Retirement Savings Rates, Returns and Results - a rough guide

For anyone in the early stages of retirement savings, it might be of interest to see a rough projection of how savings rate (how much of your after tax salary you save towards retirement) and expected average real, after tax returns would affect your 'likely' amount available to fund retirement after 45 years of working. Of course sequencing risk can alter the final amount even for identical savings rates and average return, but this simple projection will at least provide a 'ball park' indication of where you could end up.

I expressed the final result as a multiple of average annual after-tax salary, and for simplicity I held the salary constant throughout the 45 years period (assuming someone starts full-time work at age 20 and retuires at age 65).

I used real (after deducting inflation adjustment), after tax rates of return. While we don't know how tax rates and inflation will vary over a 45 year period, this will provide a rough guide to the impact of average rate of real return over the investment timeframe. For illustrative purposes I listed some such returns over the past 20 year period after allowing 15% for tax (eg. holding the retirement savings within superannuation in accumulation phase) and 2.68% for inflation (the average over the past 20 years in Australia).

The results indicate that if you saved 10% of your salary and your investment earned an after tax real return of 7% your retirement savings after 45 years might end up at about 28.57x your after tax salary. Using the 'rule of thumb' 4% initial retirement savings withdrawal rate this would provide a retirement income of 114% of your after tax salary.

However, a 7% real after tax rate of return seems very unlikely, so a more realistic expectation if invested in a 'high growth' portfolio (say 80%+ in the stock market) might be something like 4%. If you invested 15% of your after tax salary (probably close to the value 12% SGL contribution if their average income tax rate is above 15%). this average rate of return would result in a retirement savings final multiple of 18.15x after tax salary. Which would provide a retirement income stream of 75% of your average after tax salary. This is probably quite sufficient for many people, as it is more than the full Age Pension which is currently worth 29.83% of AWOTE for a single pensioner. Hence the intention of successive Australian governments to eventually have most workers end up as 'self funded' retirees, rather than relying on the Age Pension.

If you want your retirement income (assuming a 4% initial withdrawal rate) to be roughly 100% of your after tax salary, and expect to achieve an average real after tax rate of return around 4% on your retirement portfolio, then you would have to save closer to 20% of your after tax salary.

If you were a less risk tolerant investor and invested in a balanced asset allocation within your superannuation fund, then the real after tax ROR would be closer to 3% and you would need to save around 25% of your after tax salary for retirement (eg. add to SGL contributions with salary sacrifice of deductible or undeducted contributions).

It is impossible to make accurate 'projections', but at least these rough figures should indicate the 'ball park' of retirement savings rate required to achieve a particular retirement income stream, expressed as a percentage of your average after tax salary.

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NW significant events

Looking at my NW chart there are several significant 'jumps' (up or down) that have occurred during the past 20+ years, so I thought I do a quick recap of the ones that leap out on the chart -- in case anyone is wondering what caused these changes (and can't be bothered trawling through a decade or more of my blog posts).

Events of note:

[1] Stock market was booming, I was using margin loans to gear using 'other people's money' (OPM) and I was dreaming of early retirement. It did seem 'too good to last' so I contemplated reducing my risk by either a) selling off some of my shares and paying off the margin loans - decided against this as I would have faced a hefty capital gains tax bill, or b) withdrawing some cash from the unpreserved, unrestricted part of my retirement savings (superannuation) to pay off the margin loans - decided against this as I didn't really want to reduce my retirement savings, or c) be 'sophisticated' and buy some index put options with a 6+ month expiration date costing about 1%-2% of my portfolio value, that would provide an offsetting gain if there was a significant market correction that reduced my share portfolio value and I need cash to meet any margin calls - I decided to implement this strategy in mid 2007. When the put options expired in late 2007 the market was showing increased volatility and I couldn't (easily) find suitable new put options at a reasonable cost. So I let the options expire and was left holding a $700K+ share portfolio with about $400K of margin loans. Then the GFC started out as a 'normal' dip of 10% in early 2008 caused by the US housing market slump -- 'experts' were on TV assuring everyone that this was just a US problem that wouldn't have global implications. I decided I had already lost quite a bit (due to gearing), so would just 'hold on' for the long term.

[2] I was on holiday in Europe during Q2 2008 when the markets decided the GFC was 'global' and we learned that CDOs had spread the US property market risk through the world -- repackaging really bad mortgage debt into 'A+' rated CDOs. Eventually the market 'crash' got so bad that I was about to receive margin calls so had to start selling off share holdings (at low prices) to clear my margin loans. Ended up selling off most of what was now a $400K share portfolio to clear $400K of margin loans.

[3] No impact on my NW, but we decided to sell our investment residential rental property and use the proceeds to pay off most of our home mortgage. So NW stayed about the same while total assets and total debts both dropped significantly. Gearing dropped to almost zero.

[4] My parents decided to 'sell' their rural farmlet (vacation home/hobby farm) to me, instead of leaving it to me in their will. The 'price' (used for stamp duty calculations) was the market value, which they gifted me (so no money actually changed hands). The benefit to them was that after five years this gift no longed counted as a deprived asset for the Age Pension asset test, so they were able to start receiving the Age Pension. I initially tracked the 'cost price' in my NW calculation, as I intend to leave this asset to my sons, so it didn't seem to make sense counting it as part of my overall NW. Hence the one off $350K jump in NW.

[5] I decided to purchase a $1MM one bedroom luxury apartment 'off the plan' as an investment. Initally only paid the 10% deposit but added the $1MM 'cost price' and a notional $900K debt to my NW tracking. The apartment building took three years to complete. At the time interest rates were very low and it seemed possible that I would be able to get a fixed (for 5 or 7 years) rate loan at 3%-4% at 'settlement'. So the negative gearing would be modest.

[6] Covid happened. From a NW perspective the biggest factor that affected my personal NW vs. the markets in general was that I decided to switch our SMSF investment from 100% 'high growth' to about 50% growth and 50% balanced (ie. went a bit 'risk off' in Feb, when the Covid epidemic was still mostly restricted to China but there was considerable risk it might spread worldwide and impact the global economy. We reverted to our long term 'high risk' asset allocation in Aug/Sep -- so didn't quite get the timing right as we were a bit cautious and didn't go "risk on" again until after the market bottom had passed and we were reasonably certain that the gains were not just a 'dead cat bounce' (there was still talk of a 'great depression' style of market crash).

[7] Construction of my investment apartment completed and I 'settled' the purchase with a $1MM mortgage. I only needed the $900K for settlement but took out a loan for the entire purchase price (using our home as collateral). I left the 'spare' cash sitting in the offset account, so I'm not paying interest on that amount, but can access the funds if needed. I decided to start including the estimated market value of the apartment and my 'holiday home' in my NW calculations, hence the jump in NW due to the adjustment from 'cost' to 'market value' for these real estate assets. Unfortunately inflation and interest rates started to hike about 6 months before 'settlement' was due, so I ended up having to take out a variable rate 'interest only' loan. Paying 6%+ interest made the $1MM investment seem a lot less of a 'good idea' than it had when I bought 'off the plan' and interest rates were around 3%.

I don't expect any events having massive one off impacts to my NW in future -- I will just start paying down the investment property mortgage when it switches from 'interest only' to 'principle and interest' in about 3 years time. By then I should either be covering the running costs of my financial planning business from client revenue, or have switched to 'wealth coaching' and no longer have to pay the $20Kpa or so that it costs to remained registered as a financial advisor (without any clients). That $20K pa will help cover the principle payments on the investment property mortgage. Hopefully rent income will have increased enough by then for the property to no longer be 'negatively geared'. The plan is to fully pay off the mortgage by the time I fully retire at age 80.

My part-time PhD (for the next 7-8 years) shouldn't have any impact on my NW, as the uni fees are covered by the federal government's 'research training scheme' (RTS), so it will only cost me time, not money.

I plan to continue working FT at my 'day job' until about 70, then transition to working PT in my financial planning business until I lose interest (or have health issues). There might be some 'windfall profit' if my financial planning business has sufficient clientele to be sold for around 3x 'ongoing revenue' (which seems to be how such businesses are currently valued). But I'm not counting on the business having any value, so it isn't part of my retirement financial planning.

