Tuesday, December 30, 2008

U.S. Cheque Funds Available

We were told that there would be a 21 day hold on the proceeds of the U.S. cheque we deposited. But today (the first time I checked) the Commonwealth Bank site says that all that money is included in our "Available Funds". So I transferred $A1000 to our CBA credit card. The site didn't object to the move. The other moves I have planned are to Commonwealth Bank subsidiaries too. In line with the savings policy I plan to transfer another $A1000 to my margin loan, $A1000 to Snork Maiden's Colonial First State account and $A1000 to my CFS account. I plan to invest her contribution in a bond fund for two reasons: 1) To allow some liquidity in the account in case we need to withdraw some money; 2) A bond fund will move the allocation in the account a bit nearer our planned overall target allocation. After this move the planned allocation in her account will be:

In other words: 60% in stocks with double the allocation to Australian stocks as to foreign stocks and the remaining 40% split between hedge funds, real estate, and bonds. This allocation will be achieved by the following allocation to funds:

You won't get the asset allocation by adding up the percentages in each fund as the first two funds are geared. Overall the account effectively borrows 20 cents for each dollar of equity. I'll submit a new regular savings plan on this basis too soon. The new plan will also increase the regular savings amount to $A500 per month following an increase in her salary.

I'll put my contribution in the CFS Geared Global Share Fund. This makes sense as though we are at target weighting in non-US foreign stocks we are underweight US stocks and we're very overweight large-cap Australian stocks.


enoughwealth@yahoo.com said...

The $500 per month will be after PAYG tax. Depending on SMs marginal tax rate, and your long term plans (eg. retirement based in Australia?) it could be worth doing the savings plan via salary sacrifice into SMs superannuation (if her employer allows it). You probably couldn't get the exact allocation you want in her superannuation scheme initially, but that won't have much effect until her account balance builds up - at which time you could move it into a low-cost SMSF and invest in exactly what you have listed.

If you add the tax saved to the super contributions, and are eventually able to liquidate the investments free of CGT during the pension phase of the SMSF (and get tax-free income stream, assuming the tax laws don't change again) you should end up with considerably higher final investment balance.

The down-side would be losing the ability to access the savings prior to retirement age.

mOOm said...

"savings prior to retirement age."

Yes, that's what it's about. Super contribution is already 15.4% of nominal salary. The downside is 30% marginal tax vs. 15% on super contributions. I don't think Snork Maiden wants to wait till age 60 to buy a house for example...

enoughwealth@yahoo.com said...

Then again, the new super rules apparently make it worthwhile to buy a house with an interest only loan and minimal deposit, and save into super rather than pay off the home loan asap (previously the best strategy, as home loan interest isn't tax deductible). Once you retire you withdraw enough from super tax-free to pay off your home loan. Aside from being able to save $607 into super from $715 of SMs taxable income, compared to $500 after tax saved outside super, you also won't have to pay 15% tax on realised gains when the investments are sold from a SMSF in pension mode. So if the $607 doubled to $1214 by retirement age, they'd be no take when it's withdrawn and used to pay off the home loan. Compared to $500 saved outside super, which if it grew to $1000 by retirement age would be liable for $75 CGT on the $500 gain.

If you use the "super to pay off the home loan" strategy you only need to have 5% deposit for a house (or maybe 10%-15% to avoid having to pay loan insurance) - I imagine you already have this amount saved up with current investments, so SMs ongoing savings aren't required for buying a house? Especially if you and SM are eligible for the first home owners grant when you decide to buy.

Although tax planning should not decide asset allocation etc., it is very important. Saving tax is just about the only "free lunch" around - just consider the extra effective return for the same risk for SMs desired asset allocation within a SMSF compared to outside super.

mOOm said...

Well buying a house is just one thing to do that requires having capital available before the age of 60.

After my scary experiences with margin loans I can't imagine buying a house with such a small downpayment and such a big loan that needs to be serviced irrespective of employment fluctuations and the performance of other investments. I'd always assume I'd put at least 20% down and now I think likely more. Besides, will it be possible to buy a house with such a small deposit?

Another point is tax diversification. We have no idea what will happen to the tax rules regarding super in the future nor to the preservation rules. While it is sensible to put savings into super to take advantage of the current benefits I'd not want to put everything into it, even if I didn't need the money before 60.

