Amid all the hoo-ha about the changes to "Simpler Superannuation" from July 1 this year are some less-pleasant, little-know aspects. For example, from 1 July all payments made out of superannuation will be treated as a mixture of undeducted and deducted amounts per the overall mix across all your superannuation accounts with a particular trustee. For example, if you had a total balance of $400,000 and $100,000 of this was due to "undeducted" contributions, any withdrawal after 1 July will be deemed to be 25% undeducted and 75% deducted.
What does this matter? Well, some people will have amounts within their superannuation accounts that they can withdraw at any time. Called unrestricted, non-preserved amounts, I think these are generally undeducted contributions made into superannuation prior to 1999. (All contributions after then are preserved until retirement age). Currently, if you decide to withdraw an unrestricted, non-preserved amount you can nominate how much of the withdrawl is to be from the deducted and undeducted components of your superannuation account.
For example, of the $335,000 in my superannuation account, $55,000 is an unrestricted, non-preserved amount that I can withdraw at any time. My undeducted amount is $34,000, so under the current rules I can withdraw $34,000 as an unrestricted non-preserved amount and don't have to pay any tax on that amount. If I withdrew the maximum possible ($55,000) I'd have to pay some tax on the $21,000 "deducted" component (which was contributed into the fund out of pre-tax salary).
However, if I withdrew the same $34,000 unrestricted amount after the new rules come into force on 1 July, the amount would be treated as roughly 90% (34K out of 335K) "deducted" and only 10% "undeducted" - and I'd have to pay around 20% tax on the $31,000 undeducted component. So, withdrawing this $34,000 after 1 July would cost me an extra $6,000 or so in tax!
But wait, there's more...
Another other benefit of withdrawing $34,000 tax-free from my superannuation account before 1 July is that I could then use this amount over the next two years to replace around $48,500 of my taxable income (with a marginal tax rate of 30%), and I could therefore afford to salary sacrifice an extra $24,000 pa  into superannuation without reducing how much cash I have available to pay my bills. The benefit of doing this is two-fold. Firstly, the salary sacrificed amounts will only be taxed at the 15% superannuation contribution rate, rather than my expected marginal tax rate of 30% (which applies to income between $25K-$75K). The second benefit is that be doing this large salary sacrifice my taxable income should be reduced from around $55,000 to around $30,000 and I'll then be eligible to get a government co-contribution of up to $1,500 if I make a $1,000 undeducted contribution into my superannuation account.
Current Situation If salary sacrifice an
extra $24,000 pa
Taxable Income $55,000 $31,000
Salary Sacrifice $10,400 $34,400
SGL contribution $ 7,400 $ 7,400 
Income Tax due -$11,850 -$ 4,650
Super Tax due -$ 2,670 -$ 6,270
Super co-contrib $ nil  $ 1,300
(if make a $867 undeducted contribution)
Total after tax $58,280 $63,180
This means I'd end up with an extra $4,900 pa (tax saving and co-contribuction) by making the increased salary sacrifice. However, this is only possible as I have the extra $34,000 tax-free withdrawal from my superannuation account to supplement my income for the next two years. Otherwise my after-tax "take-home pay" would have been reduced from $43,150 to only $26,350.
By making these arrangements I'll end up with the following over the next two years:
Current Situation New Situation
Super Balance $335,000 $301,000 (withdraw $34,000)
Take-home pay $43,150 $31,000 (salary sacrifice)
Super withdraw nil $17,000 pa (split over 2 years)
Total cashflow $43,150 $48,000
Super contrib. $17,800 pa $43,100 pa
Super tax. -$ 2,670 pa -$ 6,270 pa 
Super balance $365,260 $374,660
after two years (ignoring earnings)
The only material impact of thisarrangement will be that the ratio of undeducted:deducted money in my superannuation account will be higher if I withdraw $34,000 of undeducted funds and recontribute via salary sacrifice (deducted funds). However, as all pension payments made from a superannuation account after you retire (and are over 60) are tax-free under the new "Simpler Super" rules, this shouldn't have any real effect in the long run.
 Under "Simpler Super" there will be an overall cap of $50K pa in deducted contributions - so you have to make sure your total of salary sacrifice and employer SGL amounts doesn't exceed this.
 My employer calculates the required 9% superannuation contribution levy based on my original salary (ie. before salary sacrifice is deducted). Legally it is possible for an employer to only contribute 9% of the actual salary paid (ie. after deducting the amount salary sacrificed). So it's important to check this with your employer before making salary sacrifice arrangements.
 The government superannuation co-contribution (up to $1500) is available on a 1.5:1 basis for undeducted contributions made into superannuation by employees with incomes up to $28,000. For incomes above $28,000 the maximum amount reduces until for incomes over $58,000 you're not eligible.
 There's no 15% contribution tax on the government co-contribution
DISCLAIMER: I'm not a financial planner, accountant, tax lawyer or in any position to give advice. This is just information about what I'm currently planning to do, and what I *think* the implications are. I checked my superannuation details (unrestricted non-preserved balance and undeducted component) with my superannuation fund, and I asked the Australian Tax Office "Simpler Super" help line about whether the new rules treating all withdrawals as being in the same undeducted:deducted ratio as the overall account would apply to unrestricted, non-preserved amounts. The ATO help line rep didn't know, and he had to go ask a "specialist" in this area to come back with the opinion that yes, this rule seemed to apply to all withdrawals by persons under age 60. As the ATO only gives binding private rulings about income tax questions and not superannuation, this seems about as definitive an answer as I can obtain. You could get professional advice from a financial planner, if so make sure that they really know the answer (since the ATO wasn't even sure!).