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Net Worth - NOV 2023

Chart updated to end of November in sidebar.

Stocks/cash increased $10,971 (+5.05%) to $228,135. This was mostly due to markets performing well during the past month.

Retirement savings (SMSF etc) increased by $72,720 (4.84%) to $1,576,439 in line with the market trend and our asset allocation. Having reallocated some surplus cash in out SMSF into an Australian Shares Index Fund during the recent market dip seems to have been a good move.

Est. valuation of our home (my half) increased by $62,601 (5.98%) to $1,109,410. Realestate.com had their monthly 'suburb snapshot' information available again, so I reverted to my usual method of estimating our house price. The 'Other real estate' (my 'lake house' and the investment apartment) decreased considerably over the past month, down by -$89,628 (-4.15%) to $2,071,844 reversing the artificial spike caused last month by the change in data source used for the estimation. This month's estimated values are probably a more accurate estimate of the actual market values - or at least are comparable to my other monthly figures.

The outstanding balance of the investment property mortgage remains at $999,993 during the 'interest only' period of the mortgage. I have about $142K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) decreased by -$443 (-1.16%) to $37,874. Having a small allocation to bullion continues to help reduce my overall  portfolio volatility without too much drag on the overall portfolio performance.

Overall, NW increased by $56,221 (1.41%) to $4,031,682 during November. Finally broke through the $4MM barrier.

New tenants moved into my rental apartment at the end of November. The agent was unable to quickly lease out the apartment for $890.week, so I agreed to maintain the rent at the previous $850/wk rate. The lease is for 12 months and they appear to have arranged to pay their rent monthly around the 15th of each month. They are another couple of Chinese students, again with a cute pet 'lap' dog. Must be the latest fashion for affluent Chinese students studying in Australia?

My AFSL has changed the way PI (professional indemnity) insurance premiums are split amongst their ARs (Authorised Representatives), so my monthly PI fee has leapt up from around $400/mo to $750/mo. Which seems absurd since I have no clients yet (so no possible liability). Overall my fixed cost of remaining a registered Financial Adviser is about $18,000 pa. Definitely time to get serious about prospecting for new (some) clients! I figure I will need to 'onboard' at least one client every month to get to 'break even' point by the end of next year. If I don't have many clients by then I think I'll give up my registration and switch to just being a 'wealth coach' for a small hourly rate. As long as I don't recommend specific financial 'products' I won't have to be registered as a financial advisor - so could eliminate the $18,000 AFSL fee, the $3,500 ASIC levy etc. Particularly when doing financial planning as a part-time 'side gig' it isn't worth the overhead costs to be a financial advisor in Australia. And the government wonders why there is a shortage of registered financial advisors, or why personal financial advice in Australia is "unaffordable".

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How superannuation was sold to Australians with a necessary lie

Superannuation is the system of private retirement savings introduced in Australia in 1992. It was sold as a 'reform' to provide more working Australians with private retirement savings to supplement (or replace) reliance on the Age Pension. Prior to this, private pensions were generally a 'perk' only available to white collar workers in some industries (for example my first job as a research scientist in the early 1980s had a 'defined benefit' plan that would have provided a fixed multiple (8.25x) my final average (last 3 years) salary upon reaching retirement age (65). The multiple was based on years of service. Of course the company decided to shift the risk of investment performance onto workers by changing the system to a defined contributions plan in the late 1980s (and incidentally removed the redundancy insurance feature) just before making most of the workforce redundant in the late 1990s)).

Initially introduced at a contribution rate (SGL) of 3%, it was part of a 'deal' finessed by the Labor government to replace part of wage increase with a legislated compulsory contribution into superannuation by Australian companies. This helped break the wage-price spiral that had entrenched high inflation in Australia in the 1970s (mostly due to the 1973/4 'oil shock').Introduction of the SGL and universal superannuation in 1992 helped 'break the back' of inflation -- bringing the rate down from a persistent 5%+ to around 2.5% (hence the current Australian 'target' band for inflation of 2%-3%). It was no coincidence that inflation targeting by the RBA was introduced in 1993.

Since its introduction the SGL rate has been increased by a series of Australian governments, with Labor generally being more in favour of pushing for increases in the SGL as part of their 'election promises' to appeal to their traditional base of 'working class' Australians (and low income workers), The conservation governments (Liberal and National Party coalition) have been less keen to increase the rate of SGL, based on their philosophy that decisions to save money for retirement should be left to the individual, rather than government legislation. The conservative government also views the SGL as a 'cost to business', although most of the cost of SGL is actually born by the employees via lower wage rises. However, Labor governments tended to 'bake in' future SGL rises by legislation covering a 'timetable' of future SGL increases -- which conservative governments usually had to promise to not rescind (or would cost them an election. Although this election promise was then often 'kept' by delaying the timing of the next SGL increase).

A side-benefit of superannuation for Labor governments was that their biggest support base (the Union movement - whose compulsory union dues often fed into Labor Party campaign coffers) used superannuation (especially 'Industry Super' funds) as a tool for propping up membership (which has started to flag since the de-industrialisation of Australia since the 1970s). The amount of Industry Fund monies pumped into advertising 'super' as some sort of Trade Union achievement was astounding (they even featured a retired Reserve Bank governor in one ad series).

There has been some debate regarding whether SGL increases actually came at the expense of wage rises. The initial belief was that any increase in the SGL rate would be offset by employers reducing the wage rises that would otherwise have occurred. And it was in fact 'sold' as an inflation fighting mechanism to swap a wage rise for universal SGL (via the Hawke government 'Accord'). But some researchers subsequently claimed that their analysis showed that the SGL increases had little or no effect on wage rises. However, the  government's Retirement Income Review recently provided a fairly definitive conclusion that between 70% and 100% of the increase in SGL has come at the cost to workers of reduced wage rises. So, no 'free lunch' - with increased compulsory retirement savings into superannuation coming at the expense of 'take home' pay (and also 'locked away' until 'preservation age' for good measure). The main sweetener used to sell this compulsory savings plan was that tax on savings inside super (15% during accumulation phase) is lower than the marginal tax rates for incomes above the 'tax free' threshold of $18,200 pa (although it isn't much of a benefit for those in the 19% tax bracket earning under $45K).

But the largely hidden reason for both Labor and Liberal governments being in favour of compulsory superannuation is that the Age Pension was going to become unaffordable over time, due to it being 'unfunded' (paid for out of current tax revenues and government debt) rather than supported (at least partially) by worker's contributions (as is the case with the US SS system, the UK NI scheme, etc). One feature of the Australian Age Pension system (since it was introduced in 1909) was that it was both Income and Assets tested (although there was a brief period when the Asset test was removed during the 60s and 70s).

The Asset test (the threshold over which the full Age Pension entitlement is removed and a part-pension may instead be available) has generally been around 7x the minimum wage (pa) since the mid 1980s:

Unfortunately, although the Asset test excludes the 'principle residence' it does include financial assets, including the superannuation account balance. Therefore, the growth in superannuation savings has directly reduced the number of Australian workers who can access the Age Pension at all, or reduced the amount of 'part pension' available for those with Assets above the Asset test threshold (but not so high as to totally eliminate Age Pension eligibility).

This reduction in eligibility for Age pension has been quite obvious, as is the rapid switch from full Age Pension entitlement to only being eligible for a part pension (and the average amount of part-pension rapidly declining due to the Asset Test and 'taper rate' as Super balances increase):

Indeed, the Australian government's own Retirement Income Review final report projected that the percentage of age eligible Australians having access to the full Age Pension would drop from over 40% to around 20% by 2060:

Overall, introduction of compulsory Superannuation and the increase in the SGL rate over time has

1. Helped transition Australia from entrenched inflation since the 1973 'oil shock' to the 2%-3% 'target band' via the 'Accord', but trading wage rises for superannuation savings.

