After discussing how hard it is for those trying to buy their first home. Slack Investor is compelled to provide some hope in the desire to own your home before you retire. The numbers are in … and, not owning a house in retirement or, losing your job before you retire, puts you at real risk of not reaching a comfortable financial position.
Whereas very few retired home owners are in poverty, most retired renters are …
There are very few existing incentives on the dusty twisted road to home ownership. They include Stamp Duty exemptions/concessions that vary from state to state. In Victoria, they are available for homes less than $750K. There is also the First Home Buyers Grant (FHBG), which, again, is dependent on which state you live. In Victoria, that comes in at a measly (but I’ll take it!) $10K.
All of these things are worth considering and applying for when you finally purchase a home, but the First Home Super Saver Scheme (FHSSS) is a lesser known arrangement that seems to make sense – but it requires a bit of “setting up”.
In order to make the most of the FHSSS, you’ll need to start planning well ahead of the time to buying a house/apartment (3 – 4 years?) – But planning ahead is the very trait that Slack Investor loves!
First Home Super Saver Scheme (FHSSS)
I did refer to the First Home Super Saver Scheme (FHSSS) way back in 2017 when it was just a twinkle in ScoMo’s eye – it started as an election promise to get the “young folk” on board as the government felt a need to at least be seen to be doing something to help first homeowners.
These voluntary contributions can be withdrawn from your super when you finally ready to purchase a home – by filling out an ATO form for a ‘determination’. The determination will tell you exactly how much you can withdraw – it will be a little more than you have put in (your contributions – up to $50K – plus deemed earnings)- and waiting a month.
Getting the money out usually takes 15–25 business days … once you withdraw money to buy a house, you have one year to use it
These extra contributions are over and above the compulsory super that your employer makes. The scheme works by making an arrangement with your paymaster to salary sacrifice into your super – up to $15K per tax year. Contributions can also be made by arranging with your super provider to make a personal super contribution.
The tax savings come about as, you only pay 15% tax on these super contributions – rather than your marginal rate of say, 32.5%. Plug in your own details into this calculator to determine your possible tax savings.
I would recommend all prospective home owners to take a look at this scheme. Assessment for eligibility is made on an individual basis … so couples and friends can combine their amounts – but start now – it will take a few years to get a useful house deposit.
Colonial First State outline a case study of a couple that have each started voluntary extra super contributions of $15K – After 15% tax this comes down to $12 750 p.a of contributions into their funds. After 4 years, they each have amassed $55K (4 x $12 750 plus deemed interest). A combined house deposit of $110K was possible using the FHSSS – and, using a favourite Slack Investor way of saving – deductions from your salary before you even see it! All of this with tax advantages.
Homework (get it!): – Potential homeowners – read about it – and get on the FHSSS!
Even Superman has his limits – Is it Kryptonite OR Brussell Sprouts?
Slack Investor writes a lot about Superannuation because it is a fantastic component to have in your armoury to establish financial independence – in a tax-effective way.
The ultimate aim for Slack Investor is to fund your own retirement, but in reality, according to the Association of Superannuation Funds of Australia (ASFA) estimates, a minority (43% ) of Australians of retirement age would be self-funded by 2023 – this percentage should increase as the compulsory superannuation system matures.
Before we get to this mix, by the time you retire, you do want to have a place to live and be free of landlords. This may sound impossible to some at the moment – but it is a vital part of financial independence. It can be a “tiny home”, an apartment, a place in a regional area …. as long as it is yours!
Tiny Homes – This 20 sq m little bewdy will set you back $32 000 – however, you still have to find land for it – and connect to services.
It is so important to aim to own your own home by the time that you retire – even if it is a 1-br apartment. Admittedly, this is so much harder than it used to be! Looking at the figures below, it is vital to get as large a home deposit as you can to reduce your borrow amount – this should be one of your early financial goals. However, without help, a multi-bedroom home near a capital city now seems near impossible.
If you dont have a deposit, October 2023 data showed that Australians need an income of more than $300,000 a year to buy a median priced home. Household incomes required were considerably less, but still “eye watering”, for outer suburbs and regional cities. e.g. Geelong $243,333, Brisbane $223,333. Apartments are usually less expensive – and require less income to service the home loan.
At its most basic level, superannuation is forced retirement savings for all working Australians. A compulsory contribution of 11.5% of your salary (from 1 July 2024) that will compound till your preservation age (between 55 and 60).
