Showing posts with label Retirement. Show all posts
Showing posts with label Retirement. Show all posts

Saturday, February 24, 2024

Checking in on the SMSF

 We have now been running an SMSF for almost three years. How is it doing?


The obvious benchmarks are our employer superannuation funds - Unisuper and PSS(AP). All these numbers are pre-tax. I probably over-estimate the tax paid by the funds, while I know the exact amount of tax paid by the SMSF. So the funds have a bit of an advantage here. 

The SMSF got a good start after which it gradually trudged higher. The two industry funds both declined substantially in 2022 and then recovered. PSS(AP) is almost catching up with the SMSF now.

The SMSF has had lower volatility than the two industry funds, though, at 1.85% per month, its standard deviation is only marginally lower than PSS(AP) at 1.87%. Up and down moves are both penalized using this metric. Unisuper's standard deviation is 2.23%.

Using Unisuper as the benchmark, the SMSF has a beta of 0.42 and an annualized alpha of 4.75%.* Another way of expressing this is that the SMSF captures 64% of the Unisuper's upside but only 24% of its downside. Reducing downside risk is one of our main goals.

* This is treating the risk free rate as zero. The official CAPM alpha using the RBA cash rate will be a bit lower.

Tuesday, January 30, 2024

Projected Retirement Income

If we retired today, how much would our retirement income be? To answer the question, I updated an analysis I did a few years ago and came up with this graph:

Passive income is what our combined tax returns would be in each year if we had not received a salary nor made any work related deductions. I also added back charitable deductions and personal concessional superannuation contributions to our SMSF as these aren't costs in the same way that margin interest is, for example. So, it is not 100% passive as it includes realised capital gains and losses. I also plot how much a 4% withdrawal from our superannuation accounts and US retirement fund would amount to under the assumption that we apply the 4% rule to these accounts. My thinking is that unrealised gains on the non-retirement funds would be sufficient to maintain purchasing power. Taxes are likely to be very low, so I just ignore them.

Last tax year our income would have been AUD 154k. Our spending not including mortgage interest and life insurance was AUD 152k. So, this is one reason why I don't feel comfortable retiring as we are spending very close to our sustainable income and spending is likely to continue to rise. On the other hand, if we apply the 4% rule to our entire portfolio at 30 June 2022, it would yield AUD 175k. But maybe the 4% rule is not conservative enough. My recent analysis of how much of our returns is needed to compensate for inflation, was much more pessimistic than this.

If we were forced to stop working we could easily slash spending by taking the children out of private school, which accounts for an expected 30% of our budget.


Sunday, January 21, 2024

How Much Investment Income Do We Need to Compensate for Inflation?

 


This chart compares the fitted investment income curve from my previous post about the "boiling point" with the monthly loss of value of our portfolio (including our house) due to inflation. I just took the monthly percentage change in Australia's consumer price index and multiplied by the value of our portfolio that month. The gap between the blue and orange curves is a naive estimate of how much can be spent each month in retirement mode.

Currently, projected investment income is only just enough to cover the loss from inflation. Smoothing inflation over twelve months tells a similar story:

Here I divide the CPI by its value twelve months earlier, take the twelfth root and subtract one before multiplying by the value of the portfolio. This shows that inflation is coming down a little but is still high. We really need to boost our rate of return relative to inflation in order to retire and maintain the real value of the portfolio. It is hard to think about retiring until in inflation is more under control.

Investment income accounts for superannuation taxes, but assumes that the only tax on investments outside superannuation is exactly equal to the franking credits paid.* In retirement, the superannuation tax would go away, but there would be capital gains and other taxes on investments outside superannuation. So, probably it is in the ballpark.

* This is because the series is computed as the change in net worth minus saving and inheritances. Saving is computed after tax including superannuation contribution taxes and income tax.


Sunday, August 06, 2023

Superannuation Returns in the Long-Run

Following up from my post on how our SMSF is performing compared to our managed superannuation funds, here is how our superannuation in general has done over time:

Note that the y-axis is a log scale! Our superannuation has outperformed the MSCI index in AUD terms in the long-run. The big win was in the couple of years after 2002 when I rolled over my Unisuper fund to Colonial First State and invested in geared funds. Then I got too conservative leading up to the GFC - the flat top you can see on the red line. Superannuation returns crashed in the GFC because I got aggressive again too early. After that, we have followed the market more closely until after 2018 when we have gone into a bit more of a capital preservation mode again. This reduced the volatility in 2022 but returns in 2023 are a bit disappointing so far.

On the other hand, our non-superannuation assets had catastrophic performance up to 2009. After that, I got my act together, which eventually gave me the confidence to set up an SMSF. But you can see the value of handing control to an external manager early on.

Superannuation returns are pre-tax but after fees. My method of imputing tax paid for public superannuation funds probably exaggerates their performance a bit. These time based returns are quite different from dollar based returns. All the early volatility wasn't that important because total assets were small. Performing well now is much more important.

Enough Wealth followed up on my original post by comparing his SMSF over a longer period to a basket of industry funds.

Saturday, August 05, 2023

Superannuation Performance Update July 2023

Inspired by this article in the AFR, here is an update on how well our SMSF is doing compared to Unisuper and PSS(AP). after underperforming for a few months, it outperformed in June and July:


Looking at the longer term, it is still ahead of the two super funds:


It rode out the 2022 downturn with less "volatility". PSS(AP) actually has a slightly lower standard deviation of monthly returns but also a lower mean. As a result, the SMSF has an information ratio (Sharpe ratio with a zero return hurdle) of 1.1, while Unisuper is at 0.61 and PSS(AP) at 0.73. Relative to Unisuper, the SMSF has an annual alpha of 5.36% and a beta of 0.44 (Relative to PSS(AP): 4.61% and 0.61).

