Category: Saving

Super, a home, and the Pension … a fruity mix! – and February 2024 – End of Month Update

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.

On 31 March 2023, 63% of the population aged 65 and over were receiving the aged pension (full or part), or other government-funded income support.

As so many Australians rely on a mix of both their super and the aged pension for retirement, it is worth revisiting the perverse ways in how superannuation interacts with the pension under the Assets test devised in 2017.

Your own Home

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.

Things are really bad at the moment for future home owners. It was assessed that for the home market to “affordable” home prices needed to be on average 3.0 times the average median income. Currently, Australia’s housing market has a median multiple of 9.1! I am hoping that future governments will adopt policies that will reduce house prices – But I am not holding my breath.

Super and the Aged Pension

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.”

Nicola Field (Using data for 2020/21)- Canstar

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.

Jack Hammond and Terrence O’Brien – saveoursuper.org.au

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.

SituationAsset LimitOther Assets*SuperDrawdown from Super @ 5%Age PensionTotal 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 $71,723Couple $46,620
Single $50981Single $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).

Savings Rate and … December 2023 – End of Month Update

My last post on “Salary Sacrifice” got me thinking on the other things that I did to help myself on the journey towards financial independence. I have before stressed the importance of your savings rate as the primary tool in the box – and, more than anything, this is the number that will affect when you become financially independent.

This figure can be calculated a few ways, but for simplicity, let’s define it as your retirement savings as a percentage of your take-home pay (disposable income after taxes and deductions) – this can be calculated using fortnightly, monthly, or yearly data.You can work out your own savings rate or, if you are in a stable relationship with a combined goal, include your partner’s savings and take-home pay.

SAVINGS RATE (%) = 100 x (Total amount of Savings put aside for Retirement/Take-home Pay)

This savings rate is the percentage of your after tax income that you must be putting towards retirement – and it defines the number of years that you have to work until you can sustainably generate your expenses from your investments. There are some assumptions for the following chart:

This magical curve is presented below to bring a bit of clarity to your goal. The object is to get to the stage when your annual return on investments (Passive income) cover 100% of your expenses. This represents the beautiful state of financial independence.

From The Escape Artist – using the conservative assumption of a 5% return on your retirement portfolio after inflation.

In Australia, with compulsory superannuation, 10% of your gross salary is deducted from your wages. Taxation rates will vary, but lets just say that 10% of your gross salary is the equivalent of about 15% of your net salary (disposable income). You add your superannuation to any other retirement saving that you are doing to get your total amount of savings put aside for retirement.

Starting from scratch, from the above graph, if you worked continuously, and only relied on compulsory superannuation you enter the full-time work force and you are 42.8 years away from a retirement – where your living expenses are covered by the passive income from your retirement savings. In other words, if working continuously, a 22-year old starting full-time work will have enough passive income to cover expenses when reaching the age of 64.8 – relying solely on compulsory super.

In Australia, there is also the aged pension to kick things along after age 67. Obviously, if you want to retire sooner and have a bit extra for holidays, and to allow a bit of a safety margin, and be financially independent – You will have to do some extra savings towards retirement yourself.

How are people going with their savings rate?

For Australians, the compulsory superannuation system provides a sound base for retirement savings (with a working life of 42.8 years). This doesn’t factor in the government funded aged pension – subject to a means test. Currently the pension (September 2023) is $28,514 per year for a single person – But who knows if this will still be available at present levels in the future. It is best to plan for your future without it – and then accept it as a bonus if you qualify.

Although this sounds OK, any disruption to your working life (ill health, family, education, retrenchment, etc) will be a real setback to your retirement plans – Any work breaks will require additional savings for your retirement. In the US, the “average” savings rate was between 5-10% for many years. Despite some impressive savings rates during COVID-19, in July 2023, the personal saving rate in the United States amounted to 4.1 percent.

Statistic: Personal savings as a percentage of disposable income in the United States from June 2015 to August 2023 | Statista
From Statista

You would have to say … this does not bode well for a satisfying retirement for the “average” US Citizen.

What was the Slack Investor Savings Rate?

Rusted on followers of this blog will recall that I had a bit of a delayed start to thinking about retirement. I had just arrived back in Australia after a 6-year working holiday overseas. I was aged 30, broke, and the only thing I knew was that I didn’t want to continue working in the field that I was trained in – high school teaching.

