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.

The NY times has an article covering the contrarian view of some academics that Americans are saving too much for their retirement, and risk squandering their youth rather than their money. The theory being that a middle-income couple could trade off $400,000 less in retirement money for an extra $3,000 a year disposble income during prime working years to spend on education or home improvement.

On the other hand, I've seen advice that if you are "on track" to meet your retirement or investment target you should adjust your asset allocation to attain the amount of return required for the least possible risk.

I don't find either of these options terribly attractive - just because my retirement fund is on track to meet my retirement income needs doesn't mean that I want to start spending more or wish to adjust my asset allocations to a mix with lower "risk" and a lower expected rate of return. I'm happy with my current budget, so I intend to add any future pay rises (that exceed increases in my cost of living) to my savings plan. Similarly I'm quite content with the current risk level of my investment portfolio, so it is likely to achieve a higher rate of return than I really require to achieve a comfortable retirement. Even if I adjusted the risk level of my retirement account investments down in order to "guarantee" that I'd have enough money in retirement, I'd still aim for the same overall level of risk in my entire investment portfolio that I'm comfortable with, so I'd likely accept an increased level of risk with my non-retirement investments as my retirement account got load up with "safe" assets.

So, my preferred option for when you find yourself ahead of target for your investment goals is just to keep on accumulating "excess" wealth. You can always leave it to charity in your will if you're so inclined, or else leave a larger estate to your heirs.

Plus there's always the risk that advances in medical technology might mean that you live a lot longer than you currently expect. Or else the world could go to "hell in a handbasket" due to global warming, WMD terrorism, etc. etc. and you could find yourself "retired" earlier than you expect, or else needing a lot more income in your retirement than seems likely assuming "status quo".

I've been doing some research on Self-Managed Superannuation (Retirement) Funds with a view to setting one up for myself, DW, DS1 and DS2 (luckily the maximum number of members in a SMSF is a perfect fit to my "nuclear" family).

The potential benefits of a SMSF compared to my company-selected superannuation fund are:
* can invest in any "suitable" investment (eg. direct shares, index funds) rather than picking from the list of 20 or so managed funds available via my current Super Account.
* saving money on fees - although our employer has arranged for a "rebate" of part of the standard admin fee charged by the Super Fund (so it ends up being around 0.4% instead of 0.95%, plus the managed fund management fees of around 1-1.5%), this is still higher than the $500 pa "flat fee" available from eSuperFund.com.au for a SMSF (eg. on my current Super Account balance of $315K this equates to an admin fee of 0.16% pa)

There are some possible drawbacks though:
* I currently have life insurance via my Super Fund. If I changed funds I'd have to apply for cover again, and, for the amount of cover I currently have ($400K) I'd probably have to pass a medical exam
* As a member of a SMSF I'd have to be a trustee and be responsible for setting an investment policy and abiding by the rules regarding running a SMSF, otherwise the SMSF can lose it's tax-advantaged status. This shouldn't be too onerous though, as I previously acted as an employee-appointed Superannuation Fund trustee at my previous job.

The other thing I have to consider is shifting some of my assets that are currently held outside of Superannuation (ie. my geared investments in Australian shares) into a Superannuation account to save tax. Basically an undeducted contribution of up to $1M can be made before Sep 2007 (due to recent changes in the Superannuation rules) and there won't be any contribution tax. Once held by a Superannuation Fund, the assets income is only taxed at 15% (rather than my personal marginal tax rate of around 30%+) and capital gains are taxed at 10% (rather than half my personal marginal tax rate). Also, once I reach retirement age (65) all withdrawals from the Superannuation account are not taxable under the new rules.