According to Treasury projections, about 60% of retirees will have less than $250 000 in super in 2024. This amount of super is not enough to fund a comfortable retirement. $250 000 in pension mode at the official Age 67 drawdown rate of 5% generates only $12 500 income per year. Clearly, many Australians will need to rely on a mix of their super and the aged pension for retirement income. The Aged Pension is available to Australians over 67 – but, it is means tested.
The bare minimum to aim for is the “sweet spot” in the aged pension asset test where your assets are a bit more than the maximum allowed for the full pension. Under current rules (2024), home owning couples can have $451 500 in assets (singles $301 750) and still qualify for the full government aged pension (at age 67).
In 2020, the Alliance for a Fairer Retirement System pointed to a super sweet spot of around $400,000, which can see a pensioner (home-owning) couple “earning $1,000 a month more than a couple with $800,000 in savings.”
The first chart shows 20 different amounts of superannuation that you might have saved up by the time you are ready to retire – ranging from $150 000 to $1 100 000 above chart – from saveoursuper.org.au.
This next chart is far more interesting, it shows your total income from different amounts of superannuation (shown in the above table) mixed with the aged pension – for a home owning couple. For simplicity, these tables assume your only non-home assets are in super and the aged pension rates were those applicable in 2021 ($34 777 per couple). The essence of the table is still valid.
Total amount of retirement income – for a home owning couple – Combination of Part-Aged Pension (orange) and 5% of Superannuation Balance (Blue) for each of the 20 amounts of Superannuation Balance shown in the first chart (Using data for 2020/21)- saveoursuper.org.au
Bizarrely, there is a point on the total retirement-income (couple) table corresponding to around $400 000 in assets/super where an increased assets/super balance does not lead to an increased total income due to the asset test pension taper rate. Above that point, for those on the part-pension/super mix, the more super you have, your total income actually goes down. This strange anomaly exists for assets/super between $400 000 and $800 000 (2021/2020 data).
Clearly, the current assets test to qualify for the aged pension is unfair and provides a disincentive to save -and should be changed. But, until then, a major retirement goal is to use your super to get your total assets to near the sweet spot before you reach age 67.
(It)is not fair that people who forgo consumption and save more to increase their living standards in retirement and reduce their reliance on an Age Pension should instead get less retirement income. This is the perverse outcome for a large range of savings under the 2017 assets test.
How the Assets test works (in real life) for the aged pension (2024 Data)
According to Services Australia, for the aged pension, assets are property or items you or your partner own in full or part – this does not include your home! It does include Financial Investments (Bank accounts, shares, managed funds, annuities, etc), Personal assets (Home contents and vehicles), Superannuation and Real Estate.
I had a recent example of filling in an assets form for a close relative. Her bank statements and investments were easy to quantify. We were advised that personal assets should be valued according to what we could get if we were “keen sellers”. It was suggested to us that, other than vehicles, most peoples personal effects would amount to between $5000 and $10 000. This proved to be near the mark as most furniture and home items end up having to be donated when finalizing a deceased estate.
For the table below, the aged pension and asset limits are current values* and correct at February 2024. Using 2024 data, the “sweet spot” for assets is now near $451 500 for couples ($301 750 for singles). If you had $250 000 in super, and your “other assets” added up $60 000 (Car $13 000, Bank Ac’ts/Shares/Funds $35 000, Home Contents $12 000). Your Total assets would be $310 000.
For a couple with similar “other assets” and a combined super of $400 000, your total assets would be $460 000.
Situation
Asset Limit
Other Assets*
Super
Drawdown from Super@ 5%
Age Pension
Total Income
Single Home-owner
$301 750
$60 000
$250 000
$12 500
$28 514
$41 014
Couple Home-owner (Combined)
$451 500
$60 000
$400 000
$20 000
$42 988
$62 988
Table based on a single home-owner with $310 000 total assets ($60K + $250K) and a couple home-owners with $460 000 total assets ($60K + $400K) – using Feb 2024 values for the Aged Pension and Asset Limits.
Using this mix of super and the pension, when reaching the pension qualifying age , a modest to comfortable retirement is possible under current rules when you own your own home. Also, under the Work Bonus Rules, singles can earn up to $5304 (Couples $9360) in a part-time job without affecting their aged pension.
Comfortable lifestyle (p. a.)
