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
Viewing the 'retirement savings' Category
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'.
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.
CUrrent Age: 48
Current Retirement Account Balance: $289,133
PV of Other investments to fund retirement: $142,158
Target Retirement age: 60
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.
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.
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
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
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
We're still waiting for our employer contributions to start appearing in the bank account of our Self-Managed Superannuation Fund. Apart from the intial $200 deposit I made last June nothing has appeared in the account yet. We notified our employer to direct our 9% compulsory employer contribution plus our "salary sacrifice" amounts into the SMSF from 1 July, and the payroll department has apparently made the change. The employer contributions still go initially to the company's superannuation administrator, who is then supposed to redirect it into the SMSF bank account within a couple of days. As no funds had appeared in the account yet I asked payroll in what timeframe I should expect the money to appear in our SMSF account. It turns out that although the superannuation contribution amount is printed on each fortnightly payroll slip the contributions are only sent in at the end of each month. So I should see the July contributions hit the SMSF bank account by the middle of August. As soon as I know that no additional contributions are going into the old fund we can send in the paperwork to close DWs account and "rollover" the entire balance into our SMSF. I'll also send in the request to rollover the bulk of my account balance into our SMSF, just leaving enough in the old fund to cover my insurance premiums. It's cheaper to get death & TPD cover through our company superannuation scheme as we get group rates and the premium is paid out of pre-tax dollars. Outside of superannuation life insurance premiums are generally higher, and aren't tax deductible. In contrast, income protection insurance is tax deductible, so it's generally better to obtain it outside of superannuation.
Copyright Enough Wealth 2007
It's a pity that I already have several online savings accounts and mututal fund investments, because the new offering from rabobank looks very attractive. They offer an online savings account with no fees or minimum balance with an interest rate of 6.6%, and from this account you can invest in wholesale mutual funds for a low entry fee of only 0.75% (compared with up to 5% entry for retail funds going direct or via a planner, or 0% for a retail fund investment via a discount broker). They are offering 0% entry fee, but only until the end of July. But the 0.75% fee is still good value as it gives access to wholesale funds (which usually charge lower management fees than their retail fund equivalents) with a minimum investment of only $250.
I'd try out this account and fund investment option if I didn't already have more accounts than I know what to do with. They do offer the account for use with a DIY Superannuation account (SMSF), but I'll have to check carefully how their costs and range of available funds compares with accessing mutual fund investments via e*Trade (I already have an e*Trade account setup for use with our SMSF). One benefit of making out SMSF mutual fund investments via e*Trade is that eSuperFund (which administers our SMSF) has access to transaction data from our e*Trade account. If we invested for our SMSF via Raboplus we'd have to send copies of all the relevant financial info to eSuperFund each year.
I was also thinking about opening a Raboplus account for DS1 and/or DS2, but unfortunately you can't open a raboplus account if you're under 12, so the kids will have to make do with their St George bank accounts and Commonwealth Bank 'dollarmite' savings accounts. It's funny how some banks and Superannuation funds have no problem with opening accounts for a minor (with an adult having authority to operate the account), while others either don't handle accounts for minors at all, or insist on the account being opened in the name of the adult trustee(s).
Copyright Enough Wealth 2007
One of the changes made in the change to "Simper Super" went relatively unnoticed until now. All the media attention was around Retirement account withdrawals being tax free for retirees over 60 under the new rules, and the last minute opportunity to contribute up to $1 million into super before the new contribution limits come into effect on 1 July. It's only now that people have started to realise that under the new rules you will be hit with a 46% contribution tax rather than the usual 15% tax on pre-tax contributions if you haven't given your TFN details to your super fund manager. You also won't be able to make any undeducted contributions into a super fund after 1 July if you haven't given them your TFN - which would mean you can't get the co-contribution.
The media seems to have bought the government line that this change is all to do with making it easier to find the owners of "lost" super accounts. I think it has a lot more to do with clamping down on tax avoidance - the fact is that there have been a lot more tax file numbers issued to individuals than really exist in Australia. In the early days it was possible to open bank accounts under false names (no 100 point worth of ID was required back in the early 80s), and it was also fairly easy for someone to get multiple TFNs when they were first introduced (often by using a copy of a birth certificate obtained for a deceased person). These extra TFNs (under false names) were used to avoid tax. I'm sure there are still quite a few people working multiple jobs and using a different TFN for each, thereby getting the benefit of multiple tax free thresholds and low marginal tax rates. Up to now each of these jobs would have paid compulsory SGL amounts into a super account under those same false names. If the TFNs are provided for these super accounts the data matching used to find "lost" super accounts could help identify where one person appears to have multiple TFNs in use. If a TFN isn't provided for an account it could be a trigger for the ATO to check if the account appears to be legit. At the very least the lack of a TFN would mean any future contributions into the account would attract the top marginal tax rate.
I'm amazed that anyone in the media has swallowed the line that the requirement for TFNs will be used to reunite "lost" super accounts with their owner. After all, if the owner knows about the account and provides the TFN, it can't be "lost".
AMP has released their new Superannuation Modelling tool, and I must say that it looks quite cool. You just enter your current age and amount of your retirement savings, your salary (to calculate the employers 9% SGL contribution), and any extra contributions (via salary sacrifice or undeducted contributions). You then pick your preferred asset mix and it display a dynamic graphic of your projected situation at age 60 for three scenarios - poor, average and strong investment performance. You can then play around with the slide bars to change your retirement age, contributions or asset mix to see what the effect it has on the projected outcomes. The only odd thing was the projected outcomes for a poor market, where the best results were obtained for the 100% conservative and 100% growth options - the various other mixes of defensive and growth assets all produced lower projected outcomes in this situation. This seems to conflict with the theory that you get lower risk and better returns from a diversified mix of non-covariant asset classes compared to investing 100% in any particular asset class.