2. Helped shift the burden for retirement income support from the government (unfunded) Age Pension to the self-funded (via SGL) Superannuation system. The fact that the SGL comes mostly (70%-100%) from lower wage rises is generally not publicized. In fact the Trade Unions generally spruik 'Industry Super' and compulsory superannuation as a 'good thing' for workers.

The way that the Age Pension Asset Test has resulted in growing superannuation balances rapidly restricting access to the Age Pension, and rapidly diminished the amount of partial Age Pension paid out to those still able to access some Age Pension is less well known.

Overall, the introduction of Superannuation in Australia was necessary (as the Age Pension system would have otherwise become unsustainable, requiring draconian cuts to Age Pension rates or much tighter eligibility rules, or significant increases in taxation revenue from a shrinking taxpyer vs retiree pool) but was sold by the Trade Union movement and both major political parties as a 'good thing'. But in reality it has simply shifted the burden for retirement funding directly onto workers -- and made such compulsory retirement savings law.

One 'loop hole' still remaining in the Superannuation and Age Pension system is that the principle residence is exempt from the Asset Test. So it is quite possible for those eligible for a partial Age Pension to increase their retirement income by taking a lump sum from superannuation and using it to 'upsize' their home. I expect that eventually this will be remedied by either a) using a carrot and stick approach to make moving superannuation into 'Pension Phase' upon retirement mandatory, and restricting the access to lump sum payments from pension phase superannuation (eg. the maximum 10% withdrawal rate applied to TRIS pension accounts could be applied to pension phase superannuation balances). or b) putting a 'cap' on the value of principal residence that is exempt from the Age Pension Asset Test (I wouldn't be surprised if the TBC ($1.9MM) or $3MM threshold for the newly introduced 30% tax rate on superannuation 'increase' (taxable income AND unrealized capital gains) eventually became the 'cap' on value of principle residence exempt from the Age Pension Asset Test).

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Credit Scores in Australia

A 'credit score' (or credit rating) in the US is a common concept, as ubiquitous as a SSN (social security number). Australia didn't have the equivalent until fairly recently, with loan applications being assessed by individual lenders, and little sharing of credit information about individuals.

This changed in recent years and now (according the the Australian government 'moneysmart' website)

"Lenders use your credit score (or credit rating) to decide whether to give you credit or lend you money. Knowing this can help you negotiate better deals, or understand why a lender rejected you."

Also

"You have a right to get a copy of your credit report for free every 3 months."

and that

"Your credit report also includes a credit rating, This is the 'band' your credit score sits in (for example, low, fair, good, very good, excellent." have

But it is worth noting that a credit rating isn't the same thing as a credit score.

For example, I was interested in checking my credit report and score, so I created a free account with Equifax and received my free report. I checked that it was accurate, and found that my total 'credit limit' was $1,029,995.00 (mostly the mortgage for my investment property) and my score was 'Excellent'. But the free report didn't provide my actual credit rating, with Equifax indicating that the 'excellent' corresponded to a rating in the band 853-1200. When I clicked on the link to see my credit score, it offered me a paid subscription.

According to moneysmart:

"Depending on the credit reporting agency, your score will be between zero and either 1,000 or 1,200"

To get my actual credit score I installed the free app from ClearScore which provided the credit score from two agencies: Illium and Experian.

The differences were quite intriguing. Illium's score was 999/1000 and gave the Australian average score as being 695 and the NSW state average as being 690.

Experian gave me a score of 920/1000 with the Australian average being 783  and the state average being 782.

The app suggested that I could improve my score by building my repayment history, as it said I didn't have a credit account more than a year old. So they obviously don't count the mortgage or personal loan accounts. So closing down all my old credit cards in January to get my investment property mortgage approved apparently reduced my credit score. Go figure.

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12% solution 'superhero' portfolio and 'moomoo' trading account - end OCT 2023 update

The "12% solution"" recommendation email from David Alan Carter for the end of October remained at 60% SHY (or cash) + 40% JNK (or SHY or cash). So I left the 12% solution part of my superhero trading account sitting in cash this month.

My Moomoo trading account ended the month close to where it started, which was fairly good relative to the benchmark. Total number of trades to date is 13 with a 46% Win:loss ratio, which is about what I was hoping to achieve. Unfortunately, although three of the trades in October were closed within 0.05% of the set target price, one position was closed out at the market open when the price had gapped down below the stop-loss price target. So I lost -$65.52 on that trade vs. my target stop-loss would have limited the loss on a single trade to -$50. Overall my average gain on winning trades so far has been $81.48 (vs. target of $100 gain on winning trades), and the average loss of losing trades has been -$71.16 (vs/ target of -$50 loss limit on losing trades). I will try to close out positions closer to planned target prices in future trades..

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Commencing a TRIS/TTR pension

In Feb I cancelled my existing SS (salary sacrifice) arrangement as I needed to boost my salary for the investment mortgage approval process, and would also need additional cashflow to service the investment property loan (as the IO monthly payments and expenses and more than the rental income). However, this meant that my total concessional contributions into super last FY was about $6K less than the 'cap' of $27,500.

To remedy this tax inefficiency without causing myself cashflow issues I've decided to commence a Transition To Retirement (TTR) TRIS pension account within out SMSF. There is no tax benefit within super (as I am under 65 and still working I can't move any of my super balance into 'pension phase' - although I think the $10K of super money I used to purchase a deferred lifetime annuity was counted as $10K of my TBC).as the TRIS pension account won't move into 'pension phase' until I hit age 65, so will still be taxed at 15%.

But it will mean that the minimum 4% pension withdrawal (based on the TRIS account starting balance as at 1/7/23) will be paid to me tax free, and I can use this additional income to afford to make personal deductible super contribution of a suitable amount to ensure my total concessional super contributions hit the $27,500 cap this FY. My SGL contributions this year will be around $12,650 so I will probably need to make a deduction super contribution next June of around $14,850 to reach the CC limit. I have requested the TRIS to be commenced from 1/7/23 with $300K of my SMSF balance, so the min pension payment this FY will be $12,000. That pension payment will cover most of the amount needed for the personal super contribution.

As this will reduce my taxable income by $14,850 and increase my concessional super contributions by the same amount, the overall impact will be $2,227.50 additional tax paid by our SMSF, and $4,826.25 less income tax payable by myself. So the overall tax saving will be around $2,600.

eSuperfund will calculate the TRIS account balance for 30 June each year, so I will know how much I need to withdraw as a pension payment in future years.

When I turn 65 the TRIS (whatever it's current balance is) will automatically be moved into 'pension phase', and I can also transfer my accumulative phase SMSF account balance into pension phase at that time.

Depending on what my total SMSF balance is when I turn 65, I might need to rollover some of my super from my other super accounts so the entire TBC (whatever it is at the time) gets used for the initial 'pension phase' account balance in the SMSF. [I am being optimistic that I might have a total super exceeding the TBC by the time I reach 65].

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Net Worth - OCT 2023

Chart updated to end of October in sidebar.

Stocks/cash increased $5,953 (+2.82%) to $217,1164. This was mostly due to me lodging my 2023 tax return last month and receiving a tax refund of around $6K due to the investment unit making a net loss since settlement in late Feb (with the depreciation schedule adding considerably to the tax loss. However, a little know fact is that the claimed depreciation has to be removed from the 'cost base' of the investment property, so while you gain an immediate income tax reduction, you will ultimately give half of it back if/when the property is sold and you calculate the realized capital gain)..

Retirement savings (SMSF etc) decreased by -$19,125 (-1.26%) to $1,503,719 in line with the market trend and our asset allocation. We moved $50K from our SMSF cash account into a new investment in Vanguard Australian Shares High Yeild Fund (VAN0104AU) during October. I will transfer another $20K from the ANZ V2 cash account into our Vanguard SMSF account this week to make an additional $20K investment into this fund. DS1 and DW are making sufficient contributions into the SMSF to accumulate sufficient cash to cover the SMSF tax bill next year and DWs minimum pension withdrawal,

Est. of Home valuation (my half) decreased by -$7,670 (-0.73%) to $1,046,809. This was mostly due to realestate.com ceasing to provide their monthly 'suburb snapshot' information about median sales price for a particular postcode, so I had to use data from similar data provided by domain.com.au - unfortunately they break down the median prices by # of bedrooms in the house or unit, so I had to change to the closest equivalent figure that was in line with reality (ie. house and unit size). The 'Other real estate' (my 'lake house' and the investment apartment) increased considerably over the past month by $91,084 (4.40%) to $2,161,472. However the change in data source made this figure fluctuate considerably, and is probably not a particularly accurate estimate of the actual market values.