Modest lifestyle (p. a.)
Couple $71,723
Couple $46,620
Single $50981
Single $32,417
ASFA calculated annual retirement requirements for those aged 65-84 (September quarter 2023) for both “comfortable” and “modest” lifestyles
February 2024 – End of Month Update
Slack Investor is IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
Little movement this month for the ASX200 (+0.2%) – but, it is testing new all-time highs. Nothing happening with the FTSE 100 (0.0%) at the moment.
The S&P 500 (+5.2) and the NASDAQ 100 are hitting new record highs and Slack Investor is pleased to go with the momentum but remains nervous for these markets.
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
Whether it has been a good investing year – or a bad one, August is the time when the Vanguard long-term (30 yr) investing chart lands. It is a timely reminder that whatever is happening in the short term, investing for the long term (> 5-10 yr) in International and Australian shares will compound your wealth. Anyone with a steady income that exceeds their living expenses can do this – so, what a young Slack Investor would do, is Automate his investments, through platforms such as Stockspot, Pearler, Vanguard Personal, or Raiz) … and “Get Cracking!”
Extract from the 2023 Vanguard Index chart (Just the 2007-2023 portion) – the dollar values on the right are the results of investing $10000 in index funds in each asset class for 30 years (since July 1993) – Check out the full glory of the Vanguard 2023 chart in PDF format – Click image for better resolution.
The lessons of long term investing
Every year Vanguard publish their performance data on each asset class. Slack Investor looks forward to this – as it demonstrates the powerful compounding that happens when the appreciating asset classes of Shares and Property are held for a long time (30 years). Although this Vanguard collection of data shows the volatility of asset values in the short term – it also also emphasizes the joys of holding and accumulating shares or property for long periods of time. These asset classes have steadily increased in value over the last 30 years. $10000 invested in Australian Shares in 1993 would have compounded to $138 778 in 2023, US Shares would have compounded to $176 155. Staying in Cash would have yielded $34 737.
Slack Investor says download and study this chart … and work towards getting a mix of some appreciating assets … accumulate, then hang on!
Financial year total returns (%) for the major asset classes
In the Vanguard 2023 table below, for each asset class the total annual returns are given and the best performing class for each year is shaded in blue/green … and the worst in pink. What stands out to Slack Investor is that is rare for and asset class to lead in annual returns (blue/green) for two years in a row – and there are years where the leading asset class (blue/green) becomes the worst performer (pink) in the next year. This drives home the need to spread your investments over different asset classes (diversification) and stay the course – 30 years of data talks loudly to Slack Investor.
Total returns for each asset class for the 30 years since 1993 – Check out the full glory of the Vanguard 2023 Brochure in PDF format– Click table image for better resolution.
This table highlights the benefits of diversification across asset classes for the long-term investor. Each asset class might be the best performing (Blue/Green shading), or the worst performing (Pink shading) for the year – and might dominate (or languish) for up to two years in a row. However, often a worst performing asset will show up as the best performing asset in the very next year – or vice versa.
Slack Investor is accepting of the occasional negative returns on a yearly basis for the appreciating asset classes- and concentrates on the 30-yr average long-term annual returns for holding shares and property of over 9% p.a.
When averaged over 30 years, the asset class and annual returns are : For AUST. SHARES 10.0%; INT’L SHARES 8.7%; U.S. SHARES 11.6%; AUST. LISTED PROPERTY 9.0%; and INT’L LISTED PROPERTY 9.7%; This compares with the average cash return of 4.3% p.a.
Slack Investor knows where he wants to be … over the long term, it isn’t cash.
August 2023 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
All Slack Investor overseas followed markets had a negative month (S&P 500 -1.8 %, and the FTSE 100 -3.4% and the Australian stock market did the same (ASX 200 -1.4%).
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
“I believe in evidence. I believe in observation, measurement, and reasoning, confirmed by independent observers. I’ll believe anything, no matter how wild and ridiculous, if there is evidence for it.
Isaac Asimov – US Author and Biochemist
Good fortune has prevailed in FY 2023. After the tough investing year of FY2022, Slack Investor has stuck to his strategy of investing with growing companies that have an established earnings record and forward P/E ratios <50 (Mostly!). As always, there have been a few lapses, but that’s just part of being an investor.