An article in today's SMH shows that the expected boom in superannuation contributions is occuring. Under the rules announced for the introduction of the "Simpler Superannuation" reforms to the Australian retirement savings tax laws, there is a one-off window of opportunuity to contribute up to $1m into your superannuation account before 30 June 2007. This is to "compensate" for the removal of age-based contribution limits with a flat limit of $50K pa of pre-tax (concessional, aka undeducted) contributions and $150K pa of after tax contributions. The new maximum contribution amounts will be indexed to increase in $5K jumps to keep pace with inflation.
This got me thinking about what the maximum amount that can be accumulated during your working life be under the new "Simpler Super" rules. Unlike the model of a minimum wage worker I posted a couple of days ago, this model has to make a few "bold" assumptions:
* the maximum contributions are made each year from age 18 to 65 ie. $50K pa pre-tax contribution via the SGL and salary sacrifice, and $150K pa of undeducted contributions. Although the $50K pre-tax and $150K undeducted contribution limits could easily be reached by a middle-aged, upper-management employee this is unrealistic for the under-30s worker. So this contribution rate would require some outside source of income. For example rich kids with an inheritance or a trust fund. I'm not fussed that very few people would possibly meet this requirement, we're just looking at what the extreme case could be under the new Superannuation rules.
* undeducted contributions aren't taxed on entry into a Superannuation account and pre-tax contributions are taxed at the concessional 15% rate
* the superannuation account is invested in a high-growth asset mix, achieving a real (inflation adjusted) net return (after fees and taxes) of 5% pa average for the 47 year investment period (up to age 65)
So, how much would this theoretical "rich kid" accumulate in their Superannuation account by age 65? Just over $37 million in today's dollars! And this amount can be withdrawn tax-free as a lump sum or a pension after age 60 (when "retired"). And this amount is per person, so a rich couple could accumulate a total of $74 million in this tax-sheltered environment.
As there is no gift tax in Australia, I imagine many rich households will be gifting $150K pa to each of their adult kids each year to put into their SMSF. The main downside of implementing such a strategy would be the legislative risk involved with locking this investment away until age 65. There could easily be further changes to the tax treatment of superannuation in the future.
After the recent announcement of a 5.3% rise in the NSW minimum wage to $531 a week a thought occurred to me - just how muxh would a person who worked for the minimum wage all their working life end up with in their retirement account? A few assumptions to start off with:
* the person is starting working full-time today at 18 yrs of age, and gets paid the adult minimum wage.
* the person never gets a pay rise or a promotion beyond the changes in the minimum wage
* the minimum wage from now on only rises in line with the CPI and not the average wage (this is very conservative, as the minimum wage generally rises at least as fast as the average wage in NSW)
* the person works fulltime until they retire at age 65
* the person manages to contribute $1000 pa ($2.74 a day) into their superannuation account from their take-home pay (in case this seems a big ask for someone on the minimum wage, bear in mind that you can earn an extra $100 a week just doing a paper round for 2 hours in the morning before work, 5 days a week).
* they get the 9% compulsory SGL contribution paid into their account by their employer each year. The current 15% contribution tax rate applies to this contribution.
* current rules apply, so they get the governments $1,500 co-contribution each year.
* their contribution and the co-contribution increase each year with the CPI
* their superannuation is invested in a high growth option that returns an average of 8% net over the 47 years they are working. Inflation averages 3% over this same period, so they get an average net real return of 5% pa
* There is no tax payable when they withdraw their superannuation balance when they retire at 65 (ie. the new Simpler Super rules still apply).
So, what amount of money (in today's dollars) would this person end up with when they reach 65?
$881,862 in today's dollars! ie. the equivalent of nearly 32 years wages.
If they withdrew this money as a tax-free pension at the rate of 5% of the balance each year (so if they kept the same investment mix during retirement the real value of the fund should be maintained indefinitely) they would receive a pension of $44,093 pa, or 160% of their pre-retirement wage (and tax free!)
Of course this scenario won't apply to most people starting work today - they can expect so time unemployed or working part-time. Some people starting work at 18 will die before reaching retirement age, or suffer permanent disability well before they reach 65. But the point is that the current superannuation system will "look after" the lowest paid workers very nicely, assuming they work full-time until 65 and also make their own $1000 pa contribution into their retirement fund rather than just rely on the employer's SGL contributions. (And assuming they don't select the "capital stable" or "conservative" investment options in the retirement account).
If the same person didn't put in the extra $2.74 per day that entitled them to the maximum $1500 government co-contribution they'd end up with "only" $407,099 at retirement, and at 5% withdrawal rate would receive a tax-free pension equivalent to 73.7% of the minimum wage (plus by entitled to receive the old age pension, assuming it is still available in 47 years time.
Now that our Self-Managed Superannuation Fund (SMSF) has been setup and the initial $200 contribution was processed OK via the ANZ V2 bank account, I'm starting to plan what asset mix the SMSF should contain, and what specific investments to make when our retirement savings are transferred into the SMSF next financial year. One complication of using a SMSF is that it will pool the retirement savings of DW and me, although the balances are reported indivdually based on each members contributions.