Clearly Slack Investor had a bit of work to do. Once I was in regular employment again, I set about getting the financial building blocks in order. Emergency fund, house deposit … and then savings for my retirement. I did this mostly using salary sacrificing into superannuation and building up my own private share portfolio.

There is nothing Slack Investor likes more than burrowing into my financial history using the excellent and free “Sunset” international release of Microsoft Money. I use the  Australian Version. I have been using this software to track my finances since 1990 (33 years!)

Including superannuation contributions, my savings rate for retirement fluctuated between 20% and 45%. From the top graph, this represents a shifting rate that was equivalent to an overall retirement goal that required between 36.7 years and 19 years of working. Since “ground zero” at aged 30 and some extra education, I ended up working mostly full time for 28 years. Luckily, I had found a job as meteorologist that I really enjoyed.

This is not the “hard core” road to financial independence (i.e retire at 35, etc) – but Slack Investor thinks a reasonable compromise with the competing priorities of raising a family and buying a house.

Savings Rate is so important. Determine what your own savings rate needs to be to achieve your retirement goals – and automate your savings deductions as much as possible – and get cracking!.

December 2023 – End of Month Update

Happy Days. The year closes and, Slack Investor was definitely not naughty … a big December “Santa Rally” this month. All followed markets rose. The ASX 200 up a mighty 7.1%, the FTSE 100 up 4.0%, and the S&P 500 up 4.4%,

Slack Investor remains IN for the FTSE 100, the ASX 200, and the US Index S&P 500.

All Index pages and charts  have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.

Things a Financial Advisor might tell you … and May 2023 – End of Month Update

From the Sydney Morning Herald

Slack Investor has blogged about financial advice before – and although an advocate of trying to do as much as you can by researching finance world yourself, it can be a very difficult journey to be across all the fields of saving, mortgages, investment loans, insurance, superannuation, taxation, and investment. 

Most people want financial advice but the problem is that it is so expensive. MoneySmart.gov.au outline a case study where “Rhett” has $400 000 to invest – He might be hit with fees of $13 600 in his first year of advice . These fees include a Statement of Advice and Insurance premiums and layers of platform and investment advice fees.

Where to invest your money is the easiest thing to sort out for yourself – with the key words being diversification and low fees. There are cost-effective ways of investing in a diversified way that will suit your risk tolerance without involving a financial advisor (e.g. Stockspot, Pearler). But some people (Not Slack Investor Readers!) need a trigger to just start investing. Finance world is much more complex than just investing your money. Slack Investor can see the need for finance professionals

Things a Financial Advisor might tell you

Firstlinks have trawled the data to determine the most recommended strategy used by financial advisers – the most common of these are listed below.

From Firstlinks

Let’s just have a look at some of these in more detail.

Rollover Your Super – “Rolling Over” your superannuation is just a way of describing the transfer of your “protected” super into another protected super fund. Slack Investor readers will be all over this one – Of course it makes sense to put all of your super with one provider to avoid multiple administration fees. Combine your super into one fund – preferably an industry fund (lowest fees) with a good 5-10 yr performance record.

Retain Your Super – This is again good advice for the long-term accumulators of wealth. Unless under extreme hardship, resist all attempts for early access to your super. During the COVID-19 outbreak, $4 billion was paid out to 456,000 people under the early super access scheme. This would have helped distressed businesses and individuals in the short-term but may not have been a great idea in the longer term.

Super Contributions – This is a more complicated area and, it might be good to have advice on when, and by how much ,you should boost your super contributions above those which are compulsory. This is tricky when you have competing loads on your take-home pay (Family, Mortgage, etc). Slack Investor was big on maximizing his super contributions once he had a firm grip on his home mortgage.

Apply for Insurance – When you have a family or debts (home loan?) to cover, life and disability insurance is a good idea. You don’t need an advisor to tell you this. Insurance through your super fund is usually the most cost effective way to do this.

Estate and Aged Care Planning – This area is really complicated for the layman. Professional Advice, or much research, needed.

Commence, Rollover, Retain Pension – You may need advice here if planning to mix aged-pension and super to fund retirement. If there are no aged-pension issues, Slack Investor believes that it is best to start an account pension (from your super) as soon as possible and re-contribute any surplus funds as non-concessional contributions.