I expect a bit of volatility in my (mostly “growth”) investment portfolio and I try to reassure myself that, despite the odd negative year in the Slack Investment Portfolio the Stable Income portfolio is doing its job and keeping Slack Investor with enough cash to keep things running. In the world markets, the FTSE 100 Total Return Index was up 7.8% (last FY up 5.7%). Dividends helped the Australian Accumulation Index to be up 10.6% for the financial year (last FY -7.5%). The S&P 500 Total Return Index is again full of optimism – and was up 19.7% (last FY -10.7%) for the same period. All of these Total Return Indicies include any accumulated dividends.
Slack Portfolio Results FY 2023
All Performance results are before tax. The Slack Portfolio is Slack Investor’s investment portfolio and, after the first negative year since starting this portfolio in 2010, I am delighted to be “Back in the Black” – with an annual FY 2023 performance of +17.9%. Full yearly results with benchmarks are shown in the table below.
FY2022 was another bumper year in real estate – particularly Brisbane -but there has been a welcome pause in housing prices for FY2023. For property, the actual falls in asset values is greater than that shown as Slack Investor is using the Total Return values supplied by CoreLogic. The Total Return is calculated from value change as well as the gross rental yield. I would have preferred calculations that include the net rental yield, but this will have to do. The Total Return is a more realistic figure when comparing real estate returns to stock market total returns, as it treats both asset classes as investments.
The share market was the place to be for FY 2023, with the Australian Share market Total Return Index (ASX200 Acc) up 10.6% and the Vanguard Diversified Growth ETF (VDGR), comprising mostly (68%) of International and Australian Shares, increasing by 11.2%. Inflation is again coming in big – with the CPI at +6.0% – reinforcing the need to have exposure to “growth assets” such as shares or property.
Although I collect yearly figures, the 5 and 10-year compound annual performance gives me a much better idea about how things are going and will smooth out any dud (or remarkable!) results. The Slack Fund is still ahead of Benchmarks – but currently being challenged by Brisbane Residential real estate over a five-year period.
5-yr Average Annual Performance
Slack Investor 5-year compound annual rate of return – compared to benchmarks – Click for better resolution.
The beauty of compounding with a succession of good performance results can be seen in the chart below showing the growth of an initial investment in June 2009 of $10000.
Growth of a $10000 Investment Since 2009
The rate of growth of $10000 invested by Slack Investor in FY 2009 – compared to benchmarks – Click for better resolution.
10-year compound annual rate of return
The Slack Fund has been around a while and, at last, I am generating some long term data (10-year compound “rolling” annual rate of return). Over this time frame, the Slack Fund has been performing very well. A 10-year annual rate of return of over 14% – Go Slack Fund!
However, the 10-yr rates of return of the Median Balanced Fund, Vanguard Growth fund, ASX200, and residential property in Brisbane and Melbourne are also great long term investments, generating a 10-year compound annual rate of return of 6-9% p.a. From the figures below, although it can add stability to a portfolio, Cash as a long term investment, is a poor choice.
In a week where I have received a polite letter from my electricity provider that the daily rate and cost per Kilowatt-hour will be increasing by 27% from August 1, 2023 – it is always good to take a step back and realise that a bloke should count his blessings.
Every year the economic wonks at Credit Suisse produce the Global Wealth Report. It takes a bit of time to gather the figures worldwide, and the latest report available is from 2022, and gives an insight into the Covid-19 times using economic data from 2021. There is some good news, in that the global wealth per adult seems to be on an increasing trend.
The global median wealth per adult was just USD 1,613 ($2358 AUD) in the year 2000. By 2021, it had risen to USD 8,296 ($12 130 AUD), a five-fold increase equivalent to average annual growth of 8.1%.
In 2021, Australia tops the table with a USD median wealth (median Net Worth) of $273 900 ($400 497 AUD) – again probably due to the ridiculously high real estate prices in this country. A reminder of the unequal distribution of worldwide wealth is that the globalmedian wealth per adult was just $8296 USD ($12 130 AUD) in 2021.
The median wealth is used below as it reflects how the normal person is doing. The mean or “average” can be misleading in countries with a large wealth inequality. For example, in the US, due to some very rich individuals, the mean wealth per adult in 2021 was $579 050 USD. but the median wealth was $93 270 USD.
Our calculations suggest, for example, that a person needed net assets of just USD 8,360 ($12 224 AUD) to be among the wealthiest half of world citizens at end-2021. However, USD 138,346 ($202 289 AUD) was required to be a member of the top 10% of global wealth holders, and USD 1,146,685 ($1 676 685 AUD) to belong to the top 1%.