The outstanding balance of the investment property mortgage remains at $999.993 during the 'interest only' period of the mortgage. I have about $127K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by -$2,864 (8.08%) to $38,290. The lack of correlation between bullion prices and the stock and property markets is one of the (few) reasons it can be a good idea to have a small (<5%) amount of bullion in your overall asset allocation, simply to reduce portfolio volatility without too much overall decrease in portfolio return.

Overall, NW increased by $73,106 (1.87%) to $3,975,461 during October. But I have no idea how close to reality (market value) this figure really is.

The tenants moved out of my investment unit on 25 October, so the agent is now advertising for new tenants. They left owing four weeks of rent - which will just be covered by their bond and rent deposit, Fortunately there was no significant damage to the unit that would require repairs. The agent estimates the rent should now be around $880-$900 per week, so it is being advertised for $890.week, Considering the unit rented for $850.wk back in Feb (and this was about $50 higher than otherwise due to the tenants having a dog, and most landlords in the unit would not allow pets), the rent has increased considerably in little more than six months. Hopefully the apartment won't remain vacant for too long.

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Australian Superannuation Averages 2023

QSuper has an interesting webpage providing details of the average superannuation balance for various age ranges for Australian Males and Females, along with a calculation of the approximate amount a person should have in superannuation now to reach the Association of Super Funds of Australia (ASFA) 'comfortable standard' balance by the time you turn 67.

For interest I plotted these figures together with the actual current superannuation balances of DS1, DS2, DW and myself to see how we compare. DS1 is tracking very well due to a combination of having had a child superannuation account to provide a solid foundation, and his current income being quite good for a recent university graduate. DS2 has just started his HSC (final) year at high school, and his child superannuation account is quite modest, but should provide a solid foundation for his future retirement savings. Especially if he makes an annual $1K contribution and benefits from the government co-contribution of $500 each year while still studying. DW is just under the calculated sum required for her age to be on track for a 'comfortable retirement' at age 67. I doubt that she will continue working until age 67 though. My super is more than adequate for my retirement needs - I mostly add to superannuation as a tax effective investment vehicle, rather than to boost my income during retirement. I have stopped making additional salary sacrifice contributions as I need the cashflow to fund my investment property investment, but earnings and SGL contributions should be sufficient to hit the transfer balance cap by age 65 when I can transfer my superannuation balance (up to the TBC) into 'pension phase' while still working full time. Transfer to 'pension phase' will reduce the tax rate applied to my superannuation earnings and realized capital gains from 15%/10% to 0%. Once I hit the TBC any further superannuation SGL contributions will remain in accumulation phase, which is still a tax effective environment for balances up to $3MM.

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Long, long term real estate investment prospects

Browsing through Moomin's blogroll, a post from Climateer Investing to a Nature article about the next supercontinent caught my eye. Looks like my home and investments properties in NSW will still be prime real estate in 250 million years, as this is one of the more temperature zones projected to exist in the future supercontinent ;) (And my properties may closer to 'absolute water front' within 1,000 years if the Antarctic ice sheet melts away faster than expected causing sea levels to rise by up to 65m - but although the floating Antarctic ice sheets might melt within 500 years, the 1.9km thick icecap on the continent would take a lot longer to melt away, even if temperatures rose significantly above zero in Antarctica).

I am a long term investor, and even contemplate wealth transfers and family trust structures that could last hundreds of years, but looking 250 million years ahead seems silly even to me.

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Net Worth - SEP 2023

Chart updated to end of September in sidebar.

Stocks/cash increased $784 (+0.37%) to $211,211. This was unexpected given the generally terrible month for the stack markets (Dow Jones down -3.27%, S&P 500 down -4.64%, All Ords down -3.86%). So I can only attribute this to my brilliant trading/stock picking (or sheer dumb luck).

Retirement savings (SMSF etc) decreased by -$66,709 (-4.20%) to $1,522,844 in line with the market trend and our asset allocation. We have about $77K sitting in cash (ANZ V2 savings account), so we might add this to our investment in Vanguard High Growth Fund once the transition from retail fund to online ETF investment is completed later in October.

Est. of Home valuation (my half) increased by $6,374 (0.61%) to $1,054,479. 'Other real estate' (my 'lake house' and the investment apartment) also increased over the past month by $17,854 (0.87%) to $2,078,388.

The outstanding balance of the investment property mortgage remains at $999.993 during the 'interest only' period of the mortgage. I have about $131K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) decreased by -$1,641 (-4.43%) to $35,426.

Overall, NW decreased by -$43,338 (-1.10%) to $3,902,355 during September. Looks like I won't become a quadrillionaire this year.

The tenants of my investment apartment paid 4 weeks rent during September, but as a lump sum at the end of the month (in arrears), rather than weekly in advance (as required by their lease agreement). So the managing agent lodged the NCAT lease termination application with the NSW Civil and Administrative Tribunal.

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Rental Investment Property update

The managing agent submitted the NCAT (lease termination application) form (costing me $60) last week, as the tenants had still not been paying their rent weekly in advance as per the lease agreement. It wasn't quite as bad as I had thought though, as they had paid four weeks rent in one lump sum last week. So they are currently only one week in arrears, but not complying with the terms of the lease. We'll see what the tribunal determines - if they agree to start paying the rent each week and catch up on any rent that is owing over a reasonable period of time, the tribunal is likely to not terminate the lease. Hopefully the proceedings might encourage the tenants to start paying their rent weekly, as my biggest concern would be if they vacated the property without notice and were owing a month or more of rent in arrears. The two week rental bond is meant to cover any damages beyond normal 'wear and tear', and isn't sufficient to cover a substantial amount of unpaid rent. Then again, my landlord insurance does (theoretically) provide some cover for unpaid rent, but making an insurance claim is bound to be time consuming and tedious.

If the lease was terminated the managing agent would charge me another one week of rent as a fee for finding new tenants, plus any advertising costs. So it would be best from my POV if the tenants simply start paying their rent on time.

ps. After chasing up the local and international payroll/HR departments of the company I work for, they finally processed the PAYG tax variation approval from the ATO. So I will now have slightly more after-tax 'take home' pay each fortnight rather than having to wait until lodging the annual tax return to get a large tax refund. This is good, as the extra income can sit in my mortgage offset account at an effective pre-tax interest rate of 6.29%, rather than have the ATO holding onto my tax instalments for more than a year (and not paying any interest) before providing a tax refund.

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12% solution 'superhero' portfolio and 'moomoo' trading account - end SEP 2023 update

The "12% solution"" recommendation email from David Alan Carter for the end of September was for

60% SHY (or cash) + 40% JNK (or SHY or cash)

So I will liquidate the 12% solution portfolio holdings when the US market opens and move to cash for this month.

David Alan Carter's monthly "12% solution" update email reported the YTD performance for 2023 so far as being +16.1%.

Overall my 'superhero' trading account was down during September - from $2,162.41 to $2,056.81

My other 'moomoo' trading app account (where I try to read the entrails of technical charts to make profitable 'long' positions on the index trading VAS ETF) managed to be slightly up during September despite VAS and the markets being down - from $5,179.63 to $5,200.38. This month the movement was entirely due to my trading performance. My overall trading result is now a 43% win:loss ratio, with four stop-loss trades losing an average of $61.53 per trade, and three take-profit trades gaining an average of $84.87 each. The win:loss ratio is still quite good (but still way too early to draw any conclusions), and the average realized losses moved closer to the planned (-$50) target, and the winning trades getting closer to the planned ($100) target. 

