Progress on Pension Restart

Unisuper restarted my pension with $823k. I was now looking to restart my SMSF pension with $1.2 million to reach the full transfer balance cap I am allowed. But I noticed in the weekly email from the Sydney Morning Herald–"Real Money"–that there could be a problem in contributing to a super fund and making withdrawals in the same year, if you want to claim a tax deduction for the contribution. I just contributed $32,500, that I was planning to claim on my 2026-27 tax returns. Now if I move money from the accumulation account, which this was contributed to, to a new pension account, I will end up distributing some of this money back to myself as a pension this year. So, I asked my fund administrator, SuperGuardian, if this would be a problem. If it is, maybe I need to take it out again first, if not, we can go ahead with restarting the pension.

Restarting My Unisuper Pension

I put in a request to restart my Unisuper (industry/employer superannuation) account based pension with a larger number. The idea is to hit the total of $2.023 million between Unisuper and our SMSF, which is my transfer balance cap. The advantage is to pay less superannuation tax, the downside is that the money gets paid out of superannuation into the taxable environment. 

Originally, I started a TTR pension with $600k. But as I have made additional superannuation contributions in the meantime, the accumulation account has been growing. Because all of the existing pension is rolled over into the new account and investment values change daily and you need to specify exactly how much to transfer from accumulation, it is hard to hit a precise number, but I also added a note that I wanted to reach $823k. Then I can restart the SMSF pension with a round $1.2 million. But no big deal, I can always start with a not round number. I now have all the $97.5k contributions for this year in the SMSF. 

You can see the effect of the new superannuation contributions in this graph. There is a jump in cumulative superannuation contributions and a reduction in current savings. The big spike in current savings was the redundancy payment. Superannuation profits are at a new high, while current accounts remain depressed mainly because of gold exposure.

Restructure in Progress

Part way through the restructure. I have now sold 60 ounces of gold from the PMGOLD ETF (6,000 shares). I still have 6,000 shares. I have bought a QO mini gold futures contract (50 ounces) in the SMSF and am in the process of moving $97,500 from our offset account to the SMSF. I have also bought another 30k shares of the L1 Gold Fund (LGF.AX) in my own name and have withdrawn $50k from my CommSec margin account back to the offset account with more to come.

Large Distribution from Macquarie Winton Global Alpha

I didn't realise, but the Winton Global Alpha Fund (managed futures) rose 22% this Australian Financial Year. And then on 30 June they paid out most of the gain as a distribution. Almost AUD 36k for us! On the spot, I decided to reinvest AUD 20k. The fund has been doing well, so, we don't really want to greatly reduce our position. On the other hand, it might make sense to take some chips off the table, and eventually we need cash. But this is enough to pay my current SMSF pension for almost 11 months... So, keeping a 7% yield and reinvesting the rest sounded about right. This fund is in the SMSF because of its propensity for big non-tax advantaged payouts like this. 

New Transfer Balance Caps

From 1 July the ATO is raising the transfer balance cap for superannuation to $2.1 million. This is the maximum amount of money that you can transfer into a tax-free pension account. There is a twist (as everything about superannuation is unnecessarily complicated). If you already started a tax-free pension, you only get a partial increase in your personal cap. ATO has already posted these new caps in MyGov. Mine is $2.023 million, up from $2 million. My total superannuation balance was already about $2k over that on 30 June. Despite that, I am contributing more money to superannuation. This is because the capital gains rate on the money that will have to remain in my "accumulation account" will be only 10% vs. a 32% minimum going forward outside superannuation. Even if my superannuation eventually exceeded $3 million, the capital gains rate will only be 20% on the returns attributed to the portion of the account above $3 million.

How much can I contribute? You can only make non-concessional contributions if your total superannuation balance is below the general transfer balance cap of $2.1 million. Your personal cap doesn't matter for this! If you have more than $1.97 million in super as of 30 June this year but less than $2.1 million, you can contribute up to $130k. But, if you already used the "bring forward rule" in the previous financial year, this is reduced to $120k. I already used $55k of that amount last year, so I can contribute $65k in non-concessional contributions plus $32.5k in concessional contributions this year. If my total balance is over $2.1 million at the end of this financial year (30 June 2027), I won't be able to make any non-concessional contributions after that.

