End of Week 2 of '90 day transformation challenge'

I've been sticking to 'the plan' for my lifestyle change (less junk food and more exercise) since the 'Pro Physique 90-day transformation challenge' started on 12 Feb. My main goal was to cut out all junk food, reduce daily calories by 'intermittent fasting' (not having breakfast and having a 'brunch' around noon, then having dinner before 7pm) and try to get enough protein intake to try to increase muscle mass by doing weight training 3 days/week, despite being in overall caloric deficit. I've also aimed to get in at least 10,000 steps/day on the 'rest' days. I've found the easier way to accumulate sufficient steps each day was to simply get up and do a ten minute walk around my 'home office' every hour or so during the day.

The first week I only did two gym sessions -- I had been only going once a week (and skipping some weeks) for the past year, so I was quite exhausted at the end of the second session and had sore muscles for a couple of days. By the second week I was already getting adapted to the workouts, as was able do all three planned sessions without getting too 'wasted' (and I didn't have any muscle soreness the following day). Each session I've increased the weights slightly and added another exercise or a few more sets, so the total 'volume' (kg) per session has been rapidly increasing. I expect the rate of increase will slow dramatically over the next few weeks. The gym sessions involve 20 mins on the treadmill to warm up, then half of my resistance training, another 20 mins on the treadmill to let my muscles recover a bit, then a final group of weight training exercises, before finishing off with a final 20 mins on the treadmill. The total session lasts just under 2 hrs (I go just before 9pm when the gym is fairly empty) and consists of about 1 hr on the treadmill and about 45 minutes of weight machines.

Overall I'm fairly happy with my progress so far:

         Body Recomposition       Averages (per day)

Week#    Wt (kg)    Body Fat %    cals    g prot    % carbs    % fat    steps/day

1        -3.4       -1.1%         1,348     85      35%        39%      11,118

2        -1.0       -0.4%         1,378     92      39%        31%      12.126

The main changes I still want to make are to increase my protein intake to around 150g/day while not increasing caloric intake too much -- so I there will be more chicken breast and broccoli, and less fillet steak and cereal in my immediate future. And I want to try to get closer to 15,000 steps/day.

Based on my caloric deficit I should continue to lose around 0.8 kg/week, and by ensuring adequate protein intake and sufficient weight training I should be able to avoid losing any muscle mass (and might even gain a small amount). Perhaps losing 1kg/wk of fat and putting on about 0.2 kg/wk of lean mass? At the end of the 13 week 'challenge' the change in average body fat % should allow me to do a rough calculation of the change in lean body mass vs. overall weight change.

Anyhow, its 9pm and time to head off to the gym...

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Deferred Lifetime Annuity Annual CPI adjustment

I logged into my Deferred Annuity account to check if the annual cpi adjustment had been made. The purchase date (after a bit of a delay processing my initial online application) was 6 Jan 2023. The initial $10,000 purchase was for a lifetime annuity with the monthly payment start deferred until age 99 (I initially picked 100, but it turned out that 100 was maximum allowed age for the first payment date, so I had to start receiving payments prior to age 100). The annuity has no spouse benefit and no cash-out option, so it will be (is?) worthless (to me) if I die before 6 Feb 2062. But I still thought it was worth a gamble as my great-aunt lived to 104, my parents are both alive (in their 90s) and two of my grandparents lived to 94. And who knows what medical advances may extend healthy lifespan during the next 40 years? Life expectancy in Australia has been increasing by 3 months per year since the start of the 20th century, although maximal lifespan hasn't been increasing as much (generally maxmimum lifespan seems to be limited to around 110 or so except in very exceptional cases).

Anyhow, the initial monthly payment amount was $3,722.92 ($44,675.04 pa) and is supposed to be indexed annually to increase with the official CPI figure. The new monthly rate is now showing when I log into my online account - as $3,922.99 ($47,075.88 pa) which is in line with the September Quarter 2023 annual cpi rise (5.4%). I had expected it to increase by the December Quarter figure, which just came out as being 4.1%. So I am glad that the increase used the September Quarter figure (which was the latest one available as at the anniversary date).

