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Archive for August, 2007

Self-Funded Superannuation Fund gets Funded

August 14th, 2007 at 03:33 am

We're in the last stages of transferring our retirement funds from our employer-sponsored fund (with BT) into the Self-Managed Superannuation Fund that we setup a few months ago. I mailed in the paperwork to BT at the start of last week and the funds had finally disappeared out of our BT accounts yesterday. Luckily that means that the withdrawal was probably processed on Friday using the unit pricing from COB on Thursday - that would mean that we just managed to escape the 4% drop in the Australian market that happened on 'Black Friday'.

So far only the funds from DWs BT account have appeared in our SMSF's bank account. As DW was closing her BT account the transfer was done electronically. I'm keeping a small amount of money in my BT account (enough to pay my life insurance premiums for a while) so I had to fill in a different withdrawal form which went to a different address at BT. The withdrawal appears to have been processed at the same time as DWs but will be sent via Cheque, so I probably won't receive the cheque until later in the week and have to deposit it into the ANZ bank account of our SMSF.

Some additional funds have also appeared in the SMSF bank account, so it looks like the compulsory SGL contributions from our employer are successfully being redirected into our SMSF. The amount doesn't reconcile with what I expected to be paid in for July, but I'll have to wait for the bank statement to try and work out exactly what has been paid in.

Once the cheque for my transfer has been processed I'll invest the entire balance of our SMSG in the Vanguard Lifestages High-Growth fund. The asset mix in this fund is broadly what we want, and by having the entire balance in this fund we'll save a lot on management fees.

The target asset allocation for the High-growth fund is:
4% Australian Fixed Interest
6% International Fixed Interest (hedged)
48% Australian Shares
29% International Shares
10% Property Securities
3% Emerging Market Shares

Vanguard in Australia charges 0.9% fee on the first $50,000 invested in any fund, 0.6% on the next $50,000 and then 0.3% on the balance above $100,000. This is a lot better than the 1.3% or more growth-oriented funds were charging in the BT scheme. In addition the BT fund admin fee was around 0.75% (even after a hefty employer-rebate). The SMSF in comparison will only pay eSuperFund $599pa plus another $150pa to the ATO. The total admin cost for our SMSF ($749pa) is therefore only 0.23% of our initial balance and will decrease over time as our SMSF balance accumulates. While we will be missing out on the dubious benefits of active fund management, I think the net saving of fees will exceed the typical outperformance of fund managers compared to the relevant indices.

Copyright Enough Wealth 2007

Time to Buy Stocks?

August 12th, 2007 at 05:36 am

With the 4% drop in the Australian stock market on Friday the "correction" is now about 8%. While there could be further drops in the coming weeks, even if this is just a correction rather than the start of a bear market, I think it may be time to start looking at stocks to buy for DS2's portfolio. DS2 turns 1 next month and I'd like to buy him a couple of stocks to establish an investment portfolio - perhaps some CSL or COH. I'm looking for stocks that over the long term should have good growth prospects but don't pay out large dividends - getting too much "unearned income" results in punitive childrens tax rates.

Copyright Enough Wealth 2007

Virtual Stupidity

August 11th, 2007 at 08:50 am

Apparently the biggest "bank" in Second Life has frozen withdrawals and converted deposits into perpetual bonds that are trading at a steep discount to face value. The thought that avatars might be throwing themselves off virtual sky-scrapers in financial ruin would be funny, except that I'm sure that many people have spent lots of real hours accumulated Linden dollars with the expectation to eventually convert them into real USD. Where they ran into trouble was investing the Linden dollars with a virtual bank that was offering an interest rate equivalent to 44%pa. With the Linden:USD exchange rate fixed this was never going to be sustainable in the long term, and the recent "run" on the virtual bank was inevitable.

Copyright Enough Wealth 2007

How Closely Does my Portfolio track the All Ordinaries Index?

August 9th, 2007 at 03:09 am

The graph below shows how well my portfolio of around 30 Australian stocks has tracked the All Ordinaries Index since 1 June 2007. As you can see there is fairly strong correlation between my portfolio and the Index (red and blue lines respectively). The chart also shows the effect of gearing (via margin loans) to amplify gains and losses (green line).