We currently have separate accounts with BT Employer Superannuation, and have slightly difference asset allocations in our accounts. Luckily our personal asset allocations are close enough to be able to get by with one asset mix that will suit us both in the SMSF:
Au Shrs Int Shrs Fixed Int Property
Overall 48.82% 39.33% 2.19% 9.67%
Me 48.11% 40.46% 0.59% 10.83%
DW 52.64% 33.18% 10.81% 3.37%
SMSF Plan 50.00% 40.00% 0.00% 10.00%
Another consideration with the SMSF will be ensuring that the investments are easy to monitor and can automatically provide the required transactional details to the SMSF administrator. eSuperFund (the administrator of our SMSF) can access transactional data for any investments done via the e*Trade brokerage account that was setup for out fund. Therefore I plan on buying any individual stocks using e*Trade and to also make mutual fund investments via e*Trade. Fortunately e*Trade rebates 100% of fund application fees (typically around 4%), so there's no issue with investing in mutual funds via e*Trade.
As the whole point of shifting our superannuation from BT to a SMSF was to save on fees we'll probably invest mostly via the CDF Australian Index Fund (which has a MER below 1%) and Vanguard Index Funds - Australian Shares Index , Global Shares Index, Property Securities Index. However, Vanguard charges around 0.90% MER on the first $50K invested in a fund, 0.60% on the next $50K, and 0.35% on any amount over $100K in that fund. Putting all our SMSF investment in just the Vanguard LifeStrategy HighGrowth fund would reduce the overall MER from around 1% to around 0.50% initially, and it would trend towards 0.35% as our SMSF value increased over time.
Fortunately the Vanguard LifeStrategy HighGrowth fund has an asset allocation close enough to our desired mix:
Au Shrs Int Shrs Fixed Int Property
HighGrowth 48.00% 32.00% 10.00% 10.00%
A Projection of our SMSF Starting Balance, Contributions and ROI shows roughly how much the fees will be over time:
'000 '000 '000 '000 Fees as Fees as
FinYear Start Add Earn End % of SMSF % of ROI
2007/2008 $360 $54 $36 $450 0.57% 7.15%
2008/2009 $450 $54 $45 $549 0.53% 6.49%
2009/2010 $549 $54 $54 $658 0.50% 6.02%
2010/2011 $658 $54 $65 $777 0.48% 5.66%
2011/2012 $777 $54 $77 $909 0.46% 5.38%
2012/2013 $909 $54 $91 $1,054 0.44% 5.16%
2013/2014 $1,054 $54 $105 $1,214 0.43% 4.98%
2014/2015 $1,213 $54 $121 $1,389 0.42% 4.83%
2015/2016 $1,389 $54 $139 $1,582 0.41% 4.71%
2016/2017 $1,582 $54 $158 $1,794 0.41% 4.60%
2017/2018 $1,794 $54 $179 $2,027 0.40% 4.51%
2018/2019 $2,027 $54 $203 $2,284 0.39% 4.44%
2019/2020 $2,284 $54 $228 $2,567 0.39% 4.37%
2020/2021 $2,567 $54 $256 $2,877 0.38% 4.31%
2021/2022 $2,878 $54 $288 $3,219 0.38% 4.26%
2022/2023 $3,219 $54 $322 $3,595 0.38% 4.22%
2023/2024 $3,595 $54 $359 $4,009 0.37% 4.18%
2024/2025 $4,009 $54 $401 $4,463 0.37% 4.15%
2025/2026 $4,463 $54 $446 $4,964 0.37% 4.12%
It's interesting to see how large a chunk of the annual investment earnings are being consumed by fees, even in this low fee arrangement.
What happens if you save "too much" for your retirement, as a recent MSN Money Article suggested was a possibility following conventional financial planning "rules of thumb" such as the 4% retirement withdrawal rate? Nothing too disasterous it turns out - just an accumulation of wealth and a perpetual income stream for our descendants, and/or a legacy to leave to one's favourite charity.
Plugging some "typical" figures into a retirement savings planner from AMP, it turns out that someone on a reasonable salary of $50K from 20-65, who saved the 9% SGL plus an extra 3% via salary sacrifice would end up with a retirement income of $33,333 that would last well beyond their expected life span - until the ripe old age of 150 years!
Calculator data entered:
Current retirement savings $ 0
Your age now years: 20
Your expected retirement age years: 65
Expected annual contribution increase: 3%
Expected rate of return before retirement: 8%
Expected rate of return after retirement: 7%
Expected annual inflation rate: 3%
Current gross annual salary $ 50,000
Your yearly contribution: $ 0
Your employer's yearly contribution: $ 4,500
Yearly retirement income required (% of current salary): 65%
Amount saved upon retirement $ 2,217,233 ($ 586,322)
Which would provide the required retirement income of $33,333 until age 94, which is considerably more than the expected life expectancy (81 years for a male).
But wait, just saving an extra 3% of salary each year via salary sacrifice (ie. pre-tax) would result in the following:
Amount saved upon retirement $ 3,086,723 ($ 816,249 in today's dollars)
Will last almost indefinitely (until over 150!)
Any higher savings rate would result in the retirement account actually accumulating wealth during retirement at a rate greater than 65% of pre-retirement income, so you would leave a perpetual income stream for your descendants.
In reality you're unlikely to get a steady 8% return pre-retirement and 7% during retirement, even if you invest in an asset allocation that is expected to average these rates. Similarly, inflation won't stay at 3%. For these reasons most people will choose to be conservative in their modelling, and the chances are good that you'll end up with an even larger perpetual income stream, plus the ability to draw a larger income stream during your retirement years.
Canadian Financial Stuff has a post Retirement? Not Likely for me that seems to suggest that only the baby boomer generation will be lucky enough to get to enjoy a real "retirement". I must admit that I think this view comes from a perception that most modern consumers combine of lack of taking ownership for their own retirement funding with an inflated expectation of what lifestyle retirement should offer them. From personal experience "retirement" has been enjoyed by most people in the developed countries for the past couple of generations, and isn't about to disappear for anyone that makes a serious effort during their working lives to fund their retirement years:
My grandfather was a plumber, retired at 65 and lived on the UK government pension until he died at age 92 - 27 years of "retirement".
