Wednesday 28 December 2022

Bought some 'death insurance'

I don't have much 'life (and TPD) insurance' (only around $100K via my employer-sponsored superannuation fund, where my employer pays the insurance premiums - so it is 'free' cover) as our home is practically paid off and I have sufficient superannuation savings to provide for my dependents if I suddenly died. So I don't see any great need to insure against 'loss of life'.

I do have loss of income insurance - which would provide 85% of my income if I was temporarily and/or partially disabled (eg. a serious stroke, cancer or whatever). One policy is via my employer-sponsored superannuation fund and would pay out after a 6 months 'waiting period' (which my accumulated unused annual and long service leave would cover) for up to 2 years. I also have a private LOI policy that would pay out after a 2 year waiting period to age 65.

One thing I would like to insure against is longevity risk. I have sufficient superannuation that I should be able to sustainably withdraw my current after-tax income (indexed to inflation) from my superannuation without exhausting it before reaching 100 or so. But, being an atheist, I don't have any belief in an 'afterlife' (I expect it will be similarly unmemorable as my 'beforelife' was) so the closest thing I have to a comfort against the inevitability of mortality is the faint possibility that medical science *might* make some significant strides in life extension during the next three or four decades. So there is some *risk* that I might end up living past 100 (my great-Aunty lived to 105, and my paternal grandparents lived to 94, and my parents are both around 90 and reasonably healthy) -- and if there are any life extension treatments or medications available by 2060 I doubt they will be cheap or readily available.

So it is conceivable that I *might* need some extra income stream if I make it to 100 years old. Which brings us to the topic of 'death insurance' (ie. insuring against loss/deferral of death). It is actually known as a 'lifetime annuity' - which you can obtain by purchasing a policy from an insurance company. It promises to pay you a set amount for 'life' (ie. until you die).  The amount of payment received is obviously based on how much you initially pay, and the typical life expectancy for your gender and age at time of obtaining the policy. However, an 'immediate' lifetime annuity (which starts making payments immediately) provides quite a small income stream compared to the lump sum initially invested. And it is even smaller if you choose some optional features such as 1. iindexing (fully or partially) the income stream to inflation, 2. having a reversionary beneficiary (ie. if you die very young your spouse would continue to receive some income payments for the rest of their life).

A more interesting type of lifetime annuity for what I *need* is a 'deferred' lifetime annuity - where you pay the initial lump sum, but won't receive any income payments until/unless you reach a specified age (it is actually quoted for a number of years 'deferral period' from date of purchase until income payments commence). The longer the deferral period the less likely you will live long enough to receive payments (and the amount of payment can be boosted if you opt-out of having a reversionary benefit, and also no withdrawal benefit - ie. nothing at all will be paid out if you don't live for at least the deferral period. For some legal reason (in Australia - the rules seem to be different in the US, UK etc)  deferred lifetime annuities can only be purchases using superannuation money (it is treated as a private pension income stream). It seems to be only available from around age 60 (preservation age), and I'm not entirely sure if it can be purchased prior to 'retirement' or only using superannuation that is already  in 'pension phase'. Anyhow, I made the application and the rollover from my employer-sponsored superannuation fund just before my birthday (as the quote was only current until then - as the payment rates are based in life expectancy and current age, in whole years) to the insurance company providing the deferred lifetime annuity appears to have been processed, so I'm assuming that it was OK to purchase the deferred lifetime annuity using superannuation funds still in 'accumulation phase'.

The more unlikely it is that you will live long enough to receive any benefit the higher the income payments (if received) will be. I just purchased a $10,000 deferred lifetime annuity with a 40 year deferral period (so nothing will be paid out if I don't live to at least 100), that will, if I live past 100, start paying out approximately $55,000 pa (indexed to inflation) every year I live past 100. If I happened to live as long as my great-aunt the insurer would end up paying out $275,000 (in today's money) - which is a pretty good return on a $10,000 'investment'.

I do wonder what might happen if there is a medical breakthrough that extends lifespan by a decade or two -- there probably aren't currently too many lifetime annuity liabilities (compared to the number of life insurance policies) that it would be an immediate financial problem for insurance companies. But if lifespan started to climb significantly the annuity rates quoted for such deferred lifetime annuity policies might start to drop rapidly (or such insurance cover may no longer be available at all).

