Net Worth: April 2019

The continued strength in the Australian and International share markets during the past month resulted in improved superannuation and  geared share portfolio valuations as at the end of April. Our house price valuation is unchanged as the suburb average sales data for our area had not been updated this month, but as the Sydney Index data from CoreLogic only showed a small fall in average sales prices for homes during April this should not have much impact on the total NW estimate. Overall my NW increased by $47,874 (or 2.11%) during April, not quite reaching a new 'peak NW' value.

I'm currently planning on remaining in my current job (unless I get retrenched - which is always a possibility in the modern workplace) while I get my Financial Planning business up and running, and try to achieve profitability while running it part-time in the evenings and weekends for the next 2-3 years (while finishing of the Master of Financial Planning degree and then possibly the CFP certification and start on a PhD in Financial Planning). Depending on how things look in 3-4 years time, I might either keep running the FP business part-time while keeping my full-time salaried job (until I reach 65 or so), or else see if I can reduce my salaried job to 4 days/week and increase the amount of time devoted to my own 'business'. I might also need to switch to 4 days/week if I commence PhD research part-time after completing the Master of FP degree, as I had found it quite difficult to spend enough time on my astrophysics research degree while also working full-time (one of the reasons I ended up 'dropping out' of my Master/PhD enrolment).

If the FP business is going well I'll probably think about 'retiring' from my salaried job when I around 65 and then continue to run my FP business for a while. How long I do that for will depend on a) if I still want to work (at least part-time) until 70+, b) if the business is profitable (and how profitable), and, most importantly, c) if I'm still healthy enough. One of my great-great-Aunts lived past 100, my father's parents both lived until almost 95, and my parents are both reasonably fit and active as they approach 90, so I have a realistic expectation of being able to continue working past 65. I do need to loose quite a lot of weight and do more exercise though! If the FP business is a going concern, I can probably sell it for around 2-2.5x annual revenues when/if I decide to retire. That might provide an extra 'nest egg' for my retirement, if I can get the business up and running ;)

Subscribe to Enough Wealth. Copyright 2006-2019

Redundancy strikes again

Until yesterday DW and I were working for the same company, having both started there about 18 years ago. Then yesterday DW was 'offered' a redundancy package. Not much choice in the matter as it was presented as a fait accompli, with her current role being no longer required, and there apparently no other 'fit' found for her. At least the redundancy package was 'generous', adding up to almost 2 years worth of salary and DW was happy enough to sign and clear out her desk the same day. Personally I'm not overly impressed by the 'generosity' of the package, as the 3 weeks x 10 years of service (the maximum counted for redundancy payouts in this state) is pretty much a requirement under state laws, and the payout for unused accumulated annual and long service leave is also mandatory. And the four weeks pay in lieu of 'notice' is also fairly standard, as very few companies these days want workers to stay at work during the required 'notice' period, as they are afraid of disgruntled, laid-off employees getting up to mischief or their presence (dead man walking) being 'bad for morale'. All-in-all the only generous aspect was a couple of extra weeks payment 'ex gratia'.

As DS2 is starting school at his new 'OC' school today, DW is quite happy to be out of work and able to meet him after school. She isn't sure if she will do a TAFE course, have a go at starting up a home business, or just spend more time gardening. Whether or not she 'needs' to get another job will largely depend on whether or not the rental income from her 'off-the-plan' investment unit turns out to be sufficient to cover the interest payments on the 'portfolio loan' (against our home equity) that will be used to pay for the unit upon settlement this coming May-June. As I pay all the household bills her lack of income won't have any immediate impact. In the longer term, if she doesn't get another job she will end up not having as much as expected in her superannuation account to fund her retirement, and she also won't be able to pay down much (any) of the loan balance. If Sydney real estate prices continue to rise over the next decade or so that won't be much of an issue, but if there is a slump in prices she might end up owning a home unit that is worth less than her mortgage...

Of course DW getting laid off immediately made me wonder how secure my own position at the company is - but there isn't really much point worrying about it unless/until it happens. At the moment my role seems fairly secure, but that can easily change, often as a result of decisions made 'behind closed doors' that one is blissfully unaware of until the axe falls. It did prompt me to do a quick spreadsheet model of how I might be tracking with regards to funding my retirement if I was laid off tomorrow, and comparing it with the likely situation if I was laid of next year, or the year after, and so one...

It turns out that, making some reasonable assumptions regarding ongoing contributions rates while I'm still working, and the likely future rates of taxation and earnings on our superannuation investments (I've taken the average rate of return for the past ten years as a 'guesstimate' of possible future returns, given that this is lower than average rate of return for the past three years, or over the entire period of available data), I could 'retire' tomorrow and get a sustainable retirement income of around 80% of my current 'take-home pay' if I sold up my stock portfolio, paid off the margin loans, and added the net amount to my current superannuation balance. This 'sustainable' model assumed that I had to re-contribute around 2% of the fund value every year to allow for inflation, and that the balance of my superannuation account would be run down until there was no residual balance at age 100. (While that may be an optimistic lifespan, my paternal grandparents both lived until 94, and my parents are both alive and well and in their 80s). It also assumed a low rate of tax on superannuation 'pension' payments, which of course is subject to legislative risk.