My father was an pilot, retired at 58 and lives as a self-funded retiree. He's 75 and going strong - so far 17 years in "retirement".
I'm a scientist/middle manager, and will probably be able to "retire" any time after 58, though I'll probably choose to work 'til 65 or 70, and then spend my time managing my investments. Hopefully I get to spend 20-30 years in retirement.
My kids already have retirement funds setup by me, and adding a thousand dollars a year into their accounts from birth until 18 will mean they're very likely to be able to "retire" any time after 58 that they choose, without having to sock too much away during their working lives. I've no idea how long they'll spend retired. Advances in health care may extend their healthy lifespan so much that retirement is postponed indefinitely by choice. Adding just a few extra years to your working life makes it MUCH easier to accumulate enough for a very comfortable retirement lifestyle - just compare the results you get from any retirement calculator with a retirement age of 60 vs. 65 or 70...
I think the only thing stopping many people in the current and future generations in the developed world from having a comfortable retirement will be "consumption inflation". Like locusts many modern consumers gorge on current consumption and put nothing aside for their own retirement.
Another aspect is that people these days often aim for a "lifestyle of the rich and famous" in their retirement. In my grandparents day all you needed for a "comfortable" retirement was a one bedroom house with a roof that didn't leak, enough money for food and utilities, and membership of the local library and church. Throw in a radio and a small garden to tend and they were more than happy. These days this existence would be labelled as living "below the poverty line"!
Many people like to lend a helping hand if they are able, especially when it comes to close family members. But financial assistance may be ineffective if you don't fully understand the situation of the person you've helping out, and how they'll react to their new situation. When you're helping out relatives you don't want to pry into their finances, but I'd advise making the effort to make discrete enquiries, even if it seems a bit awkward.
As an example, my grandfather changed jobs shortly before he was due to retire (in order to move back to the region his wife and he had lived when they were young). Unfortunately this meant that he didn't qualify for a pension from the company he had worked at for over thirty years, and instead had to rely on the government old age pension. As my grandparents didn't own their own home, my father decided to buy a house for them to live in, thinking that this would substantially boost their living standard in retirement. Later on, one of my grandparents had to move into a nursing home for several years while other other one continued to live in the house my father had bought them. It was only after my grandparents had both passed away that my father found out that the nursing home fees would have been paid for by the government if my grandparents had no substantial assets. However, because of my father's generosity they had managed to save a substantial portion of their government pension for many years (without telling anyone), apparently hoping to leave something to their kids and grandchildren. This had meant that they were required to pay the nursing home fees themselves, until all their savings had been used up. So, due to a lack of communication my grandparents hadn't gained any benefit from my father's financial help (if they'd spent part of their pension on rent they wouldn't have had to pay the nursing home fees), and the end result was simply that my father's money was tied up in a country house that didn't appreciate at all in value, when it could have been more effectively invested elsewhere.
The $200 I transferred direct from my Credit Union account into my new ANZ "V2 Plus" account that was recently set up to receive contributions into our Self-Managed Superannuation Fund (SMSF) has disappeared (temporarily I hope). Although there's often a three day "hold" on funds transfers between different financial institutions in Australia, this is usually manifest as a difference between the "account balance" and "available balance" figures for the destination account ie. the funds immediately disappear from the source account, and generally appear in the destination account the next day, but aren't available until the three day holding period expires. It seems odd that the $200 I transferred last Thursday hadn't appeared at all in the ANZ account yet - if it doesn't turn up tomorrow I'll have to phone ANZ to try to work out where the money has gone. It raises an interesting side issue - at least when transferred funds appear immediately but are "unavailable" you still earn interest on the money during those three days. With funds that disappear for three days someone else must be earning interest on my money in the interim.
After completing the 100-point identity check for DW and myself at the ANZ bank nearest my workplace, I checked with our payroll department on what paperwork was needed to start making the employer SGL payments into our new SMSF. I was advised that it would be best to get the new details entered into the pay system now, but my employer would prefer to not commence payments into the SMSF until the new financial year (ie. after 1 July) so that it was easy to reconcile this years payments. This is fine by me, it just means that we can't send in the paperwork to exit DW from the old BT Superannuation fund until after all this years payments have been processed. As I'm going to leave some money in the old fund in order to retain my life insurance policy, I can still send in the form for making my partial fund transfer next week. Meanwhile I did a $200 direct payment into the new SMSF bank account from my credit union account, just so they'd be some financial details reported for the SMSF this financial year. I want to check out what the member reporting looks like.
I was a bit interested in how various payments made into our SMSF through the one ANZ bank account could be identified by eSuperFund - ie. which member the contribution belonged to, and whether the payment was a deducted or undeducted contribution, employer SGL payment or salary sacrifice. I rang the eSuperFund help line and they advised that the deposit should note which member the deposit was from in the lodgement reference, and that employer contributions should be identifiable because they would be regular deposits from the same source. Anyhow, at the end of the year eSuperFund will send us a contributions summary for the trustees (DW and I) to check for accuracy before it is finalised. They also mentioned that it would be possible to check these details online in future, but that this was still "in development". This is another risk with moving from the BT fund into our own SMSF managed by eSuperFund - if eSuperFund ever went out of business we may find that the required record keeping hasn't been up to scratch. Hopefully tha annual compliance checks by the ATO will ensure that everything is meeting the required minimum standards.