Archive for April, 2007
Amid all the hoo-ha about the changes to "Simpler Superannuation" from July 1 this year are some less-pleasant, little-know aspects. For example, from 1 July all payments made out of superannuation will be treated as a mixture of undeducted and deducted amounts per the overall mix across all your superannuation accounts with a particular trustee. For example, if you had a total balance of $400,000 and $100,000 of this was due to "undeducted" contributions, any withdrawal after 1 July will be deemed to be 25% undeducted and 75% deducted.
With the US and Australian stock markets at, or near, all time highs, many pundits are predicting an imminent plunge. The fact of the matter is that the market will always be hitting "all time highs" as it follows its long-term uptrend over the centuries. The question is whether or not a particular high is associated with the excessive exuberance, or if it is supported by fundamental values, profitability and projected continued economic growth.
Alan Kohler had an interesting article outlining the case for viewing current market levels as reasonable, and even provides a rationale for a further gain of 25% or more in the next couple of years:
In 1987 the trailing price-earnings ratio of the Australian market was 20.4, which produces an earnings yield of 4.9 per cent. The 10-year bond yield was then 12.5 per cent. Today the earnings yield is 6.4 per cent and the bond yield 5.9 per cent.
As we stand here with the Dow at 13,000 and the ASX S&P 200 at 6150, shares are cheap.
It is now equivalent to about December 1986. History never repeats itself exactly of course, but if it did, the Australian index would hit 13,000 next January - before crashing spectacularly.
The point is that the sharemarket has not yet had the price-earnings multiple "blow-off" that usually marks the end of the bull market.
The 1987 blow-off took the average P/E ratio to only 20.4 because inflation was 8.5 per cent and the bond yield was 12.5 per cent - more than double what it is now. But that P/E was double the then 10-year average.
Now the trailing P/E is 18 times, but inflation is 2.7 per cent and the bond yield 5.9 per cent (3.2 per cent real versus 4 per cent real in 1987). Times change, but in my view people do not. At the end of a long bull market, with abundant cash and rampant optimism, people tend to go nuts. They start extrapolating existing growth forever and price assets accordingly.
So far that has not happened: share prices have merely kept pace with earnings as they are now, not what optimistic forecasters think they might be.
While I don't necessarily think Alan is right, it's nice to read that your stock market portfolio could increase another 25% by the end of next year. Of course, if it did increase that much, I'd be even more tempted to abandon my long-term asset allocation and lighten up on my stock holdings in an attempt to "time the market". The only justification for such a radical change of investment strategy would be that having experienced many years of exceptionally high growth, my net worth would be well above where I need to be to attain my retirement and investment performance targets, so I could shift to a lower-risk, lower-return asset mix and have greater certainty of reaching my original goals. The alternative would be to stick with my original asset allocations, and hope that the returns reverted to average performance which would result in my final outcome exceeding my initial expectations.
A little while ago I wrote that I'd be interested to see any research on whether or not wealth is correlated to intelligence. Well, a recent study, has found that there is no link between how intelligent people are and their net worth. Although income is related to intelligence this doesn't translate into wealth. Having a big income doesn't guarantee wealth if you spend more than you earn, and it seems that the discipline and motivation required to accumulate wealth isn't related to intelligence.
Yesterday's second trade was looking good for a while - the AUD had dropped from 0.8265 to 0.8250 USD. I thought about closing out at that point and making a $150 profit, which would have more than made up for the earlier $110 loss. However, as is always a danger, I got greedy and changed my mental exit point to 0.8240, as the trend seemed to be continuing. Of course the AUD then changed direction and I ended up watching it ever so slowly drift up, with occasional dips to give me false hope, until I gave up and sold out at 0.8264, netting a minimal $10 profit.
Today DW had made three trades before I got home from work, each one placed just before an apparent trend reversed direction. Her fourth trade was a more successful and she managed to claw back most of today's losses before calling it quits. I then logged in to my account and was going to also buy the AUD and hope the strong uptrend continued, but by the time I logged in there was a pause and a slight drop in the AUD. I should have waited a while and watched what happened next, but instead I decided it was likely to be a pullback, so I sold the AUD at 0.8306 instead. It then resumed it's uptrend and I intended to wait a while and see if it peaked and started to drop as expected. Unfortunately I decided to bail out when it reached 0.8334 (a $280 loss!), and then sat by the uptrend did finally peter out and it started to drop.
By this time my account balance was below my intial A$1000 level, so I could no longer trade A$100,000 on 1% margin - I instead sold A$50,000 and am sitting here hoping that this time the expected correction will materialise and I make a small profit on this trade... It does appear to be dropping slowly at this time, unfortunately with a A$50,000 position opened at 0.8323 I'd only make back about 1/3 my loss if it retreats back to the level I initially sold at this evening.
If I lose my entire A$1000 trading stake I'll call it quits and do paper trading for a while.
The Dell PC I ordered a couple of days ago is "expected" to be delivered next Wednesday. It will have a wireless keyboard and mouse so I can sit in comfort in our lounge room, with the 20" LCD screen sitting next to our TV (which also happens to be a modest 20" CRT TV). I had been thinking of moving the current cable modem box from my computer table in the next room (where it's currently attached to my Toshiba Satellite notebook) into the lounge room, and then running an ethernet cable from the desktop PC to the notebook. However, I've decided to have a go at installing a wireless network, as there are some instructions on how to do this on my ISP's website (Optus), and Dell offers a Belkin wireless router and USB adapter, so they must be compatible with the PC I've ordered.
I was going to check if I could add the router and adapter to my existing order (as the Dell website says that accessories are shipped separately anyhow, and if they're not part of a computer system order they get charged shipping). However, I didn't have my order number with me at work today, so I searched the internet for an alternate supplier (and to check pricing), and found that I could order a package deal of the Belkin router and a USB adapter for less money ($101 plus $11 shipping) from Mitec.