Compared to the 'benchmark' of the S&P500 index my 'trading' was quite successful during September. My overall yield is +2.03% while the S&P 500 during the same period is -6.41%. The 'plan' is to open a long position when the market seems to be in the early stages of an upward trend, and take a profit (or roll-over the position and reset stop-loss and take-profit alert settings if the trend is holding) when the price target is reached, or close out when the stop-loss is reached. Setting the take-profit to be a 1% gain while the stop-loss is set at a -0.5% loss, should result in profitable trading *if* I have winning trades close to 50% of the time. Of course, the take-profit trigger being twice the stop-loss trigger as a percentage change means that the stop-loss would be triggered more often than the take=profit trigger, if my reading of the trading entrails doesn't avoid opening positions when the market is about to start dropping. We'll see how things play out over coming months.

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Rental investment property blues

Apparently the tenants for my rental apartment have not paid the rent since 24 August, so the managing agent issued a termination notice with termination date 22 Sep (today). If the tenants don't pay the rent that is due, or vacate (give possession), then an application will be lodged with the relevant government tribunal (costing $60) and the case will be addressed in a couple of weeks. We'll see what happens. The tenants could catch up on the owed rent, or could move out and hand the keys to the managing agent, or not do anything -- in which case the application will be heard in a few weeks' time. The tribunal might terminate the lease (in which case the tenants should leave -- but sometimes you have to get the local council 'sheriff' to notify them the move out of the premises). Or the tenants might claim difficulty paying the rent and seek some sort of 'arrangement' to slowly catch up on the owed rent -- which can then drag on for a long time (and the tenants eventually move out owing even more in unpaid rent). Or the tenants could pay the owed rent the day of the hearing, in which case the application is dismissed (and often the entire cycle of falling behind in rent repeats).

In my previous experience having a rental property, it is quite common for tenants to move out without notice when they are many weeks behind in the rent, leaving a mess that needs cleaning up, damage to be repaired, and a two week 'bond' that doesn't even cover the cost of repairs and cleaning, let alone the amount of unpaid rent that is owed. The tenants then often move interstate (or in this case possibly overseas) and you can never recover the owed rent. Then you often have the property vacant for another couple of weeks while looking for new tenants (and paying for advertising etc).

One has to take the 'long view' with such things - otherwise you worry about having to make mortgage intereest payments on a $1MM mortgage at 6.29% while not getting any rental income, and also having to pay strata levy, insurance, council rates, utilities etc.

In the 'long run' rental income should cover *most* (or a large part) of the holding costs, the net negative cashflow and depreciation should provide some tax relief, and the eventual capital appreciation (after paying capital gains tax) *should* make the investment profitable in the long run.

ps. My application for income tax variation (based on the expected net loss from the investment property this financial year) was approved in August, but had not been applied by my employer's payroll department as of last week -- so I had to check with the ATO that the variation approval had been sent to my employer (it had) and then try to contact the payroll department (in HR) to find out why my withholding tax had not been varied yet. I still haven't received an update regarding the 'ticket' I had to lodge (other than an automatic response that it had been received), so I have no idea when my take home pay will start to reflect the reduced withholding tax rate of 11% for the remainder of this financial year.

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Simple Financial Lifecycle Illustrator

A Simple Financial Lifecycle Illustrator that you can play around with.

All figures are in current $ terms.

Enter the average after tax (take home) salary, age start and end full time employment, percentage of salary saved. It is assumed that all savings are available for retirement income, and that the amount of take home - savings = budget (both while working and during retirement). Then enter the inflation-adjusted after-tax rate of return (eg. If invested in index stock funds within superannuation, where the tax rate is 15% and the inflation rate was 2%, then an average return of 11% becomes 9% after adjusting for inflation, and 7.65% after tax).

Playing around with it lets you see the impact of changes to savings rate, retirement age, asset allocation (ie expected average return) and so on. It is a very simplistic model, as assumes the entered values are the average for the entire timeframe and doesn't allow for sequencing risk of any variability, periods spent working part-time etc.

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Transition to retirement plans

I currently plan on sticking with my current full-time employment (barring any serious health issues or being made redundant) for another 8 years or so -- which would bring me to age 70. When I turn 65 I will be able to transfer my SMSF accumulation account balance into 'pension phase', which will mean (under current tax law) that the earnings and capital gains be taxed within the SMSF at 0% rather than the normal 15% tax rate on earnings (and 10% on capital gains). Based on my current SMSF balance, 10% SGL contributions and roughly 6% real rate of return, I should be close to the TBC (transfer balance cap) of $1.9MM at age 65. I might use $100,000 or so of the TBC at age 65 to purchase a deferred lifetime annuity to commence payments from age 85 -- which should provide an annual inflation-adjusted income of about $21,500 pa from age 85 onwards (which would cover around half of my budgeted living expenses). This should be sufficient to ensure I have sufficient retirement income even if sequencing risks adversely affects my SMSF balance (e.g. if there is a major market crash just after I retire and switch from making contributions to making withdrawals).

The mandatory minimum drawdown rate from an SABP (Simple Account Based Pension) for someone aged 65-74 is 5% pa, so a $1.9MM account balance in pension phase would require $95,000 tax exempt pension payment to initially be made each year. As I plan to be still working FT to age 70, the entire pension income can be used to quickly pay down the balance on my investment apartment loan while I am still working (and working on my PhD).

The investment apartment should become cash flow positive after a few years of paying off the mortgage principle using my SMSF pension income.

Once I retire from FT employment I plan to continue working PT as a financial advisor for up to decade (depending on how I feel at the time). The SMSF pension should be sufficient to cover living expenses and pay off the remaining investment property loan fairly rapidly, so any additional income earned as a financial adviser when 'semi-retired' will be available for investment (probably into my investment bond).

Then when I eventually fully retire, my financial planning business *might* be able to be sold for around 3.5x annual revenue, but I can't really estimate what that might be, Once I completely stop work the SMSF pension should be considerably more than I require, so I will probably invest any surplus income. As the SMSF pension is tax exempt, I will be able to earn up to $45,000 pa from personal investments, rental income etc. and stay within the 19% tax bracket. The net rental income from the investment apartment probably won't be quite this much, so I can probably invest some amount in my own name, then, once the taxable income gets over $45,000, I will direct any surplus income into my Investment Bond account, where it is internally taxed at up to 30% (probably around 20% due to being invested in the tax optimised funds).

The SMSF balance should continue to grow as long as the minimum drawdown rate remains below 8% (the 9% withdrawal rate kicks in at age 85), after which the pension payments will have increased to an extent that it starts to erode my SMSF account balance. The increasing surplus of pension payment compared to my budgeted living expenses (around $40,,000 pa) will be invested in the Investment Bond (and can be withdrawn tax free at any time if I require some additional income during retirement).

I doubt that my SMSF balance will be depleted during my lifetime (longevity risk), but in any case my existing deferred lifetime annuity will commence making pension payments of about $40,000pa (indexed to inflation) from age 99 onwards, so I won't have any financial concerns if I happen to live as long as my great Aunt (who made it to 104).

I did a rough calculation of how my NW has tracked over the past 20 years or so, adjusting the monthly figures to constant 2022 $ terms using the RBAs annual cpi index data, and also adding in the 'deflated' value of the lake house property I was given in 2014 for the prior year figures. I have been savings/investing around $25K pa over this period, and using an average rate of return (after tax) of 6% produces a 'projection' curve that tracks pretty closely to my actual NW. Based on this I should have around $10MM NW by the time I fully retire, and as the required retirement income will be negligible ($40K pa is only 0.4% of $10MM) my NW should continue to grow somewhat in line with this 'projection' even during my retirement. Of course any prediction extrapolating several decades into the future is likely to be nowhere close to reality.

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12% solution 'superhero' portfolio and 'moomoo' trading account - end August 2023 update

The "12% solution"" recommendation email from David Alan Carter for the end of August was for

60% MDY + 40% JNK

So I will have to update the '12% solution' component of my superhero portfolio by selling the QQQ holding and replacing it with MVV.US (MDY.US is not available in the superhero platform). I have placed a 'market' order to sell QQQ which should get filled tonight, and I will then reinvest the proceeds into MVV (I am not sure if the proceeds from the QQQ sale will be immediately 'cleared' and available to reinvest).