The next step is to check what investment mix DW and I currently have in our BT superannuation accounts, and decide on what combined asset allocation we want in the SMSF, and how to meet this allocation - eg. direct share investments or CFDs, ETFs, actively managed mutual funds, index funds or whatever. One drawback of using the SMSF for DW and myself is that the assets are all managed in a "pool", and just split into member balances pro-rata the contributions into the SMSF. This means that we have to decide on the investment mix jointly as trustees, rather than being able to choose our individual investment mix as we do in our existing BT funds. This isn't a big problem as we have similar risk tolerance and investment time-frame. In practice, the SMSF balance will comprise around 80% or more my contributions, and I enjoy doing paperwork more than DW, so I'll probably make the investment selections and just get my choices approved by DW.
The paperwork from eSuperFund confirming the establishment of our Self-Managed Superannuation Fund (SMSF) arrived today. Overall the process has been very quick and efficient. The initial online application only took five minutes to complete and gave a false sense of simplicity - when the actual "paperwork" to create the SMSF arrived it was a very thick package with FIFTY of the little, yellow "sign here" stickers attached! Anyhow, the paperwork has now been processed by the ATO (Australian Tax Office) and everything is now in place. In total we received:
* A TFN (Tax File Number) for the new fund from the ATO
* An ABN (Australian Business Number) for the new fund
* A "V2 Plus" Bank Account with the ANZ (to handle all deposits into the fund)
* A Share Trading account with E*Trade for the fund
* A second ANZ Bank account to hold funds to settlement of SMSF share trades
The next step is to visit the local ANZ Bank branch and present passport, drivers licence etc. for myself and DW (the trustees of the SMSF) to complete the 100 point identity check required for any new bank account. At the same time I'll get a CRN (Customer Registration Number) and "telecode" from ANZ so we can register online for online access to the ANZ Bank accounts.
This should all be in place by next week, at which time I can do the paperwork required to transfer funds out of our current Employer-sponsored Superannuation fund (run by Westpac/BT) and into the new SMSF. DW has around $50K in her account, so we'll transfer the entire amount and arrange for future SGL (Superannuation Guarantee Levy) amounts to be paid from our employer into the new account. This will mean she loses the current life insurance cover we have via the BT Super Fund, but she only had a nominal amount of cover anyhow. I have a $400K policy through the BT Super Fund, so I'll probably transfer the majority of my balance into the new SMSF, but leave a small amount there to maintain my life insurance cover. I'll also let my future employer SGL deposits go into the 'old' BT account to cover the ongoing insurance premiums. I can always withdraw the remainder of the balance if I change jobs or have a large balance build up in that account. I wouldn't want to do too many transfers out of the BT Fund though, as they charge $35 for each withdrawal! There will also be the ongoing annual member fee if I keep my BT Super account open (around $55 pa), but at least I'll be avoiding the fairly high fund management fee of around 1.25% (even after our employer's fee rebate has been applied). Overall, with a combined Super balance of around $350K in the SMSF we'll save around $3,500 each year in management fees, even after deducting the $600 pa management, audit and reporting fee charged by eSuperFund on our SMSF.
In the future we will probably add any future savings into the SMSF as the tax benefits are considerable, especially under the new "Simpler Super" changes that apply from 1 July. With a maximum annual contribution limit of $400K ($50K each of pre-tax contributions (SGL and salary sacrifice), and $150K each of post-tax contributions) we would be able to put all our future investments into the SMSF if we want to (the only significant draw back of this strategy is that we can't get money back out of superannuation until we reach 60).
The cheque for my $34,000 withdrawal of money from my retirement account arrived today. As it was an undeducted, unrestricted, non-preserved component of my super account balance there wasn't any tax deducted and I don't expect it to be subject to any income tax (although the Eligible Termination Payment statement that accompanied the cheque looks like its something that has to be attached to this year's tax return). I emailed the payroll office at work a few days ago to organise a salary sacrifice increase to $1600 per fortnight next financial year, so I'll be using the $34,000 as supplementary income for the next couple of years. For that reason I think I'll just leave it in the high interest online account with my Credit Union (earning 6.10%) and transfer $650 each fortnight into my main Credit Union account where my pay gets deposited.
A dividend payment notice arrived today from David Jones for a fully franked interim dividend of $180, with a $77.14 franking credit.
So far this financial year I've received the following dividends from my Australian share portfolios:
UnFranked Franked Franking Credit TOTAL
FY 06/07 $1,607.90 $10,408.32 $4,460.68 $16,476.90
The Australian Treasurer handed down the annual budget tonight, and, as expected in an election year, there are some generous handouts to "middle Australia" (ie. swinging voters). Those of personal interest are:
* A "one off" doubling of the government superannuation co-contribution for the 05/06 financial year. This means that DW and DS1 (who both made $1000 undeducted contributions into their superannuation accounts that year), will get a total of $3,000 in co-contribution, rather than the expected $1,500.
* Tax cuts at the "bottom end" starting from 1 July 2007. The threshold for the 30% rate has been increased from $28,000 to $30,000, and the low income earners tax rebate has increased from $600 to $750, which means anyone with taxable income less than $30K will pay 0% tax on the first $11,000 of income (the 15% tax rate normally applies above $8,000).
Having recently withdrawn $34,000 of unrestricted, undeducted, non-preserved money from my superannuation account (prior to the rule changes taking effect on 1 July), I'll now be able to salary sacrifice a large fraction of my salary for the next two years. This will
a) save tax on the sacrified amount (super contribution tax rate is 15% rather than the income tax rate of 30% which would otherwise apply)
b) reduce my taxable income down to around $30,000, so I'll be eligible for the $1,500 government superannuation co-contribution if I make a $1,000 undeducted super contribution (it may even end up being $3,000 if this year's "one off" increase ends up being repeated!)
c) substantially reduce our combined family taxable income so we are eligible for some Family Tax Benefit payments.