I ordered the Wi-Fi router this afternoon (payment using a Paypal eCheque from my linked ING online bank account), and it should ship in 4-5 days, so will probably arrive around the same time as my Dell PC. I worked as a computer systems administrator several years ago, and networked PCs and macs using thin ethernet cabling, so hopefully setting up the Wi-Fi and getting the cable modem to work with the new PC and being accessible via the USB network adapter on my notebook PC won't be too much of a hassle.
Ideally I can use the desktop PC while relaxing in the lounge (ie. I can keep an eye on my forex trades while watching the cricket or "Lost" on TV), and can also use the notebook at my computer desk for uni assignments, or even while sitting next to the pool or having breakfast in bed.
DW has been on a trading hot streak since she opened her own account. She is now up almost 100% in just a few days. However, nine trades isn't a statistically valid sample - I'll reserve judgement on her trading "knack" until she's been at it for a couple of months.
My forex trading has been a disaster these past couple of days. Each time I've taken a position in what appears to be an established trend, then next few ticks are a major reversal. I'm now back to the starting capital, and every time I drop below $0 available margin with my $1,000 open position I get an automatically generated margin call email. Luckily I can just ignore these as I'll have a positive balance when I close my position (I wouldn't let it run to more than -$200 margin). The margin call emails warn that if I don't add in additional funds to bring my account back into the positive they may close out my open positions - I've no idea how large a negative margin would be required to trigger this. Perhaps if a went to -$1000 margin, so my overall account balance was $0, I'd automatically be closed out. Hopefully I'll never be in this position. At the moment I'm short the AUD with an apparent down trend underway - we'll see if this time my luck changes and the trend continues for a while, rather than reversing as soon as I've taken a position!
Current Trading Portfolio Status
I'm tracking my forex trading with a google spreadsheet. It includes some stats on the ration of winning:losing trades, % winning trades, avg. amount gained in winning trades, and avg. amount lost in losing trades. I'll insert the spreadsheet in this post and link to this post if future updates about specific trading activity.
Day Trading Performance
Owning our own home plus an investment rental property (albeit with large mortgages) means that my net worth is dependent in large part to the vagaries of the Sydney property market. The latest average house prices for the adjacent suburbs where our home and investment property are located shows considerably higher averages prices for house sales than were reported for the previous month:
Combined with the recent strength in the Australian stock market it looks like this month will give a boost to my net worth. Hopefully todays CPI figures will mean the interest rate on our mortgages doesn't increase again (our house is a variable rate loan, and the rental property is a 5-year fixed rate loan, with four years left to run). It may also help breath some life back into the property market - new house construction is running below the required rate to meet increased housing demand, which is starting to make rents increase. Any confidence that interest rates have now peaked will encourage both investors and home buyers back into the market, which should form the basis for the next increase in house prices in Sydney. Housing in Sydney tends to run in a 7-10 year cycle, and it's now been almost three years since the last peak in house prices.
Of the three goals I set at the start of this year (see side bar), my Net Worth and US Stock Portfolio goals are on track, but unfortunately my goal of getting down to my ideal weight by 30 June is not progressing as well as I'd planned.
In some ways diet and saving plans are similar - you pick your ideal behaviour and make an effort to stick to it until it becomes habitual or "automatic" behaviour. Unfortunately it seems easier to eliminate "junk spending" than it is to eliminate "junk food". I think the problem is that while you can arrange for your "essential" expenses (utility bills, home loan etc) to be paid automatically and can therefore focus on eliminating spending entirely (eg. "no spend" days), some basic level of food consumption is needed to maintain health. Food intake can't just be set on autopilot - every time you eat there is the chance you'll choose junk food instead of a more healthy food. I find that I'm most successful in sticking to a healthy eating plan if I have a fixed menu of healthy items for my breakfast, lunch and dinner - that way I CAN completely exclude eating anything that isn't "on my list".
Ah well, time to start writing down what I eat every day and tracking it on my diet spreadsheet...
I decided to do another trade last night after all, and promptly lost another USD$80 - the price had been bouncing up and down and I thought I could sell at the top of a bounce and claw back some of my previous loss. Of course, it then stopped bouncing and went up!
This morning my wife's account was activated after her A$1000 deposit had been processed. The AUD started a rapid drop immediately after the latest quarterly CPI figure came out at 11am - only a 0.1% rise for the quarter. This means that inflation seems to have moderated, so it's less likely that the Reserve Bank will raise interest rates next month after all. It was interesting to see that this news had exactly opposite effects on the AUD and the stock market:
Although after the initial spike up the market drifted back down, whereas the drop in the AUD was more prolonged. DW put in a SELL order for AUD$100,000 (costing $1,000 for the 1% margin) when the Aussie dollar started to slide, but, although the order said "executed" it didn't appear in her FX positions listing. After checking with CMC markets help desk it turned out that her bank had deducted $1.50 fee for the BPay transfer, so her trading account only had A$998.50 available. Due to insufficient funds her $1000 SELL order was automatically cancelled! By the time she'd worked this all out, and decided to trade a $50,000 position instead, the drop in the AUD had bottomed out. DW was quite annoyed that she missed out on a potential $250 gain. She made a series of small trades this evening, but there was no clear trend and she lost on several trades. Her most recent trade is making money as the AUD recovers - so she may break even on today's trades.
The paperwork for DW's own account for trading CFDs with CMC has all gone through and she transferred an initial $1000 into the new account. She should receive her login details tomorrow and can then start trading on her own account. Her overall trading on my account had resulted in a net profit of AUD$348.08, on which I'll have to pay tax, probably at a rate of 30%. I'll deposit $243.65 into her account tomorrow, and leave the "extra" $348.06 sitting in my account so I can do some trading myself. I quite enjoyed "playing" the forex market, so I'll probably give it a go (at least until I've used up the $348.06 "margin").