A net worth of $8360 USD ($12 224 AUD) would put you in the top half of the world wealthy, and a nudge over a million USD ($1 676 685 AUD) would put you in the top 1%.
Perhaps I will just have to take this latest utilities price rise on the chin … and reflect on my good fortune by the geographical accident of birth in a western country.
A bloke with a barrow of mutilated currency circa 1910
Every quarter, the economic boffins at ASFA (Association of Superannuation Funds of Australia go to the trouble of crunching the numbers on what yearly income they think is required for a “comfortable retirement”. They assume that the retirees own their own home outright and are relatively healthy. In one year, due to inflation, the comfortable retirement amount has increased by 7.6% , or $4920, to $69,691 for a couple (Dec 2022 ).
Comfortable lifestyle (p. a.)
Modest lifestyle (p. a.)
Couple $69,691
Couple $45,106
Single $49,462
Single $31,323
ASFA calculated annual retirement requirements for those aged 65-84 (December quarter 2022) for both “comfortable” and “modest” lifestyles
ASFA’s calculations are very detailed, but notably these annual incomes do not include any overseas travel – depending on your accommodation standards and length of journey, this could easily require another $20K.
Their latest December 2022 report notes that price rises have occurred for most spending categories. In the last four quarters,
Food rose by 9.2%
Bread 13.4%
Meat and seafoods 8.2%
Milk 17.9%
Oils and fats 20.8%
Gas 17.4%
Electricity 11.7%
Household appliances 10.2%
Automotive fuel 13.2%
Domestic travel and accommodation 19.8%
International travel and accommodation 15.9%
ASFA also helpfully calculate a lump sum that you will need to supply this income – with the assumptions that the lump sum is invested (earning more than the cpi) and will be fully spent by age 92. Let’s aim high and just concentrate on the comfortable retirement – the “modest” retirement lump sum amounts are much lower (around $100K) as they assume supplementation from the aged pension.
Savings required for a comfortable retirement at age 67
Couple $690,000
Single $595,000
ASFA calculated lump sum t requirements for those aged 65-84 (December quarter 2022) for a “comfortable” lifestyle
How to Cope with Inflation
There is just one simple way – you must be invested in appreciating assets that keep pace (or exceed inflation). Appreciating assets tend to go up in value over time. This is pretty vague, but if you are unsure about an asset, try and find a price chart over a 10-yr to 20-yr period. If it is going up, it is probably an appreciating asset.
You will always need some amount in cash for day to day requirements and to ride out any investment cycles without the need to cash in your investments at a low point in the cycle.
Knowing the difference between an appreciating and a depreciating asset (e,g cars, furniture, technology equipment, boats, etc) was an important step in Slack Investor’s investing life. I can still remember the day my father gave me “the talk”, that it was OK to borrow money for appreciating assets – I think he was pushing me in the direction of real estate at the time. However, I was not to borrow for a depreciation one i.e. a car, or consumer goods – assets that lose value when you walk out of the shop!
Appreciating Assets
Below is a (not exhaustive) list of appreciating assets. I have left out cryptocurrency deliberately as it has only been traded since 2010, and it is not established yet that it is a long-term appreciating asset.
List of appreciating assets:
Real estate
Real estate investment trust (REIT)
Stocks (Shares) and ETF’s
Bonds
Commodities and Precious Metals
Private Equity
Term Deposits and Savings Accounts
Collectibles e.g. Art
Term deposits and savings accounts might keep pace with inflation (if your lucky!) – but generally do not grow faster than inflation. Slack investor will write about why owning your own home and investing in Stocks (Shares) and ETF’s are his favourite appreciating assets in a later post.
“When you can measure what you are speaking about, and express it in numbers, you know something about it. ”
Lord Kelvin (William Thomson, Mathematician and Physicist, 1824-1907)
Slack Investor reflects on a tough investing year. I have mostly “stuck to my guns” investing with growing companies that have an established earnings record and forward P/E ratios <50. There have been a few lapses (e.g. XRO) which had a forward PE ratio of about 100 when I bought it last financial year … and, I paid the price when the higher interest rates and threats of inflation caused a rapid change in valuation of most tech stocks.