I'll admit the purchase of a deferred lifetime annuity with a 40 year deferral period is a significant 'long shot', but I figure that if I had simply left the $10,000 in my superannuation it would  have only provided about $400 pa of additional retirement income stream (ie about $1 per day) so I'm happy enough to fritter away the $10K on the prospect that I *might* live past 100. If I do make it to 100 it will be a nice 'birthday present', and if I don't make it to 100 I really won't care that I *wasted* $10K buying the deferred lifetime annuity ;)

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Saturday 17 December 2022

Investment unit final inspection and mortgage approval 'dramas'

DW and I had our 30 minute 'final inspection' tour of my new investment apartment today. Looks very nice and I couldn't find any defects that require fixing. In any case there will still be a 90 day period after settlement (in Jan/Feb) where any defects can be reported and must be rectified by the builder. The view from the balcony was as good as I had hoped for (although the weather wasn't great), and the finish of the apartment is excellent, so I am very happy with how the construction turned out. They even 'threw in' some extras that were not specified in the contract signed in 2019 (blinds for the bedroom and living room windows, a fitted microwave, and a nice fitted refrigerator and freezer drawer). The floor plan appears to be as per the original design, around 65 sq m (which is good as the contract allowed up to 10% variation in the final floor area). I'll be initially letting out the apartment - the rent is expected to be around $700-$750 per week. The agent said an identical apartment six floors above mine (and with a car space) recently sold for $1.5m. A car space adds about $100K to the price, and the price increases by about $10K per floor, so this would mean my apartment should be valued around $1.35m (I had guessed it would be somewhere in the $1.2-$1.3 million range). Including stamp duty and legal costs, the purchase price was about $1.05m, so I have made a 'paper profit' of about $300K (maybe).

                        A 'room with a view'

Unfortunately getting loan approval hasn't gone as smoothly as I had hoped. The rise in interest rates during the past year certainly hasn't helped with the 'serviceability' calculation. After making the required $400K reduction to our existing 'portfolio loan' line of credit, the bank lender passed on our application to a different loans officer, and they now said that further reductions in our existing credit limits (eg cancelling credit cards, reducing the existing line of credit further) would be required for the loan to be approved - but wouldn't give an exact amount to ensure approval. As I don't want to end up without financing in place for settlement in January or February, I talked them into agreeing to reinstate our previous 'line of credit' (back to the previous $850K) which means it will be sufficient to settle even if I can't secure a property mortgage loan. In the meantime I will submit a new loan application (the previous application had mysteriously disappeared off the bank's system during the past week) and hopefully will get 'provisional approval' that will be subject to reducing our overall existing credit limit by a specified amount. Depending on how much mortgage would be approved (and how much existing credit line would have to be eliminated) I might end up either funding the $800K required to 'settle' using a property mortgage (at about 5.8% pa interest rate) or else have to use the 'portfolio loan' line of credit (which is currently at 7.8% pa interest rate). I'd obviously prefer to get funding via a mortgage if possible.

In case I end up paying 7.8% interest (or more, if interest rates rise again) I have been busy cancelling some of my existing savings plans and eliminating my 'salary sacrifice' into superannuation. This should increase my 'take home pay' by enough to be able to cover the required interest only payments on the 'portfolio loan', provided I also put in a request to the ATO to vary the amount of PAYG tax withheld to reflect the anticipated net reduction in taxable income. Things will be a lot more comfortable financially if I can arrange a property mortgage to fund the purchase.

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Tuesday 6 December 2022

Inflation and interest rates snapshot

As I am about to take on a sizable mortgage, inflation and interest rates (and their future magnitude) is of considerable interest to me. After a prolonged period of very low (below the RBA's 2-3% target range) inflation, the transition to 'Covid-normal' lifestyles around the developed world led to a burst of inflation. Ongoing 'zero Covid' lock-downs in China certainly didn't help. After initially believing it was a just temporary blip (and would revert to previous low levels automatically), central banks realized that there was a risk of permanently higher inflation, with the possibility of it becoming 'entrenched' if people came to expect it would persist, and therefore demanded higher wages, which in turn leads to higher costs and prices in a 'vicious cycle'. The Russo-Ukraine war (and its impact on energy prices and fertilizer and food production) also gave a further boost to global inflation and made it more likely to persist.

So, in Australia, the RBA 'woke up' to the fact that inflation wasn't going to revert to its 2%-3% range naturally by around May this year. It then rapidly lifted rates by 0.5% increments each month for several months, and then reduced the rate of increase to a more 'normal' 0.25% increment in recent months as they wait to see when (and at what level) inflation 'peaks'.

There was a possible indication in the recent cpi figures that inflation *might* have peaked around 7% in the second half of 2022, which explains why the RBA has been content to use 0.25% increments. The RBA does not announce a rate change in January, so the next decision on rates won't be announced until Feb 2023. If the inflation rate continues to hold around 7% (or starts to moderate) there may be few (or no) more rate increases in 2023. On the plus side oil prices have been trending down since mid-year, and may drop below $70 if there is a global recession. But there have recently been some pushes for wages to rise in line with inflation, and a 7% rise in AWOTE would make it difficult for inflation to be brought rapidly back down to the 2-3% target of the RBA.

