Wealth Plan

[craft]

Can we talk detail?

Do you have a Super Fund which allows direct ETF exposure you can suggest? I had one suggested to me but there's an admin fee of $400 a year which on smaller balances is quite influential. How bad is it to use an industry super fund which objective is to track to the ASX300 until the balance is large enough to move into a different option?

I had a look into the only superfund that I am familiar with.

They charge $65pa + 0.10% assets as an administration fee.
You also pay a management fee based on what investment option you pick.

They have an indexed growth option with a management fee of 0.17%. To me this option is not ideal because it has some weighting to fixed interest duration assets and they neglect to tell you what the duration is. But I think it’s the best option they have.

They also have a roughly equivalent actively managed growth options with a management fee of 0.69%.

They also have a direct investment option which costs an extra administration fee of $4.75 per week but would allow you to access ASX traded ETF’s. The brokerage is a bit on the expensive side.


My SMSF costs are:
ATO supervisory levy $259
Audit Fee $300
Administration software annual subscription $198.
Total $757.00

Using VAS MER of 0.14%

Break even to make SMSF viable against Index option = ($757-65)/(.0027-.0014) = $532K

Break even against Active managed option = ($757-65)/(.0079-.0014) = $106K

Break even against Direct Investment option = ($757-65-(52*4.75))/.010 = $445K less difference in variable brokerage fees.


So why the fuss about costs when they are seemingly insignificant?

The plan I put forward which had a 0.50% expense assumption and resulted in a theoretical outcome in today’s purchasing power of $1,142,003.

If I adjust nothing else but that expense assumption down to reflect the index option of 0.027% (I’ll forget about the $65 for simplicity) the result is $1,206,510.

If I adjust it up to reflect the active managed growth option of 0.079% the outcome is $1,066,240.

The seeminlgly small difference in fees results in an outcome difference of $140,269 – almost two years’ worth of wages. Whats easier - having to work another two years when your old and cranky or changing your superannuation option to the most efficient you can find - maybe half a days digging, thinking and forms.

ps
Thanks, xr06t and Sir Burr for the links you provided on some options for accessing ETF’s in super.

 

[skc]

Back on this topic....

http://www.afr.com/personal-finance...will-lose-money-over-40-years-20170801-gxnhb9

 

[kermit345]

Hopefully craft returns, this thread has some serious merit before it got somewhat derailed. Bit unfortunate the discussion didn't continue to revolve around the assumptions and a plan, instead turning into a bit of a pissing contest or being pretty off topic about making sure divorce isn't part of your plan (not exactly sure how you 'plan' for this?).

Also boggo not all FP's are porsche driving money hungry thieves that fleece their clients with high fees and bad returns. Might come across as bias since I work in the industry but if you search around there are plenty of FP's that truly have a clients interests at heart. Plus FP's should offer much more then just investment advice - whole range of strategies for young and old that should help people long term and product side of things just becomes a means of getting it done. Anyway won't rant any further on that as don't wish to derail the thread any more then it already is.

So did we arrive at a set of assumptions we somewhat agreed on?

 

[Smurf1976]

For most things there is more than one way of doing it. Getting from A to B, cooking food, building wealth, welding metal or just about anything else there's generally more than one possible method.

There is also usually more than one realistic definition of what constitutes the "best" method since that really depends on what you're aiming to achieve. Maximum profit is not always the best approach if that comes with downsides that an individual finds unacceptable.

I have learned a lot through this forum over the years but the tendency of otherwise excellent threads such as this one to degenerate into personal spats or contests is the reason I don't post details of my trades. I'm just not interested in entering a "mine's bigger than yours" type contest.

That said, ASF would certainly benefit from more threads of the nature of this one, minus the personal attacks, so I'll think about giving something a go....

 

[PinguPingu]

Back on this topic....

http://www.afr.com/personal-finance...will-lose-money-over-40-years-20170801-gxnhb9

I know at least a few of my tech savvy mates who have terrible savings habits are at least taking up the micro transaction investing apps like Acorns to get into the markets. The biggest risk I see here and with growing any trading/investment portfolio is the life events that force you to dip into or entirely use up the asset, at the worst time.

The biggest life events seem to be:

1) Buying first home - for me personally, this will probably take up my entire trading portfolio
2) Getting married/having a kid- not sure, but probably in the next 5 or so years
3) Medical event that may require expenses above insurance/medicare or destroy income earning potential. - obviously, hopefully never

While 3 is insurable, if it happens, tough luck. 1 and 2 are more personal life choices, but nonetheless will probably happen statistically and 1 is likely eviscerate your investment asset, forcing you to start again. 2 could go either way being dual income or bad break up.