If I do manage to keep my job for at least another couple of years my sustainable retirement income rises to around 100% of my current 'take-home' pay rate, and working any longer would mean that either a) I can fund a higher rate of 'pension' payments out of my superannuation during retirement, or b) I will be likely to end up with some residual balance, or c) my desired rate of pension will be sustainable even if investment returns are worse than expected, or if there are a couple of years of poor investment performance immediately after I 'retire'.

Of course even if I get laid off tomorrow I could probably find some gainful employment until my intended retirement age - either at some other job (probably involving more work for less pay), or possibly by getting qualified as a financial planner and having a go at starting my own financial planning business...

Subscribe to Enough Wealth. Copyright 2006-2017

Adapting William J. Bernstein's book "If You Can" for Young Australians

After dabbling with stock picking and then fund/fund manager picking (and not doing very well at either), I eventually arrived at the same sort of conclusions as William J. Bernstein - pick a suitable asset allocation and invest via low-cost 'index' funds. He recently published a nice small volume of investment advice for 'Millennials', but it is a bit too 'US-centric' (eg. 401K plans and so on) to be immediately applied by young Australian investors. With that in mind, I decided to have a look at how the principles expressed in Bernstein's book could be employed by my sons when they start a career and begin to think about saving and investing.

In a nut-shell, Bernstein's advice for (US) Millennials is simply to:
* save 15% of your (pre-tax) salary annually, and invest it.
* invest it in equal proportions in: domestic stock market index fund, international stock market index fund, and domestic bond market index fund.
* rebalance each year to maintain equal proportions in these three asset classes.

For Australians, the tax system provides substantial benefits for investing inside superannuation. And 9.5% of salary is directed automatically intro superannuation via the 'SGL' (superannuation guarantee levy) for most employees. This can be 'topped up' to the 15% target by arranging to have another 5.5% (or more) of salary directed into superannuation via 'salary sacrifice' (bearing in mind the $30K pa 'cap' on concessionaly taxed contributions (SGL+SS))

However, for Australians, the plan's assumption that half of retirement income needs will eventually come from 'social security' isn't correct, as our 'aged pension' system is both means and assets tested (and while the US social security system in underfunded, our aged pension system is completely unfunded - relying on current tax payers to pay for the aged pensions of retirees -- not a great situation given the aging population and shrinking proportion of taypers:retirees). So perhaps the required rate of savings for Australian Millennials needs to be a bit closer to 30% of salary than 15%. (But this isn't quite as bad as it seems, given that US workers also have around 7.65% deducted for social security and medicare).

Now, in terms of how to invest those savings in the proportions suggested by Bernstein, one could invest in the Vanguard 'growth' index fund, which has the following 'target' (strategic) asset allocation:

35% domestic stocks/property:
Vanguard Australian Shares Index Fund (Wholesale) 31.0%
Vanguard Australian Property Securities Index Fund (Wholesale) 4.0%
35% international stocks/property:
Vanguard International Shares Index Fund (Wholesale) 24.0%
Vanguard International Property Securities Index Fund (Hedged) (Wholesale) 4.0%
Vanguard International Small Companies Index Fund (Wholesale) 3.5%
Vanguard Emerging Markets Shares Index Fund (Wholesale) 3.5%
30% fixed interest:
Vanguard Australian Fixed Interest Index Fund (Wholesale) 12.0%
Vanguard International Fixed Interest Index Fund (Hedged) (Wholesale) 12.0%
Vanguard International Credit Securities Index Fund (Hedged) (Wholesale) 6.0%

nb. Fees: 0.90% on first $50K, 0.60% on next $50K, then 0.35% on balance over $100K.

This is fairly close to the recommended three-way equal split, and would not require any rebalancing as the fund automatically maintains the asset allocation within a fairly tight band. Some of the growth asset allocation is into 'property' rather than shares, but over the long term that should not have much impact on overall return, and may add some additional diversification benefit.

Alternatively, Australian investors could invest in the relevant Vanguard listed ETFs to get the desired asset allocation. Some examples:
VGS: MSCI World ex-Australia
VTS: CRSP US Total Market Index
VUE: FTSE All-World ex US Index
VAF: Bloomberg AusBond Bank Bill Index
VSO: MSCI Australian Shares Small Cap Index
VLC: MSCI AUstralian Shares Large Cap Index
VAS: S&P/ASX 300 Index

However, while the management costs are low (0.05% - 0.30% pa), there may also be a cost to purchase the ETFs via a broker (eg. CommSec), which would rule out making multiple, small purchases on a regular basis. One disincentive to moving out of the 'growth' index fund and into a mixture of ETFs is that some capital gains might be realized (although the rate of capital gains tax is fairly low within a SMSF).