The disadvantages of putting these assets into a SMSF are:
* Can't "borrow" for a Superannuation investment, so gearing is out. However, this isn't a big issue as I'm thinking of eliminating my gearing this year anyhow as the stock market has had a good run for 3 years and will eventually have a "correction" of 10%-30%, not a good time to be geared up. Also, Superannuation Funds can invest in "warrants" which give you similar effects as margin loans, but without the risk of margin calls (but the effective "interest rate" built into warrants is higher).
* You can't "roll" existing stock investments into a Superannuation account without triggering a CGT "event" - so I'd have to pay Capital Gains Tax on the currently unrealised gains in my stock portfolio. If I was just selling off enough of my stocks to pay off my margin loans I could probably offset a large part of the realised gains by selling off all the "losers" in my portfolio.
* I'll have to get all my CGT records up to date in Quicken so I can work out how much capital gains tax I'd be liable for (I have old records up to 1998 in my old Quicken backups, but need to trawl though the past 8 years of transactions to get my CGT records up to date! It's amazing how little time I've had "spare" to do my financial records in Quicken since I got married and started a family!). I wouldn't want to do the transfer till after the end of the Australian tax year (30 June) as DW is on maternity leave this FY and may get some family assistance money if our combined income is not too high this FY. So the "window of opportunity" to make a large (up to $1M) undeducted contribution into Super for me is between 1 Jul and Sep this year. After Sep the max undeducted contribution each FY is going to be $50K, so it would then take 6 years to shift my current Australia Share investment into Super.
* Once assets are in a Super Fund they can't be "released" until retirement (except in exceptional circumstances). Thus, I'll be keeping some other assets outside of Super to act as my "Emergency Fund".

I'm also looking into DirectPortfolio.com.au which offers a managed direct share service, which can be done within a SMSF. I like the fact that they run individual stock holdings for each account, so you avoid some of the unintended tax effects that can arise when investing in managed funds. But their admin/management fee is quite high (around 2%) and you have to pay a $1000 setup fee when open an account with them. The setup fee covers recording all your CGT history if you transfer existing stock holdings to them, so it would be reasonable if I transferred my existing stocks without triggering a CGT event. But if I transfer my shares into a SMSF CGT will have been paid on the date of transfer, so there's no CGT history data required - so the $1000 setup fee seems a bit high in that case. Looking at DirectPortfolios results for their various "mandates" they have achieved around 2.3% above the ASX200 accumulation index for this period, which means they "outperform" by slightly (0.35%) more than the fees are costing. But, they don't provide data on the "beta" of their "mandates" so it's hard to tell if their risk-adjusted return actually outperforms enough to offset the management fee. So, if I decide to move my stock assets into a SMSF I'll probably just sell them off and deposit cash into the SMSF, then use it to buy a Vanguard Index Fund (perhaps their "High Growth" Fund).

Lots to research and think about in the next 5-6 months!

Easy Change wrote to me with a good question in response to my Asset Allocation post:
"I was wondering if you would be so kind as to talk more about when you started investing and/or what age range you are in at this point in your life. I am coming up on thirty soon myself and I find the whole concept of getting to 100k before then (which is what several pfbloggers are shooting for) to be a huge undertaking."
I think I've covered most of this before, in bits and pieces, but to summarise:

I'm 45, live and work in Sydney, Australia. I have a wife, two young sons, a mortgage and no pets. My personal net worth has just hit one million Aussie dollars. I come from a middle class background, have degrees in IT, industrial math and applied chemisty, and have only ever worked as a "wage slave" - first ten years as a scientist for a private R&D company, and then for ten years as for a market research company - working my way up from an entry level quality assurance role to a junior management position. My salary package is currently $8x,000, but until 2 years ago I'd never been on more than $60,000.

I started out investing by saving my pocket money and earnings (paper round, market gardening, and supermarket shelf packer) during high school into a bank account. When I worked during the Uni vacations (as a process worker in a pencil factory) I saved via my bank account and occasionally invested a lump sump ($1000) into government bonds or unsecured notes from a bank-owned customer credit company (AGC).

I first learned a bit about the stock market doing a Business Economics subject at Uni, which included doing "paper trades". As this course ran in the second half of 1987 it was quite interesting! Once I completed Uni and started working full-time I began investing in Individual stocks (using broker research to choose them), and eventually bought my first investment property.

Over time I learned more about stock selection, minimising brokerage fees and choosing Mutual Funds (for overseas stock exposure) that didn't have exhorbitant fees. Later on I began to use gearing (via margin loans) to offset dividend income with tax-deductible margin loan interest - effectively "converting" current, taxable income into tax-deferred capital gains (which, in recent years, are taxed at half the tax rates of current income).

I sold my original investment property (at a slight loss), as it was in a very poor suburb and tenants proved very unreliable. I swore off direct property investment, but then bought another property after I got married, as my wife wanted to reinvest the funds she had from selling her unit back into real estate.