Copyright Enough Wealth 2007

When Can You Retire: Case Study

August 8th, 2007 at 04:45 am

In response to my recent post about the effects of savings rate and ROI on the age at which you can retire and reasonably expect your retirement savings to last until age 85, Fern wrote a comment requesting a review of her situation as an real world example. As I'm not a financial planner I can't give personal advice, so instead I'll just look at a hypothetical situation using Fern's figures as a starting point and adding in a few extra assumptions.
Model Parameters:
Person "X"
CUrrent Age: 48
Current Retirement Account Balance: $289,133
PV of Other investments to fund retirement: $142,158
Lifespan: 90
Target Retirement age: 60
Assumptions:
Salary Income: current=$59K
Salary Increase: real 1%pa until retirement age
Retirement accounts savings rate: 15%
Other investments savings rate: 0% (assume paying off mortgage from now til retirement)
Risk tolerance: moderate
ROI: retirement account: 4% real ROI (after tax and CPI deductions)
ROI: investment account: 3.5% real ROI (after tax and CPI deductions). Lower ROI than 401K due to higher tax impost.
5 year p/t work yielding $15K pa income during early retirement years (age 60 to 65).
Investment account is drawn-down first during retirement until exhausted, then retirement account
Same investment mix held during retirement years as while working.
Outcome of model:
Plugging those figures into a spreadsheet it appears that Person "X" can retire at 60 (still working part-time until 65) and the retirement and investment accounts balances should be able to fund an income of 70% pre-retirement salary until age 90 ($46K in today's $). Indeed, there may some surplus remaining in the account at age 90 ($497K) if the assumed ROI were attained. Over the entire investment period one would hope that the ROI's average out to close to the projected values, but there will obviously be some better and some worse years. A string of bad years early on in the piece can significantly reduce how long the retirement savings will last, even if later years are better and boost the overall average ROI. However, in this case person 'X' expects to being living in a home with no mortgage during retirement, so if funds run short in the later years (or if lifespan exceeds 90) borrowing against home equity (a "reverse mortgage") would be a possible solution, given that no residual estate is planned. Another "solution" would be to save extra to make up any performance shortfall in the accumulation stage, or attempt to live off smaller pension amounts during retirement if the funds were being exhausted too rapidly.
The projected real ROI of around 3.5% or 4.0% after tax seem reasonable from a historical return viewpoint for an investment mix of 80% in stocks (eg. 70% domestic index funds and 30% foreign stock index funds) and 30% in bond funds. However, even a small decrease in actual ROI can cut into this "surplus" significantly. For example if both retirement and investment accounts attained an ROI of 3.5% the final balance remaining at age 90 is only $207K.
If, during retirement, a run of good returns had boosted the remaining funds above what was required, the investment mix could be shifted to a lower-risk, lower return investment asset mix. Alternatively the "surplus" could be withdrawn and invested in a fixed-interest account for a rainy day while leaving the retirement and investment account asset allocations unchanged.
If one was fortunate enough to attain an real after-tax ROI of 4.5% on the retirement account and 4.0% on the investment account, retirement age could be brought forward to age 56 (assuming part-time work undertaken until age 65). But this would depend on the unlikely prospect that the same above-average returns could be maintained all the way through until age 90.
It may be possible to aim for such a retirement age, but you'd want to track your actual retirement and investment account balances (allowing for accrued tax liabilities and adjusting for actual inflation rates) over the next 10 years and be willing to postpone early retirement if returns were lower than expected. For example, the model projects the values (all expressed in today's $) listed here

Bear in mind that this is only a simple model - tax effects have been eliminated by use of after-tax returns, and no allowance has been made for any social security, company pension or similar retirement income streams.

Calculating the Decline in Net Worth from "All Time High"

August 7th, 2007 at 05:05 am

I normally update the component figures (stock portfolio, retirement account) of my investments daily, but only calculate month-to-month changes in my net worth. Having had a couple of down months in a row I was interested in calculating where my net worth is in relation to my personal "All Time High" (reached on 20th June). I track my investments using an excel spreadsheet, so to calculate the current situation in relation to the "peak" value I need to know both the maximum value in a column of data (easy using the "MAX()" function) and the latest value in the column. The second figure isn't quite as easy to automatically calculate - there's no simple function (you might expect "LAST()" to do this, but no such luck), so you need to use a fairly complex function:
=INDEX(B3:B6500,MATCH(9.99999999999999E+307,B3:B6500))
This for numeric data in column B, where the data is in rows 3 to 6500. For example, today's data is in row 1408 and my spreadsheet is currently setup with dates out to my expected retirement in 2027 (row 6500).

