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Make Hay While the Sun Shines

November 4th, 2007 at 11:12 am

Besieged by the non-stop promotion of the consumer life-style everywhere we look and everywhere we go, many people are struggling to cope with consumer debt and the pressure to live a lifestyle that is, to be honest, beyond the means of their available income. However, if you look back at how our grandparents are earlier generations lived, we are currently living in a "golden age". To quote an article in the SMH:

"A couple of decades ago, the language of prosperity was almost like a foreign language ... Now, phrases like full employment, stock market highs and the commodities boom roll off the tongue.

Across the board, jobs are plentiful, wages are high and individual wealth continues to rise. There's no doubt this is a golden age of prosperity - possibly the best of economic times Australia has experienced.

And there's no doubt, either, that the economy is surging. The latest figures for the June quarter showed annual growth of 4.4 per cent, the highest for three years. Non-farm GDP growth, which removes the impact of the drought, was at its fastest in almost 13 years at 5.2 per cent."

At the same time, looking forward there are problems with "the limits to growth" that could quite possibly make living conditions much more difficult for our descendants. The apocalyptic prophesies of Malthus and, much more recently, the "club of Rome" turned out to be wrong (or at least premature). But the more recent concerns about climate change (whether or not they are caused by human activity) could mean we run into problems supplying food and water at reasonable cost to everyone. And the commodity boom has some chance of turning out to be a supercycle (or a "peak" in production of many commodities, not just oil) which could lead to ongoing real price increases in resources.

Therefore, there is a least some chance the our current economic situation is just about "as good as it gets". If so, we'd better make the most of this opportunity to build up of families wealth so we have some store of wealth put aside to tide us, or our kids and grandkids, over where the hard times come again. Make hay while the sun shines, for there may be some hard winters ahead for our descendants.

Copyright Enough Wealth 2007

Wealth Inequality Rises (Again)

August 3rd, 2007 at 02:14 am

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

How Much Will Someone On Minimum Wage Have In Retirement?

June 11th, 2007 at 11:25 am

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.

Enough Wealth

Keeping Up with the Uber-Joneses

May 31st, 2007 at 10:53 am

One of the benchmarks I use to evaluate the progress of my net worth is to compare it to 1% of the amount required for entry to the annual Business Review Weekly "Rich List" of the 200 wealthiest Australians. Last year the cut-off was A$130m. This year it has leap up to A$180m, largely due to the mining boom and surging financial services sector. This represents an increase of 38.5% in just 12 months.

By comparison my net worth increased from A$847K to A$1.033m during 2006 - an increase of "only" 22%. So, it seems that I'm not keeping pace with the Maga-Rich at the moment. This is largely due to the fact that nearly half my net worth is tied up in Sydney real estate, which has been in the doldrums for the past couple of years, and my stock portfolio is a bit underweight the mining sector. But overall I'm still pretty pleased with the performance of my investment portfolio.

Anyhow, although the cut-off point for entry to the Rich List rose by 38%, the estimated total wealth of the people making the list only increased by 27% from A$101.5b in 2006, to A$128.6b today. It appears that while accumulating wealth get easier after you've made your first million, it starts to get harder again after the first billion - those at the top of the Rich List (excluding the miners) are growing their wealth less rapidly than the others in the list.

Enough Wealth