In general, bad luck could mean terrible returns especially if you need to use up your investments during a large drawdown. I don't really know how to protect against this risk.

Honestly if I could borrow against shares the same way I could against property, I would never even contemplate owning property. The ability to borrow a lot with a modest interest rate is what makes it worthwhile.

Self funding installment warrants allow 50% gearing at rates similar to home loans these days and with no risk of margin calls. Could be something to look at.

 

[Faramir]

Can I say this and anyone can disagree?
If a Wealth Plan is so simple and obvious, then the majority of our population will be "very" well off. I would not have been so 'ignorant'. The original idea was to design a system that would be simple enough for anyone to follow - actually anyone who is interested? Who is interested? Why should anyone be interested when they want to attend and/or follow more pressing needs of life.

Many people in the world don't have the luxury of thinking about the future, let alone planning for it. They have urgent needs now.

I had a lot hope for this thread but now, should I think it is too late for me?

Maybe there cannot be a Wealth Plan - it is too varied and wide ranging. Be it stocks, property or running a business just to name a few options. It is too individually diverse and each "plan" is different as each person's fingerprint.

Fire away, any disagreements is welcome. I want to be wrong. I want work out a plan, at least one for me. Does it matter if it is wrong for everyone else?

 

[Smurf1976]

Many people in the world don't have the luxury of thinking about the future, let alone planning for it. They have urgent needs now.

A wealth plan will necessarily have a long term focus. Well, it will except for the very few who really do win a major lottery prize etc.

For someone caught up in a war or with lack of food or shelter then there's no way they're going to be focusing on future wealth. But if you're living in Australia, have a job and have reasonable health then it's certainly an option to be focusing on your own long term future.

For some, the best way ahead from their present situation will simply be to adjust discretionary spending an focus on getting rid of debt. For others it will be investing in shares and for others their own business.

"One size fits all" is never going to work for the simple reason that we have a diverse society in a very diverse country. Beyond speaking the same language and being part of the same country, there's basically nothing else in common between inner Sydney versus rural SA for example. What works is going to differ hugely between individuals due to their own and surrounding circumstances.

So I see it as plans not plan. There's more than one way and which way to go really will depend on the individual and their situation.

 

[willy1111]

Doesn't this Barefoot Investor "Scott Pape" that writes in the business/money section of the Herald Sun every Saturday/Sunday have a book out on this concept?

A money guide for the Average Joe.

He is a qualified FP that gives general advice.

I have no affiliation, but he seems to have quite the following of Average Joes. Seems quite clever to write a column for the Herald Sun to attract followers given that would most likely be the paper of choice for Average Joes.

Anyone on hear read it?

 

[kermit345]

Rather then working towards a set dollar figure for passive income in retirement is it possible to put together a plan based on assumptions that works towards a % of current employment income? I'm sure we could build something pretty easily that shows if you put x% into a broad market aussie shares ETF now at these assumptions you'll have a portfolio at y age that is estimated to produce z amount of dividends.

That way it kind of cuts through the differing wages etc that you'll get between syd, adelaide, perth etc etc. I think craft was working towards this earlier in the thread before it got a bit off track - maybe we can return to that train of thought?

 

[Ves]

Rather then working towards a set dollar figure for passive income in retirement is it possible to put together a plan based on assumptions that works towards a % of current employment income? I'm sure we could build something pretty easily that shows if you put x% into a broad market aussie shares ETF now at these assumptions you'll have a portfolio at y age that is estimated to produce z amount of dividends.

That way it kind of cuts through the differing wages etc that you'll get between syd, adelaide, perth etc etc. I think craft was working towards this earlier in the thread before it got a bit off track - maybe we can return to that train of thought?

Hi Kermit

You can certainly calculate the number of years to reach a target in Excel fairly simply.

However it is very limited unless you make a more complicated model. The savings rate would need to be constant in the formula and so would the real return (adjustments need to be made for tax and inflation at different salary levels). I guess you could break it down into life stages with a bit of effort.

So before you start you'll need to know two things. The target dividend stream and the savings rate.
Once you've got the target dividend stream you need to divide it by the estimated dividend yield (Craft used 5.25% gross - obviously could be lower if outside of super and adjusting for tax payable in retirement). The result of this division calculation is the target lump sum (because a real rate of return is used it's in today's dollars). So in basic terms if you say earn $100,000 and want to replace 75% of it you'll need a dividend stream of $75,000 in retirement. At a gross dividend yield of 5.25% you need a lump sum of $1,428,571.43 to achieve this.

