Wealth Plan

[craft]

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!

Thanks

Argentina scenario - gulp. But did they lose their balances or were they just forced to move to the government run scheme, retaining their transfer balance?

 

[kermit345]

Agree with other sentiments, a great thread which is very thought provoking also evidenced by the number of replies the thread has received in just a few days from some of the very best contributors on the forum.

Thanks for posting the figures Craft of the solely inside super vs inside/outside scenario as well. Goes to show the importance of not only investing but also structuring in the most tax-effective manner. Even something as simple as purchasing the investments in a partners name that may only work part time or do home duties could potentially increase the eventual balance substantially especially due to the compounding benefits of any dollar saved in the early years.

Not sure if you've considered this idea also craft or if you have the ability to run the numbers on something like the following:

Utilizing an investment bond which has tax paid internally at the company tax rate (no taxable income for the individual counted), has no capital gains tax implications after the 10 year investment period and still gets the benefits of franking credits. Further to this some investment bonds (1 I know of) offer lending against the bond at competitive rate (i.e. 3% currently) which you could further invest in shares with the dividend essentially covering interest and it being tax effective.

Any thoughts on this approach? I know its a bit of an outside the square idea and not many people would have looked at investment bonds before but could be an option - would just need to meet the criteria/legislation around them in the process.

 

[craft]

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.

Or maybe none of these fears happen. Maybe India goes through a resource intensive growth phase next and we get another Peter Costello with unbelievable largess towards self funded retirement.

 

[Value Hunter]

Apart from the Aregentina example another good example of what can happen to private "pensions" is Poland in 2013

http://www.zerohedge.com/news/2013-...private-pension-funds-cut-sovereign-debt-load

Here is another link (it discusses examples in addition to Argentina) talking about instances of governments fiddling with pension assets. https://barnabyisright.com/tag/argentina-pension-funds/

I am assuming by the time I become old (I an late 20s now) the government will have confiscated or taxed away most of my superannuation hence I never voluntarily contribute to it.

 

[kid hustlr]

VH - Your point is fair and agreed.

I'm a unique case for several reasons though. A couple more eggs in this basket is a smart move for me.

 

[CanOz]

Thanks

Argentina scenario - gulp. But did they lose their balances or were they just forced to move to the government run scheme, retaining their transfer balance?

This is what she planned : http://www.economist.com/node/12474636

I'm finding out from a mate that lives there what they did...but perhaps I'll post it in another thread to avoid side tracking this one too much.

 

[Ves]

Thanks

Argentina scenario - gulp. But did they lose their balances or were they just forced to move to the government run scheme, retaining their transfer balance?

Both Poland and Argentina's situations involved a nationalisation of some (or whole) of private pension fund assets. It looks like both governments wanted them on their books so that they had a better credit rating / more borrowing capacity.

The retirement benefits in both of those countries are completely different to Australia. For a start there are very few 'defined benefit' pensions left like there are overseas.

Nothing as far as I can see was confiscated from individual beneficiaries (and that's probably because their system is completely different - the pensions are funded and calculated differently because they are not based on beneficial ownership of assets).

There's obviously a long backstory behind both the Argentina and Poland situations and I'm afraid you won't get it from zerohedge.

 

[McLovin]

I won't derail craft's thread because it is a very interesting one, but back in my uni days pottering around the library I happened upon this book....

https://www.amazon.com/Australia-Argentina-Parallel-Paths-Duncan/dp/0522842690

I actually ended up doing a pretty long essay on the economic decline of Argentina.

 

[Sir Burr]

But I think you should broaden your base first.

Not sure if anyone has thought of this idea but as a younger person would it not make financial sense to pour all into that big ticket item first? Paying off a CGT free PPOR and get rid of interest?

Then pump the salary sacrifice into super?

 

[tech/a]

Or maybe none of these fears happen. Maybe India goes through a resource intensive growth phase next and we get another Peter Costello with unbelievable largess towards self funded retirement.

Put yourself in front of opportunity and let it hit you!

 

[kid hustlr]

Craft,

Obviously returns don't happen in a straight line, have you stress tested the model at various points over the 40 years with periods of -5, -10, -15 type returns, can you provide some insight into the results?