Once DS1 is old enough to become a member/trustee of our SMSF, I'll add him to our SMSF and arrange for his current 'retail' superannuation fund balance to be 'rolled over' into our SMSF. Our SMSF doesn't quite have the asset allocation recommended by Bernstein - it has around 4% invested in cash (in an ANZ V2Plus account paying a silly 0.75%) to provide a 'float' for any SMSF tax bills, and the rest is invested in the Vanguard Lifestrategy 'High Growth' fund. The fund is around 90% invested in 'growth' assets, and only 10% invested in fixed interest. By the time DS1 finishes uni (he is only doing his HSC this year, and plans on doing a 5-year 'double degree' and possible then a 1.5 year masters) and has substantial superannuation contributions flowing into our SMSF, both DW and I will be close to retirement, so we may review the SMSF asset allocation at that time. Once the bulk of the SMSF is in 'pension mode' any capital gains tax implications arising from moving out of one Vanguard Fund into another will be insignificant.

Subscribe to Enough Wealth. Copyright 2006-2017

Children's Superannuation: Retirement Savings Account (RSA) Comparison - AMP vs CommBank

I opened two retirement savings accounts for DS1 several years ago, one when he was born, and the the second when he started earning money doing a paper round.

The first retirement account was a 'Child Super' account that allowed parents or grandparents to contribute up to $1,000 each year into a superannuation account for their child. These accounts were never very popular as there was no tax deduction for the amounts contributed, so the only real benefit of a 'Child Super' account is to avoid the incredibly high tax rates (around 60%) applied to children's unearned income (eg. interest on bank savings accounts where the money came from gifts or pocket money) once it exceeded a threshold (of around $2,000 pa after applying the low income tax rebate). Earning within a 'Child Super' account are taxed at the usual concessional superannuation tax rate of 15%. I opened the 'Child Super' account with Macquarie, and at least it offers a good choice of investment options (eg. Australian and Overseas share funds). Once DS1 reaches 18 years of age this account will transition to a normal "personal" superannuation account (I may add him as a member of our SMSF when he turns 18. Under 18 it's harder for children to be members of SMSFs as they can't be a Trustee).

Once DS1 started having 'earned income' (from his paper round - deposited into a separate savings account to keep it separate from his pocket money and any money gifts) I opened a second "personal" superannuation account for him, so he could benefit from the 1.5:1 government co-contribution on personal, undeducted superannuation contributions (ie. when he deposited $1000 into super each year he received a $1,500 "co-contribution" from the ATO). Finding a suitable superannuation account was a bit difficult - Child Super' accounts aren't eligible for the co-contribution (as they don't accept contributions from the child themselves), and most "personal" superannuation accounts required the applicant to be over 18 years of age. At the time, the only account I could find for DS1 that didn't require applicants to be over 18 years old was the AMP Retirement Savings Account (RSA) (at the time they didn't require DOB information on the application form, although they later did apply an incorrect "default" DOB and I had to send in a copy of his birth certificate to get the data fixed). This worked well, with DS1 received the co-contribution "match" for FY04/05 and FY05/06 (that year the budget even gave a second "bonus" co-contribution of $1,500). DS1 didn't receive the co-contribution for FY 06/07 (once he had stopped his paper round), as the Superannuation co-contribution rules at that time required having income from an employer to be eligible (ie. the rules excluded the self-employed). The rules were change the following year so that any income earner (including self-employed) under the age of 75 who makes an undeducted superannuation contribution is now entitled to receive the co-contribution (although it's been reduced to $1,000 this financial year). DS1 received the $1500 co-contribution in DEc 08 for the FY07/08 tax return he lodged in July 08, and I expect he'll receive the $1,000 co-contribution for FY08/09 later this year...


However, since I opened his AMP RSA account interest rates have dropped considerably, and the rates on offer from the AMP are now very low:

AMP RSA:
Balance________________ Int Rate
<$1,000________________ 0.00%
$1,000 - $2,500________ 0.15%
$2,500 - $10,000_______ 1.15%
$10,000 - $50,000______ 1.40%
>$50,000_______________ 1.60%

The 0% rate is obviously set to allow for the Superannuation rules that prohibit charging any fees on Superannuation account balances below $1,000, and all the rates are net of MER (estimated at 1.9%).

I recently received a PDS (Product Disclosure Statement) for a new RSA on offer from Commonwealth Bank. It looks pretty good for anyone looking to setup a superannuation for a child or teen wanting to save something towards their retirement (and possibly get help from the government co-contribution, although the next Labor government budget may change that). There is a flat annual admin fee of $25, but only when the account balance is over $1,000. And the interest rates on offer are much better than the AMP rates, especially for balances under $2,500:

Commbank RSA:
Balance________________ Int Rate
<$1,000________________ 1.90%
$1,000 - $5,000________ 2.00%
$5,000 - $10,000_______ 2.15%
$10,000 - $50,000______ 2.30%
>$50,000_______________ 2.60%

On DS1's current RSA balance of around $12,000 he would earn an extra $83pa in interest with the Commbank RSA.