To check how the current value compares to my "All time high" value I calculate:
=INDEX(B3:B6500,MATCH(9.99999999999999E+307,B3:B6500))/MAX(B3:B6500)

Using this calculation in my various spreadsheet tabs (one for each portfolio component) shows that my current situation is:
Current Property Equity = 98.23% of all time high
Current Retirement Account value = 94.84% of all time high
Current Stock Portfolio value = 88.85% of all time high

Overall, current net worth = 93.87% of all time high

Although I'm fairly sanguine about recent drops in the stock market and the post-boom slump in real estate prices (they've been stagnant in Sydney for the past 4 years, and the prospect of further interest rate rises means the recent mild recovery is likely to come to an end), it highlights the fact that I really haven't suffered a major decline in my net worth. Even back in '87 when I only had a tiny investment portfolio, mainly invested in stocks, the "crash" only wiped about 25% off my net worth at that time (I also had a "defined benefit" retirement plan which wasn't affected and I didn't count in my net worth calculations - just as well as my employer converted the plan to a defined-contribution scheme prior to laying off a large chunk of the workforce in the late 90's).

It makes me wonder how well I'd cope with a total melt-down across all asset classes (such as happened in the great depression). What if my stock portfolio was down to only 10%-20% of it's peak value, property was unsaleable (and valuations down 50%), and I lost my job? Hopefully the decline would be gradual enough to have some chance to unwind my geared positions - selling off shares to eliminate my margin loans and selling our investment property in time to pay off our home loan with whatever equity remained. The tricky part would to know when to "pull the plug" on debts. The temptation would be to first view a decline in asset values as a correction (10-15% down), and then as a bear market/housing slump if the decline extended to a 20-40% drop over many months or years. In such cases selling out would be the wrong move, while holding your position (or even buying more at the "bottom") would be a good long-term move. But, if such a recession turned into a full-blown depression then a buy-and-hold mentality could easily lead to bankruptcy.

One can only hope that the world's central banks know enough to avoid a global depression, just as one hope's there won't ever be another "world war" and that global climate change doesn't need to be factored in to personal financial plans! In the absolute worst case my "Plan B" is to move the family up to my parent's farm - they have a spare shed we could live in, a rainwater tank and bore water, so we could grow our own food. This is also the "plan" in case of WWWIII, SARS or bird 'flu Wink

When can you afford to retire?

August 6th, 2007 at 03:57 am

There are many retirement calculators available online, but it's interesting to look at the figures that pop out of a simple spreadsheet model to guage the effect of savings rate and return have on possible retirement age.

MODEL ASSUMPTIONS:

Start off retirement savings with $0 at age 20

Initially earn $30Kpa which increases 5%pa until hit $50K salary, then 1%pa increase until retirement

Retirement savings to be drawn down during retirement at 70% of final salary

Savings to last in retirement until death at age 85 - this is about the average lifespan for someone who has reached 65. The assumption being that you live long enough to retire!

Investment returns and salary rises are expressed as real, after-tax percentages. This avoids having to guess what inflation rate may apply.

No other retirement income aside from retirement savings eg. no government or company pension.

RESULTS: Table of possible retirement age where funds will last until death
SR = savings rate (% of salary put into retirement account each year)
ROI = avg return on investment

ROI --->
SR 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%
8% 74 72 70 68 66 64
10% 72 70 67 65 63 61
12% 70 67 65 63 61 59
14% 68 65 63 61 59 57
16% 66 64 61 59 57 55
18% 64 62 60 58 56 54


CONCLUSIONS:

Early retirement before age 60 is a big ask - you either have to save a huge % of your salary, achieve a very high real return on your investments (which means higher risk of missing you target), or be willing to live on less than 70% of your pre-retirement income as a pensioner. To retire much before 60 you'd probably have to have other sources of wealth beside your retirement savings - such as a successful business or an inheritance.

Typical savings rates (10%-12%) and ROI (4%-4.5% real) result in a typical retirement age of 65

Investing too conservatively (3% ROI) or saving too little (8%) mean you couldn't afford to retire until your 70's if you want your retirement income to last until 85.

Copyright Enough Wealth 2007

Car Repairs Done

August 5th, 2007 at 08:47 am

The car now been fixed - one reconditioned Japanese gear box and a new clutch installed for a total cost of around $1510. Hopefully the car will now last for another 5 years or so (by which time it will have done around 150,000 km) and we'll then replace it with a "new" 2nd-hand vehicle.

Copyright Enough Wealth 2007

Frugal living: Educational Coaching for Kids

August 4th, 2007 at 01:37 am

Many parents give their kids education highest priority, and a lot will resort to expensive out-of-school coaching to help them get better marks and/or pass selective school tests. Things were different when I was in primary school - you just sat for the selective ("Opportunity Class") school tests in Year 4, and if you did well on the test you were offered a place. These days many parents spend a lot of money on professional "coaching" classes or computerised study assistance programs. But there isn't much evidence that this is money well spent - in fact some recent reports suggest that having kids spend too much time on repetitive "coaching" sessions after school can get them burned out and perform worse on selective school tests than they would have without any coaching at all!