Recently I've diversified my investmenting to include hedge funds, agribusiness investments (pine, sandlewood and teak plantations) and some wine, coins and bullion. I started direct investment into US stocks last year - trying out the "Magic Formula Investing" method outlined in the "Little Book that Beats the Market".

I'll probably reduce my level of gearing this year, as the stock market has had a very good run for several years and I'm ahead of my projections - no point risking reversion to the mean, especially when using margin loans. I'll also add any future wage rises straight into my superannuation (retirement) account, as by doing a "salary sacrifice" it gets taxed at 15% rather than my marginal personal tax rate. They've also recently changed the tax treatment of retirement income from superannuation accounts in Australia, so that they will be tax exempt. This makes superannuation more attractive than gearing shares or property investments for accumulating assets, although there are some limits to what you can invest in via superannuation, especially if I stick with the company-selected retirement fund, rather than opening a "self-managed" super fund.

I reached $100K net worth by age 30. That was worth more than $100K in today's money, as it was way back in 1991. But it was also easier for me than for most people, as I was living at home still (not paying rent or board), and I had no student debt outstanding when I graduated (I paid the HECS (Uni) fees as I went along. And HECS fees in Australia are only around 25% of the full cost).

My accumulation of net worth over time was covered in a previous post.

Worst investment decisions:

* Spending the money I saved up working during uni vacations on a 10" meade SC Telescope. You can buy one today for about the same price I paid back in 1982, and I've probably only used it for a total of ten hours in the last 20 years. Then again, I always wanted to be an astronaut when I was a kid, so it was worth every cent. I just wish I'd got around to building that observatory up at my parent's farm...

* Spending around $1000 on a Sinclair ZX80 computer and accessories in 1980 - I should have bought some Microsoft shares when they listed instead...

* Buying $2000 worth of an unlisted internet stock (GEN) in 1995, which went broke before it could list on the NASDAQ. If only I'd waited and bought Google or Amazon.com instead...

NCN did an interesting post that listed how much he had earned so far, and how much he could have saved up by now (if he'd saved 10% of his income every year) compared to what he's actually accumulated (starting a couple of years ago).

I thought I'd run through the same process myself, just for interest:

"How much money have I made during my lifetime."

Here are the details. I'm almost 45, and I've worked since I was about 14 (part-time during high-school doing a paper round, market gardening, storeman & packer and music tutor, and then during uni vacations working in a pencil factory). The breakdown:

Year Salary
1974 200
1975 300
1976 400
1977 500
1978 1000
1980 2000
1981 2000
1982 2000
1983 5000
1984 14000
1985 16000
1986 18000
1987 20000
1988 22000
1989 24440
1990 27926
1991 31985
1992 34695
1993 37678
1994 38509
1995 38924
1996 38924
1997 40481
1998 41695
1999 39047
2000 40286
2001 55714
2002 58093
2003 66261
2004 68249
2005 73602
2006 75810

These are rather rough estimates (but pretty close) for the early years. I got my first "real" job in 1984 working as an "engineering trainee" while finishing off my first degree.

So, how much money have I made, in salary, over the past 32 years? $935,719. Now, for some folks, that's not much money, and for others, it's a lot of money. Whatever you think about the amount you have to admit that it is a pretty decent chunk of change. To continue with NCN's method of analysis... Where would I be if I had SAVED 10 percent of my salary, at say 8 percent interest, per year. And how does this compare to where I'm actually at. Let's run the numbers:
Ten Percent End Of Year
20 21.60
30 55.73
40 103.39
50 165.66
100 286.91
200 525.86
200 783.93
200 1,062.65
500 1,687.66
1,400 3,334.67
1,600 5,329.44
1,800 7,699.80
2,000 10,475.78
2,200 13,689.85
2,444 17,424.55
2,793 21,834.53
3,199 27,035.67
3,470 32,945.58
3,768 39,650.45
3,851 46,981.46
3,892 54,943.77
3,892 63,543.06
4,048 72,998.46
4,170 83,341.39
3,905 94,225.78
4,029 106,114.73
5,571 120,621.02
5,809 136,544.75
6,626 154,624.51
6,825 174,365.37
7,360 196,263.61
7,581 220,152.18
At the end of the 32 year period, I would have had 220,152.18 in my retirement account. Not bad. Instead, I have about 304K, as I've been putting in more than 10% and have averaged more than 8% by investing in the "high growth" funds available in my retirement account. Now, for the sobering reality. Ready? If I NEVER put another dollar into retirement, but left that 304K to grow at 8 percent, how much money would I have in, say, 20 years when I'm ready to retire?