Then it's just a matter of using the financial formula "Nper" in Excel. There should be a formulas tab at the top, and once you find Nper it'll open a dialog box where you can insert the numbers.

Rate is the real rate of return. Craft used 4.25% I believe. Make it more conservative or aggressive if need be.
Pmt is the yearly savings invested. This is salary x savings rate. This needs to be entered as a negative figure.
Pv is the starting capital balance. If it's from scratch you just put 0. If you already have capital invested enter it as a negative figure. But obviously you're assuming the same real rate of return applies to it as well. So be careful if it's invested differently.
Fv is the target lump sum. See above.
Type is 0 This assumes savings invested at end of year and no earnings added. Use 1 if you want earnings added during first year.

So if for example if you think you can achieve a real return of 4.25% and you earn $100,000 and save $15,000 to invest each year and require a dividend stream of $75,000 it would take 38.89 years to achieve this.

I cannot emphasise enough how many disclaimers are needed here. This is just really rough numbers and clearly life is not as simple. But the number the formula spits out is just if I do X for N years then Z will happen as long as my return for N years is Y%.

 

[kermit345]

Hi Ves,

Thanks for the reply, never realised excel had the ability to do these calculations so simply. Did numerious of these calcs on financial calculator at uni for my degrees so totally understand the makeup of them. Been fiddling in excel and its pretty easy to make a spreadsheet with all the moving parts that actually tells you either how many additional years you'd have to be employed for or your shortfall at your desired retirement age based on all the assumptions you mentioned which are also adjustable.

Can post the spreadsheet here once i'm finished if people are interested? Obviously its just for playing around with numbers and as Ves said is by no means advice or a definitive guide, its just to provide general numbers around the idea of a simple plan.

EDIT: Isn't the issue with this is that its assuming a consistent investment (PMT within excel) for the entire time of the investment period. When in actual fact were talking about increasing this payment level as employment income increases?

 

[Ves]

EDIT: Isn't the issue with this is that its assuming a consistent investment (PMT within excel) for the entire time of the investment period. When in actual fact were talking about increasing this payment level as employment income increases?

Yes the PMT is constant. This kind of formula is good for getting a feel for the base numbers. Which helps come up with further adjustments.

Now to make adjustments you need to start adding more assumptions and this is where it gets harder. Once you get to that point that there are different stages of savings growth I'd say you'd need to do it line by line rather than coming up with a single formula as there are too many moving parts. That's obviously a problem because you have to find the time period by trial and error.

If you have different 'stages' of savings growth I'm also going to assume that return sequencing becomes more of an issue?

 

[kermit345]

I'm just playing around in excel at the moment, couldn't you work out the present value of future cashflows and use this as the PMT constant? Would only work though for specific time periods I guess which becomes the next moving part issue. I guess at least if the PMT is the only constant it means all the other moving parts give you a pretty good indication of what's required. I'll post what i've put together anyway for those that are interested and might be less excel savvy.

Retirement Calcs

 

[kid hustlr]

Back on this topic....

http://www.afr.com/personal-finance...will-lose-money-over-40-years-20170801-gxnhb9

SKC,

What happens if the model real rate of return is dropped by 1%?

Am I correct in saying if I multiply the table by 1.046 I get the results of where I need to be at each age respectively 1 year from now (and so on)?

 

[skc]

SKC,

What happens if the model real rate of return is dropped by 1%?

If you use a real return of 3.25% instead of 4.25%, the final dividend stream is $47,467 which is ~20% lower. Remember though that the 4.25% has already been reduced by 1.75% relative the actual historical real return of 6%.

I’ll try explaining the Real yield using the historical numbers.

So real return historically = 12.1% - 0.9%(tax) -0.5%(expenses) -4.6%(wage growth) = ~ 6%.

I have chosen 4.25% to be conservative and because some of the economic drivers going forward like population growth and productivity might be weaker than history.

Am I correct in saying if I multiply the table by 1.046 I get the results of where I need to be at each age respectively 1 year from now (and so on)?

Craft's table is super easy to reconstruct (is that what you are asking)?

Basically Capital @ Year (n+1) = Capital @ Year (n) x real rate of return + yearly contribution.

So Age 28 = $48,278 (capital @ age 27) x (1+4.25%) + $11,327 (yearly contribution) = $61,657.