Commence, Rebalance Investment – An old truth – Best time to start investing? 20 years ago. Next best time to start investing? Now! Rebalancing can be done automatically with cost-effective platforms e.g., Vanguard Super, Stockspot.

What Types of advice Do You Really Need?

The current financial advice system is complicated by well-meaning regulations that are in dire need of reform. In 2022, the Australian Treasury provided a consultation paper seeking feedback on changes to the regulatory regime that would allow financial advice on specific matters without the obligation that the advisor should know everything about your financial situation – No need for the expensive Statement of Advice (SOA).

Ideally, in a future world, you could get advice at various stages in your life from finance professionals at an hourly rate – perhaps in the same way you would consult a medical specialist about a problem. For Instance

  • Early/Mid-Career Advice: Am I on track with my savings, super contributions and retirement plan? What strategies should I employ to achieve my goals?
  • Pre-Retirement: Am I ready? Taxation Issues? Aged-pension/Super mix?
  • Estate and Aged Care Planning: Complicated – Many issues to discuss here.

Alternatively, you could just turn your financial future into a hobby (Like Slack Investor did), and use the internet and books to educate yourself.

May 2023 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.  It was a dreary month for the Slack Investor followed markets. The ASX 200 performed poorly this month – down 3.0%, and the FTSE 100 even worse – down 5.4%. The S&P 500 was flat (+0.2%) for the month.

In this month of turmoil for stock indexes, the Slack Portfolio did quite well. This is because it is heavy with technology stocks that are having a moment in the sunshine. The Nasdaq 100 index was up 7.7% for the month of May.

All Index pages and charts  have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Greed and Fear – Battling the human condition

Sick Bacchus - Caravaggio Self Portrait
“Sick young Bacchus” a self portrait by Caravaggio (circa 1593) showing himself as the Greek God Bacchus, the god of wine. It is thought that Caravaggio painted this portrait when he was not well – probably suffering from malaria. From the Borghese Gallery, Rome.

Fear and greed are part of the human condition, these traits have evolved over time.

Without the right dose of fear, we would expose ourselves to unreasonable threats and, without the right dose of greed, we would forego opportunities to secure the resources that we need to live.

Fear and Greed: a Returns-Based Trading Strategy around Earnings
Announcements

The fluctuations of the stock markets are just a symptom of these traits. There is a lot of general panic and selling when the stock market starts consistently falling. Stock owners become fearful of further losses and press the sell button. This sets up a chain reaction and the markets fall even further.

A “Herd Effect” exists in the financial markets when a group of investors ignore their own information and, instead, only follow the decisions of other investors.

The herd effect in financial markets – Quantdare.com

It is easy to see how herd behaviour evolved as copying what other individuals are doing can be useful in many situations. For example, if there is an immediate threat, that you haven’t noticed and the herd has – it might save your skin to follow the herd.

Then, of course, there are the good times when the stock market is pumping – the buyers start piling in regardless of the fundamental foundations of the stocks. Asset bubbles often result and a good example of this greed was the “dotcom” bubble in the late 1990’s when big prices were paid for any company that mentioned the internet in its prospectus. Nobody wanted to miss out on, what looked like, easy money.

But these herd behaviours are the opposite of what the astute investor should be doing. We must fight these evolved traits and develop our own behaviours that keep us on the right path.

Savings Automation and Dollar Cost Averaging

Slack Investor has written before about automating your savings. There are also huge advantages to automating your investing – particularly when you are just starting out in the investing world. The first stumbling block that new investors face is to start investing. Then they must develop the habit to keep on investing. There is always a reason to use the money somewhere else or, you might think that right now is not a good time to invest. This “paralysis” must be over come and the best way to do it is through automation.

With auto investing, you don’t have to make the decision when to invest, it just happens automatically when your savings reach a pre-determined point. This opens up the delights of “Dollar Cost Averaging” where, if the market is relatively expensive, you will buy few shares – and if the market is undervalued at the time, your set amount of dollars will buy more shares.

You are buying in the good times and bad . This doesn’t matter – the important thing is that you are buying into companies and accumulating your wealth. Your purchasing is relentless, no decisions, no procrastination – Warren Buffet would be proud!