The AUD dropped from around .838 to around .830 during the day - due(?) to the producer price index being flat for the last quarter, which led to speculation that the CPI figure due out on Wed will also be lower than expected, so the Reserve Bank won't raise interest rate again, after all. It was speculation of another interest rate rise that had allegedly been driving the AUD towards 84c US recently (although I think the dollar will still trend up as long as commodity prices remain strong, which probably relies on the China economy remaining strong. As China is hosting the Olympics next year, which is usually a fillip to the host nation's economy, I think the AUD still has a way to go in this uptrend).
But that doesn't have much to do with the short-term fluctuations in the AUD/USD spot exchange rate that we're actually trading. Of course my very first trade off my own bat did badly - I bought the AUD at 0.8333/35 thinking that it had bottomed and was recovering towards the 0.8340 level. It turned out that I'd bought at the local maxima, and when it continued to drift lower I cut my losses at 0.8323/25, crystalising a USD$80 loss. It's still bumping along with a slight downward bias, so I don't think I'll be trading again tonight.
I got $36.35 in dividends from Alinta today. However, I also spent $200 for DW and DS's dentist visit. Purely by coincidence I was also booked in for dental work today (with a different dentist). I'm getting a crown done for a molar that previously had root canal and a couple of fillings. I still have another appointment to get the crown fitted (today was just the prep work and mouldings), but the dentist charged for both sessions today - $1,450!
I also finally decided to buy myself a new PC today - a base model Dell with some extra RAM, bigger HDD, slightly upmarket graphics card and a 20" "ultra" LCD monitor. Hopefully it will be OK to edit my digital home videos with - although running Vista it could be a struggle with 2GB of RAM. Total cost was $1802.90 - it didn't sound so bad when I worked it out as costing $1.65 a day over three years. I'll mainly use it for maintaining my investment records and doing my university assignments, so the depreciation will be tax deductible, reducing the "out of pocket" cost further. Dell phoned when I got home to confirm the order (and try to sell me a four year extended warranty for an extra $165 - no thanks), and advised that the computer should arrive within 10 business days.
Anyhow, if I manage to quit drinking 4L of diet coke each day as planned, I could afford to buy a computer like this every 9 months
Total net spend for the day $3,416.55. Oh, and we also bought a roast chicken for dinner and did some grocery shopping on the way home - call it a round $3,500.
I don't drink much alcohol (just the odd glass of wine at Christmas or when dining at a restaurant) but I do drink copious quantities of diet coke. Ever since my Uni days I've consumed several litres a day. Aside from wanting to cut down or eliminate this completely for my health, it also isn't very good for my wallet. Until recently diet coke typically cost around $2.40 for a 2L bottle, and I could stock up when it was on "special" for $1.69. However, it seems that Coca-cola has increased the wholesale price of their range (their excuse was increased sugar prices - which doesn't really make sense for "diet" coke!). All the major supermarket chains in Sydney have raised the regular price to around $3.30 for a 2L bottle, with the price on "special" only dropping to $2.49 these days. Even buying only on special this means that the cost has gone up by 50%, which will cost me around $600 extra each year. Time I tried to quit drinking diet coke "cold turkey" and switch to just drinking filtered tap water and the occasional cup of tea.
DW the day trader, after getting off to a flying start, crashed to earth on day three. She opened a short position selling the AUD at 0.8341 on what appeared (to DW) to be the start of a down trend. Unfortunately, no sooner than she'd sold the Aussie dollar it started rising - slowly and with occasional tantalizing dips. By the time I got home from work the exchange rate was around 0.8350/52 and I suggested that she close out with a 11 point loss - which would just exceed the $100 "stop loss" she'd agreed to. However, the occasional dips were still giving her hope that she was right, and that the market would eventually come to its senses and behave the way she thought it should
A little while later the rate had drifted up to 0.8355 and suddenly started to tick up quite rapidly. I stepped in and strongly encouraged she close position when the rate hit 0.8359, creating a $180 loss for the trade. DW still thought I'd panicked, but although the rate did drop back a little bit at various times in the next hour, it was definitely trending up rather than down.
After DW went to bed I stayed up watching the cricket world cup (Australia vs. NZ) and noticed that an up trend now seemed well established - so I went long at 0.8366. After continuing upwards to around 0.8370/72 the uptrend ran out of steam and I thought about closing the position for a small gain ($30), but left the position open as I was still watching the cricket and could check on the price every ad break. Eventually DW got up during the night to change DS2's nappy, and we watched the up trend resume. Eventually we got tired (Australia had NZ on the ropes at 7 for 140 or thereabouts, with NZ chasing 349, so the cricket had also lost interest), so we closed the position at 0.8372/74 for a reasonable $80 profit and went to bed.
So far our forex trades have a 75% success rate, but not sticking to the $100 stop loss limit was an expensive lesson for DW. Of course 4 trades are not indicative of any trading skill or lack thereof - once we've clocked up 100 trades we'll be able to see if we have a statistically significant deviation from the roughly 50:50 win:loss ratio you'd expect from random outcomes (actually, you'd expect to "win" less than 50% of the time, as CMC Markets is taking a $20 cut of of each round trip).
I believe that "successful" traders (allegedly exhibiting skill rather than luck) typically achieve around 65% winning trades, with their profitability depending largely on letting the winning trades run, and cutting losses ruthlessly according to a set trading plan. We'll see how things work out. Anyhow, with a $1000 starting stake, and now a $300 or so "buffer" to cover margins, DW should be able to have some fun trading before she runs out of margin and has to call it quits.