One positive thing about having a deferred annuity that will provide enough to cover my basic retirement income needs from a fixed age (99) is that I *could* calculate my retirement savings to be fully consumed by that age ( the old "die with zero" retirement spending strategy), without any concern that I might 'outlive' my retirement funds. But it isn't really an issue for me, as I expect the initial minimum withdrawal rate of 4% from age 65 when I move my SMSF account balance into 'pension phase' will be more than enough to cover this (while I am still working I will either recontribute this 'pension' payment into my QSuper account (I want to build it up to $600K by age 70 so I can purchase a 'Lifetime Pension' from them - which should provide around $44,416 (with no spouse benefit option selected), and/or use it to pay off my investment property loan while I am still working. The QSuper Pension isn't indexed to inflation, but does have an annual adjustment based on how the underlying Balanced Investment Fund. The past 10 year average performance has been 7.5%, so this *should* mean an average annual increase of 2.5% over the past ten years. During that period inflation averaged about 2.7%, so the adjustment may be roughly in line with cpi during my retirement.

Basically the $600K Lifetime Pension purchase at age 70 should cover my minimum retirement income needs in perpetuity, so any payments I receive from age 99 onwards from the Deferred Annuity would simply be a bonus. I would have to live to at least 101 to get a decent ROI on the $10K Deferred Annuity 'investment', but the ROI would become very impressive if I lived as long as my great-Aunt ;)

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Another attempt at lifestyle change

One of my most frequently failed goals is to shed the extra weight I've had since high school, and to make regular exercise a part of my daily routine. I was slightly overweight in high school (78kg) and not very active (although I did do some soccer, judo and comp tennis, and did my bronze medallion and bronze cross lifesaving qualifications). I gained weight during university, and then slowly put on more weight over the years, despite being interested in healthy eating (CRON) for longevity and did some occasional activities (SCUBA diving, skiing, hiking etc.), but not part of a daily routine.

There have been several times when I've stuck to my 'healthy eating' plan for 6-12 months and gone regularly to the gym, but overall the weight slowly increased over the years of having a sedentary office job and not much interest in exercise for fun. (having extremely bad eczema getting 'hot and sweaty' was never a fun time for me). My last serious attempt to reach my 'ideal' weight (around 75 kg) and go regularly to the gym three times a week was well underway just before Covid began. Then the combination of occasional 'lock-downs', gym closures and working from home undid all the good work in fairly short order, and it has been a struggle to get back into the routine of sticking to a meal plan and doing regular walking and gym sessions.

So, this week I began a '90 day challenge' via the Pro Physique 'New Year New Start Transformation Challenge'. Paying $50 to join up and posting a (very embarassing) photo for 'day 1' was a good motivation to get started again -- and this time it will have to be for the rest of my life. No more snacks and lollies for me!

Anyhow, my basic 'plan' is:

<1,800 kcals/day -- and using 'intermittent fasting' to not eat after 7pm then delay 'breakfast' until noon. Having a 'brunch' instead of breakfast and lunch helps keep the total daily calories in check. I'm also aiming for >100g protein/day, and <15% fat, but need to replace some more carbs with protein to meet that target.

Do daily walking (around the house) of at least 10K steps/day. Doing a short stint every hour as a break from staring at the computer screen is good - but I just need to remember.

Go to the gym for some weight training 3x per week, and do '5BX' at home on the 'rest' days. I had been going once a week to the gym, so this week I'm adding in a second session, and will start three sessions a week from now on.

I'm expecting to be able to lose about 10kg during the 90 day 'challenge', and should be able to get down to my 'ideal weight' by the end of this year. Looking at my weight over the past 20+ years it is certainly 'doable', but the trick will be to stabilize once I hit my 'ideal weight'. I have a bad habit of going back to 'ad libitum' eating with a lot of junk food and lollies as soon as I stop focussing on tracking my food intake and exercise is minute detail.

ps. There is a correlation between my wt and nw, but correlation is NOT causation! Both are simply due to time/age.

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Why the first $1X is the hardest - further musings

Many people (including myself) had written (or done youtube videos) about why 'the first $100K is the hardest', and Charlie Munger famously said that investing your first one hundred thousand dollars is the most difficult part of creating wealth. It all boils down to the effect of compound interest, which according to Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

But the effect of compound interest isn't restricted to the first $1 million -- it works exactly the same regardless of the order of magnitude (multiples of $10 million, multiples of $100 million, multiples of $1 billions etc.)

I did a quick excel illustration of this, using a fairly typical savings/investment rate of $10,000 pa and an after tax investment return of 7%pa. Of course achieving a 7% return is easier said than done -- using a tax efficient vehicle (eg. superannuation or 401K) is important for 90% of the population aspiring to their first $1 million, and explains why 'the rich' tend to relocate to a 'tax haven'. And to have any hope of getting 7% real returns you would have to be risk tolerant and accept considerable volatility (eg. invest in equities rather than bonds or cash).