Now if I or Snork Maiden was 55 years old I'd be likely to jam every dollar I could into super as with five years to go to get the money out the uncertainty is reduced all round.

Now in your case the preservation age is 56 or 57 I think but for Snork Maiden is 33 with a preservation age of 60 (same preservation age for me born in 1964).

enoughwealth@yahoo.com said...

In the end the strategy has to be what suits your situation and feels most comfortable to you, but some of your concerns can be at least partially countered.

Most banks will easily lend 95% of the purchase price of a owner-occupied residential property, provided your income is sufficient to meet the standard repayments on a 25-year loan. (And if you are opting for an interest-only loan the repayments will be more affordable than a standard P+I loan). If you have more than the 5% deposit saved up, a good strategy is to still borrow the maximum 95% and then use the extra money you have saved up to make an immediate lump sum repayment off the loan. This has the same effect on the loan balance (and hence interest payments) as using would putting up a larger deposit and borrowing a smaller amount, but has the advantage of the "extra payment" being available for redraw at any time (it works the same as having a line of credit, but without the extra fees). If you have 6-12 months worth of interest only payments available for redraw you would have peace of mind in case of unemployment, lower investment income etc.

A home loan is a very different beast to a margin loan - the initial valuation used to determine the loan amount doesn't get revised for existing loans (unless you want to get a HELOC based on an increased valuation), and has a set term (usually 25 years). As long a you meet the scheduled repayments the bank can't ask for the loan to be repaid, or reduce the loan amount just because property prices in general have declined.

Super does lock your money away for a quite a while, but even you and SM can access some of the funds prior to your preservation age via a "transition to retirement" pension (where you start making withdrawals from your SMSF at age 55 while you are still working and making super contributions).

If you have some expectation of receiving other income before SM reaches preservation age (eg. MoominMamas bequest), locking up some of her income in super for 27 years (22 years via a TRP) is less of a problem. You probably won't be need to access the $500 per month savings from SM for funding expenses prior to retirment.

Considering the life-cycle model of income and expenditure, deferring only 15% of current income for spending during retirement is probably not all that high. Also, if you "ear mark" some of the superannuation contributions to be used to repay the home loan when you retire, those contributions should be viewed the same as if the money was being used for principal repayments with a conventional P+I home loan.

While the legislative risk relating to savings within superannuation is real, but unknown, it probably shouldn't be a factor when deciding between in-super and outside-super investing. Since there exists the same legislative risk for investments outside of super (eg. changes to marginal PAYG tax rates, CGT rates etc). For example, the superannuation rules were vastly different when my father was working, but by the same token there was no GST at that time, no imputation (franking credits) and the top personal income tax rate was over 50%! Indeed, superannuation probably has less legislative risk than investments made outside of super, as political considerations mean most super changes that have potential negative impacts get "grandfather" clauses.

Bigchrisb said...

I agree with Moom on this one - to me there is substantial regulatory risk for superannuation, which diminishes substantially as you approach preservation age. I think it is a great investment vehicle for those nearing retirement. However, for me at 26, that is a rather long way off to punt on static policy.
Personally, I believe that the super tax arrangements are likely to be short to medium term, and not sustainable in the longer term. These arrangements have substantially reduced the taxation base, and in a sector of the population which has a rapidly increasing proportion of population and wealth distribution.
With 34 years to (the current) preservation age, I don't think that the policy and time risks outweigh the current benefits for someone of my age.

mOOm said...

EW: I'm not arguing with the basic idea of your strategy but I'm not comfortable with the level of at least subjective risk that that implies now. Now if I had 40-50% equity in a house I would be in no rush to pay down the rest of the loan. My employment experience has been a boom bust cycle with periods of employment and unemployment. I wouldn't want a big mortgage that would force us to both have to work in good jobs all the time and also depend on remaining married to each other for that matter...

With the preservation age increased to 60 my impression is that this transition to retirement pension thing won't be available for my and Snork Maiden's generation.

We just went through a scare where it seemed that the government might take away SM's super due to her not being a permanent resident. Who knows what might happen in the future if we live outside Australia and SM hasn't become an Australian citizen at that point.

It's also true that I expect to inherit money from Moominmama but that is a risky strategy to depend on e.g. she could live to 100 years, something might go wrong with those investments (e.g. hyperinflation in the countries we are invested in), and Snork Maiden and I could in theory get divorced before we ever inherit the money. Her financial strategy shouldn't depend on it.