Trading so far (1% margin on $100,000 AUD/USD spot price)
Trade Capital Open Close Profit
Short (SELL AUD) AUD$1000 0.8369 0.8362 US $70
Short (SELL AUD) AUD$1000 0.8328 0.8296 US $320
Short (SELL AUD) AUD$1000 0.8341 0.8359 US-$180
Long (BUY AUD) AUD$1000 0.8366 0.8374 US $80
Overall US $290 (AUD$346.23 CR)
An Interim Dividend of $160.00 fully franked (franking credit $68.57) arrived from Onesteel.
I also received the confirmation notice for the 113 Suncorp shares I'd bought for $15.50 in the recent share entitlement offer. As expected the stock price for Suncorp didn't drop very much from the dilution (probably not everyone took up their entitlement). They're currently trading at $21.60, so the offer price turned out to be a bargain.
I updated my US stock portfolio spreadsheet using Google spreadsheet, and used the "publish" feature to create html code to display the current portfolio (with current prices linked into the google spreadsheet from google finance data) and performance in live tables in the blog sidebar. These tables will be automatically updated to show current prices, overall gain, and the calculated annualised return (using the XIRR function). It's quite a cool little tool, but I wish google finance provided data on the Australian market - currently they only supply data on the US, Japan and European markets.
I also just noticed that although this displayed OK using IE at work, it doesn't display properly using Firefox (although on my other site http://enoughwealth.com it DOES display OK with both IE and Firefox!). I'll have to edit the code to fit into this blog...
It's a bit hard to work out exactly what my savings rate is. Apart from my salary I also get dividend income from my stock portfolio, but the dividends are mostly used on paying interest on my margin loans. To simplify things I did a calculation of my direct savings as a percentage of my gross salary:
Saving stream % of salary
Employer Superannuation contribution 8.25 % (The 9% SGL as a % of total salary including the SGL)
My Superannuation contribution 11.62 % (as a pre-tax "salary sacrifice")
Other savings/investments 9.72 %
TOTAL Savings Rate 29.60 % of gross salary
I've included principal repayments off my portion of our home loan as part of my "savings" but haven't included the interest payments on our home and investment property loans.
I also did a rough calculation of what taxes I'm paying:
Federal - Income tax & Medicare levy 13.81 %
State taxes - Land tax & GST* 3.72 %
Local taxes - council rates 1.28 %
TOTAL Tax Rate 18.81 % of gross salary
or 31.17 % of taxable income
* although the GST rate is 10%, unprocessed food is GST-free, so the average GST on my grocery bills is only 1.86%
The federal tax is based on the tax rate applicable to net "taxable income". It's a bit misleading to quote it as a percentage of gross income, as it includes tax paid on dividend income. State and Local taxes are a function of consumption (GST) and real estate assets (land tax and council rates). As a percentage of my Net Worth my annual tax bill is a much more modest 1.51%. But this figure doesn't include taxes paid on superannuation fund earnings (@ 15%), superannuation pre-tax contributions tax (@ 15%) or any Capital Gains Tax (@ half my marginal tax rate, say 15%) on realised gains. However, if I move assets into my superannuation fund and only realise gains when it is "pension" mode (after age 60), there would be much less capital gains tax due.
We have no gift tax or death duties in Australia, which helps with intergenerational transfer of wealth.
Overall, it appears that income from all sources (salary, investment income, capital gains) ends up being taxed at around 15% on average, with little "double taxation" occurring (due to franking credits and no gift tax or death duties). And the new "simple super" offers good opportunities to greater reduce tax on capital gains by realising such gains during retirement.
DW went solo with a spot AUD/USD trade today. Managed to make around US$300 profit! It seems so easy when things go your way, the biggest dangers are in getting overconfident and not sticking to your trading plan - ie. closing your position if things don't go the way you expect. We'll see how her trading progresses in the next few weeks. I suggested that she apply for her own CMC account to do her forex trades - there's no point in her continuing to use my account, as the profits are taxable at my marginal tax rate, which is higher than hers while she is on maternity leave.
DW and I sat up for two hours with our shorted $100,000 AUD/USD spot price position open, watching the Aussie dollar drop from 0.8360 to a low of 0.8358 and then bounce around 60/62 for ages. In the end we gave up (the down trend seemed to have petered out) and closed the position with a net profit of USD$70.00
Of course DW started musing that "if I could make $50 a day trading while on maternity leave..." which I had expected. I'm not too worried that she'll get carried away and lose any substantial amounts of money, as she was happy to agree to call trading quits for the day if she loses more than $100 in a session.
It was funny that because the AUD had initially gone up a few pts after we opened our short position, and we had used the entire $1000 I had sitting in the account for the trade, we didn't have our margin covered for a short while at the start. This morning my email box had a "margin call" for AUD$23.89 which had apparently been automatically generated when we initially went into the red and didn't have the full $1000 margin covered. As we had closed out our position at a profit after a couple of hours I just ignored the email. It was my first ever "margin call", despite having used margin loans for my stock portfolios for over ten years.
It's interesting that I view trading differently from DW. I think that trading (especially synthetic trades like CFDs) is a zero-sum game, and any winning streak we have will be due to "luck" rather than any great trading skills. DW on the other hand imagines she will be able to trade profitably be anticipating market moves. Then again, when we occasionally visit a casino I'll stick to the $5 blackjack table and attempt to count cards to shift the odds in my favour, whereas DW carefully studies the patterns of numbers that have come up on the roulette wheel and can see "patterns" in the sequences of (random) numbers that have come up.
Perhaps DW's degree in economics makes her more likely to view random events as having some underlying, predictable basis, whereas my degree in applied science makes me view more of the things that go on in life as simple random, and unpredictable, events.