By investing regularly, in this case, $417 per month, you accumulate shares regardless of the share price. Dollar Cost Averaging buys you more shares when the share price is cheap and less when they are more expensive. – From SeekingAlpha.com

Pearler and Auto Investing

A new kid on the block in the broking business for Australian and US shares is Pearler with distinguishing points of a flat $9.50 brokerage charge and the use of the Chess system for attributing shares to individuals. This means that you are issued with a Holder Identification Number (HIN) and you have direct ownership of your shares. Slack Investor likes this model rather than the custodial model of many other new broking players. Pearler also offers free brokerage on the purchase of selected ETF’s (provided that you hold them for a year).

However, Slack Investor thinks the absolute best feature of the Pearler platform is that it encourages Auto Investing and makes the process simple. If you are serious about your investing journey, you need a broker and why not make it Pearler.

There are some well researched and comprehensive reviews of Pearler and its many features by Captain FI and AussieDocFreedom.

Auto Invest through Pearler is an excellent way to combat the cycles of fear and greed and take the emotion out of your investing decisions.

Other than just opening an account with them, Slack Investor has no affiliation with Pearler.

Ride Your Own Bike

Like Sally, one day the realization will come that your best interests rely on you steering your own bike – in the direction that you want to go!

The ultimate goal is to get your three substantial piles going – house, income and investments. But before any of this happens you have to develop a mindset … I want to be in control of my financial life.

You must gain control over your money or the lack of it will forever control you. —

Dave Ramsey – Author of The Total Money Makeover

If you don’t take control, perhaps you’re plan is to take all your affairs to a financial adviser one day. Most people will feel the need for financial advice at some stage but only 20% of Australians have a financial advisor. The current structure makes getting advice a difficult step – and it’s not the financial advisors fault.

The pricing problem of Financial Advice in Australia

64% of survey participants agreed that financial advisers were too expensive.

ASIC Survey August 2019 – Financial advice: What consumers really think

The Australian Government passed a piece of legislation known as the Future of Financial Advice (FoFA) in 2012. FoFA was a series of laws that were supposed to improve the quality and transparency of financial advice. One of the main purposes was banning conflicted remuneration – where advisers were recommending products that gave them good commissions. While FoFA and the Hayne Royal Commission were well intended and vital in restoring some trust in the sector – there have been some unintended consequences.

(The Financial Services Royal Commission) identified the problem of conflicted remuneration without providing a mass market solution.

Graham Hand, Firstlinks – FoFA, the Failure of Financial Advice

There has been a huge rise in regulatory red tape and the associated compliance costs for financial planners. A combination of these costs, the big banks dumping their financial advice arms, and the need for upgraded qualifications has put this sector in crisis. The total number of licenced advisers is set to drop by a third in the next few years.

There is broad recognition that financial advisors have expertise that the normal punter does not have. However, the biggest barrier to getting financial advice is the expense. One of the big problems is that when you engage a financial advisor, they are obligated to present you with a full Statement of Advice (SOA). On the surface this makes sense, the client would want a document that takes into account your own circumstances and outlines the fees and risks of each strategy. However, according to one planner, the SOA has turned into pages of jargon, repeated disclosure and boring generic graphs. These statements are weighty tomes that take many hours to prepare. Sadly, they seem to confuse the actual advice and provide no real value to the client.

A full Statement of Advice (SOA) runs over 100 pages and the need to review all circumstances and develop a plan takes 10 to 15 hours and costs between $3,000 and $5,000 depending on complexity.

Graham Hand, Firstlinks – FoFA, the Failure of Financial Advice
From FirstLinks – FoFA, the Failure of Financial Advice, Take 2

James Kirby from The Australian uses the example of paying annual adviser fees fees of $3000 and he supposes that the structured advice that you receive will match the 4.3% pa return of the new Magellan retirement income product Magellan FuturePay (FPAY). He points out that for an investment of $500 000 and an expected FPAY return of $21 500, your advice fees would be 14% of your earnings. This does not make sense to him … or Slack Investor.

James Kirby suggests that a better model for the regulators to adopt would be that you could approach a financial adviser for advice that you need at the time … and pay the financial adviser for this “niche” advice. This is not possible under current legislation.