Starting the Big Restructure

I have started restructuring our portfolio in response to the new tax laws. The first step is to make contributions to our SMSF's Interactive Brokers account. I plan to use up all the available contributions. The step after that will be to sell shares in the PMGOLD gold ETF at CommSec and then transfer some of that money back to our offset account to replace the contributions to the SMSF. We'll then buy a futures contract in the SMSF, reduce our margin loan at CommSec, which has a very high interest rate, and also make some new investments. This first stage will only sell less than half of our gold. 

2026-27 Pension Payments and Contribution Limits

If you have a tax free superannuation pension in Australia, you must make minimum pension distributions each tax year in order to maintain the tax free status. Between ages 60 and 65, you need to pay out 4% per year.

In 2025-26 I paid out $3,150 a month from my SMSF pension account and $2,000 a month from my Unisuper pension account. The SMSF returned about 12.5% for the year, so that should be the increase in the value of the pension account before taking into account the pension payments I made. I am estimating I need to pay $3,400 a month this year. I won't know for sure till near the end of the financial year, when SuperGuardian have completed the accounts for 2025-26 (the deadline for submitting a tax return is much later for SMSFs than for individuals). I might need to make an extra payment then. 

I could reduce the Unisuper payments a little. However, HSBC require me to deposit $2,000 per month in my account to get 2% cashback on tapped payments. I think this tax free $120 or so is worth it (purchases over $100 don't get cashback) for paying out an extra $900 for the year. 

In any case, I can still recontribute this money. Because my 30 June 2026 total superannuation balance is less than the new $2.1 million transfer balance cap, I can still make non-concessional contributions this year. I already brought some forward to 2025-26 and so the limit remaining is $65k. I can still make concessional contributions up to age 67. The annual cap is now $32,500. So, I can make $97.5k in super contributions this year.

 

How Can You Run Out of USD 6 Million?

Financial Independence asked on my recent post about the 4% rule:

"I need to have more insights on how somebody can run out of almost 6 million dollars. Why and how would you even spend 180,000 a year"

Thank you for the inspiration for another post! First of all, this is a simulation where you spend 4% in the first year and it then increases at the rate of inflation. The expected rate of return is 8.3% a year with a monthly standard deviation of 1.86% (that is low volatility)* and the inflation rate is 4% per year, which is the current rate in Australia. Failure is defined as having negative money left apart from our house (currently about USD 950k of the total) in 2060, when Moominmama would be 85. The model does include getting the Australia age pension when the money falls below the asset test level and the UK state pension. You could still sell the house, but that would reduce the Australian age pension–owner occupied property is not in the asset test. With 4% inflation there is a 10% probability of failure. There is about a 20% probability of having less than AUD 1 million left. With only 3% inflation but the same rate of return the failure rate falls to 3%.

So, this doesn't say that we would actually spend USD 180k per year. It is a thought exercise. 

On the other hand, to see what we actually spent, you can check this post with almost 40 years of data and my latest post on 2024-25 spending, which also gives recent years. We spent about AUD 175k (c. USD 125k) according to this last year. It includes mortgage interest but not principal in spending. It doesn't include taxes. These will be a lot lower than they were in recent years, but you also have to pay those out of your portfolio. I think we can easily get to USD 150k including taxes going forward. Education is the biggest expense apart from taxes. If we stay in private education it is going to rise steeply. It is around USD 30k per year at the moment. Apart from this we don't live a luxurious lifestyle–for example, our car was built 22 years ago, though we will probably buy a new one soon.

* The investment returns are the averages over 30 years of the target portfolio. They are better than our own track record, because we did so poorly before 2012.  

4% Rule Failure Rate

I have been discussing retirement planning with my brother who is two years younger than me. As a result of these discussions, I have added stochastic investment returns to my projection model as well as the Australian Age Pension (which is means tested) and I increased the planning horizon to 2060 from 2050. Moominmama would be 85 in 2060. Previously, I stress tested the projection by using very low constant rates of return.