Anyhow, at the end of day 1 as a day trader, DW's account balance is AUD$1000 and USD$70 - for a total value of AUD$1083.64. If you annualise this out our ROI so far is around 3,100% pa! Perhaps I should start a "secrets of day trading success" newsletter
Some simple scenarios I've run on excel to illustrate various retirement situations that might arise depending on how much one saves, rate of salary increases, ROI, and % of final salary spent each year during retirement. They're only meant as rough indications of how these variables can effect the final outcome.
General assumptions used throughout:
* all figures are in today's $
* all % are real, after-tax rates eg. to get the 5% ROI you'd have to make maybe 10% gross return.
* a $40K starting salary at age 20
* starts working F/T at age 20
* works F/T until retirement at age 65
* salary increases x% pa until age 54, then remains constant
* earns 20% of age-20 salary when 18, 25% of age-20 salary when 19 (eg. casual work)
* saves y% of gross salary each year (ie. any debt repayments student loan/home loan are in addition to this)
* spends p% of final salary each year during retirement phase
ROI x% y% p% Comments
A 5% 3% 10% 100% "Typical" situation. Comfortable retirement with all NW consumed by age 80.
B 5% 2% 10% 100% Lower rate of salary progression. There is actually a residual NW at age 80
in this case as final salary (and hence pension) is lower as a % of starting
salary and savings in early years were thus relatively higher.
C 5% 3% 15% 100% A "PAW" - saves 15% of gross salary. Has a high NW at age 65 so ends up with a
large residual amount at age 80. Could either leave a large estate, or could
spend more than 100% of final salary during retirement years. (see D below).
D 5% 3% 15% 150% As above, but spends 150% of final salary during the retirement phase.
E 5% 3% 20% 100% "Super Saver" - consistently socks away 20% of gross salary while working.
F 8% 3% 20% 100% High-risk, high-return (8% real ROI), super-saver. This is my model
I can meet the 20% savings target and so far have met the 3% real salary rise
and 8% real ROI hurdles. This is the most uncertain model as it would need
everything to work out in order to achieve 3% real wage rises and 8% real,
after-tax ROI for the next 20 years.
Reading through some of the previous posts I noticed that I've sometimes substituted words when typing these posts. For example, writing "every data" instead of "every day", and "under the water" instead of "under the weather".
I've never been good at proof-reading on screen, for work and uni I usually print out the final copy and do a final proof check of the hardcopy. But I used to just notice the usual typos - not that I was inserting incorrect words that just happen to sound the same as the word I had intended to write! Hopefully this is just a sign that I'm typing these posts too fast, and getting older, and not the first sign of some exotic neurologic problem
BTW - my earlier posts are no longer showing the linked graphics correctly. I can't be bothered going back and uploading and linking to all the affected images, so if you are reading an older post and a graphic seems to be missing, just look up the same post on my other site:
Some of the graphs and charts were pretty cool, so it may be worthwhile browsing through the other site anyhow.
Well, my theory about using CMC Markets Contracts for Differences to trade my US Stock portfolio at lower cost than via my broker was a non-starter. When I picked a short list of 6 possible stocks to buy from the "magic formula" list, none of them were available to trade via CMC Markets. So it looks as if I'll stick to buying US stocks through my Comsec-Pershing broker account for $65 per trade. Some kind folk have suggested some US online brokers that will open accounts for non-US traders, but they all required funds transferred in advance of trading, and by wire transfer. Wire transfers cost $30 each time from my Australian bank, so it would cost half as much as the Comsec-Pershing brokerage fee just to transfer the funds for each monthly trade. I could save on the wire transfer fees by shifting a large chunk of cash into the US broker account, but as I'm borrowing the trading funds at around 8% pa interest this also would cost.
Anyhow, having opened the CMC Markets account and funded it with an initial A$1000 it was ready and waiting when DW suddenly decided that the AUD had gone too high vs the USD and wanted to know how she could short the Aussie dollar. I told her she could use my CFD trading account and I did an initial trade selling $100,000 AUD vs USD spot @0.8369, just as an experiment to confirm that currency movements were affecting the open position in the way I expected. So far the AUD went up 4 ticks, costing DW $35, then dropped back down to 0.8365, making her a $35 "paper profit". I'll watch the currency movement on the live chart for a while before closing the position before I go to bed. I'll then explain what happened to DW tomorrow and let her have a go at doing a trade. Personally I think this is just like gambling (which DW enjoys on a small scale), which I don't get any pleasure from. I think this is going to turn out to be a lose-lose situation. If DW makes some money from trading she'll probably think it's an easy way to "earn" some money while on maternity leave, and will be at risk of suddenly making a big loss. If she loses a little bit she'll probably lose interest in it after a while. Either way I don't think this day trading lark will finish with us making any profit.
Hopefully this "entertainment" won't end up costing too much...
I'm currently using a 3 yr-old Toshiba Satellite notebook as my main PC at home. I'd bought it after my previous Gateway PC died (OK, I was an idiot and plugged in a USB device upside down without looking and totally shorted out the motherboard. D'Oh!). The one I had before that was a "clone" Pentium-100 that I'd had for ages - it has been serving quite well as DS1's PC - he's only 6 so most of the software he runs works quite happily on a P-100. Unfortunately when I got home tonight I was informed that they'd had to turn it off when there was a "bang" and smell of smoke. I inspected the PC and all appeared OK, but the old VDU was smelling of smoke, so I think it's the monitor that has broken. I can probably pick up a replacement monitor for free as lots of people seem to put out old/broken PCs for collection when the bi-monthly council cleanup is on.
