Should You Keep Your Superannuation in Accumulation Mode?

The accepted wisdom is that as soon as you retire in Australia and are over 60 years old, or as soon as you hit 65 years old even if you are still working you should shift your superannuation from accumulation to pension mode. You can transfer up to $1.9 million per fund member into pension mode currently. Investments in pension mode have zero tax. This is in comparison to 15% tax in accumulation mode with a 1/3 reduction for long-term capital gains.

But what if you have a lot of investments outside of superannuation? These are highly taxed and so doesn't it make sense to run these investments down first to reduce your overall tax? In pension mode there are required minimum withdrawals each year. If you don't spend that money it is simply added to your highly taxed non-super investments. So, despite not having to pay tax on your money in super, you are transferring more and more money out of super into your taxable accounts. Does it make sense to wait till you have spent your non-super investments?

I ran a simulation in my long-term projection spreadsheet. This isn't a Monte Carlo simulation. I just assume my historical average rate of return over the last 20 years applies into the future. I assume that I retire at age 65 and convert my super to a pension and Moominmama converts her super to a pension at age 60. She stops working when I do. I also assume that the tax rate on investments outside super is 20% of returns (without any attempt to define realised and unrealised gains) and in super in accumulation mode is 12.5%. Both are probably at the high end of what might actually happen. But the contrast with zero tax in pension mode, makes pension mode more attractive relative to accumulation mode. The simulation runs to 2050.

I also run a simulation where all our super stays in accumulation mode. This no pension scenario has 8% more assets in 2050 than the pension scenario.

This modelling is still not that realistic. I assume that all our superannuation can be moved to pension mode, even if we exceed the $1.9 million threshold. Also, we are likely to make more non-concessional contributions to Moominmama's account before 2029 and I assume we don't. I'm think that these tweaks won't change the fundamental result. We would have to have a lot less non-super investments to change the conclusions.

New Spending Sub-Category

 

As the Sydney Morning Herald personal finance newsletter, Real Money, is featuring car expenses this week, I was curious about how much of our spending on car went to actual driving vs. maintenance. So, I split the existing "Petrol, maintenance etc." category into "Petrol, parking, tolls" and "Car repair, NRMA etc.". In the last twelve months we spent $2,143 on the former and $1,978 on the latter. So, it is about even. The total transport category was at $9,383, with a total spent on the car of $5,707 (61%) and $3,676 (39%) on taxis, Uber, buses, and scooters. Flying falls in the "Travel" category. Car expenditure also includes registration, insurance, and depreciation.

July 2024 Report

This was a better month, ending with us outperforming all benchmarks apart from the ASX200 and MSCI. Spending hit almost AUD 25k this month, the highest since the month we bought our house in January 2015. We paid quarterly school fees, half the cost of a new air conditioning system and went on holiday in Queensland. A lot of the Queensland trip was already paid for before July but probably a couple of thousand in expenses wasn't.

In July, the Australian Dollar fell from USD 0.6671 to USD 0.6531 so US Dollar returns are lower than Australian Dollar returns this month. Stock indices and other benchmarks performed as follows (total returns including dividends):

US Dollar Indices

MSCI World Index (gross): 1.64%

S&P 500: 1.22%

HFRI Hedge Fund Index: 1.27%

Australian Dollar Indices

ASX 200: 4.20%

Target Portfolio: 1.79%.

Australian 60/40 benchmark: 2.86%.

We gained 3.55% in Australian Dollar terms or 1.37% in US Dollar terms

Here is a report on the performance of investments by asset class:

The asset class returns are in currency neutral terms as the rate of return on gross assets and so the total differs from the Australian Dollar returns on net assets mentioned above. Returns varied radically across asset classes. RoW stocks (mostly Defi Technologies) gained more than 20% and contributed the most to the overall return. Gold had the second highest return and contribution. Only hedge funds lost money due to the fall in Pershing Square Holdings.

Things that worked well this month:

• Defi Technologies (DEFI.NE) was the top performer, gaining AUD 61k. Also gaining AUD 10k or more were: Gold, 38k, Bitcoin, 30k, 3i (III.L), 10k, and Regal Partners (RPL.AX), 10k.
  

What really didn't work:

• Pershing Square Holdings (PSH.L) lost AUD 32k. It fell steeply after Universal Music Group – one of its main holdings – fell sharply following its earnings report. Nothing else lost AUD 10k or more.
  

Here are the investment performance statistics for the last five years:

The top three lines give our performance in USD and AUD terms, while the last three lines give results for three indices. Compared to the ASX200 we have a slightly lower average return but also lower volatility, resulting in a higher Sharpe ratio of 0.89 vs. 0.53. But as we optimize for Australian Dollar performance, our USD statistics are much worse and worse than either the MSCI world index or the HFRI hedge fund index. We do beat the HFRI in terms of return, but at the expense of much higher volatility. We have a positive alpha relative to the ASX200 of 3.59% with a beta of only 0.45.

We moved towards our target allocation. I raised the desired level of cash and reduced all the other asset classes accordingly. We are most underweight cash and overweight rest of the world stocks. Our actual allocation currently looks like this:

About 70% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily, monthly, or quarterly liquidity, so our portfolio is not as illiquid as you might think.

It's time for a check-in with the SMSF. This was a good month with a return of 6.15% after a few months of underperformance:

Performance since inception has been 9.8% per year compared to 6.7% and 7.2% for the Unisuper and PSS(AP) benchmarks. Volatility has been greater than either of these, but that includes volatility to the upside. Compared to Unisuper, we have captured 81% of its upside but only 29% of its downside. Put another way we have a beta of 0.43 to Unisuper but 6.8% of alpha annually.

We receive employer superannuation contributions every two weeks. We contribute USD 10k each quarter to the Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. We made the following additional moves this month:

• We made our annual concessional superannuation contribution to the SMSF for Moominmama. AUD 22.5k this time.
  
• I sold all our 96k shares of Platinum Capital (PMC.AX) following the announcement of their restructuring plan. I bought 17.5k shares of Pengana Private Equity (PE1.AX) and 6k of Regal Funds (RF1.AX) in place of our SMSF holding. I am transferring most of the proceeds of the sale in my own brokerage account to our offset account.
  
• I bought another 250 shares of the Fidelity bitcoin ETF (FBTC) in the SMSF.
  
• I bought 400 shares of the Putnam BDC ETF in the SMSF.
  
• I redeemed all units of the Longwave Australian Small Companies Fund in my name – 118k units worth about the same number of dollars. I reinvested half in the First Sentier Imputation Fund and sent the rest to our offset account. I also redeemed AUD 25k of Moominmama's holding. This funded her superannuation contribution above.
  
• By the end of the month we had around AUD 125k in our offset account, which is a big change.