Wealth Plan

[craft]

Seriously??

When your finished.

The wank fest you mention is an attempt to
show that someone without a degree in finance or
working in a financial background can achieve extra
ordinary results.

While that is very upsetting for you craft it maybe
very encouraging to others out there without your acumen.

What's hard about salary sacrificing into a broad based equity portfolio to secure your future and give you a safety net under the more active risks you may want to take chasing bigger rewards?

Financial risks (wheter you know you are taking them or not) witout safe back-up plans lead to poverty in retirment for the great majority. Just look at the statistics.

 

[kermit345]

To be fair Craft is kind of right, in my view you can do a lot worse then just being in a broad based equity ETF. From what i've seen working in the financial planning industry the vast majority of the population fall into the following two categories:

1) Simply invested in default fund within industry fund - often has an allocation of between 20-50% fixed interest which isn't exactly appropriate for someone who is 25-30 years of age and has 30-40 years of growth to take advantage of in asset classes like equities and property.
2) Don't actually care where or what their superannuation is invested in because they see it as 'free money' that they can just withdraw and use as early as possible with no actual consideration for funding retirement.

Most of the people that fall into these categories get to around age 50 and start to realise oh crap I'm sick of working but how do I actually live when I do stop working and by then its too late, or at least too late to meet their expectations/goals. The community on this forum that actually take an interest in their future and investing are more so the minority then the norm.

I think what craft is getting across is that a equity based ETF approach is at least a simple to administer starting point for basically anyone and for those that want to put in the extra effort there's no problem with being more active - but at least they have a solid foundation starting point.

EDIT: Plus isn't the purpose of this to make some assumptions about getting to a point of passive income in retirement. The actual 'how' of getting there in terms of investment vehicles isn't really important. As long as people achieve the assumed returns or above then thats all that really matters.

 

[tech/a]

What's hard about salary sacrificing into a broad based equity portfolio to secure your future and give you a safety net under the more active risks you may want to take chasing bigger rewards?

The big draw back is not accessing your money until---quite possibly 75.
You may not live that long.

It leaves very little to none to use for ventures outside of PAYE
and "Conventional " Super.
Its not a safety net either as you wont access it and if you do
it defeats the purpose.

I have no problem with what your suggesting.
But I think you should broaden your base first.
Adding strings to your bow.

In your plan you just wont be able to.

 

[kermit345]

Have to agree with tech/a in terms of using super as the investment vehicle - try convincing any newly employed 23 year old to put almost 10% of their first full time wage into superannuation that they cant access for 40-50 years and you've got yourself a hard task. Could always go down the path of 50/50, some inside and some outside of super?

 

[craft]

What's hard about salary sacrificing into a broad based equity portfolio to secure your future and give you a safety net under the more active risks you may want to take chasing bigger rewards?

The big draw back is not accessing your money until---quite possibly 75.
You may not live that long.

It leaves very little to none to use for ventures outside of PAYE
and "Conventional " Super.
Its not a safety net either as you wont access it and if you do
it defeats the purpose.

I have no problem with what your suggesting.
But I think you should broaden your base first.
Adding strings to your bow.

In your plan you just wont be able to.

Changes to the current preservation age of 60 or younger for some already close to retirement are a risk but it would be politically hard change to make now. Maybe stopping it being used as alump sum - but we want an income anyway.

Super is just as accessable to self employed, even has some added perks.

It required about 6% reduction in take home pay for an average wage earner to secure their future in the most efficient way possible. The idea of looking to maximum efficiency was to leave as much money as possible for living or other higher risk active strategies.

I don't know, a perpetual purchasing power preserved income stream in retirement sounds like a good safety net too me.

Add strings to your bow all you like but do it from a position of stregth.

 

[craft]

Have to agree with tech/a in terms of using super as the investment vehicle - try convincing any newly employed 23 year old to put almost 10% of their first full time wage into superannuation that they cant access for 40-50 years and you've got yourself a hard task. Could always go down the path of 50/50, some inside and some outside of super?

Are they making the best eductaed desicion? has there been any education of a 23 year old? Has their been adequte education of the population as a whole since Defined Contribution schemes become the norm and the demographics of the baby boomer lump srewed government transfer pension affordability in the very near future. No use getting eductaed about this at 50 - its too late.

How many listen to the fear mongering, take the easy options, fall for the get rich quick options without having the requisite skills because they don’t have a suitable education of financial history and economic realities.

 

[systematic]

a) Save it all outside Super then, and adjust the savings upwards - better than the alternative of not doing it all! craft; have you run the calc for that option?

b) My limited thoughts on Super: whilst they allow personal contributions it virtually has to provide some kind of advantage over outside savings, no matter how much they narrow the margin. Still, it would be nice if they were able to lock down the rules permanently, beyond a party's ability to change them.