The others changes won't immediately affect us, but the childcare rebate changes should be good once DS2 starts preschool in a couple of years.
My Networth as at 30 April totalled $1,116,129 (AUD), an impressive overall increase of $45,141 (4.21%) for the month. My stock leveraged stock portfolios increased by a net 5.10% during April, and the estimated valuations for my share of our home and investment property increased 2.10% compared to last month, continuing the mild uptrend that began last month. The property gains were slightly offset by our mortgage loan balances increasing by a net $1,082 (0.30%) due to our monthly redraw of $3,500. We're continue redrawing some of our advance mortgage payments each month to help meet our mortgage repayments while DW is on maternity leave for another two months. Unlike last month's big drop in the valuation of my retirement account, this month my retirement account balance went back up $10,919 (3.37%).
So far this year my Net Worth has gone up by $83,346 (8.07%), which is 59.53% of my goal for the entire year.
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!).
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.
One of the catchiest phrases I ever heard at an "investment seminar"* was "tax is optional". Despite the common confusion between legal tax minimization, and illegal tax evasion, there are some relatively straight forward methods to protect one's hard earned income from the ravages of taxation. Now, the following is simply a couple of scenarios I've been thinking about, it is not professional tax advice as a) I'm not qualified to give any, and b) you'd be an idiot to base your investment planning purely on something you read on a blog - always check it out yourself against reliable reference material, or get professional advice. Having got past all the disclaimers, let's look at a few rough examples.
a) The obvious one - if you're over 60, come 1 July this year the new "simple super" legislation will make all income coming to you from your superannuation fund tax exempt - it doesn't even have to be included on any tax return you fill in. Hence retirees with adequate retirement savings will easily be able to pay no tax on a $100,000 annual income if it's coming to them from their taxed super fund.
b) If you're earning $100,000 salary in Australia the 2006/2007 tax rate for a resident single person would mean you normally would pay $27,850 in income tax (not counting the medicare levy), leaving $72,150 after tax income. This could be reduced to zero by arranging a salary sacrifice of %92,500 into superannuation. This would reduce your taxable income to $7,500. The tax rate on the first $6,000 of income is 0%, and the $235 low income tax offset would mean you could earn at least $7,500 taxable income without actually paying any income tax. Of course you'd probably need some other way to finance your living expenses if you reduced your taxable income to only $7,500! There is also the superannuation contribution tax of 15% on salary sacrificed contributions, so to some extent you'd simply be replacing $27,850 income tax with $13,875 contribution tax. This makes salary sacrifice of taxable income below $25,000 (the threshold for the 30% income tax rate) generally not worthwhile.
BTW This option would not longer be available after the new "simple super" rules come into force on 1 July - the max. salary sacrifice + SGL contribution total will be $50,000. And under the current rules, there is an age-based maximum that would make this option only work for older employees.
c) Have large tax deductions from investment interest expenses to reduce your taxable income to the extent that it entirely offset by franking credits from your stock dividends. This is theoretically possible, but would only be possible for some investors with large existing investment portfolios. For example,
Person X has a $1,000,000 stock portfolio yielding 3% ($30K) in fully franked dividends and earns $70,000 in salary. The stock portfolio averaging 6% capital growth.
If this person borrowed $2,000,000 via a margin loan at 8% interest and used it to expand the existing stock portfolio. The new situation would be:
$70K salary + $90K dividends.
Dividend franking credit $38,571.
Gross income = $198,571
Tax deductible interest = $160,000, paid for by salary and dividends.
Taxable income = 198,571 - 160,000 = 38,571
Tax on 38,571 = 6,921.30
Refund due = franking credit - tax liability = 38,571 - 6,921.30 = $31,649.70
The extra capital gain from the $2m extra invested is worth an average of $120,000. As it is eventually only taxed at half the applicable marginal income tax rate, the eventual after tax gain would be more than the decrease in current income.
Of course this would only work if you could live on $31K of after tax income, ie. you were going to invest $40,500 (56%!) of your after tax income anyhow. Otherwise you'd be short of income for living expenses.
Now, none of these options are practical or advisable for most people. And the ethics of paying nil tax is very personal - after all, someone has to pay for roads, schools, hospitals etc. And the use of gearing, especially using margin loans, increases risk - you may end up with investments that perform way below "average" during your holding period. But some combination of the above can be used to reduce the amount of income tax paid, provided you are currently spending less than you earn and are investing some "after tax" dollars.
There also some further benefits possible by lowering your taxable income - for example, reducing the amount of medicare levy payable, qualifying for the government superannuation co-contribution, and so forth. You have to be a bit careful if you are married with kids and getting some "family tax benefit" payments (A or B) - the rules for calculating income differ between the ATO and centrelink.
It's probably best to end with another catchy quotation - "tax reduction should not be the key factor behind any investment decision." After all, it's no good getting a big tax break on an investment that ends up worthless.