I think a small amount of preparation for selective tests is probably worthwhile - knowing what sort of questions to expect in the test, practicing the exam format and getting used to the time allowed and exam technique can only help the child relax and do as well as possible "on the day". So, rather than spend a small fortune of coaching classes I've just bought a book of practice material and some sample tests which I'll work through with DS1 over the next couple of years (the exam is in year 4, but DS1 is only in year 2 at the moment).

Another fun activity which will help DS1 academically is spelling bee practice. Although spelling bees aren't nearly as big a deal in Australia as they are in the US, there has been a state-wide "Premier's" Spelling Bee running in NSW for the past couple of years. Entries for this year's competition closed last month - the school DS1 attends wasn't aware of the Spelling Bee until we told them, and was quite pleased to learn about it. DS1 was keen to compete in the yr 3-4 group, so the school decided that he will be able to compete against the kids in years 3-4 for selection to represent his school. The spelling lists used for the early rounds of the competition are available online, so DS1 will be able to practice learning them. A good, cheap, fun activity that will help him academically.

Copyright Enough Wealth 2007

DFS(FP) Update 4

August 3rd, 2007 at 07:28 am

I checked through some of my email accounts yesterday and noticed that my assessment items for the DFS1 course had been marked and feedback emailed to me last Wednesday. The turnaround time for marking (3 business days) was very impressive. Three out of the twenty assessment items weren't quite right and will need to be ammended and resubmitted. That won't be any trouble as the feedback email explained what areas need to be improved and provides references to the relevant pages of the study guide to use as a reference.

Doing this course is a lot like the Certificate courses I've studied at TAFE (technical college) rather than the courses I've done at uni - everything you need to know to pass the course is provided in the printed course notes, and provided you work methodically through the course it's almost impossible to fail. Again like TAFE, doing the DFS(FP) course provides a sound foundation of the basics and the technical requirements (eg. rules and regulations), but, unlike a uni course, doesn't require much creative thinking or independent investigation to pass.

I've only completed the first one of the twenty assessment items for the DFS2 module (insurance) so far - I'd better get cracking on some more of it this weekend. My GradDip Ed course commenced last week and I don't want to fall behind in the readings for that course. Unlike the science and computing/math courses I've done in the past, the education course material isn't hard to comprehend and absorb, but does require a TON of reading. The assessment items are all essays, which means lots and lots of background reading and recording tons of quotes with referencing (in the approved "style").

Copyright Enough Wealth 2007

Wealth Inequality Rises (Again)

August 2nd, 2007 at 07:14 pm

Figures published in today's Sydney Morning Herald show while the disposbale income of low-income households rose by 31% in real terms over the past decade, high-income households saw their disposable incomes rise by 40% in the same period.

The popular assumption is that this is a "bad thing" - and it is when the increasing the gap between rich and poor causes social friction and reduces social harmony. But it can't be all that bad when the "poor" households have still seen their disposable income increase by a hefty 31% in real terms over ten years.

Copyright Enough Wealth 2007

Jobs For Kids

August 2nd, 2007 at 06:30 am

DS1 is quite interested in the financial topics I've discussed with him. He enjoys doing his banking, earning some money busking, and I showed him how to apply for a business number online and how I fill in his eTax return. He's also been keen on using the computer - drawing using MS Paint and has worked his way through the QBasic tutorial I gave him. It therefore seems quite logical to combine his interest in computers and money-making to start his own blog. I don't want him to be posting anything personal on the web, but blogging about his busking and other financial adventures anonymously should be OK. So today I registered a domain name for him to use - Dotster has a special on 1-yr rego of .info domains, so I registered jobsforkids.info and will show him how to setup a blog using blogger and to setup some adbrite banner ads and inline ads. If we can setup a PayPal account for him linked to one of his existing online bank accounts I'll do that, otherwise we'll use my paypal account and I'll just keep track of how much he makes and add it to his pocket money. Hopefully a blog using the domain name jobsforkids.info and some strategic use of suitable keywords in posts should generate some traffic from search engines.

Copyright Enough Wealth 2007

Net Worth Update July 2007

August 1st, 2007 at 07:13 am

My net worth as at 31 July dropped by $23,420 during the month to $1,126,770 (AUD), due to a perfect storm of asset classes all declining simultaneously (so much for non-correlated asset classes). My leveraged stock portfolios decreased by a net -1.39% last month due to the overall weakness in the stock market. Whilst the estimated valuations for my share of our home and investment property also decreased slightly by -0.85%. The valuation of my retirement account decreased quite significanlty during July (-3.23%) as there were declines in both domestic and international stock funds, listed property funds and bond funds.

Given today's large drop in the Australian stock market I don't expect this month to turn out to be a net positive either...

Copyright Enough Wealth 2007