Take charge

So, with full service financial advice gravitating towards high net wealth clients, what is the average punter supposed to do? Robo-advisors such as Stockspot could be part of the solution. This automated service can provide help with allocation of assets other services that will suit your age and risk profile. But there are so many more financial questions you might want to handball to your financial adviser if you could afford one. Well, if you can’t … it’s up to you.

Decide what you want to achieve in the finance sense. Go through the savings basics and get your savings rate up. Take charge on where your money goes, get your superannuation set, reduce any unnecessary fees that you are paying, set a target on your financial piles.

Educate yourself on things financial. There are some great books. The Barefoot Investor is an excellent start. Some fabulous podcasts The Australian Finance Podcast will get you going and there are heaps of other Slack Investor favourites. Get involved and start to enjoy the immense freedom and satisfaction of riding your own bike.

Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.

Franklin D. Roosevelt

Two Very Important Numbers

There are many numbers to note in finance world – Fees, Investment returns, etc. However, there are two extremely important numbers when it comes to financial independence. Both are percentages and the first one is the 4% “rule of thumb” and the second is your savings rate.

The 4% Rule

All followers of finance blogs would have heard of this often quoted “rule” Slack Investor acknowledges that this magic number is arguable and depends on individual circumstances but, it is an excellent way to estimate how much you will need to retire. The 4% rule is a way to “roughly” link assets with income. For example, as an estimate, if you would like to generate a $40 000 yearly income, you would need to have investments assets of $1 000 000 to earn this income using the 4% rule (4% of $1 000 000 = $40 000).

Another way of looking at this 4% rule is that you need to save 25 x your annual spending for your retirement fund so it can generate an income to cover your spending. So, if you spend $30 000 a year, you need a portfolio of $750 000 (25 x $30 000). To get an idea about what your expenses are it is important that you track them over a year using a spreadsheet or finance software. If necessary, this investment income can always be supplemented by a government pension or a part-time job.

Bill Bengen originally came up with this “4% safe withdrawal rate” in 1994. He developed it by backtesting a conservative US portfolio with data dating back to 1920 and tried to get a safe withdrawal rate that would generate an income for at least 30 years. He is the first to admit that the 4% number was always treated too simplistically and has since updated the rate to be closer to 4.5%.

Slack Investor is a bit old fashioned in liking to hold on to most of the capital that is earning the money and has a flexible approach to how much to extract from investments each year. In a good year for the stock markets, I am happy to dig deep into the investments pile – using dividends, distributions and even some capital gains as income. When the market performs poorly, it is more complicated and I have to dip into my stable income pile. Most of the Slack fund is in Australian Investments and in 2021, the Australian Index has a 12-month forward dividend yield of 3.5% . Hopefully, the shares will also increase in value over time. Over the past 10 years, Australian shares had a total return of almost 7% – with growth shares you can aim higher, but prepare for volatility. In the good years, I will also take out a bit of capital gain for extra spending. All of this is in addition to the stable income component of my investments.

Your Savings Rate

Warner Bros

“Wealth consists not in having great possessions but in having few wants.”

Epicetus

Using the 4% rule we estimate how much will give us a sustainable retirement. But there is another number to add to our arsenal.

Just as in Lord of the Rings there is ” one ring to rule them all…”, there is also one “percentage” to rule them all in the Financial Independence world – and that is the Savings Rate percentage.

The annual expenses is critical here as this is the figure you are trying to generate out of investment income. Lets have a look at the effect that savings rate has on the number of years that you have to work until you can sustainably generate your expenses from your investments. The table below is from the great financial blogger Mr Money Mustache. There are a few assumptions used to generate this table

Here’s how many years you will have to work for a range of possible savings rates, starting from a net worth of zero:

Table from “The Shockingly Simple Math Behind Early Retirement” – From the one, the only, Mr Money Mustache

At a saving rate of 10% you will have to work for over 50 years – we have to do better than that! There are some pretty heroic savings rates amongst financial bloggers e.g Aussie Firebug 61%; Dividends Down Under 61%; I have admiration for these savings rates and note that these bloggers are in a hurry to get to financial independence – and retire early. At 60% savings you can retire after 12.5 years of working and saving – but that sounds pretty hard.

Slack Investor was on a much slower train and lucky that he quite enjoyed his job – and didn’t mind spending 30 years saving for his retirement. I have always been a good saver but, when looking at my past savings rates, it was usually around the 30-40% level and, some years had dropped down to 20%. Raising a family and holidays are a delightful interference with savings and you just have to find a balance. In Australia, we have compulsory superannuation which currently adds a welcome 9.5 % to your savings rate.