The Commbank RSA also offers a second investment option within the RSA account - fixed rate term deposits for amounts over $5,000:

Commbank RSA term deposits (min $5,000):
Term___________________ Int Rate
1 year_________________ 2.40%
2 years________________ 3.40%
3 years________________ 4.50%
4 years________________ 4.95%
5 years________________ 5.20%

Although variable interest rates are likely to start rising in 2010, and may go up considerably if inflation takes hold post-GFC, the term deposit rates look attractive for a government-guaranteed investment sitting in a low-tax (15%) environment.

As the minimum amount to open a CommBank RSA is just $1, I'm going to open an account for DS1 in preparation for rolling over his AMP RSA account as soon as this year's co-contribution has been processed.

This graph highlights the difference in net interest rate on offer from AMP and CommBank:

Subscribe to Enough Wealth. Copyright 2006-2009

Revised my retirement projections

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

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

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

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



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

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

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

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

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

Subscribe to Enough Wealth. Copyright 2006-2008

Wealthy Pensioners to Pay the Price

As reported by the SMH and elsewhere, it appears likely that eligibility conditions to receive the pension in Australia will be tightened in order to cover the cost of raise the rate for Single pensioners to 67% of the Couples Pension rate (it's currently 50%).

The driver for these changes are, as usual with a Labor government in power, "Equity" considerations. The current pension assets and income tests mean that some relatively wealthy seniors are being paid a pension. Labor is firmly against the idea of "middle class welfare".

Ignoring the fact that the "wealthy pensioners" are the same cohort that probably paid nearly all of the taxes that provided the pension to the previous generation of pensioners, I have to question the fairness of any "equity" argument that only looks at the current snapshot of people's situation.

A moral, compassionate society should obviously care for the paupers, widows and orphans, sick and demented that would otherwise end up starving and homeless. However, the provision of pensions is extended to a much wider group of people, raising the question of who actually 'deserves' to get a pension. As is often the case, equality of opportunity is being confused with equality of outcome.

Consider the hypothetical cases of Bob and Bert, two 70-year old retired bus drivers. Both are married, have two grown up kids, and rely on the pension for their retirement income. However, Bert is living in rented accommodation, and has a much lower standard of living (less disposable income) than Bob, who is living in a modest house with no mortgage. The value of Bob's home is currently not included in the assets pension test, but that may soon change, severely reducing or possibly eliminating his pension income.

However, is this really fair? Bob worked to 45 years, paid his taxes, and lived a fairly frugal lifestyle so he could afford the mortgage repayments on his family home. At the same time, Bert has always rented his accommodation, and enjoyed consuming his higher disposable income while he was working. Although they had exactly the same take-home pay, Bert was dining out and going to the theatre each week, while Bob was drinking beer in front of the TV and worrying about his mortgage repayments. For some reason, Labor thinks it's "inequitable" that Bob can now afford to dine out and go to the theatre using his pension income, while most of Bert's pension income is being spent on his rent.

To my mind, since both Bob and Bert earned the same income and paid the same amount of taxes over their working lives, they are both equally entitled to receive a pension. Having blown your income at the race track or down the pub very Friday night should not make someone more 'deserving' of a pension.

Australia already has moved some way towards a self-funded retirement system, with compulsory superannuation ensuring that in future generations the Bert's and Bob's of the world will have both accumulated similar retirement savings and neither will require (or get) a government (tax-payer funded) pension. In the meantime, I can't see the justification to take money out of Bob's pocket and give it to Bert.

Subscribe to Enough Wealth. Copyright 2006-2008

Annual Self-Managed Super Fund Paperwork lodged

I finally got around to scanning all the paperwork from ANZ bank and Vanguard regarding our SMSF investments during 2007-8 and emailing a zip file (2MB) containing the 52 files to our SMSF administrator. ESuperfund.com does all the annual compliance, tax return and audit paperwork for a flat $699 annual fee, and they have electronic read-only access to most of our SMSF accounts. However, the Trustees (DW and myself) are supposed to lodge a "checklist" by 30 September to help in the preparation of the SMSF's tax return (due by 31 October). Because I'd been overseas on holiday during August and September, I only just got around to completing the "checklist". The only information that eSuperfund probably needs to complete the tax return was the spreadsheet detailing what each contribution into the SMSF bank account was for. Because DW and I work for the same employer and are both making "salary sacrifice" contributions into our SMSF, the monthly employer contributions for both DW and myself were deposited into the SMSF bank account in a single transaction each time. Hopefully I'll get a copy of the SMSF tax return to check before it is lodged with the ATO at the end of this month.

It will be interesting to see if the annual member statements provide any "annual return" calculations, or just opening and closing balances and total contributions and earnings for 2007-8 (negative of course!). It's been a pretty bad year for our retirement savings. We "rolled over" about $380,000 (combined) into our SMSF last year, but the current value is just over $300,000 despite 9% of our salary going into the fund via the Superannuation Guarantee Levy, plus additional contributions via "salary sacrifice". Ah well, I've still got another 20 years or so to rebuild our retirement nest egg. Hopefully the "High Growth" fund will perform well over the longer term, and we don't get laid off in the coming recession...

Subscribe to Enough Wealth. Copyright 2006-2008

Should I count on an inheritance in my reitrement plans?