If you were talking to a 20 year old who was tossing up buying a PPOR vs renting for the next 40 years what would your answer be? (classic conundrum)

 

[tech/a]

Craft,

If you were talking to a 20 year old who was tossing up buying a PPOR vs renting for the next 40 years what would your answer be? (classic conundrum)

Think the question is a little early for a 20 yr old to be contemplating.
Few would have a deposit even with Home start.

BUT

PPOR would not surprisingly my choice. But Id urge 25-30 yr old to think outside of the square.
2 examples

A friend of ours son bought a 3 bed modest home close to Flinders Uni and rents 2
of the rooms out for $250 a week to over seas students.

Another bought a PPOR in the southern beach suburbs and rents 2 rooms Air B&B
$80 a night off peak (Its also 5 K from Mc Claren Vale Wine district.) and $120 a night
in summer.
He has 65% occupancy on average over a year (Been doing it 2 yrs).

 

[kid hustlr]

Think the question is a little early for a 20 yr old to be contemplating.
Few would have a deposit even with Home start.

BUT

PPOR would not surprisingly my choice. But Id urge 25-30 yr old to think outside of the square.
2 examples

A friend of ours son bought a 3 bed modest home close to Flinders Uni and rents 2
of the rooms out for $250 a week to over seas students.

Another bought a PPOR in the southern beach suburbs and rents 2 rooms Air B&B
$80 a night off peak (Its also 5 K from Mc Claren Vale Wine district.) and $120 a night
in summer.
He has 65% occupancy on average over a year (Been doing it 2 yrs).

I like this.

To be honest I read that reply as "don't buy a PPOR, invest the money instead" It just so happens the investment is property in this case

 

[craft]

Craft,

Obviously returns don't happen in a straight line, have you stress tested the model at various points over the 40 years with periods of -5, -10, -15 type returns, can you provide some insight into the results?
(classic conundrum)

If you don't get the geometric return you assumed long-term, then you won’t make plan. If you do get it – it doesn’t matter the path. Though you will be behind the planned flight path for the period of extended weakness – which would be alarming as to whether the assumed long-term rate is correct or not.

 

[craft]

If you were talking to a 20 year old who was tossing up buying a PPOR vs renting for the next 40 years what would your answer be? (classic conundrum)

Big question and I haven’t thought about it enough from a 20 year old's persepctive to have definite answer.

But I would say watch the Castle to make sure you can distinguish between a house and a home.

If you’ve got a family and you’re pretty settled and you want a home then buy. I’m not sure a house can become a home if the occupants are financially stressed – so only buy what you can afford- watch the Castle again.

If it’s just a house- then it’s simply an unemotional buy / lease financial decision. Include implied rent in the house purchase model and compare the outcome to all other investing options. Houses can be a pain and costly to buy and sell if you want flexability to move around.

You mention PPOR which is the capital gains exemption – be aware if you are going to have tenants to help you pay it off, the exemption will not be available for the income producing portion of the house.

If it’s just a financial decision – take the best relative option. I’ve never modelled a non-development house investment opportunity that has come out superior to other opportunities. That’s why I own shares as investments and not houses, but we own our home.

 

[skc]

Craft,

Obviously returns don't happen in a straight line, have you stress tested the model at various points over the 40 years with periods of -5, -10, -15 type returns, can you provide some insight into the results?

It doesn't matter. The assumption used was average return over the 40 year period. It's (or should be) derived from the beginning and the end point, not through adding or multiply sequential periodic performance.

To illustrate.... the relevant index at year 0 was 250 points and at year 40 is 2500. The nominal CAGR would be 5.925%. The actual profile of the index would be completely different. It would certainly include many negative years, but the average growth rate will get you to the same end point.

The bigger concern is whether a period of major drawdown would throw people out of their long term plan.

 

[Klogg]

Big question and I haven’t thought about it enough from a 20 year old's persepctive to have definite answer.

But I would say watch the Castle to make sure you can distinguish between a house and a home.

If you’ve got a family and you’re pretty settled and you want a home then buy. I’m not sure a house can become a home if the occupants are financially stressed – so only buy what you can afford- watch the Castle again.

If it’s just a house- then it’s simply an unemotional buy / lease financial decision. Include implied rent in the house purchase model and compare the outcome to all other investing options. Houses can be a pain and costly to buy and sell if you want flexability to move around.

You mention PPOR which is the capital gains exemption – be aware if you are going to have tenants to help you pay it off, the exemption will not be available for the income producing portion of the house.