Over $1,026,000.

Yep, that's right. I've saved around 10 per cent of my income while working, and in another 20 years I should have over $1,000,000 dollars in my retirement account, without ever saving another cent.

Wow! Now, as you can see, I have "low-balled" my estimates. I assumed a VERY modest amount of savings, and a very, very modest rate of return, which is why I actually have 38% more in my retirement account than this model predicts. If I just stick with the conservative 8% return and don't contribute any more I STILL would have over 1 MILLION dollars in my retirement account. This shows how important time is.

In reality, I'm now saving around 20% of my salary into my retirement account and will continue to do so. Assuming I earn to same amount for the next 5 years and then take a pay cut when I take up a high school science teaching job, I'll end up with $1,401,207 at 65. The recent Australian tax changes mean that my retirement account earnings are only taxed at 15% and the final benefit, taken as either a lump sum or a pension, will be tax free. So this should be enough for a comfortable retirement. In fact, based on my current spending and the fact that I won't have a mortgage when I retire, I'll probably have more income than I need and will be able to increase my savings rate when I'm "retired". I suppose at that time I'll have to consider myself a "professional" investor. After I've completed my teaching qualification and Master of IT I may enrol in the Master of Finance course my wife is currently doing so I can officially call myself a "pro"

My other assets (around $700K) will continue to be invested in real estate and stocks, even after I retire, so this should provide a sizable estate for my two sons and their heirs. I've already set up retirement accounts for each of them, so they should end up with a comfortable retirement even if they never contribute anything to their retirement accounts.

It's amazing what you can achieve on a "modest" salary via a regular savings plan and sensible investments over the long haul.

I must admit that the question of inheritance doesn't take up much of my time - I expect to have enough accumulated to fund my own retirement, and there's a good chance my parents will still be around when I retire - I have a Great Aunt still alive in her 90s, and two of my Grandparents lived to 94. So if I ever inherit anything I'll probably be too old to enjoy it anyhow.

However, for a lot a Baby Boomers who have been "living in the moment" and are only now starting to get concerned about where the money will come from in their retirement, the possibility of an inheritance bailing them out may have been in the back of their mind.

I had read that this hope was misplaced, with the current crop of retirees planning to spend their money, and possibly use a reverse-mortgage to spend the family home as well. So they'd bit little left for the Baby Boomer's to inherit.

But a new Citibank report contradicts this belief. Apparently most retirees are living within their means and around 85% plan on leaving a bequest to their children.

The average amount expected is $427,000, but some are planning on leaving a lot more:
Expected size Proportion of
of Estate Retirees
$900,000 15%

wealth, retirement

Our most recent addition to the family is now 7 weeks old - plenty old enough to start planning for his retirement

I had a look through the current superannuation (retirement) account offerings on the web, and found one (ING OneAnswer) that seemed to fit all my requirements - low initial amount ($1,000), low regular savings plan additions ($100 per fund) available monthly or quarterly, and a suitable mix of investement options (as the investment has a 65 year time horizon before it gets rolled over into a pension I'm going for high-growth asset mix with some gearing).

It will be a "child superannuation account" (so friends or family can make contributions into the account on my son's behalf), which means the maximum that can be contributed is $1000 per year (actually, it's $3000 every three years per account, and you could set up more than one account if you wanted to contribute more than $1000 per year per child). I made the minimum initial contribution ($1000) via direct debit from my bank account and set up an automatic direct debit from my bank account to contribute another $200 every quarter, starting from next June. This will mean I don't exceed the $3000 cap within the first three years of opening the account.
The asset mix I selected for the initial $1000 is as follows:
Geared Australian Share Fund 30% ($300)
Australian Shares Index Fund 20% ($200)
International Shares Index Fund 20% ($200)
Global Small Company Fund 10% ($100)
Global Emerging Markets Fund 10% ($100)
Property Securities Fund 10% ($100)
The regular savings plan contributions will be split:
Australian Shares Index Fund 50% ($100)
International Shares Index Fund 50% ($100)
At the end of three years this will mean the asset mix only contains around 3% Property and 3% emerging markets, so I'll probably top up the savings plan contributions after year three with an additional $100 into the Property Fund and $100 into Emerging Markets Fund each year to reach the $1000pa contribution cap. I won't bother rebalancing as the buy-sell spread is still an unnecessary cost, even if switching is free. I'll just change the weighting of the savings plan contributions to keep things roughly 50% AU shares, 30% Int shares, 10% Emerging market shares and 10% Property Securities.