My parents gave me a copy of their Will today. They'd previously discussed their intentions with me, so the contents came as no surprise. They expect to have enough capital to provide a reasonably comfortable reitrement income, and are leaving me a small lakeside, rural property. They've owned that property since I was a boy, and I'd like to retire there. Living there and being able to rent out our current home would also provide extra income during our retirement, but I'll continue saving for our retirement without taking into account any inheritance. My parents could easily end up needing extra money during retirement, so I don't think it's wise to include an inheritance in my financial plans.

Subscribe to Enough Wealth. Copyright 2006-2008

Are you a super saver?

Can I Get Rich on a Salary posted about the story of Shawn Larsen who is 47 years old and planning to retire in a couple of years at age 50. He has accumulated assets of $300K in his retirement fund, $680K in mutual funds, plus he has some equity in his home (although it doesn't say how much, just that he's still paying off a mortgage. The average house price in the US would suggest he may have $200,000 or so in home equity). He also will get a $30Kpa pension, which is equivalent to having another $750,000 in retirement funds (assuming a conservative 4%pa withdrawal rate). So, his total deemed NW might be around $2m, which is pretty impressive for a 47 year old wage earner.

The Money article and Can I Get Rich appear to think that saving 50% of a $180,000pa salary is an amazing feat, but I don't think it's that much of an achievement for someone on a relatively generous salary - especially for a single guy with no dependents. It may indeed be extraordinary (after all, a lot of US and Australian citizens his age would have a negative or negligible net worth, and have a negative savings rate due to consumer debt burdens), but it isn't all that hard to achieve if your maintain a modest, but comfortable, lifestyle.

For example, I currently save $30Kpa out of my salary (35% of gross), or if you include the 9% compulsory employer retirement contribution (SGL) that we have in Australia, 40% of gross. And I'm supporting a family and paying off a mortgage on that salary. As my salary has increased over the years I've slowly increased the proportion I save, and we live comfortably enough now that any future raises above inflation could be added straight onto my savings.

DW currently works 2 days per week, and is saving 53% of her pre-tax salary into her retirement account, and another 35% goes towards our home loan repayments (which we split 50:50). That doesn't leave her with much "play" money, but since I pay the utilities, food, kids school expenses etc. she can still afford the odd indulgence.

So, if I was earning an extra $90,000+ on top of my current salary (like Mr Larsen) I'd be adding it all to our investments. It's very hard to save and invest if you're in a low paid job, but it shouldn't be a stretch for anyone earning above the average wage.

Copyright Enough Wealth 2008

Can I afford to retire?

Well, yes and no ;) I ran some numbers through Excel to see what situation I'd be in if I retired today, compared to "early" retirement when I turn 56, "normal" retirement at age 65, or "late" retirement at age 71. I made some fairly simplistic assumptions as follows:

start with my current net worth,
an assumed ROI of 8% (after tax - a large chunk of NW is tax-sheltered in SMSF or family home)
an assumed inflation rate of 3%
constant current salary and savings rate (not adjusted for inflation, so probably conservative) retirement income of 75% of my current pre-tax income

If I quit paid employment tomorrow, my investments (excluding my family home and minus a lump sum to pay off the home mortgage) would yield a net income of around $25,000pa (using a "sustainable" 4% pension rate), or $50,000 (using a withdrawal rate of 8%, which invokes longevity risk and would leave no estate for my heirs). Probably a good thing that I'm not planning on quitting tomorrow, and that I have adequate Death, TPD and loss of income insurance in place ;)

If I choose to "retire" (stopped all paid employment) at the relatively young age of 56 I should be able to consume my retirement savings at the rate of 75% of my current pre-tax salary (adjusted for inflation) indefinitely, and may have an estate of around $6m (in today's dollars) to leave the kids (and grand kids) by age 95. I'm probably being overly optimistic with the life expectancy assumption - although I had two grandparents live until 94, the average of all four grandparents was 82, which happens to be mid-way between my current age and the world's longest verified lifespan. Then again, my parents are both quite healthy in their mid-70's, and medical science is pushing out life span's in the developed world by around 2 years per decade at the moment, so it's not completely unfeasible.

If I "retire" at the standard age of 65 I should be able to consume my retirement savings at the rate of 75% of my current pre-tax salary (adjusted for inflation) indefinitely, and may have an estate of almost $10m (in today's dollars) to leave the kids (and grand kids) by age 95.

I was somewhat surprised to find that delaying retirement to 71 and consuming my retirement savings at the same rate of 75% of my current pre-tax salary (adjusted for inflation) indefinitely, would only increase the residual estate to around $11.5m (in today's dollars) by age 95. I think this is because my retirement at 65 would only require a pension rate slightly above 3% of my investible net worth, so delaying retirement beyond 65 wouldn't have a huge impact on my estate.

I haven't included any possible inheritances in my calculations, as I think my parents and other elderly relatives are quite entitled to spend all their money on themselves, and may wish to leave any bequests to charities rather than their relatives.