A beautifully presented calculator at Networthify shows how the savings rate works and gives a yearly breakdown. It also shows some interesting OECD statistics for average National savings rates (e.g. The US 6%, and India 32%). The aim is to eventually save enough money to invest in a way that you average (at least) 5% return on your investments after infation. If you withdraw from this retirement pool at the rate of 4% and have enough to cover 100% of your expenses – you become financially independent – the retirement pool keeps on giving!

Automate your savings

One of the best financial habits that I formed was to take the thinking out of saving and set up automatic recurring transfers from my work money to my savings or investment accounts – Pay Yourself First. I also took full advantage of “concessional contributions” to my super account which were taxed at 15% rather than my then marginal rate of 37%.

So, automate your savings. Investment returns are important and we hope that we can exceed the 5% after inflation returns that the above table and 4% rule are based on. However, the number you have most control over is your savings rate – and that is most important.

Household Comfort … and March 2021 – End of Month Update

The couch seems to be looking good for some, but not for others. ME Bank have updated the annual Household Financial Comfort Index that surveys 1,500 Australians every year to get an idea of how Australia is travelling in a money sense. Slack Investor was surprised at the research results which revealed that over the past six months, to December 2020, the “financial comfort” of Australian households has reached a record high of 5.89 out of 10. This index is 5% higher than before COVID-19! However, it is full-time workers that report the highest financial comfort across the workforce.

The changes in the Household Financial Comfort Index since 2012 (Scores out of 10) – ME Household Financial Comfort Report 2020

The high financial comfort can probably be linked with some households going into “savings mode” as the uncertainty caused by COVID-19 on the economy, and the very high levels of government support.

Although, not everyone feels the same after a year of COVID-19. About 30% of households said that their financial situation has worsened. Clubs, pubs, gyms, air transport, restaurants, education, and the creative arts were hit particularly hard – with the cohorts of casual workers and adults under 24 shouldering the burden of Coronavirus disproportionally.

Household Response to the Pandemic

The main method that households used to ease the financial burden during COVID 19 (Columns %) and the line showing level of financial comfort associated with each method – ME Household Financial Comfort Report 2020

The main ways that households chose to ease the effects of the pandemic were 1. Dipping into savings (14%); 2. JobKeeper payments (Govt. wage subsidy) (11%); 3. Superannuation withdrawal (9%); 4. Delaying bills (7%). With JobKeeper payments having now ended, the raid on super halted, and the other main methods likely exhausted, it looks like a tipping point is approaching.

“And, at $90 billion, (JobKeeper) it’s the single largest economic support program that any Australia government has ever undertaken.”

Australian Treasurer Josh Frydenberg – ABC News

The Australian government’s massive JobKeeper program ending is likely to cause a big rupture in the economy with many small businesses who have, till now, been just “hanging on “. Many of these businesses are likely to cease trading. For employees, Treasury estimates that up to 150,000 workers will move from JobKeeper into unemployment.

Financial Cushion

With tough times ahead, there will be many who would wish for a financial cushion. Slack Investor has often banged on about the need for an emergency fund of cash that will help when one of life’s inevitable bits of bad new turns up. In December 2020, about one in five households reported virtually no, or very low, amounts of cash savings (<$1000).

How much in cash savings does your household currently hold – including savings accounts, term deposits and offset accounts? – ME Household Financial Comfort Report 2020

As for the pandemic effect on retirement savings, the reality of individual super balances is starting to bite with the report revealing that only around 18% of households expect to fund retirement with their own superannuation and 42% expecting to use both private savings and the government pension.

“Financial comfort levels are up for now, but many households
are on the cliff’s edge. They’ve lost income, their jobs and entire
livelihoods, their wafer-thin savings buffer is dwindling, and government support is the main action stopping them from falling over.”

Household Financial Comfort Report – 2020 ME Bank survey –

March 2021 – 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 followed markets this month had solid rises (ASX 200 +1.8%; FTSE 100 +3.5%; S&P 500 +4.2%).