The account will automatically come under my son's control when he turns 18 - but as he can't withdraw the funds until he reaches retirement age (60) it will be a good tool to teach him a bit about investment management.

I lodged the application via a financial planner who will rebate 100% of the initial application fee (which is around 4% for the front-load option) as additional units. Hopefully, he will also OK the rebate of the on-going trailing commision (0.6%) - he did this when I set up a child superannuation account for my first son five years ago. [As he has processed several of my other investment applications (on a non-advisory basis) he earns enough trailing commision from me to make it worthwhile processing the odd "freebie".]

The trailing commision rebate will add quite a lot to the account's performance over 60+ years - if it earned 10% pa on average (after fees), the trailing commision rebate would add another 0.6% to this - a boost in performance of 6%! This will basically mean an extra 6% in the final value of my son's retirement account (maybe $20,000 in today's money) - just by processing the initial application in the best possible way.

Of course all this planning is highly speculative - who knows what changes to superannuation rules will be made over the next 60 years. Also, I'm being optimistic and assuming my sons will both be around to enjoy their retirement. Although there will be some benefits to them much earlier on - when they start work they won't have to worry about making extra contributions to their retirement account (probably just the 9% SGL minimum will suffice), so they can concentrate their savings on buying a home etc. Also, having a significant balance in their retirement account will mean they won't need as much life insurance.

retirement

There is much to be said for starting an investment portfolio as soon as possible - compound interest works it's magic over long periods, and you can set your asset allocation to a much more aggressive "high-growth" mix if you have a very long time horizon. So, starting an investment portfolio for your kids is one of the best possible strategies, and is even more so with the proposed changes to superannuation tax in Australia - ie. that there will be no tax on superannuation withdrawals made during retirement.

This means that if you set up a child superannuation account into which you (or any relatives or friends of the child) can contribute up to $1000 each year. (There is a cap of $3,000 every three years PER ACCOUNT - if you wanted to save more than $10 per week you just setup several accounts for your child). There will be no tax due on deposits (as they are made as undeducted contributions), no tax on pension or lump sum payments over 65 years of age, and a maximum 15% tax rate on earnings (likely to be reduced below 15% due to the benefit of franking credits on share dividends).

For example, if you contribute around $10 each week ($250 per quarter) into a child superannuation account from birth until 18 years of age, and then no additional contribtions are made, at retirement age (65) the account would be worth $2,218,843 (or $317,898 in today's dollars) - assuming an average return of 10% pa for a high-growth asset mix (shares (preferably geared), some bonds and some property), and an average inflation rate of 3% pa.

For a total contribution of $18,000 your child's retirement fund will have added $300,000 (in today's dollars) by the time they retire - with no further contributions required after they turn 18. This will let your child concentrate on paying off a mortgage or investing outside of super when they start working.

personal finance, investing, money, saving, wealth, investment

Yet another article about the abyss facing baby boomers in retirement - there won't be enough tax payers to fund pension payments for everyone, and baby boomers haven't been saving nearly enough to have a "self-funded" retirement.

An article in the Sydney Morning Herald lays out the problem very clearly. Some of the points are universal, applying equally to baby boomers in the US, UK and Australia:

"To give you some idea of the challenge, to retire on 45 per cent of your pre-retirement income you need to have contributed 12 per cent of your salary every year for 40 years."

"With the male retirement age averaging 58 years, drawing on retirement savings at 60 per cent of salary will see the money run out at age 72. But, if retirement is postponed for only two years (until 60), the money would last until 79. Working an extra two years funds a further seven years of retirement."

An interesting read, though everybody should be thoroughly familiar with all this by now, and have an action plan in place to look after themselves in retirement.

personal finance, investing, money, saving, wealth, investment

A major concern that has arisen throughout the developed countries in recent years has been in relation to the aging of the population, with the implication that unfunded pension schemes will become unsustainable as the number of tax-payers supporting each pensioner gets less and less. Some countries began to address this issue by the introduction of private pension arrangements many years ago - for example, in Australia, compulsory superannuation savings were introduced in 1992. Prior to this only 58% of full-time workers, and around 20% of part-time workers had a private pension account (1998 figures).