The results show that while earnings and savings rate are important while you are accumulating multiples of $100K (or even more so if aiming for multiples of $1K or $10K), income becomes largely irrelevant once you are past your first $1 million (hence the real reason why 'the rich get richer' without seeming to have to do any personal exertion -- unless you are at the very top of a lucrative career (eg. movie star, sports no.1 or similar) once you have a few million invested, your personal income is irrelevant).

The number of years to move from your third million to fourth million is practically the same number of years needed to move from your third $100 million to fourth $100 million, or from your third billion to fourth billion...

It also shows why nearly everyone is on a lifelong struggle to aspire to become a 'millionaire' -- as we are nearly all starting from $0 at age 20ish, and can aim to save and invest 10%-30% of somewhere around average income during our working lives (of 40 or so years). And why anyone born with a 'silver spoon' (eg. a $1M trust fund or seed capital provided by a wealthy family) will either blow the lot or be a financial success even if they do nothing but leave their investment sitting in an index fund and earn enough to pay the bills.

Unfortunately most people either just earn enough to 'get by' (often relying on welfare to make ends meet) and don't save anything at all, and a large percentage of those that do earn more than average income just increase their spending ('lifestyle creep') rather than boost their savings and investment rate. This is why despite the 'magic' of compound interest, the median net worth of households in most countries has 'flat lined' over many decades, rather than increasing exponentially.

It doesn't bode well for 'closing the gap' between the 'top 1%' (or 10%, or 25%) and the 'average' person. Compulsion (such as the Australian Superannuation Guarantee Levy) is about the only way to 'force' most people to accumulate wealth during their working lives -- and most people prefer to have the 'choice' to spend their earnings as they see fit -- even if it results in perpetual financial struggle for most people.

Mathematics is a cruel mistress.

ps. One thing I do find odd is that the exponential growth of wealth seems to break down once you get to billionaire status --rather than continuing to grow exponentially, it seems to transition to a linear growth rate beyond a certain point. I can't imagine that lifestyle/expenses can continue to rise exponentially, so it seems more likely that beyond a certain point it gets more difficult to find suitable investment options (or perhaps the mega-rich just become ultra-conservative and invest mostly in cash and bonds once they have a billion or more?).

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Annual salary review and bonus

Another year, another pay rise lower than inflation, not to mention in comparison to the rise in AWOTE (average wage). I received a 2.5% pay rise, same as last year. Considering inflation was 4.1% in 2023 and 6.6% in 2022 that means my salary has decreased by 5.3% in real terms during the past two years.

Fortunately at the stage of working life I am happy enough to just earn enough to pay the bills while SGL continues to slowly add to my retirement savings, and my investments can be left to (hopefully) slowly grow.

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Investment Bond Asset Allocation Factor Tilt Analysis

Since 'tilting' a vanilla index fund asset allocation to those factors that apparently add excess performance (small vs large market capitalization, values vs growth stocks, etc.) I decided to do a rough estimate of whether or not my current Investment Bond asset allocation has any 'tilt', and if so. is this in the direction(s) that should (theoretically) provide some excess return over the long run.

I looked up each of the four funds using Morningstar, and got the 'style' breakdown from the portfolio risk tab. Using the new weightings that will apply to my asset allocation for future contributions and the annual rebalancing (which will move my IB portfolio to the new asset allocation at the end of May), I calculated the overall 'small vs large' and 'value vs growth' metrics for my chosen asset allocation.

I then looked at the overall allocation to equities (about 90%) and split that into Australia (about 37% of the total allocation to equities) and Global ex-Au (about 63% of the total allocation to equities), to get a 'benchmark' based on suitable indices (the ASX All Ordinaries Index, and the MSCI International (ex Au) Index), and got the style breakdown for each of these indices from Morningstar and calculated the style of a suitable overall benchmark (index) using the 37:63 split.

The results show that my chosen asset allocation is about 50.2% value vs 48.8% growth, compared to the benchmark (index) allocation being about 48.1% value vs 51.9% growth. The figures are not very precise, as Morningstar breaks down the style in Value/Blend/Growth, so for factor comparison I simply assumed that the 'Blend' stocks are 50:50 Value:Growth on average.

The results also show that my IB asset allocation is about 82.4% large vs 16.6% small. compared to the benchmark (weighted index) allocation being about 88.0% large vs 12.0% small. Similar oversimplification of Large/Medium/Small into just Large/Small was done for the purpose of a rough analysis using the available (free) data.

Overall, my chosen Investment Bond asset allocation appears to be 'tilted' about 10% SML (small minus large) and about 5% more towards value.

Looking at the 5-year historic returns for the four funds in my Investment Bond (after fees and taxes), the overall 5-year weighted return for my chosen mix of funds is 8.49% (annual rebalancing might actually improve this slightly over time?).