* ie. high pressure sales talk for an investment scheme
The paperwork from ESuperFund.com for setting up our new Self-Managed Superannuation Fund (SMSF) arrived in the post yesterday. A very thick envelope of "personalized" boiler-plate, with sixteen(!) little yellow tags showing where DW and I have to sign our names. I'll take a stab at wading through the details of the more relevant parts (the Trust Deed and the Investment Strategy) this weekend, between doing my university assignments and hiding Easter eggs* for DS1 to find, and hopefully we can get it all signed and sent back next week. Transferring DW and my super from BT super into the SMSF will save at least $1,670 in annual admin fees as far as I can tell**. I'll invest in the same asset mix within the SMSF as I had selected in the BT super scheme, just via Index funds instead of actively managed funds in some cases. If the capital gains tax liability caused by liquidating my stock portfolios isn't too high I'll also look at shifting my direct share investments into the SMSF as well, as there will be considerable tax savings over time within the super environment (especially NIL capital gains tax on super assets sold when the SMSF is in pension mode). You can't use gearing within a super fund (they're not allowed to borrow, except for very limited cases, such as when settling share trades) but, apparently it is OK to buy CFDs.
* They're actually lots of little packets of Trolli "bunny surprise" sweets (a bit like gummi bears), as DS1 is allergic to both milk and soy, so chocolate eggs are a no-no, even the "lactose free" ones. Just as well that he loves gummi bears
** The SMSF admin fee is AUD$599 pa. The BT fund charges a $53 pa member fee, plus an admin fee of around 1.5% pa. Our employer has arranged for a "member fee rebate" of about 0.9% pa but this still means that on the combined balances of DW and myself (around $370K) we're currently paying a net admin fee of around $2,270 pa to BT.
My Networth as at 31 Mar totalled $1,070,988 (AUD), an overall increase of only $4,210 (0.39%) for the month. My stock leveraged stock portfolios increased by a net 3.52% during March, and the estimated valuations for my share of our home and investment property increased 1.42% compared to last month, which is encouraging. The property gains were slightly offset by our mortgage loan balances increasing by a net $1,084 (0.30%) due to our monthly redraw of $3,500. We're redrawing some of our advance mortgage payments to help with our repayments while DW is on maternity leave.
The biggest negative for the month was a sharp drop in the valuation of my retirement account, which wasn't recovered fully by the stock market recovery - possibly some fee or tax liability was paid out during the month. The retirement account balance ended down $6,628 (2.00%) for the month. I'll have to check all the transactions for the month online to confirm exactly what was going on, but the online transactions are a pain to analyse - having half a dozen investment options (mutual funds) in my retirement account, each and every transaction is split into a separate transaction for each investment option. The easiest method is to download the relevant date range and import it into excel, then sort by transaction type and description and total up all the related items for each date to work out the total amounts being deducted for fees, insurance premium, fee rebate, tax etc.
A couple of dividend statements arrived today - $403.23 from Foster's Group and $324.08 from Australian Pipeline Trust. The Foster's dividend is fully franked (ie. carries a tax credit for the 30% company tax that has been paid), so on my tax return I'll declare both the dividend and the franking credit as income, but get a tax credit for the amount of the franking credit ($172.81). This basically means that I'll only have to pay additional personal income tax on this dividend if my marginal tax rate ends up higher than 30% (ie. in the 40% or 45% range). As I usually reduce my taxable income considerably via the tax deductible interest paid on my margin loans, I'll probably not have to pay any additional tax on this dividend. If my marginal tax rate was lower than 30% I'd get a tax refund for the excess franking credit.
The Pipeline Trust dividend was actually a combination of unfranked dividend of $185.76, a capital return of $69.66 which is not taxable (but which reduces the cost basis of the shares when they are eventually sold and capital gain is calculated), and a trust distribution of $69.66 which gets reported under a different tax item from dividends and has different tax treatment - I don't know exactly what, the details will be in the end of financial year taxation statement from the trust. Overall I prefer the simplicity of a straight dividend to trust distributions, even if they have favourable tax treatment!
I filled in an online application for a self-managed superannuation fund (SMSF) account with esuperfund.com. As its nearing the end of the 2007 tax year (30 June 2007), and a SMSF has to report each year to the tax office, eSuperFund has an offer of $0 annual fee (as well as the usual $0 establishment fee) for the 2007 fund paperwork. This is good, as it lets me get the fund established this financial year and have everything in place to transfer most of my existing superannuation account balance into the SMSF asap. I'll probably leave a small balance in my existing super fund with BT Employer Superannuation, just to keep my existing life and TPD insurance in place. I may even leave my employer 9% SGL contributions and salary sacrifice amounts going into the BT account as the 1% admin fee on these small amounts will not be material. I can always transfer additional amounts into the SMSF later on. My wife will probably transfer her entire balance and arrange for future contributions to go into the SMSF as she has a smaller balance and won't be doing any salary sacrifice while working part-time for the next few years (until DS2 starts school).
Finally, I didn't do much spending today - $39.64 for some grocery shopping, and $26.60 for petrol. I normally fill up the car on a Tuesday as that is generally the bottom of the weekly price cycle, but as there is often an early increase in petrol prices immediately before the Easter long weekend, I decided to fill up today instead.
Over the past two years, AMP and the National Centre for Social and Economic Modelling (NATSEM)have producted a series of reports that open windows on Australian society, the way they live and work – and their financial and personal aspirations.
The reports focus on the distribution of income and wealth as key factors that differentiate generations and segments of Australian society.
Well worth a look as the reports are well written and easy to digest, pulling together heaps of detailed statistical information that would otherwise be hard to track down and analyse.
Although it's always risky to make long term plans based on the assumption of status quo - especially where tax laws are concerned - the recent changes to the Australian Superannuation rules bring some interesting long term tax planning ideas to mind.