The column labelled "dividend stream" doesn't come into the calculation because of the 4.25% used. It is only there to display how much passive income is associated with that capital.

 

[mcgrath111]

As a 24 year old I feel like there is a wealth of knowledge within this post (pun intended).

As someone who is finding less time for markets / time to research, could I essentially put all funds into diversified Vanguard ETFs
Asx200
Real estate
High interest etc.

Trying to work out the major downsides/can seem to see any.

 

[mcgrath111]

As a 24 year old I feel like there is a wealth of knowledge within this post (pun intended).

As someone who is finding less time for markets / time to research, could I essentially put all funds into diversified Vanguard ETFs
Asx200
Real estate
High interest etc.

Trying to work out the major downsides/can seem to see any.

Ignore this, it needs a seperate thread and more detail.
Cant seem to delete my post above.

 

[Belli]

I acknowledge I am "late to the party" on this one but I may as well throw in my perspective.

I'm 65 yo. Single. Income will be from SMSF (5% of assets) plus dividends outside SMSF. The actual income from each doesn't matter as such but I do think it needs to be recognised that, under current tax laws, there may be a tax refund for the franking credit at a personal level - the $18,200 tax free threshold applies.

By my calculations (subject to an error in calculation of +/- 100%), the refund could be in the order of $7k (fingers crossed). Not a huge amount but not to be ignored either.

 

[kid hustlr]

The 5.25% yield is a nominal yield. It is what the capital actually yields in today’s terms.

My rational for choosing 5.25% was to look at historical and future economic drivers and ease it back a tad to be conservative.

It is made up of a 4% dividend return and a 1.25% imputation credit (assuming 75% franking)

Thought I'd poke the bear to see if he's awake.

I can't find any data which supports the current yield on offer. The data I see has the ASX at roughly 4% including franking.

 

[kid hustlr]

I was thinking about working through each of the variable estimates required in detail prior to putting up any model outcome, however somehow, I think I may have lost the interest of a lot who have already concluded the task was going to be too far out of reach if I went that avenue. So, I have made preliminary estimates for the variable required. I think they are realistic and defensible estimates and this is the flight plan outcome of modelling those estimates.

View attachment 72067

The average wage multiple is fixed – the Capital and Dividend Stream targets will ratchet up as average wage increases. This table is based on current average weekly earnings @ $1533.10

For the average wage earner, the modelled plan requires a salary sacrificed 7.2% of gross wage contribution every year to meet the target. (plus your standard 9.5% Employer superannuation guarantee amount)

For each age in the above table, there is a capital and dividend stream amount. Because Price/Dividend ratios fluctuate over time, In assessing your current situation against the plan you would need to have both stock(capital) and flow(dividend) above their respective target amounts before you could think about reducing the 7.2% contribution rate and still achieve the targeted outcome. If you are below these amounts you will need higher than 7.2% contributions going forward to catch up.


The 75% target would be tax free and in disposable income terms (currently $59,955) would be slightly more than the disposable pre-retirement income of $57,059.80.


Gross Salary $79,940.21
Less Salary Sacrifice $(5,731.36)
Taxable $74,208.85
Less Tax $(15,664.88)
Less Medicare $(1,484.18)
Disposable $57,059.80

If you are on less than average wage then achiving 75% of average wage requires a lot higher % of your income. Howere that same consistent ~7.2% sacrifice of your actual gross wage will stiil produce around the equivalent disposable retirement income as your pre-retirement disposabe wage.


The variable assumptions made:

Real rate of return: 4.25%
Nominal yield: 5.25% (including franking)

Asset class:
100% Equities.

Tax structure:
Superannuation.

Investment vehicle:
Broad, Low Coast, Non-synthetic Exchange Traded Equity Fund.

Key Consideration:
Volatility risk: Dividend flow has some volatility around the 5.25% average return assumed. Can the income needs be flexed (vary living expenses or have other back-up reserves) during below average yields to ensure capital does not need to be drawn down? If not 100% equity allocation close to and during retirement is not appropriate due to sequence risk and this plan is not appropriate.

If people are interested in this sort of wealth plan we can work through validating the assumptions and strategy choices, the model workings etc to ensure the plan is realistic which will fortify people’s belief systems to stay the course in times of market duress. Because at the end of the day none of this is too hard with a few right choices and some consistent application – Its more an issue of understanding than anything else.

Inspired by a recent Craft sighting, i thought id update this table 2 years on so people can see where they are at.

I think I have done this correctly.

Inflation is a killer.