Home mortgage rates are generally 1.5-2% above the 'cash rate', so further increases in the cash rate during 2023 will flow through to higher mortgage interest rates. On the other hand, rising interest rates and falling real estate prices generally lead to a 'bust' in the building industry, which eventually leads to a tightening of housing stock and rising rents. So rents *may* rise in line with mortgage repayments to some degree. Hard to predict how things will develop during 2023 - I certainly wasn't expecting to see inflation to rise to 7% when I bought my investment apartment 'off-the-plan' back in 2019.

The RBA cash rate decisions certainly appear to be 'lagging' the movements in the inflation rate by a year or more, so I hope the RBA doesn't keep raising rates for too long and ends up throwing the Australian economy into a deep recession like in 1982 or 1991. A lot will depend on what the cpi numbers are during the next two months. Good figures would probably see the RBA 'pause' further rate hikes for a couple of months, but they are unlikely to reduce rates until they have confirmation that inflation has been brought under control. So even if inflation has peaked the RBA is unlikely to contemplate any reduction in the cash rate until at least the middle of 2023.

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Friday 2 December 2022

Applying for a mortgage 'pre-approval'

The 'off-the-plan' one-bedroom apartment I contracted to purchase back in 2019 has now completed construction. I have the 'final inspection' scheduled for 17 Dec, during which allotted 30 minute  period I'll have to go through a check-list to try to identify any 'defects' that the builder *should* rectify before settlement (which will happen sometime in January). I had intended to pay ~$200 to get an inspection done by a registered building inspector, but the company I contacted for a quote said they couldn't do it within a fixed 30 minute appointment window (they probably won't take more than 30 minutes, but probably just go from one job to the next and can't guarantee to arrive at a fixed time). Hopefully everything is working OK and the apartment floorplan ended up as advertised, and the finish it to a high standard (I would hope so, given the unit cost $1 million!).

I initially paid a $100K deposit back in 2019 (plus the $42K state 'stamp duty' tax), so I'll need $900K to pay the vendor at 'settlement'. I have about $100K in my bank account (I sold some shares earlier this year), so I need a mortgage for the remaining $800K. I could use my (and DWs) existing 'portfolio loan' line of credit (that is secured against our existing home equity), but the interest rate (7.53%) is considerably higher than I'd pay on an investment property mortgage loan (5.29%).  So I'm applying for a 30 year variable rate loan, with 'interest only' payments for the first five years. Preliminary calculations by the bank's mortgage officer indicated that we have to reduce our current 'liabilities' by around $400K to meet the bank's lending criteria. This is largely due to my having unused credit limits on several credit cards (which I don't use, but like to retain as an 'emergency fund') and a large credit limit on our portfolio loan. As we only have a small amount currently taken from on the portfolio loan.(about $80K with a credit limit of $880K), we will apply to reduce our portfolio loan credit limit by $400K so I can get the new mortgage pro-approval passed.

Based on some rough calculations, the apartment should end up costing me around $100 per week 'out of pocket' (after taking into account the tax savings due to negative gearing), which I can easily fund doing a couple of Door Dash  sessions each week. The rest of the repayments and costs during the five years of 'interest only' payments should be covered by the rental income. Hopefully rents may have risen sufficiently over the next five years so that I will be 'neutrally geared' by the time the loan reverts to 'principal and interest' payments (which will be about 20% higher than 'interest only').

If mortgage interest rates rise, I'll have to find some additional cashflow (eg. by reducing my current automated savings plans, or eliminating salary sacrifice into superannuation). Every 0.5% rise in mortgage interest rates would add another $77 per week to the required repayments.

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Net Worth: NOV 2022

My monthly NW estimate has been updated in NetWorthShare for the end of November. Chart is in the side-bar.

My 'Stocks' figure was up $11,049 (4.10%) to $280,631 net equity.

The value of my 'Other Assets' category (gold and silver proof coin collection, valued at bullion value only, Perth Mint unallocated gold, silver and platinum holdings, and my small art investment via Masterworks) was up slightly during November, rising $1,070 (3.46%) to $31,993.

Our estimated house price for November (my half) fell another $18,138 (-1.64%) to  $1,088,267 with continued weakness in the Sydney real estate market due to rising interest rates. Declines are likely to continue until inflation is brought under control, the RBA ends the cycle of interest rate hikes, and home loan interest rates stop rising. I expect falls in absolute terms to continue, with the decline in real terms being worse due to inflation (currently running at 7.3% pa).

The value of my retirement savings recovered to $1,468,873 (up $85,164 or 4.64%) during November.

Overall, my estimated NW increased to $3,181,321 during the past month - up by $59,395 (1.90%), recovering most of the losses since last June, but still down by about $140,000 from the highs reached last December.

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