Although compulsory superannuation has now been in place for 14 years, the median superannuation balance of female baby boomers in 2004 was only $8,000 (males $30,700).

The picture would not be so bleak for baby boomers that have been working full-time, especially women. The following table shows the amount that baby boomers working full-time since the SGL was introduced would have contributed into their personal retirement account:
avg female average F/T male average F/T
FY SGL rate wage SGL amount wage SGL amount
92/93 3.75% $27,809.60 $1,042.86 $34,814.00 $1,305.53
93/94 4.00% $28,750.80 $1,150.03 $35,973.60 $1,438.94
94/95 4.50% $29,884.40 $1,344.80 $37,689.60 $1,696.03
95/96 5.50% $31,059.60 $1,708.28 $39,431.60 $2,168.74
96/97 6.00% $32,448.00 $1,946.88 $40,794.00 $2,447.64
97/98 6.00% $33,716.80 $2,023.01 $42,400.80 $2,544.05
98/99 7.00% $35,094.80 $2,456.64 $43,914.00 $3,073.98
99/00 7.00% $36,238.80 $2,536.72 $29,286.40 $2,050.05
00/01 8.00% $38,183.60 $3,054.69 $46,800.00 $3,744.00
01/02 8.00% $40,190.80 $3,215.26 $49,306.40 $3,944.51
02/03 9.00% $42,088.80 $3,787.99 $51,849.20 $4,666.43
03/04 9.00% $44,465.20 $4,001.87 $54,932.80 $4,943.95
04/05 9.00% $46,384.00 $4,174.56 $57,226.00 $5,150.34

If the fund had been conservatively invested (earning, say, 5% pa), then typical current balances for female and male baby boomers who have worked full-time since compulsory Superannuation was introduced would now be around:
Female: $31,628.53
Male: $38,212.73

The actual balance will vary for each person, depending on the fees charged by their superannuaton fund and what investment options they had chosen.

The main problem facing the baby boomers is that a) they didn't start work in 1992 - even the youngest boomers were in their 30's when universal private retirement accounts were introduced, and b) the SGL was phased in, so the first 12 years of compulsory super were only equivalent to 9.5 years at the current rate of 9%. SO the typical boomer who has worked F/T since 1992 only has a super balance equivalent to a 30 year old Gen X/Y/Zer. Some people think that the SGL rate needs to be higher than 9% over a persons working life to accumulate enough to self-fund a comfortable retirement lifestyle (say 12-15%)

Hopefully, the increase in average personal retirement account balances at retirement age over the next 30 years will match the necessary reductions in age pension benefits paid by the government. The fairest method would seem to be to restrict pension entitlements (via assets and income tests) and reduce benefits over time, with the new rules being 'grandfathered' so they phase in with age. This sort of restriction has already been done with the phasing in of raising the "retirement age" from 55 to 60, based on each persons date of birth.

Of course, in countries such as the US and UK where the move to personal retirement accounts has started later, there is going to be a much bigger "gap" to be be funded while state pensions are phased out self-funded retirement accounts start to accumulate meaningful balances.

I generally think a 40% domestic shares, 35% foreign shares, 15% property, 10% bonds is the basic starting point for working out a long-term investment mix, provided this weighting towards growth assets matches your risk tolerance. Since my retirement fund is definitely a long-term investment(20 years till retirement age, then maybe another 20 or so during retirement) this was my starting point. I did decrease my weighting in shares and increase the % in property during the bear market in 2001, and then weighted my asset mix more towards shares in 2003 when the market seemed to have bottomed out.

My current investment mix in my retirement account is as follows
BT Business Superannuation
Investment Option wt %
Colonial First State Diversified 1.91%
Westpac Australian Shares 19.68%
Colonial First State Australian Shares 25.53%
Westpac International Shares 1.93%
BT Core Global Shares 20.48%
MLC Global Share 20.13%
Westpac Australian Property Securities 10.26%
Westpac Australian Fixed Interest 0.06%
Intech High Opportunity 0.03%
Overall the asset allocation works out as:
Asset class wt %
Australian Shares 43.52%
International Shares 37.93%
Property 10.13%
Bonds 0.38%
Cash 8.03%
The cash component isn't really intentional - it's just that all the stock funds tend to have a cash float at all times. I've got less in bonds than my "plan" requires - but with interest rates still quite low the risk of capital loss with bond investments seems more towards the upside, and the coupon rate is nothing too exciting. If interest rates here go up another 0.25% or .50% and the economy slows down, I'll reweight from stocks to bonds. I think my "model" retirement portfolio is around 40% AU shares:35% INT shares:15% LPT:10% bonds:0% cash