Running my baseline spending scenario–linear growth in real spending with stepdowns of 1/6 after each child finishes university–it is very rare to run out of money by 2060. This is defined as negative net worth beside our house. In 100 runs there are no failures.

But if we spend according to the 4% rule, we run out of money by 2060 about 10% of the time, though rarely by 2050. This is using the monthly returns distribution over the last 30 years of the benchmark target portfolio as investment returns. In many more cases, real (2026 dollars) net worth is below AUD 1 million by 2060 and falling fast. If I use our own historical returns–which were very bad before 2012–the failure rate is around 40%. With our returns and linear spending the failure rate is around 25%.  

This graph compares the target portfolio, our track record, Australian shares, the MSCI World Index, and gold:

Spending according to a 3% rule and the target portfolio returns has no failures in 100 runs, though a few near misses. 

So, we need to keep our spending well below 4% or increase returns if we don't want to run out of money.

Fixing Margin Loan Interest Rate?

A year ago, I fixed most of my CommSec margin loan at a constant rate for the year ahead. The rate I got was 7.54% compared to a variable rate of 9.4%. I just got an email from CommSec asking whether I want to fix my rate again. The fixed rate is now 9.2%, but the variable rate has only increased to 9.65%. Clearly, I made the right choice to fix my loan, but this doesn't look like a good option going forward. Instead, I will reduce my borrowing probably by selling my gold ETF holdings, or at least some of them, especially if the recent budget CGT measures are passed by Parliament. The Greens hold the balance of power, but they think that nominal gains should be taxed at ordinary income tax rates and that there should be no grandfathering, so they might yet derail things for Labor.

Just Cancelled My Life and Disability Insurance

I hadn't realised I was still paying life and disability insurance premia post-retirement. I just cancelled them online, saving about AUD 700 per year. The amount you pay is fixed or rising with inflation, but the coverage that you get falls as you get older and stops entirely for disability at 70 and death at 75.

Update to the Target Portfolio

Time to tweak the target portfolio we use for benchmarking and asset class allocation. I am lowering the allocation to futures from 7.5% to 5% and increasing the allocation to hedge funds from 15% to 17.5%. This better reflects current reality.

Private vs. Public School

Moominmama is a Chinese Mum who stereotypically thinks you should sacrifice anything for your children's education. Her friend from uni days also lives in our city and sends her children to the most expensive private school. So, we have been sending both children to a private school that is in walking distance of our home. I think that public schools are fine, at least where we live. Fees at the private school have increased by 8% in each of the last two years. Then a couple of weeks ago they announced 2026 fees. They are up for the school years relevant to us by almost 23%. The school is suggesting that fees will increase by 9-12% for 2027 and after that by smaller numbers, but it would likely be 7% per year I think. The school community is shocked and outraged by this. The school has taken some financial missteps, but we can't see how more than say 10% is justified. We have gotten a lot of education on school finances in the last fortnight, both on a huge parent WhatsApp group and from the school's own presentation in reaction to the outrage. On Monday there will be a live parent-organized town hall. 

So, I have modelled the effect of these on our finances and in theory we could cope with it, though by Little My's final year the school would be as expensive in real terms as some of the more expensive schools in Melbourne and Sydney now. Trinity Grammar at AUD 44k matches what this school would cost in his final year. Our school has 2,200 students. It grew so big by offering a private education at a reasonable price. Lots of parents are talking about leaving. If students numbers fell but costs remain high they could go into a death spiral, in my opinion, where they have to raise fees more and choke off more and more demand. 

So, we are starting to think about public schools seriously again. Moomintroll will be in Year 5 next year. High School starts in Year 7 here. We are locked into next year pretty much, and it doesn't make sense, I think, to move him to a public primary school for just one year. So, maybe he would move to our local public high school in Year 7.  That school has reasonable NAPLAN test scores. 47% of students are from the top socio-economic quartile compared to 80% at the current school. This will depend on what we think the future trajectory of school fees will be how are finances are holding up.*

In another negative shock, Moominmama's employer announced another restructuring. They will make 5% of research staff redundant and maybe a much higher share of her division. So far, she has managed to survive all the previous restructurings, but maybe her luck will finally run out. Again, we could handle this, but all of this is adding stress. 