Basically the new Superannuation rules are that any withdrawals (lumpsum or pension payments) from a "tax paid" superannuation fund will be tax free after age 60. One possible side effect of this change will be to make it more tax-efficient to realise capital gains on investments held outside of super once you are retired, over 60, and getting most of your income as an untaxed superannuation pension. The ATO information about the new rules states that "Individuals will not need to include lump sum superannuation benefits and superannuation pensions from a taxed fund made after 30 June 2007 in their tax returns. Superannuation funds will not need to report benefit payments made after 30 June 2007 to the ATO for RBL purposes." Presumably this would mean that such amounts are not taken into consideration when calculating capital gains tax for your personal tax return during retirement.
I'm thinking that I'll be able to live off my tax-free superannuation benefits during retirement, make use of margin lending to offset any non-superannuation investment dividends with tax-deductible margin loan interest, and thus have almost no taxable income during retirement.
This should mean that I could sell off, say, $100,000 worth of my non-superannuation portfolio each year during my retirement and have a fairly low capital gains tax liability each year (as the CGT calculation is based on the normal personal marginal tax rates applied to 50% of the realised gain for assets held more than 12 months).
For example, selling $100,000 worth of my portfolio during a retirement tax year, with say 75% of the amount being a "capital gain" would result in a CGT bill of:
75% realised capital gain = $75,000
50% discount applied = $37,500 taxable CG
tax on $37,500 = $6,600 (using 2007 tax rates)
I'm trying to do a spreadsheet comparison of holding my current non-superannuation geared stock portfolio until retirement and liquidating it during retirement using this technique, vs. liquidating the geared stock portfolio now (and paying considerable capital gains tax due to my taxable salary income) and contributing the after-tax amount into my superannuation account where concessional tax rates would apply to the investments. Regardless of what the modelling tells me is the more tax-efficient plan, putting all my investments inside superannuation may not be a wise choice due to the restrictions on accessing any superannuation investments prior to "retirement age". Although I do have an adequate undeducted, non-preserved amount within my superannuation account that could be withdrawn in an emergency.
I'll let you know if my spreadsheet modelling comes up with any useful insights.
A new detailed report is out that gives an interesting summary of the results of a global survey on retirement plans, attitudes, and status. The survey covered topics such as:
Attitudes towards retirement.
Comparison of retirement perceptions with reality: from working and retired people.
Identifying perceptions of the working and the retired on various issues.
Identifying changes in perceptions of retirement between 2004 and 2005.The report is mainly in the form of charts, so its a quick read. I recommend that you check it out.
The past month provided more good gains in my stock portfolio and retirement account, offset only slightly by a small drop in the valuations of my real estate assets:
* Average property prices were slightly down, dropping my property equity by $4,146 or 0.58%. We also had to redraw $3,500 from our home loan prepayments to meet our repayments as DW is on maternity leave and not earning any income at the moment.
* My stock portfolio equity went up another $19,568 (5.50%) this month and my retirement account also increased significantly, although it was boosted a bit by some extra contributions being deposited by my employer this month - up by $12,561 to $324,598 (up 4.03%).
My Networth as at 31 Jan now totals $1,058,372 (AUD), an overall increase of 2.48% for the month.
As discussed in a previous post, I'm looking into either buying Index Put options to protect against significant losses if the market drops, or else selling off some of my stocks to repay my margin loans and eliminate my gearing while the market is at the current high level. I'm leaning towards the Put Options idea as I don't want to realise capital gains this financial year, and most of my margin loans have had the interest prepaid until 30th June, so I should keep my investments until then (and keep my fingers crossed that the market goes up a bit more until then).
Although my preferred strategy is a "high-growth/high-risk, buy-and-hold, stick to your asset allocation" one, there comes a time when the market starts to look a bit too high to any dispationate observer. The pundits are still saying that the Australian stock market isn't cheap but isn't too expensive either, based on historic p/e ratios and company profitability outlook. Then again, they're saying that after three consecutive years of total returns of 20%+ the best they expect this year is around 10%, so the upside seems limited, while the downside risk has obviously increased from what it was four years ago. Looking at the chart for the All Ordinaries Accumulation Index since 1980 the current market rise looks a lot like 1987 - and we all know how that ended up!
Anyhow, the Superannuation (retirement) account for my son was invested with the following asset allocation:
80% Geared Australian Share Fund
20% International Shares Fund
This allocation has performed very well since I opened his account four years ago, with returns of:
FY 04/05 25.3%
FY 05/06 42.0%
I figure that having gotten off to such a good start DS1 can now afford to move to a more conservative, high-growth asset mix (even though at age 6 he has another half century before he reaches retirement age), so today I sent in the paperwork to change his investment mix to:
30% Australian Share Fund
10% Australian Small Co Share Fund
20% International Shares Fund
20% Property Securities Fund
20% Australian Bonds Fund
This is still a high-growth, high-risk allocation (with 60% in stocks) so it should provide a good rate of return over the next 50 years, but at lower volatility than the previous asset mix. If there's ever a significant (30%-50%) correction in the Australian Stock Market I'll think about moving some funds back into the geared Australian Share Fund again. I think this weak form of market timing is called "dynamic allocation" - but it's still just a guess no matter what you call it.
* * * *
The current market also has me a bit nervous about my Australian Share Portfolio. I have two margin lending accounts holding $540K of Australian Shares, with a loan balance of $263K, so a severe market correction would have a big impact on my Net Worth! I'm toying with the idea of buying some PUT options on the ASX200 Index as insurance against a major market correction occurring between now and the options expiry date (21 June 2007). For $12K I could buy enough Options to offset any losses where the market drops below 5500 (it's currently at about 5750). The simpler option (excuse the pun) would be to just sell off enough of my portfolio to pay off the margin loan balances - but the interest has been pre-paid until 30 June 2007, so I'd be throwing five months of interest payments down the drain if I paid off the loans now. I also have reasons for not wanting the realise a capital gain prior to 30 June.
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