Copyright Enough Wealth 2008

Planning a second (or third) Career for the over-50s

These days very few people can be sure of having a job for life, and many people will change careers many times while working full time. Changing careers can be tough at any age, but it can be especially challenging for 'mature' workers. While early retirement is the dream of some people, it could turn into a nightmare if you can't really afford to stop working and have to try to find a new job in your fifties. I'm currently studying towards a Master of IT degree that is relevant to my current work, but I'm also doing a Diploma of Financial Services (Financial Planning) and a Bachelor of Teaching degree. These qualifications would be useful if I decide to change careers and become a school teacher or financial adviser. Both of fields seem interesting to me and offer a chance to reduce working hours (and commuting time) somewhat, without too great a cut in pay compared to my current job. It was interesting to see that both these jobs are in the "top 5" listed for the over-50's by CNN Money! The financial adviser apparently has a median salary of around $67,000 and rates a B+ for "meaning" and flexible hours. The public school teacher has a median salary around $47,000 (about the same as the starting salary for a 4-year trained teacher in NSW) and gets a rating of A- for "meaning" and a B for flexible (the long summer vacation helps).

The full list of "top 20" jobs for over-50s according to CNN Money is:
1. Non-profit executive
2. Patient Representative
3. Celebrant
4. Financial Advisor
5. Public School Teacher
6. Residential Real Estate Appraiser
7. College Professor
8. Day Care Centre Teacher
9. IRA Specialist (Tax preparer)
10. Labour Relations Manager
11. Leasing Consultant
12. Lobbyist
13. Medical Records Coding Technician
14. Pension Administrator
15. Religious Educator
16. Department Retail Sales Manager
17. Retail Sales Staff
18. Staff Nurse
19. Tax Accountant
20. Tutor

My current position is interesting enough and sufficiently well-remunerated for me to stick with it for several more years, but I can't see myself working for the same company until I'm 65. So I have a good opportunity to get qualified for other careers that interest me while still working full-time. I can even "try out" teaching via the month-long prac teaching sessions which I'll squeeze into my annual leave from my current job during the next couple of years.


Copyright Enough Wealth 2007

Reverse Mortgages can be a Wealth Hazard.

A recent phenomena in the finance industry has been the increased marketing and availability of "reverse mortgage" products for retirees to access the equity tied up in their family home, without having to sell their home. However, such loans are poorly understood by many retirees. A recent ASIC survey found that almost half of those with a reverse mortgage product did not know how much the loan would eventually cost. As there are around 31,500 such loans at present in Australia, worth around $1.8 billion, this could become a big issue. Retirees often have never had access to such a large lump sum of cash before, and can be in danger of spending it all and then having to radically cut their expenses when the money runs out. The loans are not particularly cheap (around 1% more than the standard variable home loan rate) and because the lender is taking on the longevity risk (Reverse mortgages are a form of equity release that allow retirees who own their own home to borrow against the property but defer all repayments until they die or the home is sold) the loan is often fairly small compared to the value of the property. If the lump sum is poorly invested or rapidly spent then the wealth tied up in the family home can easily be consumed by accumulating loan interest long after the initial loan has been spent.

For example, one retired man in his 70s spent more than $135,000 he obtained through a reverse mortgage in only two and a half years."I've been in business all my life and never had to budget. I might have to budget now.", Another woman borrowed $50,000 "in anticipation of needing it over the next three to five years", but then invested the money in a term deposit at a lower interest rate than the loan was charged. Other retirees were recently encouraged by financial planners (who were getting commissions of up to 10%) to take out home equity loans and invest the proceeds in mezzanine financing products that offered double-digit returns. The recent collapses of Westpoint property group, Fincorp and Australian Capital Reserve left such investors with nothing. While a reverse mortgage can be a good way to provide retirees with some extra income without having to sell their only significant asset (their house), it can be dangerous given the relatively poor financial literacy of the retirees being sold these products.

Copyright Enough Wealth 2007

How much would I need to retire tomorrow?

I currently earn around $84K + 9% superannuation, but could "make do" with much less, which is why I can afford to think about changing careers to become a high school science teacher (with a starting salary around $50K) in a couple of years time (assuming I finish my GradDipEd course!). But what if I decided to retire tomorrow (or had to, due to a disability)? What lump sum would I need to be able to provide this level of income until I reach 60? A common "rule of thumb" is to allow a draw down of 4% pa from a lump sum, but this assumes you want the funds to last indefinitely. Assuming a total return of around 10%, 3% inflation and to provide an annual income of $50K (adjusted for inflation) for 14 years it turns out that a lump sum of around $450K would be sufficient. This is about what I expected -for example my life insurance and TPD insurance is for $400K. In fact my investments outside of my home and retirement account are more than this, so I could retire tomorrow if I suddenly had the urge, but this would mean a fairly frugal retirement, with no spare for "luxuries" or unexpected medical needs, and there wouldn't be much of an inheritance for the kids. But it does give me some peace of mind knowing that if I suddenly lost my job or quit I could afford to take my time looking for a new position.