* The public high school is a bit awkward to get to. You need to change buses in our local "town centre". I don't think Moominmama should have to drive him there and back every day. After the first year, I think it would be reasonable for him to cycle there and back if the weather is OK. It is actually only 2.5km away. There are bike paths, but also big highways to cross, though there are traffic lights on the crossings. But I did a thought experiment where he took Uber back and forth every day. That would cost about AUD 5k per year, which is a sixth maybe of the private school fees! 

Hockney Sold

Masterworks sold the Hockney painting I invested in. Profit after fees is 23% and the IRR was 6%. They are giving the option to reinvest in another paper or receive the cash. Overall, my Masterworks investments only have a 2% IRR. 

Art has been in a slump while stockmarkets have rallied in the last 3 years. Who knows if it is going to recover now? I'm not inclined to tie up the money again for an unknown period. This is especially given that I am retiring now. So, for now, I am going to withdraw any money I can from this portfolio. I have investments in nine paintings remaining.

FOMO-ing In

I have been saying no to investing in Aura's new venture capital fund when I have been asked. My reason was that I am retiring and don't want to lock capital up. With lower taxes going forward, the negative tax status of Australian venture capital investments isn't so important any more. Also, I am an investor in both their previous funds and the parent company, so that feels risky. Also, I didn't have a current wholesale investor certificate.

But then I saw an email that now is the "last call" before the "first close" and I sent them an email asking if I could invest AUD 100k instead of the usual AUD 250k minimum. They approved right away and I just completed the application form. This is an investment of about 1.5% of net worth, which will be called over several years, so with this lower number it doesn't seem as risky or impose as large cash flow requirements. The fund plans to invest in 25 companies if the target amount is raised. So, this would only be AUD 4k per start-up. At Aura VF 2 I have around AUD 25k exposure to each start-up. And I now have a wholesale certificate again. Also, I have been thinking recently that we can cover our current cash flow requirements with just AUD 1.5 million (8% yield) to AUD 3 million (4% yield) income-oriented investments and invest the other half or more of our net worth in long term growth investments to compensate for inflation and maybe actually grow our net worth. 

But in the end, it's really FOMO.

Required Withdrawal Rate

Following up from the discussion on the safe withdrawal rate here is the history of our required withdrawal rate. This is the past twelve months spending divided by net worth minus housing equity, assuming that we have no other sources of income:

 

Retirement first looked possible in 2018 when we received the inheritance. Without that, we would likely be only just on the cusp of the 4% SWR currently. But then expenditure rose around the birth of our second child and the stock market fell in the pandemic and we went back above the 4% level. There was a voluntary redundancy scheme at my workplace in 2020, but I decided I couldn't afford to do it. 

Since then, we dropped back to a fairly consistent 3% till recently. I was waiting for another voluntary redundancy scheme though I thought about going part-time from age 60. Early this year there was a new scheme and  I submitted my application. Then I panicked and didn't take it up. Meanwhile, markets rebounded and we are now near 2%. My employer reopened the scheme and this time I am doing it. 

My forward projections assume that real expenditure will continue to grow linearly, though actually it looks like it has flattened out:

 

I do assume step downs in spending when each of my children reach age 21. In my worst case scenario, if we only made zero real investment returns after 2026, then our net worth would about halve in real terms by 2050. Our required withdrawal at that point would be 5.5%. That assumes that we don't downsize our house or cut spending.

In the best case scenario–historic rates of return of 8.4% nominal per year–we would have 4 times our current net worth in real terms in 2050.

Something people in the FI community don't talk about is that if you annuitise your wealth you can then withdraw much more than 4%. Maybe 6-7%. This is because you pool longevity risk with other people. 