 

[Toyota Lexcen]

Keeping it outside of super can impact newstart, disability pension, not just for you but also wife,

 

[craft]

a) Save it all outside Super then, and adjust the savings upwards - better than the alternative of not doing it all! craft; have you run the calc for that option?

b) My limited thoughts on Super: whilst they allow personal contributions it virtually has to provide some kind of advantage over outside savings, no matter how much they narrow the margin. Still, it would be nice if they were able to lock down the rules permanently, beyond a party's ability to change them.

a) Not explicitly for a passive approach, but the contributions are going to be far larger than required inside super and the size of the contributions already seems to be a sticking point with the super example. The other option to get the numbers to work at the same level of contribution is to assume an above market return but that is an unrelistic approach for most and must result in a failed plan on average.

This do it outside super and make exceptional returns is the Tech/a and Quant big picture versions. I'm waiting for the detail and numbers to see if they have substance or fluff.

 

[Sir Burr]

Do you have a Super Fund which allows direct ETF exposure you can suggest?

I'm just researching this at the moment. Have a SMSF but will be non complaint as a non-resident so looking:

I think this is a good spot to start:
https://login.chantwest.com.au/cwAC2Shell.aspx

The two I have shortlisted (so far) is Hostplus and Australian Super. Both have direct share/ETF investing and Hostplus is cheaper for direct shares (similar prices to Comsec) but seems more expensive for their managed funds.

 

[kermit345]

Unlikely a 23 year old getting their first regular wage is going to make the best educated decision about a future passive income when their world has just been opened up to all kinds of possibilities due to the income they are now receiving. Personally I don't think the population as a whole (which I think you're alluding to craft) is educated enough in superannuation, investing or taking care of their finances. However I also think the vast majority don't want to be educated or take any interest/responsibility in this space either, all just my opinion of course. Most people are happy to point the finger at anyone else when there is a price rise on electricity or their mortgage interest rate increases etc etc - Not many actually shop around for the lowest interest rate mortgage or review it annually or review their insurance providers regularly etc etc. Most people like convenience and access when it comes to their finances even if it costs them in the long term, which is an unfortunate attitude to have when your income and how you use it is your number 1 asset through life.

Obviously contributing 7.2% as a salary sacrifice from a young age is the most preferred and efficient way of accumulating to provide a passive income in retirement. All i'm suggesting is that maybe its not a very realistic approach as a small percentage of people would be comfortable doing that without access to the funds and have that kind of foresight.

 

[craft]

Obviously contributing 7.2% as a salary sacrifice from a young age is the most preferred and efficient way of accumulating to provide a passive income in retirement. All i'm suggesting is that maybe its not a very realistic approach as a small percentage of people would be comfortable doing that without access to the funds and have that kind of foresight.

This should be tried (But I'll leave it to smebody else).

Start varying the asumptions - part inside super part out and varying the 'real returns' accordingly to see how much the required contributions go up.

Could also vary other assumptions like 100% equity vs Balanced growth options that contain bond, cash, real estate etc exposure and see how that changes the real return and contributions required to achieve the target.

Change the expenses - see what impact that has.

Change every variable you have CONTROL OVER and see what the impacts are.

People need to educate themselves. Excel and a hand full of time value of money formula's is not rocket science but can be an extreme eye opener - Why it's not taught in school is beyond me.

 

[kid hustlr]

How are more people not excited about that regressed earning chart Craft posted

 

[Skate]

People need to educate themselves. Excel and a hand full of time value of money formula's is not rocket science but can be an extreme eye opener - Why it's not taught in school is beyond me.

Here lies the problem...

 

[Ves]

Have to agree with tech/a in terms of using super as the investment vehicle - try convincing any newly employed 23 year old to put almost 10% of their first full time wage into superannuation that they cant access for 40-50 years and you've got yourself a hard task. Could always go down the path of 50/50, some inside and some outside of super?

Could also add some leverage outside of super as a bit of a tax-shield as well. Not saying it's suitable for everyone, but at some stages in life it's definitely worth thinking about if it's easily serviceable.

 

[systematic]

I'd love to see a personal contribution become compulsory. At first that seems impossible, but Super is compulsory, as is voting and paying taxes - I really don't think it would be that impossible. It'd be a big thing like the GST to bring in, but not impossible.

I've seen government agencies still have personal contributions as a default setting for new employees (they needed to opt out).

Taking SG to 12% sooner rather than later and adding a 5% contribution (either compulsory OR at least opted in by default) could help.

Or what about something similar in spirit to the co-contribution:
where the SG is 9.5%, if you make a 5% contribution, the SG becomes 12%. And also make that the default. If you don't contribute (i.e. you deliberately opted out), you get 9.5% and that's it.

