Superannuation, the ultimate government cash cow?

[shouldaindex]

The only time I hear $1m isn't enough is from managed fund companies.

In that article Challenger actually just shows how much of a rip of their annuities are if $1m only gets you 3.3% P.A.

Even savings accounts are about 4% and you don't lose your $1m.

 

[Value Collector]

If interest rates were at the long term norm of 7 - 8%, $1m would possibly be adequate.

.

That can be achieved easily if you use a share market index.

I don't think people should try and live off bank interest, a portfolio made up of property, shares and bond securities should get a decent cash flow and growth in excess of inflation.

 

[sptrawler]

That can be achieved easily if you use a share market index.

I don't think people should try and live off bank interest, a portfolio made up of property, shares and bond securities should get a decent cash flow and growth in excess of inflation.

When in retirement, you don't have the ability to recover loses, that is why SMSF carry a reasonable percentage in cash.
One it gives them a buffer, so they don't have to sell at depressed prices.
Two it gives them the option to buy, if there is a GFC event. It is no good having opportunity, with no cash to take it up.
To have a super fund made up of property, shares and bond securities, what would you think are reasonable percentages of each?

 

[Vixs]

The only time I hear $1m isn't enough is from managed fund companies.

In that article Challenger actually just shows how much of a rip of their annuities are if $1m only gets you 3.3% P.A.

Even savings accounts are about 4% and you don't lose your $1m.

Love to know where I can get 4% on $1m at the moment.

That looks like roughly the rate for a RCV100 lifetime annuity based on current rates, so in that case they wouldn't be losing their $1m either. Not enough information to make a judgement and quite frankly pretty poor by them for providing the figure with so little context, or by the journalist for not providing the full context - either or.

A lot of variables impact the pricing of annuities - payment frequency, inclusion of a reversionary beneficiary, surrendering withdrawal guarantees... Again, not enough info to make a judgement comparing it to anything else.

 

[sptrawler]

Love to know where I can get 4% on $1m at the moment.

I'm interested to see the asset allocation of $1m in property, shares and bonds, also what return is expected.

Apparently, it will give you a decent cash flow and keep up with inflation.

Give me the info on that, Please.

 

[shouldaindex]

Prior to the last interest rate cut there were savings accounts and term deposits at 4%.

Now they look like around 3.5-3.7%.

Which is still higher than the Challenger quote of paying 1m for 33k (3.3%). You can keep your capital for 3.5% savings or term deposits, which are likely to be higher rates in the future as well.

 

[Triathlete]

Love to know where I can get 4% on $1m at the moment.

Try this site...

www.fiig.com.au

Indicative rates
at Monday 13 April

Wholesale investors only* Retail investors
Fixed rate bonds up to 6.54% up to 6.42%
Inflation linked bonds^ up to 5.39% up to 5.33%
5-bond portfolio up to 6.08% up to 5.47%
1 year term deposits# up to 3.00% up to 3.00%

 

[qldfrog]

all that with a 2 to 3% inflation?

I target living till 95 (average expectancy I am told ) so 20 years of income with current return environment and a real inflation around 2/3 % (quite conservative when you consider a retiree main expenses: medical, rate and power, food and services)
And does the 1million include or exclude a fully paid PPOR?
if it exclude it, and assume you have an asset of 0.5million extra to sell in your later year that might be enough, but i would not take that bet...

 

[sydboy007]

Love to know where I can get 4% on $1m at the moment.

That looks like roughly the rate for a RCV100 lifetime annuity based on current rates, so in that case they wouldn't be losing their $1m either. Not enough information to make a judgement and quite frankly pretty poor by them for providing the figure with so little context, or by the journalist for not providing the full context - either or.

A lot of variables impact the pricing of annuities - payment frequency, inclusion of a reversionary beneficiary, surrendering withdrawal guarantees... Again, not enough info to make a judgement comparing it to anything else.

Envetra 2025 ILB, SYD 2020 or 2030 ILB, G8 Education, JEM Southbank, Mackay Sugar, ElectraNet, Plenary Justice SA, are just a few companies with corporate bonds providing in excess of 4% yield, son in excess of 5%

AYF invests in various hybrids and offers aroudn 6.5% gross yield

MXUPA also offers over a 6% yield

EPX is currently offering 9% yield.

yes, it's riskier than keeping the money in cash, but if someone chooses to keep your money in cash when there's options providing a good deal more yield with not too great an increase in risk, then they need to accept the cost involved with their choice.

 

[sydboy007]

When in retirement, you don't have the ability to recover loses, that is why SMSF carry a reasonable percentage in cash.
One it gives them a buffer, so they don't have to sell at depressed prices.
Two it gives them the option to buy, if there is a GFC event. It is no good having opportunity, with no cash to take it up.
To have a super fund made up of property, shares and bond securities, what would you think are reasonable percentages of each?

2 years of cash reserves would be adequate.

There will be no fixed ratio as people will have different requirements

For myself I'd be comfortable with bonds that cover my essentials and a bit more. That way I know I can survive the ups and downs of the markets. Inflation linked bonds will help to give you a real % income every quarter.