In comparison the Weighted Benchmark 5-year return after fees was 10.74%. Allowing for the internal tax rate for the Investment Bond being around 25% (it is supposedly slightly less than the headline 30% tax rate, due to some tax optimization efforts - but it is hard to get exact data) this would mean an after fees and taxes 5-year historic return of about 8.06% for the relevant benchmark (index). So, in theory, over the past 5 years my chosen asset allocation has produced about 0.43%pa excess return due to the 'tilt' towards small and value.

An extra 0.4%pa return can have a major impact over the long term due to compounding. It isn't certain that having a 'tilt' towards factors that are believed to provide enhanced returns will pay off in the future -- value stocks have underperformed vs growth stocks over the past decade. But at least my chosen asset allocation is 'tilted' in the (theoretically) 'right' direction ;)

Having some internal gearing included in my asset allocation should also provide a small boost to long term returns (at the expense of having higher volatility). I've seen discussions of back-tested results that claim a portfolio using 5-factor 'tilr' achieved an average of 0.35% excess return over the very long term. It will be interesting to see if my Investment Bond performance over the next 10-20 years outperforms the weighted index (after adjusting for IB tax rates) by 0.3%-0.4% pa. We'll see.

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Fiddling around with my Investment Bond Asset Allocation

I started my Generation Life Investment Bond ('LifeBuilder') investment at the end of 2020, with an initial deposit of only $1,000. The initial investment was processed on 6 Jan 2021, so that is the 'anniversary date' for calculating the '10 year rule' basis for any withdrawals being 'tax free' (although the internal tax rate is around 30%, so this isn't really much of a boon unless your marginal tax rate is over 30%). If you withdraw prior to year 8 the capital gain is taxable (but you will get a 30% tax credit, so it might be worth making an early withdrawal if you tax rate is less than 30%).

Anyhow, my initial investment was allocated equally between the Dimensional World 70/30 Fund and the Vanguard High Growth Portfolio Fund. I made four additional $500 contributions into the account during the first year, so the 'base' investment amount was $3,000. Therefor the maximum investment (without resetting the '10 year' counter) was 125%x$3K = $3,750 for the second year. I made one $500 investment and three lots of $1,080 in the second year to come in just under that limit.

In year three I made one contribution of $1,080 and three contributions of $1,198 to come in just under the max allowed limit. I also decided in June 2023 to switch the investment allocation to include some Perpetual Geared Australian Share Fund, as I wanted to reduce the overall allocation to cash and bonds, and include some internal gearing (although from the performance of the Geared Fund to the benchmark, the fees and interest on borrowed capital makes this a rather dubious proposition). At this point my Asset Allocation within the Investment Bond was 20% Geared Australian Fund, 40% DFA World 70/30 Fund, and 40% Vanguard High Growth Fund.

This year I have setup automatic quarterly contributions of $1,460.62 to exactly hit the maximum contribution target ($5,842.50) for year four. I also did a review of the overall historic performance for my current asset allocation over the past one, three and five years. My actual overall performance to date is currently 5.08% pa, but as I still in the early stages of making contributions, the performance isn't of great concern at this stage. The historic performance of my current asset allocation was 9.16% for the past 12 months, 6.16% for the past three years, and 7.21% for the past five years. All performance figures are after fees and taxes.

As I want to use the Investment Bond to slowly build up a portfolio to form the basis for a long term Family Trust, I am not too concerned about volatility, but more interested in the potential long term average performance. For that reason I decided to tweak the asset allocation once more (hopefully the last time!) and have now changed the allocation to 20% Perpetual Geared Australian Share Fund, 20% Dimensional World 70/30 Portfolio, 25% Vanguard High Growth Portfolio and 35% iShares Wholesale International Equity Index Fund.

The historic return data for this new asset allocation is 11.64% for the past year, 7.71% for past three years, and 8.49% for past five years. Historic performance is not a reliable indicator of future performance, and chasing high returns is always fraught with recency bias, but overall I am happy to have reduced the Cash allocation from 0.47% to 0.30%, the Australian and Global bond allocation from 15.66% to 8.33%, and Australian and Global property exposure from 0.95% to 0.47%. The overall gearing level has remained at 10.3%, and the allocation to Australian and Global Shares has shifted from 43.94% Australian/38.99% International to now be 33.73% Australian/57.17% International.

I'll probably let this allocation remain unchanged for the next 10 or 20 years and see how things are going when I'm retired and using the Investment Bond as a sink to store any excess retirement income. If the asset allocation can average 7% or more after fees and taxes I'll be delighted.