If it’s just a financial decision – take the best relative option. I’ve never modelled a non-development house investment opportunity that has come out superior to other opportunities. That’s why I own shares as investments and not houses, but we own our home.

Bolded point is SO important. Opportunity cost is everything.

FWIW - this is the path I've taken. I'm now 30, but I came to this decision at 25. My parents lost sleep over the fact that I chose to rent... they're still not comfortable with it, 5 years on.


I actually drew up a long term plan based on:
- my daily contracting rate at the time, using a 40 week work year (EDIT: this has been modified to include my wife's income)
- an estimated CAGR of that contract rate (I used 5% p.a.)
- a yearly return on assets invested (10% p.a. used)
- a cash/liquid asset buffer ($100k buffer)

I also have a good idea of my expenses, and add a buffer of 20% on that, and assume I'll bank the rest. So far I've exceeded this target by the buffer plus another 10%... I'm now moving toward 'paying for time' (e.g. cleaner, groceries delivered, etc.), but that's another discussion.

TBH, my mistake was over-estimating my expected return. I put 10% p.a. and although I've managed 17% in that time, it's still not prudent.
I probably also have too large a buffer, but I haven't changed that. It helps me sleep knowing I can fund a whole year's worth of expenses without worrying.

That said, I've reconsidered this option from time to time, especially because I'm starting a family and can likely buy the house I'm after without a mortgage. No decision made just yet.


Another metric worth measuring is the 'passive income to expenses' line.

(I would post it, but there's probably a such thing as TMI when it comes to forums like these)


If anyone does go down this path, expect huge social pressures from family and friends to buy a house. The social short-squeeze is intense, and it's multiplied if you have a partner who sides with them.

 

[Klogg]

If it’s just a house- then it’s simply an unemotional buy / lease financial decision. Include implied rent in the house purchase model and compare the outcome to all other investing options. Houses can be a pain and costly to buy and sell if you want flexability to move around.

The two big variables in the above are the capital appreciation and mortgage rates.

Some members of my family assume 4% mortgage rates and 7% capital appreciation for eternity, and then wonder how you can go wrong. Change that up and assume 7% mortage rate and 4% capital appreciation... then work in cash flow as a result of renting/costs/NG etc. It's really not that appealing.

It's well and truly worth going through those numbers and playing with various scenarios if you're thinking about investment property/buying for financial reasons.

 

[tech/a]

Klogg in the last 20 yrs in most areas its been Interest rates 5% average and Capital appreciation over that period 10% + /yr.

If you put down 20% the return on your investment is mind boggling.
In your 20s the house/home you buy isn't going to be the last one.

I don't see it as a great deal different than purchasing over the long term
a Blue Chip Share on Margin if its a string to a bow.

 

[kermit345]

I tend to side with craft's view in that unless you're buying property as a home then its not as appealing as the wider public would have you think. People like to spruik about their successes with investment properties but often once you look at the underlying position after all costs it can be very underwhelming.

A brief example - my parents are recently retired and have available capital and were thinking of purchasing a house or unit in their nearby capital city as they live in the country. For the purpose of the example i'll just say they were looking at spending $500,000 and thought it would be a good idea as they can use it whenever they like, can have friends over when they are in the city, or friends could occasionally use it for a small fee. However I said hang on if you purchase a unit or house, you have to pay rates and/or strata fees, furnish it, insurance & bills plus other maintenance costs and you'll feel like you have to go to that city for every holiday so you feel like you're getting use out of it.

Compare that to investing the $500,000 elsewhere and assuming what i'd say is a relatively conservative 5% return per annum you then have $25k on average to use each year to travel anywhere you wish without the additional expenses hanging over your head and the flexibility of having that capital available if needed whenever you wish.

That's a pretty basic example but I've got a pretty firm belief that unless you're lucky enough to pick properties that end up going through substantial growth then all the incidental and underlying costs really make it not worth the hassle particularly with the lack of flexibility and agent fees etc. Property allocations in a portfolio are much easier to come by in other manners plus it means you can get access to not only residential but commercial property as well which is almost impossible on an individual basis.

Property to me is a bit of a status thing for people to say around a bbq, "oh yeh i've got a couple investment properties now" and sound superior. People understand that more then another guy at the same bbq saying "I've got a pretty solid portfolio of ETF's established now".