After that I'd be looking at some hybrids for extra yield and shares to provide a bit of growth. In the current market I'd be investing in foreign shares to hedge against a falling dollar and the likely better growth prospects of other economies relative to Australia.

I hate the financial repression going on with those in debt favoured over those lending, but I can't change it so I have to work within the system as it is. There's still plenty of opportunities that are providing a decent yield relative to the risk compared to a savings account.

 

[sptrawler]

2 years of cash reserves would be adequate.

There will be no fixed ratio as people will have different requirements

For myself I'd be comfortable with bonds that cover my essentials and a bit more. That way I know I can survive the ups and downs of the markets. Inflation linked bonds will help to give you a real % income every quarter.

After that I'd be looking at some hybrids for extra yield and shares to provide a bit of growth. In the current market I'd be investing in foreign shares to hedge against a falling dollar and the likely better growth prospects of other economies relative to Australia.

I hate the financial repression going on with those in debt favoured over those lending, but I can't change it so I have to work within the system as it is. There's still plenty of opportunities that are providing a decent yield relative to the risk compared to a savings account.

I have probably been a bit risk averse and will have to look into bonds and hybrids, as this low interest period appears to be setting in for the longer term..

As for overseas shares, the capital growth is there, however you are always chasing the next winner. But with a falling dollar, there is a lot of upside.

While franking is in operation, it fits well with the SMSF, as you can have a bit of a sit and forget attitude.

 

[Value Collector]

When in retirement, you don't have the ability to recover loses, that is why SMSF carry a reasonable percentage in cash.
?

pretty much every big crash has come after a big boom, so the crash is usally largely offset by the growth in the years before, and the recovery in the years after.

I am not saying go 100% shares at the top and then sell out at the bottom, you could just continue collecting dividends on the shares and property throughout the crash and supplement the dividends by drawing down on the cash component.

To have a super fund made up of property, shares and bond securities, what would you think are reasonable percentages of each

What ever works for you, but if you had $1,000,000. You could break it up as follows.

$400,000 shares
$300,000 property securities
$150,000 Bonds and hybrids
$150,000 cash / fixed interest

That mixed would probably throw off $50K a year in tax advantaged income, and that income would grow over time because the shares and the property provide a hedge against inflation but should also have organic growth.

If you owned your own home, You should be able to survive on $50K, however over time you can also increase this by drawing down some capital growth, or even your original principle.

If you plan on living 20years in retirement, you need growth assets, cash won't ever cut it, Inflation, low interest and the need to draw down capital far out weighs the risk of a market crash.

 

[Value Collector]

I have probably been a bit risk averse and will have to look into bonds and hybrids, as this low interest period appears to be setting in for the longer term..

As for overseas shares, the capital growth is there, however you are always chasing the next winner. But with a falling dollar, there is a lot of upside.

While franking is in operation, it fits well with the SMSF, as you can have a bit of a sit and forget attitude.

A broad cross section of the market like the ASX200 index should provide the cash flow and inflation hedge you need, and most superfunds will be able to offer you some diversified property securities.

Just remember chasing high yield can be a trap, growth is very important, and asx 200 index I believe is the right mix of cashflow, growth potential and stability.

 

[banco]

I have probably been a bit risk averse and will have to look into bonds and hybrids, as this low interest period appears to be setting in for the longer term..

As for overseas shares, the capital growth is there, however you are always chasing the next winner. But with a falling dollar, there is a lot of upside.

While franking is in operation, it fits well with the SMSF, as you can have a bit of a sit and forget attitude.

Chris Joye has written a few columns about how hybrids are much riskier than they appear to be.

 

[Value Collector]

Chris Joye has written a few columns about how hybrids are much riskier than they appear to be.

for sure, each issue has to be analysed on it's own merits, and the pros and cons weighed against taking a straight stock or bond position in the company.

Would probably recommend those not well versed in analysing securities to use a managed fund to gain access to such securities rather than picking individual issues, which normally leads them to just picking the ones with the highest yield.

 

[Vixs]

Prior to the last interest rate cut there were savings accounts and term deposits at 4%.

Now they look like around 3.5-3.7%.

Which is still higher than the Challenger quote of paying 1m for 33k (3.3%). You can keep your capital for 3.5% savings or term deposits, which are likely to be higher rates in the future as well.

Again, that figure of 3.3% is nowhere near enough information to base an opinion on. It doesn't even include the age or gender of the annuitant, and again whether or not there is a reversionary beneficiary. It's like trying to get prices for a new car and basing it on "Must have an engine." I'm not some annuity cheerleader that feels the need to swing in and defend them, but I do want genuine, useful information out there if people are going to use it to form opinions.

Current term deposit rates for 12 months paid at maturity are in the vicinity of 2.5 - 3%. You can't plan retirement on at-call savings accounts with bonus rates and introductory offers - there is no certainty, not to mention there are often modest deposit size limits with those incentives (less than 100k etc).