 

Retirement Update

So, I now have a copy of the contract for my retirement and severance package, following it previously being approved. I will hand in the document in person on Monday. I will still be employed for the next six weeks. The severance package follows a standard formula and amounts to about AUD 255k after tax. That would be similar to working another two years full time. I think Financial Samurai would approve: 

1. I reached financial independence - I will only need to spend less than 2% of net worth initially. That is Ed Thorp's retirement rule. Still, I don't go 100% in equities. I don't want to go through the GFC holding all equities again. I think it is possible to get equity-like returns with much lower volatility.
2. I'm retiring early - at 60, which is less than 67 and very early for people in academia. 
3. I got a severance package.
4. My wife is still working part time. 😎

My life won't change that much, actually. I won't have to teach or go to meetings I don't want to go to. I won't feel guilty about doing other stuff when I am supposed to be doing my job. Like right now 😀 But I wasn't scheduled to teach again till next July, once I finish this year's teaching in late November. I was actually scheduled for 2 months leave in December and January, to use up my "leave balance". But I will still be supervising PhD students, doing journal editing for the next year, and doing some research stuff.

What will change at Moomin Valley? I will probably going back to tracking net worth regularly, as this will be an important number. Obviously, I have been tracking it, but I haven't been reporting on it in the blog except on the NetworthShare widget. The "retirement number" - net worth at the end of November, plus the severance that I will get in December will also be important to keep in mind.

P.S. 

Interesting discussion with Karsten Jeske, where he admits that he hasn't sold any shares and would find it difficult to do, despite all his research on safe withdrawal rates:

 

New Thoughts on Keeping Superannuation in Accumulation Mode

A year ago, I wrote a post about whether you should initially keep your superannuation in accumulation mode when you retire. I thought that if you don't need to spend the money in your superannuation accounts right away, it doesn't make sense to pay out that money to sit in regular taxed investments. But I missed one key point. Dividends from what Americans call "taxable accounts" are taxable whether you spend them or not, but capital gains are only taxed if you sell. The more capital gains you realise, the higher tax bracket you are going to be in. Unless you are lucky enough to be able to live on dividends from the "taxable accounts" alone, you are going to have to realise capital gains if you don't have a superannuation pension. 

In my case, I might be able to stay in the 16% tax bracket if I don't need to realize capital gains. So, with tax free superannuation, I will pay very little tax. If I kept my superannuation in accumulation mode, I would be paying an average of 12.5% tax on earnings in superannuation and I would have to realise $80k of capital gains in "taxable accounts" instead of receiving a superannuation pension. That would push a lot of my earnings into the 30% tax bracket.* So, I am planning to put my superannuation accounts into tax-free pension mode and pay out the minimum distribution of 4% a year until I am 65.

With my wife still earning around $45k a year in salary for now, I might not need to do much in the way of realising capital gains outside superannuation.

What about just spending the redundancy payment for the first couple of years? Some of that is going to go into superannuation and the rest will sit in our offset account. The more we spend it, the more mortgage interest we are going to have to pay. Despite that, it might actually make sense to spend that first, but psychologically I prefer a big cash buffer, low mortgage interest, and a steady pension coming in. I can just set and forget the pension from Unisuper.

* Of course, long-term capital gains are only taxed at half the headline tax rate, so the effective marginal rate would be 16% including the Medicare levy.  

Employer Approved My Redundancy Again

I heard yesterday that my employer approved my redundancy under this round of the voluntary redundancy scheme. So, if everything goes smoothly, I will retire 30 November, just before my 61st birthday. I would have gone on leave from 1 December anyway, in order to reduce my surplus leave entitlements.

I am already changing my accounting spreadsheets to reflect this. I have also set all my investments to pay out dividends rather than re-invest them in order to maximize cashflow.

FIRE?

The university has reopened the voluntary redundancy scheme after saying that there will be no further forced redundancies. It looks like they have increased the payout to 3 weeks pay per year or service instead of two. My simulation shows that it would be a breakeven until the end of 2028 under the assumption I work full time in 2026 and half time in 2027 and 2028. In addition, I now know that I will get a UK state pension. Using the 4% rule, that means I need to save AUD 1/2 million less than I would otherwise need to. 

We don't need to reapply if we applied previously. My previous application was approved. But I said no. So, maybe I can say yes now. Technically, I would be retiring early as I am younger than 67, even though I can get a tax free pension from my superannuation.