I expect a bit of volatility in my mostly “growth” investment portfolio and I try to reassure myself that, despite the odd negative year in the Slack Investment Portfolio the Stable Income portfolio is doing its job and keeping Slack Investor with enough cash to keep things running. In the world markets, the FTSE 100 Total Return Index was up 5.7% (last FY down 13.8%). Dividends helped the Australian Accumulation Index to be down 7.5% for the financial year (last FY +27.8%). The S&P 500 Total Return Index took a breather at last – and was down 10.7% (last FY up 36.4%) for the same period. All of these Total Return Indexes include any accumulated dividends, wheras the chart below of the ASX 200 for FY 2022, just shows stock prices.
The ASX 2oo Weekly chart for FY 2022- Dividends helped stem the losses for FY2022, but the ASX Accumulation Index is still down 7.5% for the FY – Incredible Charts – Click for better resolution.
Slack Portfolio Results FY 2022
All Performance results are before tax. The Slack Portfolio is Slack Investor’s investment portfolio and it had its first negative year since its establishment in 2010 – with an annual FY 2022 performance of -14.3%. Full yearly results with benchmarks are shown in the table below. It was a challenging year for all of my benchmarks that were exposed to sharemarkets (Median Balance Fund -2.5%, Vanguard Growth Fund -13.0%, ASX 200 Accumulation -6.5%).
Slack Investor seems to be clueless in real estate predictions … I have thought for some years that there must be a sizable correction soon – as the prices are still stratospheric in Melbourne and Sydney compared to incomes. The correction may still yet happen as interest rate rises are yet to take their toll.
The Brisbane real estate market was the place to be for FY 2022 (+25.6%) on top of a big year last year!) – Inflation was also a suprise for the challenged Slack Investor – with the CPI at +6.1%.
However, the five-year compound annual performance gives me a much better idea about how things are going and will smooth out any dud (or remarkable!) results. The Slack Fund is still ahead of Benchmarks – but currently being challenged by Brisbane Residential real estate.
Slack Investor 5-year compound annual rate of return – compared to benchmarks – Click for better resolution.
The beauty of compounding with a succession of good performance results can be seen in the chart below showing the growth of an initial investment in June 2009 of $10000.
The rate of growth of $10000 invested by Slack Investor in FY 2009 – compared to benchmarks – Click for better resolution.
10-year compound annual rate of return
The Slack Fund has been around a while and, at last, I am generating some long term data (10-year compound “rolling” annual rate of return). Over this time frame, the Slack Fund has been performing very well. A long-term annual rate of return of over 15% – Go Slack Fund!
However, the 10-yr rates of return of the Median Balanced Fund, Vanguard Growth fund, ASX200, and residential property in Brisbane and Melbourne are also great long term investments, generating a 10-year compound annual rate of return of at least 7% p.a.
An “enhanced” satellite view of eastern Australia incorporating an “exaggerated relief” technique to emphasize the topography. The mountains of PNG and Indonesia are on the horizon.
It serves an investor well to occasionally lift themselves away from the day to day stresses of the world – and the trials of owning a share portfolio!
ASX 200 – The Australian Index
My previous post outlined a few of the difficulties of market timing and my decision to be tentatively out of the Australian Index according to my “market timing rules”. I also try not to trade against the market trend … and I would not sell while the weekly chart was looking positive.
So far this has been the case, with the weekly chart just above the rising trend line. I will sell if the ASX200 is below the trend line and still below the stop loss at the end of the week. This gets to one of the problems of market timing – you can set up the most definitive strategy that will give you an objective selling point – but my heart is not in it as Slack Investor believes that the ASX 200 represents reasonable value at the moment. I am actually looking forward to the end of my 20-year market timing experiment – even though it does have the useful purpose of giving Slack Investor something to do in a market downturn.
Lifting the gaze
My absolute favourite way of lifting the gaze is to look at the Vanguard Asset Index chart over a long period. However, a later version than 2021 isn’t due out till mid August 2022 – so I have just shown last years version. The Long term asset class returns chart shown below – in a logarithmic scale, show that the asset classes of Residential Property and Australian shares – are the only really worthwhile games in town. When things just get too much in the day to day trading world – just sit on the couch and gaze in wonder at these two charts … and then perhaps doze off.
Long term Asset returns 1926-2020 – From Stockspot
Extract from the 2021 Vanguard Index chart (Just the 2008-2021 portion) – the dollar values on the right are the results of investing $10000 in index funds in each asset class for 30 years (since July 1991). – Check out the full glory of the Vanguard 2021 PDF chart – Click for better resolution.