Try this site...

www.fiig.com.au

Indicative rates
at Monday 13 April

Wholesale investors only* Retail investors
Fixed rate bonds up to 6.54% up to 6.42%
Inflation linked bonds^ up to 5.39% up to 5.33%
5-bond portfolio up to 6.08% up to 5.47%
1 year term deposits# up to 3.00% up to 3.00%

Hi Triathlete, my sarcasm didn't translate very well across text. There is an enormous difference in terms of risk between cash and corporate bonds. I'm not sure what's included in those portfolios to get the 'up to' rates, but I'd put a wager on that it's not all federal government debt and bank deposits.

If you keep to the realms of sovereign debt for the sake of security, inflation linked bonds provide a point of difference to traditional government bonds. If you were to look at an ILB with a 15 year maturity in 2030, you're getting a 2.5% p.a. coupon paid quarterly indexed with CPI. Based on that bond, the price you are paying for what is now $112.43 face value is $149. That's a pretty rubbish yield of 0.317% p.a. ILBs trading near their adjusted face value are paying lovely coupons of 1 to 1.25% p.a. paid quarterly. Not much interest from me at this point in time.

Regular old government bonds will get you yields of 1.5 - 2.75% at present, and with record low interest rates if I were a retiree I would not be keen to pile in for the long haul to hold them until maturity - when rates rise people are going to eat a loss on them in the short term as market yields rise and they trade closer to or below face value.

Envetra 2025 ILB, SYD 2020 or 2030 ILB, G8 Education, JEM Southbank, Mackay Sugar, ElectraNet, Plenary Justice SA, are just a few companies with corporate bonds providing in excess of 4% yield, son in excess of 5%

AYF invests in various hybrids and offers aroudn 6.5% gross yield

MXUPA also offers over a 6% yield

EPX is currently offering 9% yield.

yes, it's riskier than keeping the money in cash, but if someone chooses to keep your money in cash when there's options providing a good deal more yield with not too great an increase in risk, then they need to accept the cost involved with their choice.

When you're talking about the risk free rate then jumping into corporate bonds and hybrids is a relatively great increase in risk. Terms on hybrids have gotten progressively worse for those taking them up in the chase for yield than the kind of offerings available pre-GFC. The conversion terms on most hybrids have gone from being instruments that truly made sense and you could get behind as an investment vehicle, offering a regular income with equity upside, to the current offerings where the conversion terms aren't based on the share price at issue but rather the share price at time of conversion - where's the equity upside compensation in that?

2 years of cash reserves would be adequate.

There will be no fixed ratio as people will have different requirements

For myself I'd be comfortable with bonds that cover my essentials and a bit more. That way I know I can survive the ups and downs of the markets. Inflation linked bonds will help to give you a real % income every quarter.

After that I'd be looking at some hybrids for extra yield and shares to provide a bit of growth. In the current market I'd be investing in foreign shares to hedge against a falling dollar and the likely better growth prospects of other economies relative to Australia.

I hate the financial repression going on with those in debt favoured over those lending, but I can't change it so I have to work within the system as it is. There's still plenty of opportunities that are providing a decent yield relative to the risk compared to a savings account.

You're right, there's no point bemoaning the woes of savers vs spenders. If we all saved the economy would be shafted as consumer spending drops. Our infinite growth dependent economic models require us to borrow, spend, consume, consolidate and repeat. It's not healthy, but we won't see much incentive given to savers. The real risk is exactly what's being documented in this thread - people cannot live off the income from low risk investments anymore and as a result are willing to accept growth asset risk that most can little afford to take.

Chris Joye has written a few columns about how hybrids are much riskier than they appear to be.

Absolutely. Haven't read their column but the carefree attitude many have towards hybrids, particularly perpetual notes, is not befitting the risks involved.

It feels like this will all end in tears again.

 

[Vixs]

On the topic of superannuation and the government, Tony Abbott restated that there will be no changes to superannuation policies until the next election. I look forward to that promise being upheld, or the roasting that the government thoroughly deserve if they will make promises like that and then break them.

Little faith in either side of parliament's ability to make the right choice with regards to superannuation policy.

 

[sydboy007]

the below graphs shows how poorly targeted the super + pension system really is

http://www.abc.net.au/news/2015-04-21/super-tax-concessions-fc/6365098

 

[sptrawler]

From those graphs, it would appear it is only the top 10% that is causing an issue.
If you only view the graphs upto 90%, when you consider the system is still young, it isn't bad.

Obviously things need tweaking, however it isn't as bad as I presumed.

One has to keep in context, that super was meant to be a pension supplement not a pension replacement, it was to encourage people to save to enhance their retirement.

The side benefit for the Government, was less dependence on the pension due to means testing and a sovereign wealth fund of sorts.

 

[craft]

the below graphs shows how poorly targeted the super + pension system really is

http://www.abc.net.au/news/2015-04-21/super-tax-concessions-fc/6365098

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I wonder if the pretty graphs take into account the fairly recent DIV 293 tax which results in a 30% tax rate on contributions for income over 300K?

I suspect most over 300K will be structuring outside super to cap their tax rate at the 30% corporate rate any way. So the concession calculations to the top end are more ‘notional’ then real life.