David Alan Carter's monthly "12% solution" update email reported the YTD performance for 2023 so far as being +21.5%.

My overall 'superhero' trading account was up slightly during August - from $2,149.11 to $2,162.41

My other 'moomoo' trading app account (where I try to read the entrails of technical charts to make profitable 'long' positions on the index trading VAS ETF) was also slightly up during August - from $5,072.30 to $5,179.63. Although a large part of that increase was due to the value of the 'free' shares allocated to the account as a 'new account' bonus. My actual trading result was a 50% win:loss ratio, with two trades losing an average of $73.94 per trade, and two trades gaining an average of $73.25 each. The win:loss ratio was quite good (but with such a small number of trades it is way too early to draw any conclusions), but the realized losses were higher than planned ($50) due to missing one 'stop loss' alert on opening, and closing out the position well below the 'stop loss' target price. I also closed out one positive position too soon, as it was my first trade and I got nervous and wanted to crystalize a 'profit'. At least I improved my trading discipline during the month, with the deviation of trade price from target decreasing from $0.92, to $0.62, then $0.26 and finally $0. The final 'trade' was actually to reset my existing position with new 'stop loss' and 'take gain' alert levels when my profit target was reached. As the chart seemed to show the up trend was being maintained, I decided not to close and reopen a position, but simply do a 'paper trade' and keep the position open but treat it as a new position.

Compared to the 'benchmark' of the S&P500 index my 'trading' seems to have been reasonably successful during August. Even if my account goes down in value, the trading is still a 'success' if it goes down less than the relevant benchmark. I'll see how this looks after a year to two of 'trading'. The dollar amounts involved are relatively trivial, but it gives me something to play around with while my superannuation and real estate investments just sit there and do their thing over several decades.

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Net Worth - AUG 2023

Chart updated to end of August in sidebar.

Stocks/cash increased $4,918 (+2.39%) to $210,527.

Retirement savings (SMSF etc) decreased by -$7,149 (-0.45%) to $1,589,553

Est. of Home valuation (my half) increased by $17,879 (1.74%) to $1,048,105.Conversely,'other real estate' (my 'lake house' and the investment apartment) decreased by -$20,825 (0.54%) to $2,052,532. 1

The outstanding balance of the investment property mortgage is $999.993. The bank credited a small adjustment, so the loan balance decreased to slightly below the $1MM. I have about $136K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $1,077 (2.99%) to $37,067.

Overall, NW decreased by -$4,093 (-0.10%) to $3,945,693 during August. With a dip at the start of the month being recovered by month's end

The tenants of my investment apartment paid 6 weeks rent during August, so have basically caught up with their arrears. So I am glad I told the managing agent to not proceed with a lease termination notification unless they fell more than two week's behind again. The managing agent has a bit of a conflict of interest in this matter, as a change of tenants means I would have to pay one week of rent as a fee for finding a new tenant and additionally pay for some 'advertising' for new tenants (which is basically advertising for the management company paid for by their clients!).

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How the Age Pension Asset Test is designed to penalize the average Australian couple if they make additional super contributions

Based on 2019 statistics, the average man aged 60-64 and approaching retirement had a superannuation balance of $178,800. And the average woman aged 60-64 and approaching retirement had a superannuation balance of $137,050 (due to having contributed less into superannuation over their working lives and, possible, the fact that women typically have slightly lower financial risk tolerance that men, so may have their super invested in slightly more conservative asset allocations, providing lower yield and lower volatility).

So, for a 'typical' homeowner couple the average combined superannuation balance just before retirement would have been around $315,850.

Assuming they only had $30K of personal assets (car, jewellery, furniture etc.) in additional to their family home and superannuation, they would have become eligible for the full Age Pension at age 67*.

Assuming they have put their superannuation into an account based pension when they retired, their superannuation in pension phase would provide some retirement income. For simplicity I have assumed the minimum withdrawal rate (which is 5% for someone aged 68).

The amount of Age Pension they receive would be the standard rate for a homeowner couple of $1,604 per fortnight (as at March 2023) as long as their Age Pension was not reduced due to the Assets or Income tests. Generally (due to deemed income rates being fairly modest, and most retirees not earning much other income) the relevant test that will start to impact the amount of Age Pension entitlement is the Assets Tests. The family home is exempt, but other financial assets (such as superannuation) and personal assets (such as cars, jewellery, furniture etc.) are all counted for the Assets Test.

Lets assume this 'typical' homeowner couple has $30K of personal assets. Now, the Age Pension Asset Test threshold (where the Age Pension starts to reduce by $3 per fortnight for every additional $1,000 of assets) is $451,500 for a homeowner couple. So the couple could own their principal residence, have $30K of personal assets (car etc) and have $420,000 combined total superannuation and receive the full Age Pension ($41,704 per year).

Now, the general 'rule of thumb' for a homeowner couple to have a 'comfortable' retirement is their income in retirement should be around $70,000 per year. So, the Age Pension alone won't provide a 'comfortable' retirement for a retired homeowner couple.

But having some superannuation pension will boost their total retirement income -- up to a point.

The sad reality is that every $1,000 of superannuation balance for the couple over $420,000 would reduce their Age Pension entitlement by $3 per fortnight ($78 per year). But if their extra $1,000 in superannuation will only provide an extra $50 of income (at the 5% withdrawal rate), they would actually see a reduction in total retirement income of -$28 for every extra $1,000 they have accumulated in superannuation during their working lives!

This 'penalty' for having more than the average amount accumulated in superannuation will continue to impact as long as you have any entitlement to a partial Age Pension. Once a homeowner couple had total assets over $986,500 they would not receive any Age Pension**, so having more superannuation would provide more retirement income as they would not be any Age Pension left to reduce!

Overall, the interaction of the Age Pension asset test and combined superannuation balance on total retirement income for a homeowner couple is shown below. The orange horizontal stripe shows the $70K pa needed for a 'comfortable' retirement for a home-owning couple. The blue arrow points to the average combined superannuation balance at retirement age of $315K, and that for combined superannuation balances over roughly $450K up to $900K having accumulated more in superannuation will actually mean you end up with less total retirement income (Age Pension entitlement plus minimum withdrawal from superannuation in pension phase).

The graph might not be 100% correct (it is based on a quick review of the Age Pension Asset test rules - for accurate calculation of Age Pension entitlement you have to consult Centrelink -- which makes planning and modelling such interactions quite difficult, even for financial advisers), but illustrates the general interaction of Age Pension entitlement and having accumulated more than 'average' in superannuation.

One interesting thing to note is that while the Age Pension and asset test threshold are generally indexed, the 'average' superannuation balance will be increasing at a faster rate, due to the increase in SGL contribution rates in recent years. So more and more retirees are going to find that they would be better off (in terms of total retirement income) by withdrawing some of their superannuation as a lump sum and spending it!

Of course this could quite easily be fixed by eliminating the 'dip' in total retirement income by simply changing the rate at which Age Pension entitlement is reduced for every extra $1,000 in assets above the Age Pension asset test threshold. Reducing it from $3/$1000 to $2/$1000 would replace the 'dip' with a 'flat spot' between $420K and $1MM combined super balance. And anything less than $2/fortnight reduction for every extra $1,000 in assets would mean that it was actually worthwhile accumulating some extra superannuation to provide a boost to retirement income...

I doubt that there will be any 'tweaking' of the Asset Test to eliminate this 'feature', as most Labor voters would not be affected (as they are likely to end up with below average superannuation balances), and the more affluent Liberal voters will likely never be entitled to receive any Age Pension, so don't care. So, as usual, it is the 'middle class' earning around the average income and retiring with around the average superannuation balance that would be most affected.

PS. It isn't actually as simple as this analysis suggests - you would also have to take into account the benefit of tax savings due to making additional concessional superannuation contributions (eg. via salary sacrifice) and so forth. So whether or not aiming to end up with a higher than average superannuation balance will depend on individual circumstances. You can also alter the scenario by using some superannuation to move to a better 'principle residence' (that is exempt from the asset test) in retirement.

