Thursday 17 August 2023

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...

Subscribe to Enough Wealth. Copyright 2006-2023

Saturday 5 August 2023

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.

Subscribe to Enough Wealth. Copyright 2006-2023

Tuesday 1 August 2023

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).

Subscribe to Enough Wealth. Copyright 2006-2023

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.

Subscribe to Enough Wealth. Copyright 2006-2023