Copyright Enough Wealth 2007

What If You Make Maximum Retirement Contributions For 20, 30, 40 Years? (Superannuation)

No Credit Needed did an interesting post regarding what amounts can be accumulated by Americans maxing out their retirement contributions. In this post I show similar calculations from the Australian perspective, “What If… You Make Maximum Retirement Contributions For 20, 30 or 40 Years?”

Notes about the charts -

Annual contributions are held steady at 2008 maximums ($50,000 in tax-deducted contributions [employer SGL contributions and salary sacrifice], and $150,000 in undeducted contribution]
Returns are annual and do not fluctuate
Interest is calculated using year-end-balance
I used percentages between 6% and 14% and a span of 1 to 40 years.
Tax on tax-deducted contributions is 15%. Tax on interest is calculated at 15% (it would be lower for most people as capital gains are taxed at 10% within superannuation during accumulation phase, and 0% if realised during in pension mode).



Copyright Enough Wealth 2007

Effect of Retirement Age on Retirement Savings

How would early (or delayed) retirement affect your retirement savings and retirement income? I had a play around with the figures for my situation, and it suggests that I could retire "early" at 57, assuming I keep adding to my retirement savings at the planned rate and achieve the expected investment returns. However, I'm not sure that I would retire early just because I could afford to - I'm contemplating changing career (again) in a few years time to try my hand as a high school science teacher. If that role suits me I'll keep working until it's no longer enjoyable.

Looking at the figures, if I retire at 57 I'd probably run out of funds in my SMSF account sometime in my mid 80's. That wouldn't really be a problem as I also would have some other stock and real estate investments to draw upon if necessary.

If I continue working until "normal" retirement age of 65 I would probably never exhaust the SMSF, although the tax law requires a pension payment rate that would shift all the funds out of that account before I hit 100, so the extra pension amounts would be reinvested outside the superannuation system.

If I change careers and enjoy teaching enough to keep working until 70 (a nice thought, but modern teaching isn't quite like "Goodbye, Mr Chips") I'd end up with around $3.4m balance (in today's $) still unused at age 94 (I've used 94 as the limit to my projections as my paternal grandparent's lived to that age).

The calculations are based on the following assumptions:
current SMSF balance: $330,000
annual retirement savings: $19,250 (9% SGL + 13% salary sacrifice)
real ROI in SMSF account: 5%
SMSF pension in retirement (PV): $52,000



Copyright Enough Wealth 2007

Retirement Age

There seems to be something afoot regarding the "retirement age" in Australia at the moment. On the news there was mention of a "push" towards increasing the retirement age, and in today's Sydney Morning Herald there was an article by Ross Gittins espousing the virtues of gradually increasing the age at which the aged pension becomes available from 65 to 67 (or 68). There is some validity to the argument that since people are living considerably longer than when the "normal" retirement age was set at 65, it could be increased somewhat. It's also true the people are generally healthier in their elder years - if 40 is the new 30, then 70 must be the new 60. And increasing the retirement age will certainly help reduce the impact of the aging population on overall workforce numbers and the ratio of tax payers to state funded retirees.

The question of equity doesn't seem to have received much attention - those who are in a position to become "self-funded" retirees would still be able to retire at 65, while those relying entirely on the aged pension will be unable to retire until they reach the official retirement age. However, I don't think this is a huge issue - while equity of opportunity is an important principle, this is often confused with equity of outcome. If person A saves diligently for their retirement while person B doesn't save, there's no reason person A shouldn't benefit from this "deferred gratification" when they get to 65. Anyhow, this issue already exists to some extent with the aged pension cutting in at 65 - affluent workers are often in a position to take "early retirement" before they reach that age. Then again, even those on modest wage will have accumulated a reasonable superannuation balance by the time they reach preservation age (currently 55 for those born before 1 July 1960, and increasing with DOB until it hits 60). This means that many workers of relatively modest means will be able to retire at age 60, and consume their superannuation savings by the time they reach 67 or 68 and can move onto the aged pension.

Copyright Enough Wealth 2007

Planning Issues: Life Expectancy

One of the unknown variables that needs to be estimate when formulated any plans for retirement funding is "how long will you live"? Although I think outliving your funds is less of a problem than dying before you reach retirement age, it is still good to have some idea of how long your retirement is likely to last. After reading a post on this topic by My Wealth Builder I plugged my current situation into the life expectancy calculator and got back an answer of 83 years. Not too bad for a male, but largely due to having grandparents who lived to 94, not smoking and being in fairly good health. If I change my answer to include regular aerobic exercise, losing my excess weight (the only one of my 2007 goals that is way behind target so far this year!), and being a "happy" person I can improve this figure to 92 years of age... Time to break out the tracksuit and take fruit to lunch for snacks.

Copyright Enough Wealth 2007

Retirement Myths, Lies and Traps

An interesting counterpoint to recent reports that people may be saving too much for retirement, is this video report that suggests that retirees may need a larger percent of their working salary as retirement income than is generally accepted. Personally I think you're better off doing a "retirement budget" that suits your planned retirement lifestyle and see how much retirement income this would require.