*Yes - there are a lot of more detailed eligibility conditions (eg. being an Australia resident, year of birth etc) but I am only doing a simply illustration for a 'typical' case here.

** Unless they are legally blind (less than 6/60 vision in both eyes, wearing corrective lenses), in which case the Age Pension (blind) is not subject to the Asset or Income test...

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Our SMSF Performance vs Index (Industry Funds)

Inspired by Moomin's post of his SMSF monthly performance compared to comparable Uni/PS super funds (unisuper and PSS(AP)) where he and Moominmama might otherwise have their superannuation savings, which was in turn inspired by an AFR article by Tony Boyd comparing his SMSF's performance to a relevant index of industry super funds, I decided to have a look at how our SMSF has perforned over the past decade compared to the Index of industry super funds reported in the AFR article.

Our results have been quite comparable to industry fund returns overall, but with slightly better net returns in the worst years - especially in FY2022 when my/our decision to tactically adjust our asset allocation for several months (to a more conservative stance) when the Covid-19 pandemic was just starting to spread globally, helped mitigate the impact on our retirement savings.

Overall our SMSF has a slightly higher average net return for the past ten years compared to an index of industry super funds - 8.70% vs. 8.05%. The extra 0.65% doesn't seem like a huge amount, but compounded over many years such increments in annual performance will have a significant effect on the final outcome. I plotted a bar chart of our SMSF annual net return vs. the Index, with the baseline set at roughly the average inflation rate over the past decade (to show the relative inflation-adjusted average return of our SMSF vs the Index).

The net performance difference is likely due mostly to the average industry or MySuper fund charging around 1.08% admin/mgmnt fee (which is about half that charged by retail super funds), whereas the admin/mngnt/audit/ASIC fees on our SMSF was around $1,300 with the total SMSF fund balance (me, DW and DS1 accounts) of roughly 1,950,000 - or 0.06%. So the industry funds (runs by professional fund managers) might be producing about 0.35% better net returns (before fees) than our trustee-managed SMSF, but after adjusting for the admin/mngnt fee impact we end up around 0.65% ahead.

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Net Worth - JUL 2023

Chart updated to end of July in sidebar.

Stocks/cash increased $23,402 (+12.85%) to $205,509 - but this was largely due to my adding another $5,000 from cash by setting up my new Moomoo trading account.

Retirement savings (SMSF etc) increased by $37,830 (2.43%) to $1,596,702

Est. of Home valuation (my half) increased by $13,215 (1.30%) to $1,030,226. So the general improvement in Sydney residential real estate market has finally started to be reflected in the sales prices achieved in our suburb.

Other real estate (my 'lake house' and the investment apartment) increased by $11,125 (0.54%) to $2,073,359

The outstanding balance of the investment property mortgage remains at $1MM (the loan is 'interest only' for another 4 years 7 months). Interest rate is currently 6.29% after the RBA hit 'pause' on the overnight cash rate hikes while they wait and see how inflation and economic activity responds to the series of rate hikes done so far. Inflation seems to have peaked and is (slowly) trending down, and the inflation surge has not (so far) been passed on in full to wages. So the RBA may not need to raised interest rates further (unless the inflation rate trend towards the target 2%-3% 'band' doesn't proceed rapidly enough for the RBA).

Other assets (my online depository bullion account and Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $794 (2.26%) to $35,990. Bullion prices recovered part of the losses suffered the previous month.

Overall, NW increased by $86,366 (2.24%) to $3,949,786 during July. This is another new 'all-time high' for my NW estimate.

The tenants in my investment apartment have slowly fallen two weeks behind in their rent -- so the managing agent will see if they will agree to a plan to start making some extra payments to slowly get back up-to-date with the rent arrears. Otherwise a notice to terminate the lease will be issued (costing $60). I'd prefer the tenants remain, so hopefully they were just falling behind by the allowed 14 days and will at least pay their monthly rent in full from now on. Issuing a notice is often rather pointless, as if the tenants make a payment to reduce the arrears to less than 15 days at any time during the next two weeks the termination notice will be invalidated. And if they then fall behind by 15 days again, a new notice would have to be issued. This cycle can continue for months... Alternatively, tenants will sometimes vacate without giving notice when they receive a termination notice -- often meaning they are a month behind in rent before the managing agent and landlord finds out. This means that the two weeks 'bond' money is insufficient to even cover the unpaid rent, let alone cover the cost of repairs to damage the tenants may have caused. Theoretically the unpaid rent and any costs for repairs could be sought from the ex-tenants, but this is often difficult and financially not worthwhile. If the current tenants move out, hopefully it won't take too long to find new tenants (the rental market is fairly tight in Sydney, with vacancy rate still quite low at 1.7%) for the current rent (since rents are currently trending upwards in the suburb).

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12% solution superhero portfolio - end July 2023 update

The "12% solution"" recommendation email from David Alan Carter for end of Jul was an unchanged recommendation from last month, I.e.:

60% QQQ + 40% JNK

So I was able to leave the '12% solution' component of my superhero portfolio unchanged this month (which saves on trading costs)

Since I bought on 12 Jul the price changes for the current components were:

QQQ 1.07449 units @ $372.2696 [=> $383.68    +3.06%

JNK 2.88576 units @ $92.1768  [=> $92.75     +0.62%

Total gain for the (partial) month was $($12.26+1.65 ) = $13.91 on the initial ($400+$266) = $666.00  investment, so 2.09%  so far. As the initial investment wasn't made at the start of the month, this isn't a monthly return figure. In future I'll report monthly performance and a cumulative return.

David Alan Carter's monthly "12% solution" update email reported the YTD performance for 2023 so far as being +22.5%.

Since 2008 the '12% solution' has produced a total cumulative return to the end of July 2023 of 582.0% compared to the S&P 500 Index cumulative return of 326.7% for the same period.

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Another dabble in trading

I was browsing through Youtube videos (anything to procrastinate working on my PhD literature review or making cold calls to find prospects for my financial planning 'business') and came across an interesting talk about trading psychology by Dr David Paul. Despite being 4 years old, it still had some good point about needing to stick with a simple trading strategy, execute the plan with discipline, and use careful money management to ensure the position size is in line with the amount you have available to put at risk.

He gave a simply example of a bet on a coin toss where the payoff for a win is $2 for a $1 bet, and if you lose you forego the $1. Now, despite a 'win' paying out twice as much as a 'loss' (so the expected average return is positive), you can easily go broke due to a random string of losses. If you start playing you will have a 25% chance of having two losses in a row, a 12.% chance of three losses in a row, and 6.25% chance of four losses and so on. So, if you play this 'game' long enough, you are quite likely to encounter a string of 10 or more losses. Since each loss costs you $1, you should not play the game if you only had a 'kitty' of, say, $10 (you can no longer play if you run out of money, despite there being a positive expected return in the long run). A similar situation arises if you engage in card counting to make money playing Blackjack at Casinos -- despite have a positive expected value (EV) in the 'long run', you have to start off with a large enough 'bankroll' compared to the bet size.

So, armed with a reminder of how important trading discipline and money management is for a 'day trader' I decided to dabble again with a bit of trading for fun. This time I decided I'll simply take long positions on the Australian share market when there seems to be a positive run. I opened a new trading account with Moomoo (since they were offering a few months of 'no fees' for a new account, plus a random draw of some US shares as a bonus if you deposit some initial amount and keep the balance for a month or so. I funded the trading account with $5,000 and bought 54 VAS for $90.96 at the open (the fact that the US market had been positive overnight also seems to improve the odds that the Australian market will open on a positive note -- and my order was filled before the major up-tick happened (probably due to the staggered open used for Australian share trading?). For my $5,000 'kitty' I should close the position when I either make 2% ($100) for a 'win' for when I have lost 1% ($50). So I have set alerts to notify me if the price of VAS rises above $92.78 or drops below $90.05. If I manage to 'win' roughly half the time I *should* end up making some profit (how much will depend on trading costs in the long run I suppose).