In these uncertain times, especially with the high prices on the US market, I am monitoring my index funds weekly and if, at the end of the week my Index funds are below the stop loss, then I will put a post on the blog and sell at the next opportunity. All Stop Losses are Live.

All Index pages and charts  have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.

Retirement sweet spot – a place to live is a good start!

From Pixabay

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 …”

The Australian Treasury Retirement income Review (2019)

Get a Roof

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.

The Association of Superannuation Funds of Australia (ASFA) retirement standards for 2018

Using the average figures, there is a big gap between existing super saved and a comfortable lifestyle

80% of retirees fund their retirement years with a combination of superannuation and the age pension

Money Magazine June 2018

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.

SituationSuperannuationDrawdown from Super @ 5%Age PensionTotal Income
Single Home-owner$300,000$15,000$19,210$34,212
Couple Home-owner$400,000$20,000$33,272$53,272
Table from Realize Your Dream and based upon 2018 values

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.

Cash is not King

From memegenerator

My nephew is a carpenter and he would often gleefully say “Cash is King” when offered a cash job – no paperwork and no tax. This was fine for him as he was on a travel holiday and didn’t want the hassle of being on the books and claiming his tax back at the end of his holiday.

But, to the investor, Cash is not King.

If you hold too much of your wealth in cash, you won’t be able to keep pace with inflation, meaning your purchasing power will go down and it will be more difficult for you to achieve your goals.

Black Swan Capital

Slack Investor cannot argue that money in the bank is not safe, The government guarantees balances up to $250,000.

Cash is important for day to day expenses and your emergency cash buffer, “the cushion” to keep you going for about 2-3 months in an emergency. However, to get on the path to financial independence you must invest in appreciating assets.

Term Deposits, Bonds and Fixed Interest

For a relative, Slack Investor was trying to find a place where cash would earn a decent rate – without too much risk. There is not much around. Most transaction accounts pay no interest or 0.1% interest per year. If you are prepared to lock your money away for a year in a term deposit in a major bank, you might get 0.85%. One of the newer banks, Judo Bank, is offering 1.01%.

There are a few offerings in the bonds and fixed interest area. I ended up in the Vanguard Australian Fixed Interest Index Fund with a management fee of 0.24% and 1 and 3 year returns of 3.2% and 4.7%, respectively. The fund lends money to mostly government authorities – but, unlike term deposits, the returns are not guaranteed. A similar product is offered as an Exchange Traded Fund Vanguard Australian Fixed Interest Index ETF (VAF).

Growth Assets – Shares and Property

Higher up the risk curve are funds based upon share (equity) investments. In these funds or ETF’s the rewards can be higher – but the risks are also much greater. Only invest in shares or share funds with money that you can lock away for 3 to 5 years.

To grow wealth we must have exposure to growth assets such as shares and property.

Shane Oliver, AMP
Asset classes shown on a logarithmic scale for the past 120 years – From “5 charts to help you through COVID-19 investment fear” – Shane Oliver

Australian shares have returned on average 11.5% per year from 1900 to 2020. The incredible value of sustained compounding over long periods is shown by the dollar amounts achieved over 120 years – A $ 1 investment yielded $481, 910 for Australian Shares, $1017 for Bonds and a paltry $242 for cash. But these high returns on investment in Australian shares did not come without risk. Since 1900, Australian shares have had negative returns for two years out of ten.

A similar chart with data to 2016 shows that Australian residential property has a similar trajectory to Australian Shares (11.1% p.a.). There are many hidden costs to owning property – but that is another story. Lower on the risk curve, are Bonds and Cash.

Slack Investor acknowledges that people have different appetites to risk, but if you are in the fortunate position to be sitting on some cash in excess of your emergency fund … the current rates for term deposits encourage a first journey up the risk curve and consider fixed interest funds or ETF’s. For money that you wont need for the next 3-5 years, then shares have the best long term returns. If your time frame is longer, then a well positioned property has been a good investment.

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

H. Jackson Brown Jr. from Goodreads

Robo On

When Robo Advice gets it wrong … Exterminate Financial Freedom! – Image from aminoapps.com

Last month’s post on robo advice had a look at a couple of options … but there is more. They all work in much the same way. In the “old days”, to enter the investing world you would have to register with a broker (e.g. Self Wealth, CommSec) to get access to shares or Exchange Traded Funds (ETFs) – and you would be charged brokerage for each buy and sell. Each ETF also has a management fee (usually 0.10% to 0.50% per year) but that is deducted from your returns internally.