Ah the stuff of politics and plans to save the world, ha!

 

[skc]

You got any charts on dividend volatility? I seem to recall in 2009, dividends were cut across the All Ords by about 30%. If my memory is correct, that's a pretty big fall in income for someone targeting an income stream of 75% of the average wage. They wouldn't want any unanticipated expenses rearing their head at that point.

It won't be comforting if something extreme like this happens but it shouldn't be a deal breaker either. Remember the dividend stream is worked out based on 5.25% yield. If the dividend stream is reduced by 30% we are talking about drawing down 1.6% of capital to make up for the short fall. Even if you allow for the overall market being down 50% when you needed to make that 1.6% draw on the capital... it is still not a large number. A small change to the rate of return assumption would likely create a larger impact.

Have to agree with tech/a in terms of using super as the investment vehicle - try convincing any newly employed 23 year old to put almost 10% of their first full time wage into superannuation that they cant access for 40-50 years and you've got yourself a hard task. Could always go down the path of 50/50, some inside and some outside of super?

One thing to remember... for a salary earner 9.5% is compulsory within super. The 7.2% salary sacrifice is the additional discretionary. If you do this 7.2% outside super there will be an impact, especially down the line when the dividend stream becomes quite large and goes into the higher tax brackets. Also that, doing so outside Super will need a larger contribution (in terms of percent of gross income) due to the tax shield available with super contribution. If you want to maintain after-tax disposable income, then the contribution would be lower. By my rough calcs the difference in outcome after 40 years is about ~20-30% lower for this discretionary component outside super, or ~10% across the whole strategy. So it's meaningful but perhaps not a deal breaker. It may be considered the price to pay for 40 years of liquidity / being available at call on your money.

I did a uni double degree at uni which took 4 years and started full time employment when I was 22 (I'm now 30) on a starting wage of $40,000.

The issue now becomes paying off my house. Being a single guy essentially all the funds i've directed to equities in the past will now be going towards paying off the house. My salary has only increased to a little about $60k but should grow some more over the next 5 years as I take on clients and more responsibility within the business. However the issue becomes that it becomes increasingly difficult to invest that amount anymore towards the future when repaying a mortgage as well - particularly when you're single.

Thanks for sharing your story Kermit. Time to get a partner or may be a tenant? This is yet another consideration... there'd be plenty of 23 year olds entering the workforce with meaningful student debt. Although one could argue that, if such debt was incurred en route to a professional qualification than hopefully the income trajectory would be better than just average wage growth.

 

[craft]

One thing to remember... for a salary earner 9.5% is compulsory within super. The 7.2% salary sacrifice is the additional discretionary. If you do this 7.2% outside super there will be an impact, especially down the line when the dividend stream becomes quite large and goes into the higher tax brackets. Also that, doing so outside Super will need a larger contribution (in terms of percent of gross income) due to the tax shield available with super contribution. If you want to maintain after-tax disposable income, then the contribution would be lower. By my rough calcs the difference in outcome after 40 years is about ~20-30% lower for this discretionary component outside super, or ~10% across the whole strategy. So it's meaningful but perhaps not a deal breaker. It may be considered the price to pay for 40 years of liquidity / being available at call on your money.

Hi skc

Changing nothing but accumulating the 7.2% outside super I get.

Super Guarantee component finishes with a multiple of 8.14

Extra contributions finish with a multiple of 3.54 outside super v's 6.15. inside.
The killer is changes to amount initially invested due to marginal vs contribution tax and changes to the real retuurn because of higher tax on cashflow to be re-invested, marginal vs 15%.

Total equals 14.29 all inside super v's 11.68 mixed. (over $200,000 difference in today's dollars)

As mentioned by Ves you could claw back a bit by strategic leverage - but that has associated risks that you really want to be getting compensated for anyway.

Interestingly if you did use leverage and it blows up - I'm pretty sure your superannuation accumulation is protected from creditors in bankruptcy.

 

[Value Hunter]

Kid Hustlr if you are young I would strongly reconsider voluntary super contributions. Legislative risk here is huge and is being underestimated.

Decades from now if national finances are bad enough (which they most likely will be), the government could and probably will push out the retirement age until 75. Also if you look at once happened in other countries they could have a large one off wealth tax on super. Or for an entirely new twist they could force super funds to buy a certain amount of government bonds, etc. These scenarios are all aside from the assumption of regular tax increases which are almost certain to occur over time.

 

[CanOz]

Or as in the case of Argentina, they could just confiscate all Superannuation. Another great reason to have a comprehensive wealth plan, including super.

Super makes up less than 5% of our total net worth at this stage and i am not contributing myself to my current super, only my employer is.

Great thread Craft, very interesting topic! Bravo!