One of these days I'll buy a new desktop PC (probably a Dell) as I'd like to be able to edit and burn our home videos onto DVD and run some of the games I have. The notebook doesn't run most of my games as it doesn't have a suitable graphics card, and it only has a DVD player and CD-burner. I keep putting off buying the new PC though as each year they get cheaper and have better features. I've bought quite a few PCs since my first one (a Sinclair ZX80) and got a bit sick of spending a couple of thousand dollars every couple of years on a new PC.
The Australian federal government announced recently that they were going to ban the sale of incandescent light globes from next year, so that everyone switches to the new, energy efficient compact fluorescent ones. Supposedly they are much cheaper to run and their higher initial cost is less than the equivalent number of incandescent globes that would burn out during their lifetime. This sounds like a win-win with the emission of greenhouse gases being reduced while the consumer actually saves money in the long run.
I'll use the new fluorescents as much as possible (I already have half a dozen scattered through our house), but I think I'll also put in a stockpile of incandescent globes in the garage before they're no longer on sale. Why?
- unused, an incandescent globe should have an almost unlimited shelf life, and it's cheaper to have some of these sitting around as spares than the more expensive fluorescent globes.
- I have a mix of screw thread and bayonet light fittings in the house. I've only seen compact fluorescent globes with the modern bayonet fitting, and it may be difficult or impossible to get them with screw fittings. I'd rather not have to replace light fittings just to be able change light globes.
- I can cobble together a generator from some wire and an old bike - so in a disaster I could always get lighting setup using incandescent globes. Doing the same with compact fluorescents would be much harder as they don't work with DC and need 240V (as far as I know).
A day of financial odds and ends. The Australian stock market powered up to new all-time highs early in the morning, so I decided to purchase another 4 XJORT S&P/ASX200 20-Dec-2007 5500 PUT Options - as the market goes higher the cost of the PUT options drops, so the same options that cost $1580 each back on 9 FEB, today cost me $960 each. I now have a total of 7 PUT option contracts, which would offset around 2/3 of any losses my Australian stock portfolio would suffer if the market crashed below 5,500. Below 5500 the contracts are "in the money" and are worth $10 for each pt the index drops below 5500. Above that level the value of the contracts will diminish as the expiration date (20-Dec) approaches. But they still mirror that movements in the market, so I have some "insurance" if the market suffered a correction in the meantime. A look at the All Ords index for the past 25 years shows that we're above the long-term market trend. Although the pundits say the market isn't overpriced on current p/e rations, that could quickly change if the world economy slowed or there was some significant global crisis.
Aside from buying the PUT options I also phoned the plumber to query the $800+ bill for clearing out a blocked drain. The owner said he'd check into it and get back to me.
My mother is thinking about cashing in her retirement fund (she deposited $119,865 of the proceeds from selling an investment unit back in 2004 in order to reduce the amount of capital gains tax payable). $91,149 of the $119,865 was tax deductible, so it had 15% contribution tax ($13,672.31) applied when it was deposited into her retirement fund. The balance of the contribution ($28,716) was undeducted, so there was no contribution tax due. Unfortunately the capital gains realised on the unit sale meant that her overall adjusted taxable income (ATI) was high enough that a superannuation surcharge was also charged ($13,216.60). So the overall tax saving was not very large, but every little bit helps. Anyhow, her balance has grown to $139,078.74 - an annualised ROI of 11.86%. Her retirement fund has a pretty aggressive investment mix for someone in their 70s - mainly due to the fact that the balance of my parents assets are in cash or real estate, so this component can be overweight in stocks.
Some more dividend statements were waiting in the mail when I got home - $49.70 from Rio Tinto and $498.00 from Sims Group. Most of the dividends I receive end up going towards the interest on my stock portfolio margin loans. I only have a few DRPs in place - those where the number of shares issued gets rounded up to the next whole number of shares.
The monthly statement for one of the Credit Cards I used for 0% balance transfer arbitrage just arrived. I somehow managed to misjudge and overpaid the amount required to clear the balance just before the 0% period ended. The amount overpaid was one minimum monthly payment - so I now a $240 credit on a CC I never use. Ah well, I'll just have to use this card to pay a couple of grocery bills at the supermarket. This will teach me to double-check the final amount required to clear a CC at the end of a 0% balance transfer period.
Do you prefer white wine or red? Collect HO or N gauge railway models? Do you prefer actively managed funds or index funds? Stocks, Bonds or Property?
I must admit that to a large degree I treat investing as a hobby. I enjoy reading through the weekly investment lift-outs in the newspapers, read investment magazines and surf the web looking for the next "millionaire in the making" article. Even if a lot of it doesn't teach me anything new, or I don't agree with the viewpoint, I still enjoy spending my time "playing" with my investments and reading about investing. Just as I enjoy reading about scuba diving sites or model railway layouts. Sometimes I'll even open up a new investment just for the fun of it.
Another thing in common with my other hobbies is that to some extent I accumulate net worth just for the sake of it. My retirement fund is on track to support me when I choose (or are forced) to stop working for an income, and although my other investments have theoretical performance targets, and target amounts, I'm not saving for any particular items or expenditures.
For me, saving and investing my money isn't all about deferred expenditure for some future purchase. For me the act of investing is an "experience" or "consumption" in and of itself. The only strange thing about this particular hobby is that often the more you spend on buying fancy new investments, the more you can afford to indulge your hobby in the future!
One mildly worrying thing (OK, it doesn't actually worry me at all) is that many people apparently view collecting money as a hobby as an undesirable behaviour. While gathering money to "keep score" may be OK for businessmen (ie. investing as a sport), it is viewed as unwholesome to accumulate money "for it's own sake". Some people continue to have a phobia about being poor even when they are, by most measures, already rich, and thus end up taking frugality to extremes and becoming the stereotypical Scrooge McDuck. I'm sure many well-balanced people enjoy the simple pleasure of watching their net worth increase over time. And you don't have to justify it by saying that you're saving for that round the whole cruise you've always wanted, or intend leaving your millions to a charity in your will.