A recent Choice article outlines two things have worked against young people investing in the stock market. Firstly, a lack of knowledge about how to start investing, and then, not having a decent stash of money saved up to make broker fees worthwhile.

With the robo advisors, small amounts are no problem. For a monthly fee they take care of the purchasing and the brokerage – This is usually a much easier experience as it takes less thought and action.

  • From the robo advice website you open an account and establish your identity.
  • After a few questions to get your risk profile, the robo advisor will suggest a portfolio of ETFs.
  • Your bank account details must be given to fund your initial portfolio of ETFs.
  • You might also setup a regular investment and some of the robo advisors ( Raiz and FirstStep have a cool rounding feature where your everyday card purchases are rounded to the nearest dollar – and the rounding excess will go towards your portfolio.
  • The Robo Adviser does regular rebalancing of your portfolio.

Robo your Investing

Lets Robo On, Six park, Stockspot, Raiz, Clover, QuietGrowth and FirstStep have some great offerings and are worth a look.

ROBO ADVISORFee Schedule$2,500 portfolio fees pa$10,000 portfolio fees pa$200,000 portfolio fees pa
Six ParkMinimum $10000. Management Fee 0.4% to 0.5%……$50$1,000
StockspotFixed fee of $66 pa for balances < $10k with asset based fees of 0.396% to 0.66% pa$66$66$1,320
Raiz$1.25 per month <$5K; 0.275% pa >$5K$15$27.50$550
CloverMinimum $2500. $5.50 per month <$10K; 0.45% -0.65% pa >$10K$66$71.50$1,210
QuietgrowthMinimum $2000. Promotion No Monthly Fees <$10K; 0.40% – 0.60% pa >$10K$0$0$1,045
First Step$1.25 per month <$5500; 0.275% pa >$5500$15$27.50$550

The above prices were compiled July 2019 and should be checked before you start investing.

Robo your Super

All of the above Robo advisors will help you build up your ETF investments as a “side hustle”. But, there is a new way of adding to your existing super (hopefully you have made an effort to make sure it is an Industry Fund!) in a relatively painless way. Longevity has a mobile phone app that automatically tops up your Super calculated as a percentage of your everyday purchases – into whatever super account you choose. It is based on your everyday spending and then calculated as a percentage of your spend (default 1% – but go higher if you can -and maybe a set amount each payday!). At the minimum, if you spend $200 on groceries, this will generate a 2 dollar deduction at the end of the month. You can limit your monthly deductions to an amount – so that you don’t go negative in your everyday account.

Because Longevity operates in the superannuation environment it is taxed favourably compared to investments outside of super where earnings are taxed at your marginal tax rate.

What to do Now?

There is always a bit of inertia involved to enter the world of investing. More experienced investors who already have a lump of cash and a disciplined approach to saving perhaps don’t need savings apps like Raiz. They could buy ETF’s directly through a discount broker (e.g Self Wealth), or setup a more sophisticated robo account with Stockspot. Robo investment apps such as those in the above table aren’t after this demographic. Most Robo Advice platforms are targeting younger people who might not otherwise start investing until much later in life.

“Raiz aims to encourage its customers to be mindful of their spending and to start saving and investing some of their income … the average Raiz customer has made 11% per annum since launch

Raiz’s Managing Director, George Lucas. from Choice

Simple steps

When in doubt, do something.

Singer-Songwriter Harry Chapin of “Cats in the Cradle” fame

The beauty of Robo Apps and instruments is that they are an easy way for anyone to start investing. Slack Investor says … just start! The rounding and transactional nature of Raiz and Firststep really appeal to me. Slack Investor likes this sort of painless saving and would get either of these apps as a great first step into investing. I wish these vehicles were around in my younger days. There are risks involved (i.e. share prices going down!) – but hey, That’s Investing – and the risks diminish over period of time (say, 5 years) – According to ASIC, Risk is part of the investing experience.

Given the huge returns money invested early in life can generate, the costs of the lower priced robo devices (e.g Raiz, FirstStep, Longevity) of around $1.25 a month is very reasonable. Pick a platform, install their app and set your contributions – You are launched into the wonderful world of investing – get on that road!