Hopefully these Asset classes should return something like the following in the long term:
Asset class return %
Australian Shares 9.5%
International Shares 9.0%
Property 8.0%
Bonds 5.0%
Cash 3.5%
This would give my "model" portfolio an expected return of around 8.65% (after fees and charges)

personal finance, investing, investment, stocks, real estate

A recent survey conducted as part of the Fujitsu/JPMorgan Australian Mortgage industry Report (Volume 4) found that there are significant differences in attitudes towards mortgage lenders and awareness of interest rates between different age groups.

The survey divided respondents into four groups by age - Seniors (over 60 years old), Baby Boomers (between 45-60), Generation X (between 30-45) and Generation Y (between 18-30).

The survey found that:
* Significantly more Baby Boomers and Generation X prefer to use a mortgage broker, compared to Seniors and Generation Y respondents, who said they would prefer to use a bank for their home loan needs.
* Generation Xers are more aware of mortgage interest rates - with 88 per cent claiming they could quote the interest rate on their mortgage while only 22 per cent could quote the interest rate on their credit card.
* Baby Boomers were also considerably more aware of their mortgage interest rate with 55 per cent of respondents claiming they could quote the interest rate on their mortgage, compared to 28 per cent who could quote the interest rate on their credit card. On the other hand, only 32 per cent of Seniors and 24 per cent of Generation Y respondents were aware of the interest rate on their home loans. (Perhaps because most people in these last two groups don't HAVE a home loan!)
* Generation X showed the highest predilection towards fixed rate loans, with more than 51 per cent claiming they would consider a long-term fixed rate re-finance compared to 31 per cent of Baby Boomers, 13 per cent of Generation Y and one per cent of Seniors.
* Boomers were more likely to have investment properties than Seniors (67 per cent and 41 per cent respectively).
* Owner-occupied mortgages were most prevalent amongst the Generation X group (55 per cent) while investment mortgages were significantly more popular in the Baby Boomer group (59 per cent).
* Unsecured lending was most common in the younger peer groups, with 36 per cent of Generations Y and 22 per cent of Generation X with unsecured car loans.

personal finance
money
real estate

The National Information Centre on Retirement Investments (NICRI) has just launched a website full of basic financial advice.

The site provides basic advice, plus calculators to help you see what you can achieve when you start investing or saving.

Six Tools are provided online:
1. Budget Sheet.
2. Assets and Liabilities tables.
3. Needs and Objectives - learn about and prioritise investment objectives.
4. Risk Profile – determine your attitudes towards risk.
5. Choosing Investments – access to information about 30 investment types and investment related topics.
6. Calculators.

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investing
money
saving

Let's face it. Superannuation is a business, and Fund managers want to make as much profit as possible - by taking as big a cut as possible out of our money!

A typical example was the response to the Treasurer's proposed cut in Superannuation tax (to 0%) on end benefits. After an initial "any cut in superannuation tax is wonderful" reaction from the Funds (because it will encourage more money to flow into superannuation instead of other investments, and hence generate more fee income for them). It quickly became a unified call from the Fund managers to "cut the tax on money going IN to superannuation instead". Allegedly this will mean bigger end benefits for members, but the only detailed analysis of this I've seen showed that the difference between eliminating tax on end benefits compared to eliminating it from contributions is minimal.

The REAL reason (that no one has mentioned) is that a cut in tax on end benefits doesn't directly increase Super Fund profits, all else being equal (ie. ignoring any increase due to increased contributions into Superannation). On the other hand, eliminating the 15% contribution tax means that super funds will get an immediate 15% increase in the amount of fees they collect on contributions! And the bucket of money sitting in your retirement account (and subject to a typical 2% MER) would get 15% larger over time.

Funny that none of the Fund managers seem to have pointed that out, or have offered to cut their fees if the tax cut was applied to contributions instead of end benefits!


Personal finance, Money, Investing, Investment, Real Estate, Wealth.