– Adapted from ‘Three Mounds’ by Yoko Ono is displayed at the Serpentine Gallery on June 18, 2012 in London, England – From Getty Images.
With apologies to Yoko for interfering with her art, but Slack Investor first thought of his own “Three Pile Theory” back in 1989 when I had got myself a “Proper Job” and enough stability in my life to make the big plunge into Real Estate. At that time, I owned a few grains of dirt in my House pile (the Bank owned the rest), My income was OK, and my investments (which would later morph into the Slack Fund) contained a few thousand dollars in shares.
Now, 32 years later, Slack Investor still has these three financial pillars to keep himself steady.
House – Home ownership gives me great security and pleasure. The bank owned most of this 30 years ago – but now I have the upper hand! (~30% of Net Worth)
Stable Income – This used to be my job, but in retirement I have some stable income annuity style investment (~20% of Net Worth) that would pay my bills and maintain a basic Slack Lifestyle should Armageddon befall the stock markets for a few years. This income is supplemented by income from the Slack Portfolio.
Slack Portfolio Investments – (~50% of Net Worth) – Now currently in my Self Managed Super fund (SMSF) which is almost exclusively invested in growth companies. These are great businesses to be invested in if you have a long term horizon – however, stock prices can be volatile in these high Return on Equity (ROE) companies. I am currently retired and do not rely on the Slack Portfolio for stable income. Because of the stability of my other two pillars, I can be quite aggressive in the allocation of my investments in the Slack Portfolio – as I know I will not have to panic sell (for income) during any downturn.
Slack Investor didn’t really invent “Pile theory” – it has been around for a while in various guises – Three Buckets is a tried and true way to manage your retirement expenses by dividing your retirement stash into buckets of cash, conservative investments and more risky, growth investments.
House
My home may not feel like a palace to you, but to me, it is a whole Kingdom.
There are some who argue that you are financially better off by renting over a 10-year period rather than buying. But for Slack Investor, the tax advantages – no capital gains tax on your own home in Australia; the leverage – banks are usually willing to lend at least 80% of the house value; the forced saving – your mortgage payment is a big monthly portion of your income which you set aside for a long period; and, the stability provided by home ownership make this a clear winner for me. “The Serenity” is just a bonus.
Stable Income
To cover living expenses and to give yourself “peace of mind” it is so important to have a slab of money that is not subject to the vagaries of the sharemarket. In Australia, if you haven’t enough super to go independently, you might qualify for a full or part pension.
If going the fully self-funded route, many advisors recommend your stable income should be in two parts. You should work out your living expenses for a year and then keep between 2 and 5 years worth of expenses in stable cash deposits – Let’s start with 3 years of expenses in accessible cash. The rest of you stable income pile can be in longer term cash deposits, bonds or REITS. Because the investments pile (Slack Portfolio) is in growth shares that can be very volatile, my stable income must be something that is not highly correlated to to the sharemarket.
Term Deposits– although interest rates are woefully low now on bank term deposits, it is still possible to get ~1% p.a. from some of the minor banks that still have the Government Guarantee for the first $250 000.
MER (0.20%) – Annual performance over 1/5 years – (4.08%/4.49%)
Challenger Fixed Term Annuity – Rates are pretty low at the moment, locking away a deposit for 5 years will earn a measly 1.65%.
Real Estate or Real Estate Investment Trusts (REIT) – these are a bit higher up the risk curve but as they produce income (rent) and can be associated with longer term leases – are usually less volatile than the share market. For example, Vanguard Australian Property Securities Index ETF (VAP) – MER (0.23%) – Annual performance over 1/5 years – (-13.3%/6.23%)
Investments – The Slack Fund
Because the Slack Portfolio is mostly in growth shares, I have steeled myself that this particular pile is volatile and changes value every day. I am prepared for a few low performing (or even negative) years in a row for this pile. Even great investors that have much more knowledge than Slack Investor have the occasional bad year – during some periods, share investments just perform poorly. I am accepting of this truth.
Because this Investment pile is mostly in my Self Managed Super Fund (SMSF), I am usually obliged to withdraw 4% of its total value each year – this percentage increases with age – but this payment is currently tax free for those over 60. I can use this income in a discretionary way. My living expenses should be covered by income from the Stable Income pile – and any other income is gravy.