I'm not sure, but the investment options I picked for the Personal Superannuation account I opened for DS2 on 10 Nov 2006 (DS2 was born last September) were:
ING Global Emerging Markets - Entry Fee 10% 1.4382 1.52460
OptiMix Geared Australian Shares Entry Fee 30% 1.2060 1.38040
OptiMix Global Smaller Companies Shares - Entry Fee 10% 1.6289 1.73940
Vanguard Australian Shares Index - Entry Fee 20% 1.2370 1.38410
Vanguard International Shares Index - Entry Fee 20% 1.2491 1.25220
Vanguard Property Securities Index - Entry Fee 10% 1.2090 1.33700
The entry fee for the ING OneAnswer Personal Superannuation scheme is quite hefty (around 4%), but doesn't matter as I made the investment application via http://www.count.com.au/Count who rebate the upfront fee 100%.
Total initial investment was $1000, with quarterly additional investments scheduled to start from next July. The current value of the investment is $1,091.
When DS2 is older I'll help him find a casual job, such as delivering letter box junk mail on the weekends. Although it is quite easy for kids to earn some pocket money doing odd jobs, it's a much harder task finding a "real" casual job for the under-15s. The benefit of having such a job (apart from the life lessons around working, earning money etc.) is that if he earns more than 10% of his income working for an employer he can make an undeducted contribution of up to $1000 each year and get a government co-contribution of up to $1500 per annum.
I already did this for a couple of years with DS1 while he had a job doing a paper round. Boosting retirement savings at such an early age should have a huge impact on their final benefits, as they have 60 years for the magic of compounding to do it's thing.
Apart from a monthly update using NetWorthIQ, I also update a spreadsheet with my net worth data each data. I get daily values for my stock portfolios, margin loans, and retirement fund. The real estate valuations and mortgage loans are only updated monthly. This suits me as it only takes a few minutes each morning and its fun to see the daily gyrations in the various values. I find that I've gotten used to daily ups and downs, so that even fairly large "crashes" don't worry me as I treat it as just part of the "noise" in my investment returns.
My retirement fund is pretty well on track to provide for a comfortable retirement, so what do I compare the total NW to? I've chosen a couple of indicators that are shown on the chart below.
Firstly, I've used a logarithmic scale for the chart, so that projected ROI of 7%, 10% and 13% are straight lines. These values are my personal view of what would be "poor", "likely" and "good" returns over the long term for my ideal asset mix - assuming an inflation rate averaging 2.5%. The grey scale at A$1m is adjusted for the actual CPI data from 2002 to 2007, and projected forward at an assumed rate of 2.5%.
Secondly, I've plotted available data from the annual HILDA reports to show what the top 10% NW is for a single-person of my age at that year (actually HILDA only reports household data, so I've taken half the household value as an approximation for the single-person NW).
Thirdly, I've plotted available data from the annual HILDA reports to show what the top 25% NW is for a household with head of household of my age at that year.
Finally, I've plotted 1/100th of the annual BRW "Rich 200" list cut-off value. I scaled it to 1% so the figure is in the region of my NW. I think that the annual cut-off figure of the "rich list" is a good indicator of what returns the best investors are actually each year - with some upward bias as those whose do badly drop out of the "Rich 200" list, and more successful investors are added to the list.
Overall I'm quite happy with how my NW has been tracking in terms of both absolute return (averaging more than the expected ROI of 10%pa) and in comparison to the "rich list". In fact I've slowly been creeping up on the "rich list" data points - at this rate I might make it on to the list if I live another 200 years or so!
It's rather depressing to see how the NW of even the "top" 10% and 25% of Australian households has been progressing - it seems to be keeping pace with my "poor" average ROI of around 7%. This is probably due to "choice" of asset mix these households are making -most likely just a stake in their own home, a mortgage, and their compulsory superannuation being invested in the default "balanced" option. It would be interesting if the HILDA studies included details of asset allocations.
It will be interesting to track my continued progress against these "KPIs" in future years - since 2002 we've had the real estate boom go bust in Sydney, while the stock market has had a phenomenal bull run for the past 3-4 years.
The bill from the plumber arrived today for clearing out our blocked sewer pipe. I'd initially expected it to cost a couple of hundred dollars, as he'd done the job before and I think it cost around $400 that time, which had included installing a new access pipe to "make the job easier next time". I started to suspect it wouldn't be all that cheap when I initially talked to him via mobile after he first arrived at our house. When I mentioned the access pipe he'd installed last time, he said that this time the blockage was in a different spot connected to the other bathroom. He also asked for the drainage diagram, which is never a good sign for a supposedly simple job.
It turned out that the diagram we had from the house purchase was out of date, and didn't include changes made after the house was built. So after digging around the back of the house looking where he thought the pipe might be, he went away and promised to come back after looking up a copy of the new diagram. When I had a look the next evening after he'd finished, I noticed the neat new cement work where he'd added in a permanent access port to the pipe he installed last time, and also the repair job he'd done to the paver he'd dug up looking for where the pipes might be. When I commented to DW that the cementing was very neat, but I hated to think how much it would all cost, DW replied that "Oh, that shouldn't cost anything as he guessed wrong about where the pipe was" - I didn't say anything, but....
Anyhow, the bill came to $832.15 (!) - $50 service call, $65 plant hire (don't they have their own gear?), $573.50 labour, and $68 materials (some cement and a new garden tap).
The funny thing is that the job sheet shows that the blockage turned out the be immediately upstream of the Inspection Opening that he'd installed last time - which I mentioned to him when he first arrived. But what would I know, I'm not a plumber.
|<< Newer Entries||Older Entries >>|