I'll track how things go for the first 30 or so trades, and see if I manage to stick to my 'trading plan' (and can sell close to the trigger prices). I'm still trying to decide if I might not need to actually close my position if I 'win" as long as the overall market trend still seems to be positive at the time. Instead I could just close my position 'virtually' (on paper), and set the new price alerts as if I had just bought the stock at the new 'entry price'. Not sure if my logic is correct about that, but I'll see how things work out in practice.

As I am only risking a $50 loss on each bad trade (assuming I can close out close to the trigger price if there is a market crash!) it would take a long time to lose my entire $5,000 'kitty' if things go horribly wrong. I do a monthly update on how my 'day trading' is working out.

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Updated Supehero 'fun' trading account to include 'The 12% solution' monthly trades

I decided to transfer A$1,000 into my superhero trading app and convert it and some residual A$ cash balance into USD. A$1,009.79 ended up being US$666.19 after conversion, so I had US$666.83 available to trade (I also has some residual USD cash sitting in my account). I used this to purchase the '12% solution' position recommended in David Alan Carter's 1 July email.: 60% QQQ and 40% JNK.

I ended up purchasing 1.074449 QQQ for US$400 and 2.88576 JNK for $266.00 with a 'market' order overnight. I will buy and/or sell the required positions at the start of each month per the '12% solution' recommendations and we will see how it performs over the next few years. At least trading the required US stocks using Superhero will not incur brokerage each month, which was the reason I gave up my previous attempt to track the '12% solution' portfolio previously (trading costs were making the small positions unviable).

Currently my overall Superhero App Portfolio is:

code              value             units                         daily change   overall change

USD        $  0.83

QQQ                   1.07449 units    +1.26%

JNK                   2.88576 units    +0.92%

CORN                  5.0124  units    -3.19%

WEAT                 14.75716 units    -3.52%

ITA                   3.17325 units    -0.63%

Overall USD holdings $246.92                          -0.32%

AUD       $  0.00

RBTZ                  19.0000 units    +0.00%

Overall AUD holdings $1,242.69                        +3.34%

For NW estimate I will just track the value in AUD and USD at the end of each month and use google to get an approximate AUD value for the USD holdings (unfortunately Superhero only provides exact FX conversion values (including FX fee) when you have some AUD or USD cash in the account to convert (min $100 amount).

The USD holdings CORN, WEAT and ITA are intended to be 'long term' (I expect them to rise more than inflation over the medium to long term) while the '12% solution' portfolio holdings will be traded each month as required. The AUD holding in RBTZ is also intended to be a long term play.

It will be interesting to see how this portfolio performs over the next 5-10 years, although whatever the 'performance' is, the trivial amount at risk will make the end result immaterial from my NW POV.

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Can (almost) anyone get rich?

Can anyone (at least those living in a developed country, and of average intelligence and reasonable health) get rich during their lifetime? And without doing anything exceptional/unique, or getting 'lucky'? I think the answer is yes. Although it does take a reasonable amount of effort and discipline.

As a thought experiment, consider an 18 year old who starts saving $5 each and every week, and invests in a basic 'growth' index fund. S/he might have to start off saving up cash (or putting it in a no fee online savings account) and then starting to invest via a no/low cost investment app like Superhero (no inactive account fee and $100 minimum initial investment and $0 brokerage for Australian ETF purchases, such as VDHG) or Vanguard Personal Investor ($500 minimum investment, or $200 if done via an automated savings plan).

Such an investment might earn an average return of 9.45% (the actual average total return for the last 10 year period = although past performance is not a *reliable* indicator of future performance) which, after adjusting for inflation (lets assume it averaged 2.25%, although it is quite hard to predict the future) and a 32.5% marginal tax rate (although it is hard to predict future changes in income tax legislation or tax rates) for the average Australian average salary of $90,800, would produce an average real after-tax return of 4.2%.

This would mean the $5 weekly saving/investment could grow to $38,400 (in today's dollars) by age 65. Not rich, but not bad for a modest $5 per week.

If this person actually put in a bit of effort they could probably manage to save $500 per week without too much difficulty. Sure, they might not be able to buy the latest model iPhone, eat out every day (eg. might have to 'brown bag' their lunch), or buy a new car every few years using a car loan, but $500 per week would be in the realm of possibility for many people. If they wanted to.

So, at $500 per week, this hypothetical 18 year old would end up with $3.85 million by age 65.

Sort of similar to my situation.

I started out attending public (state) high school in 1972. I did some casual work at a market garden on weekends in senior high school, earning 60c per hour (the equivalent of $5.50 per hour in today's money, adjusted for inflation from 1974 to 2022 - see https://www.rba.gov.au/calculator/annualDecimal.html) and then changed to better paid work as a night fill packer at the local supermarket for minimum wage while in year 11 at high school. My major financial achievement in high school was to end up with $100 in my St George Credit Union savings passbook by the time I started university ($532 in today's money). I then spent a few summer vacations working in the 'lacquer room' (wonderful acetone headaches!) of a pencil factory while at university, before getting a job as a new university graduate in 1984 for $25K pa ($90K in today's money).

Unfortunately I spent most of the $10K I'd saved up by the time I graduated from university ($30K in today's money) on a 10" Meade telescope (which I still own) and a Pentax MX SLR camera and some lenses (which I still have, but later upgraded to a Nikon DX digital SLR) - I should have spent the $10K on Microsoft shares when they floated in 1986 for US$28 (although it was very difficult and expensive to trade US shares in Australia back in the 1980s!). A $1,000 investment in Microsoft shares made in 1986 would be worth $3.23 million today. At the time I thought the Microsoft IPO was overpriced! D'Oh!

I've always saved around 25% of my salary (sometimes a bit more, sometimes a bit less), and never earned much more than the average Australian wage (my peak salary was probably about ten years ago - I've had salary increases below CPI and well below AWOTE increases for the past decade or more). And should end up with around $4.5 million by age 65. Pretty much where you would expect to end up by saving around $500 per week...

Now, $4 million or so probably isn't really "rich", but it's good enough for me. And most 18 year olds would probably be quite happy with the idea of ending up with $4 million if only someone could tell them how... Although they would probably dream of getting this amount and retiring by age 30.

But the reality is most Australians will actually end up with a lot less. The average net worth of Australians at age 65 is only about $1 million ($350K in super, a house worth $575K (on average), and about $50K in household items).

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FY24 PAYG tax variation

Now that I know the current recurring expense and income for my investment apartment (and making the assumption that interest rate remains unchanged, rent remains unchanged and 100% occupancy, rates etc don't rise -- all of which are assumptions likely to underestimate actual loss, given that it seems likely that rates etc. will rise with inflation, occupancy can only be less than 100%, not more, and that interest rates are more likely to rise a little more during this FY), I was able to lodge my PAYG tax variation for the 2023-24 tax year. The figures submitted were:

gross rent:       $44,200

Interest:                  $56,610

rates/insurance:           $ 2,867

agent mngt fee:            $ 2,563

depreciation:              $19,153

land tax/strate levy:      $ 5,536

net loss:                  $42,529

Based on my marginal tax rate being 32.5%, this will reduce my annual taxable income by $42,529 and my tax liability by $13,822. So I should see an increase in my bi-monthly take-home pay of around $575. That will help meet the cashflow requirement for servicing my investment loan interest payments.

Hopefully by the time the interest only period on my loan ends in 5 years the rent will have increased more than the expenses (strata levy, insurance, land tax etc. Not by enough to cover the principle repayments, but by then I will be able to transfer my superannuation into 'pension phase' and the minimum annual pension payments should be more than sufficient to cover the loan repayments and possibly pay off some of the outstanding loan principle while I am still working full-time.

The reduction in tax rate from 15% to 0% on my SMSF balance when in pension phase should offset about 1/4 of the required pension payments, so won't affect my super balance at retirement too much. And will be offset by having increased equity in the investment apartment when I retire.

If I can pay off the investment property loan when I retire, the net rental income should be around $33K pa (in today's money). As my SMSF pension income stream not be taxable income, there should be very little (around $2,800) income tax due on my overall income stream during retirement (assuming current tax rules still apply).

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