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HEAS for fun and profit

The Home Equity Access Scheme (HEAS) is a Federal Government program runs by Services Australia to provide older Australians who are Pension age (67) or older with voluntary access to a non-taxable loan from the government, secured against unencumbered Australian real estate (usually the family home). It was initially intended to provide Australian pensioners living off the Age Pension with a way to unlock some of the equity in their family home without having to sell the home and downsize, or else take out a commercial reverse mortgage (which often had relatively high costs and interest rates, and could result in someone owing more than their property was worth, if there was a housing market crash). The costs (stamp duty, conveyancing etc) of down-sizing, and the risks (and cost) or taking out a commercial reverse (home equity) loan had encouraged some pensioners to stay in their family home and fund their retirement with no other source of income than the Age Pension. Because the family home (principal residence) is not counted as a financial asset under the Age Pension assets test, there were some instances where an elderly couple would be struggling to managed on the Age Pension income while living in a multi-million dollar property, often with high council rates and other expenses.

Originally introduced in 1985 as the Pension Loan Scheme (PLS) to assist 'assets test' Age Pension recipients, it was expanded in 1997 to include 'income tested' age pensioners, then renamed as HEAS on 1 Jan 2022. It is available to those eligible for the Age Pension (ie. Australian residents aged 67 or more), but does not require qualification to receive any Age Pension (ie. the assets and income tests do not apply). The  maximum loan amount (MLA) is a fairly complex calculation equivalent to an age-based fraction of the value of the property, but essential means you can borrow up to 25% to 35% of the value of the property. The loan can either be taken as one (or two) lumps, and/or via a fortnightly regular loan amount.

Unlike a commercial reverse mortgage, the legal costs are modest (around $500) to establish the loan, the interest rate is very competitive (currently 3.95%pa, vs. a commercial reverse mortgage product currently charging 9.20% from one provider). There is also a 'no negative equity guarantee' on the government-backed HEAS loan -- once the MLA is reached interest will continue to accrue and compound, but even if there is a major drop in home prices, the loan is secured only against the property title. So, even if the loan balance was more than the value of the property when you die, the loan would be cleared entirely from the proceeds of the property sale.

When taking the HEAS loan via fortnightly regular payments, the maximum payment amount is 150% of the Age Pension payment. If you receive the full (or part) Age Pension, the HEAS payment can only 'top up' the total amount of Age Pension and HEAS payment each fortnight to a maximum of 150% of the Age Pension amount. If you choose to take one (or two) lump sum HEAS payments, you can only do one lump sum of one year's worth of 150% of Age Pension each time (ie. each lump sum is for a maximum of 1.5x the annual amount of Age Pension).

While it seems like quite a good scheme (for those wanting to access some of their home equity to provide retirement income), it hasn't been all that popular: by August 2022 it was being utilized by over 6,000 older Australians, compared to only 768 in 2019.

In our case, DW might utilize the HEAS to provide some additional retirement income once she turns 67. I estimate she could receive around $13,000pa from age 67-85, before her HEAS loan balance reached the MLA. This would supplement the SABP pension payments from her self-managed super balance.

I might also utilize the HEAS loan scheme, but I might use the fortnightly amounts to invest via dollar cost averaging (DCA). As the HEAS loan payments are not taxable income, I can start this even while still working. Provided the investment ROI is greater than 3.95% after tax, it should be a fairly low-risk instance of investing using 'other people's money (OPM).

It will be 5 years before DW and I can apply for the HEAS. And I would probably have to clear our home title (currently being used as collateral for the investment apartment mortgage) before we can apply. But this looks like a useful service for self-funded retirees such as ourselves. Of course there is the usual legislative risk that the government could suddenly change (or cancel) the scheme at any time, so it may no longer be available by the time we could make use of it.

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Net Worth - JAN 2024

Chart updated to end of January in sidebar.

Stocks/cash increased $7,615 (+3.27%) to $240,716.

Retirement savings (SMSF etc) increased by $25,722 (1.56%) to $1,678,500 in line with the market trend and our asset allocation.

Est. valuation of our home (my half) decreased by -$1,296 (-0.11%) to $1,138,275. The 'Other real estate' (my 'lake house' and the investment apartment) increased by $1,795 (0.02%) to $2,094,740. So overall the real estate asset class had negligible impact to my NW during the past month.

The outstanding balance of the investment property mortgage remains at $999,993 during the 'interest only' period of the mortgage. Another 4 years remain of the 'interest only' period.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by $582 (1.57%) to $37,656.

Overall, NW increased by $34,418 (0.83%) to $4,197,894 during January.

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