Copyright Enough Wealth 2007

SMSF - the Devil is in the Details

No wonder they call it "Self-managed". Even with the fund administration, auditing and tax returns out-sourced to eSuperFund there is a fair bit of "paper warfare" involved (at least initially).

Investing our SMSF money into the Vanguard fund is turning out to be less simple than I had initially thought. Just when I was about to apply to invest in the Vanguard Fund online through our SMSF's e*Trade account, I noticed in the fine print that e*Trade would be charging an annual 0.66% "portfolio fee" for managed fund investments. This makes a mockery of our attempt to minimise fees and charges using a SMSF, and would have come as a big shock at the end of the year if I had skimmed over that part of the "fine print". Managed fund investments made via e*Trade would be at the "wholesale" fund management rate, but this isn't a significant benefit when investing in the Vanguard Fund as the retail fees are quite low anyhow (not as low as in the US, but that's a whole other story).

For example;

Investing via e*Trade Managed Fund Service:
Amount     Vanguard Fee  e*Trade       DOLLAR
Invested   Wholesale     Porfolio Fee  COST pa
 $50,000   0.37%         0.66%           $515.00
$100,000   0.37%         0.66%         $1,030.00
$200,000   0.37%         0.66%/0.55%*  $1,950.00
$500,000   0.37%         0.66%/0.55%*  $4,710.00
*e*trade fee is 0.66% on amounts up to $100,000
and 0.55% on amounts from 100-500K, then 0.5% on
amounts above $500K. Vanguard Wholesale fee via
e*Trade is 0.37% on all amounts invested.

Investing via direct application to Vanguard
(application lodged via eSuperFund):
Amount     Vanguard Fee  DOLLAR
Invested   Retail        COST pa
 $50,000   0.90%           $450.00
$100,000   0.775%**        $775.00
$200,000   0.5625%**     $1,125.00
$500,000   0.43%**       $2,150.00
**Vanguard Retail fee is 0.90% on amounts
up to $50,000 and 0.60% on amounts from
$50-$100K, then 0.35% on amounts above $100K.

So we could have ended up paying a couple of thousand dollars in extra fees each year if I hadn't been paying attention.
The other problem with investing via e*Trade is that you can't choose automatic reinvestment of distributions, and any additional investments in the same fund have to be made through the same process.

Investing directly by sending an application to eSuperFund should allow the initial investment to be made direct from the SMSF via BPay. The automatic reinvestment of distributions is possible, and I should be able to 'set and forget' an automatic additional investment by BPay each month.

The other bonus of investing directly (via eSuperFund) is that eSuperFund will have electronic 'read only' access to the Vanguard account, so I won't have to forward a hardcopy of the annual fund report.

The other wrinkle I found out when I tried to transfer the $300,000 back from our SMSF investment sub-account into the main account was that the ANZ bank hadn't correctly setup the accounts. Our 100-pt ID check data was confirmed for the main V2 bank account, but hadn't been set for the investment sub-account. This meant that while I had been able to transfer funds INTO the investment account, I wasn't able to transfer the funds back OUT into the main account electronically! Luckily this won't matter until the Vanguard application form has been processed and I need to make the BPay funds transfer for the investment.

Finally, it also turns out that when eSuperFund said that the normal $5,000 account balance minimum for an ANZ V2 account was "waived" in actually just means that we get paid interest on balances below $5,000. The ANZ bank system is still setup so that the "available balance" is always $5,000 less than the account balance. This means that there will always be $5,000 sitting in the ANZ V2 account that can't be invested into the Vanguard Fund or other investments (such as direct share purchases through e*Trade). It's not a huge problem since the $5K will be earning interest, but it still means an extra 1.5% of our SMSF balance is unavoidably allocated to "CASH" on top of whatever allocation to cash exists within the Vanguard High-growth fund (around 4%).

Copyright Enough Wealth 2007

Decisions, decisions

The funds in our SMSF bank account have finally cleared, so I was able to transfer $330K into the investment sub-account which is used to settle any e*Trade transactions. I can now apply via e*Trade to make our initial investment into the Vanguard LifeStrategy High-Growth Fund. Of course I don't know if the unit prices will go up from here in the short term or maybe drop even further, but at least I can be 100% sure that the current price is around 10% off its peak from earlier in the year, and that we gained a couple of percent by being in cash for the past two weeks. I'm sure that in 20 years time the current dip won't even be noticeable in the chart. The important thing is to be invested in our chosen asset allocation and remain invested for the next 20 years. One good thing about investing all our SMSF funds in the one fund is that rebalancing between the underlying asset classes should be done automatically by Vanguard to stay close to the target asset mix for this fund. This is even better than using a mixture of Vanguard Index Funds to achieve a desired asset mix because rebalancing between funds would cost the 0.5% buy-sell spread in unit prices, although since rebalancing would generally only require a small fraction of the total investment to be moved, the effect would be negigible. All we need to do on an ongoing basis is to periodically adjust our automatic investment plan to reflect the amount of money we are depositing into our SMSF bank account each month via salary sacrifice and the SGL contribution from our employer.



Copyright Enough Wealth 2007