance, rather than reinvesting the proceeds in some other market proxy such as a listed investment company or ETF.

In future I intend to focus more on investing within our SMSF rather than increasing the size of my margin loan accounts. At one stage it was possibly to use gearing within a SMSF by investing in CFDs, but that may no longer be available.

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Friday 1 May 2009

Net Worth Update: April 2009

Woo-hoo! Two positive months in a row.

My net worth as at 30 April increased by $28,626 (+4.65%) to $644,180 (+4.65%), but that gain is still dwarfed by the huge -$141,895 (-15.68%) net loss experience last October. My leveraged equity investments continued to climb towards break-even (up by $20,811 in April to now be 'only' -$14,366 in the red), and my retirement account put on another $12,852 (+5.26%) in April, although a large part of that was due to contributions paid by my employer during the month.

The share market gains were partly offset by a drop in the valuations of our real estate investments, with the estimated valuation of my share of our real estate assets decreasing by -$5,798 (-0.75%). The balance of my half of the mortgages decreased slightly (by $761 to -$363,700) as we made some extra repayments using our tax refunds. we shouldn't need to make any redraws to meet loan repayments in future as we recently switched one of our loan accounts to be fixed at 5.34% for three years (the three year fixed rate has since risen again to 5.69%). That leaves less than 1/3 of our total mortgage balance on variable rate, currently at 5.09%. All of our home loans are currently 'interest only', so any reduction in the loan balances will occur through one-off extra payments when receive some spare cash flow via tax refunds, Family Tax Benefit or Child Care Benefit/Rebate payments.

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