Pile Rebalancing
Once you are in a house that you are happy in and hopefully will be near paying off any outstanding loans as you get into retirement – other than maintenance, you can leave this pile alone.
The Stable Income cash pile might occasionally need a bit of topping up from the longer term stable Income or Investments fund. Any dividend or interest income from your investments is fair game. The investment Slack Fund usually produces 2 -3% income.
Hopefully, with 3-years worth of living expenses in the stable income pile, you can ride out a few bad years in the share market and only sell shares to top up the stable income pile when the share market has had a good run. Ideally, you would only sell share assets out of this pile when the share market is above the long term trend line. However, realistically, from the chart below (in red) there are long periods when the market is below trend. Have no fear, your basic expenses are always covered by a mixture of stable income, interest and dividends.
The long term chart of the US S&P 500 with the dotted inflation-adjusted long term trend line – from seeitmarket.com
There are other piles worthy of attention such as Health and Relationships but the finance stuff is necessary too. So get the shovel out … and start working on those piles!
Slack Investor has thought a lot about retirement – a lot!
Even though I liked most aspects of my jobs, the thought of doing what I want each day was most appealing. I read quite a few blogs on financial independence and they seem to fall into two main types. The “retire at 30” types and the “building of financial skills to gradually gain financial independence” types. Slack Investor is definitely in the latter camp and, without outside help, or big slabs of luck, I can’t really see a way of avoiding the 25-35 years of work to build up your funds before you then launch your retirement.
This post sets out with two of the building blocks to retirement – a home and some superannuation. You might be just starting your working life, or be in your forties and thinking … “Well, how do I get to my retirement from here?”
The recent Australian government Retirement Income Review emphasised that if your are renting in retirement then things are tough.
In retirement, renters have higher levels of financial stress. A significant proportion of retiree households that rent are in income poverty …”
So take the advice of Flo Rida and Slack Investor and make it a big priority in your life to own a place to live. I know this seems like an impossibility to many as the cost of houses in Australia is eye -watering in the big cities. However, the place you want to own might be an apartment or, it doesn’t have to be in a capital city – it can be in one of the many fantastic regional towns!
From Australia’s most liveable regional cities. Not sure why “Distance to Alcohol” is a criteria – or what it means … might be good … might be bad!- but this is a nice selection of great Australian towns.
When you have found a place that you could retire to, the next step is to get yourself into the property market by saving for a deposit and buying a place. There will now be 30 years of pain … and then you own it! But, at least you have borrowed money for a “hopefully” appreciating asset. Make sure that any property you buy makes good sense – Schools, Transport, Parks, Shops, etc.
Another way to do this is “rentvesting”. This an option where you rent your place to live near your work while your are buying a place that you might want to retire to one day. Rentvesting makes sense when the costs to rent a place is cheaper than the buying costs (Loan Interest/Rates/Stamp Duty, etc). While you are renting in a share house or apartment the extra rental income from the property you own, and tax incentives, will allow you to use any surplus funds to invest in a share portfolio. Rentvesting can also increase your borrowing power and hopefully get a better property – Just don’t over extend yourself.
Get some Super
According to Investblue, in 2018, as boomers are retiring, the average retirement super balance in Australia for men is $270,710, and for women $157,049. This is not really enough, but an “average couple” would have over $400000. Things should get better as compulsory super has only been with us since 1991 . Boomers have had many advantages during a period of rapidly increasing asset prices – but compulsory superannuation over their whole working life was not one of them.
If you are relatively healthy and own your home outright, the Association of Superannuation Funds of Australia (ASFA) have estimated the annual retirement income required for a modest and comfortable lifestyle.
It is worth some study into how the pension and superannuation systems interact. The bare minimum to aim for is the “sweet spot” where under current rules, home owning couples can have $400000 in superannuation (singles $300000) and still qualify for the full government pension. Using this mix of super and the pension, when reaching the pension qualifying age of 67, a modest to comfortable retirement is possible under current rules.
This “sweet spot” is our first “port of call” in super terms, and meant to demonstrate that if you own your own home and have a good chunk of super … then you are going to be OK in retirement.
Slack Investor hopes that you have got onto the idea of financial independence a bit earlier than aged 40. By starting to plan in your twenties or early thirties, you can aim to fund your own retirement … and, perhaps not wait until you are 67.