I compute all these returns pre-tax. This probably overestimates the taxes paid by Unisuper and PSS(AP), giving them a bit of an advantage. OTOH, I don't charge for my time in managing the investments.

Saturday, August 13, 2022

Superannuation Performance Update

 

I just calculated the return on my TIAA-CREF 403b in Australian Dollar terms to compare to our Australian superannuation funds. While the SMSF has done a lot better than Unisuper and PSS(AP) since inception, TIAA has really shone. This is mainly due to our investment in the TIAA Real Estate Fund and partly due to the fall in the Australian Dollar. Now, I am wondering whether to switch out of that fund.

Pre-tax returns for the 2021-22 financial year were: SMSF 2.6%, Unisuper -5.0%, PSS(AP) -2.9%, TIAA-CREF 28.5%. I am very generous in estimating the tax paid by Unisuper and PSS(AP). This boosts estimated pre-tax returns on the way up a little but detracts a bit on the way down.

Saturday, July 16, 2022

Division 293 Humblebrag

It looks like I will have to pay Division 293 superannuation contributions tax for the first time. This is an extra 15% tax on superannuation contributions that you have to pay if your income including concessional super contributions is above AUD 250k. My preliminary estimate of my taxable income is already above AUD 250k. So, for sure the total including around 30k of super contributions will be even if the final income number is a little lower. This is probably going to mean an extra AUD 4,500 of tax. 

I'm also currently estimating I'll owe more than AUD 13k in extra tax after paying AUD 6k in tax installments. Last year I got a tax refund because of the Virgin Australia debacle. Bond losses can be deducted immediately from your income unlike losses on shares. The tax installments were because the previous year's tax return...

I'm reluctant to stuff more money into super as non-concessional contributions to reduce tax in case we'll need it. For example, to buy a bigger or better located house. If I continue to work, we can't withdraw the money from my account till I'm 65 in 8 years time. And much longer in Moominmama's case. That liquidity costs in taxes. 

In the last couple of years we made large non-concessional contributions. I also have illiquid investments in venture capital and art. Our liquid investments are 46% of gross assets not including our house. I doubt I can get a bigger mortgage given my age and Moominmama's low wage income.

Thursday, March 31, 2022

Related-Party Asset

I have been trying to invest in a fund on the AngelList venture capital platform. But my SMSF administrator flagged that there might be issues because the fund is organized as a limited partnership. The auditor has now provided the following information:

"A partnership can elect to be taxed as a Limited Liability Company (LLC) in USA or a partnership under the tax law due to the elections that the LLCs make with the US Internal Revenue Office. It is common for such partnerships (US) to be taxed as a company.

To support compliance with SISA/SISR for investments in Limited partnerships we note the following potential scenarios and information for audit purposes:

  1. Where the entity is taxed as an LLC, this supports that the LP should be treated as a company where the members of the Fund are not members of the LP and the investment therefore is considered as an investment in an unrelated entity. This is usually able to be ascertained from the financial report of the LP. 
  2. Where the entity is taxed as an LP, and the members of the fund are not members of the LP, and the investment is in within a limited capital account arrangement. This is usually able to be ascertained from the financial report and the application agreements. 
  3. Where the entity is taxed as an LP, and the members of the fund are members of the LP.

If the investment falls into scenario 2 and 3 then the investment would classified as an in-house asset which would mean it needs to be below 5% of the SMSF’s total assets."

It seems that this falls under scenario 3. I just sent AngelList an email to check. The problem is that the minimum investment required, let alone subsequent hoped for appreciation, would take us over the 5% limit. So, it seems it is not really true that you can invest in anything you like through an SMSF. It seems silly to me to treat a fund where I am only investing through the SMSF along with 1500 other investors as a "related-party asset". Probably, I will need to invest in this fund using my own name and pay higher tax than I would through the SMSF.

Thursday, February 03, 2022

Update on TIAA Real Estate Fund

Back in May, I predicted that the TIAA Real Estate Fund would perform well and shifted almost all my US retirement account into it. Well, it has done exactly that:


Since May it has gained 14.4%, while the Social Choice fund gained only 1.3%! I wish all my predictions were this good and I hadn't left anything in the Social Choice fund. The question now is when to start switching back again.

How Has Our SMSF Done So Far?

 

We have been fully invested in the SMSF for 9 months now. It's more volatile than PSSAP – Moominmama's employer super fund and about as volatile as Unisuper – my employer super fund. It has higher mean returns than both of them so far: 1.32% per month vs. 0.30% for Unisuper and 0.81% for PSSAP. Unisuper's return has really been brought down by a more than 5% loss in January. By contrast, the SMSF lost 1.18% (preliminary) and PSSAP 1.52%. If I regress the SMSF returns on the Unisuper returns I get a beta of 0.34 and alpha of 16% p.a. Of course, these are really early days and I don't expect that to hold up. I will want to see a longer track record before considering rolling over any of our employer superannuation into the SMSF.

Friday, November 26, 2021

Defined Benefit vs. Defined Contribution Update

Each time I was given the choice to be in a defined benefit scheme or a defined contribution superannuation scheme, I chose defined contribution. So, now and then I like to check whether I made the right decision. I worked from 1996 to 2001 in the Australian Higher Education sector. In fact, at the same employer I now work for. Originally, defined benefit was the only option. But then they gave us the choice to switch. In 2001, I rolled over my account to Colonial First State and then this year to our SMSF. I have now worked out how much that money is now worth. I estimate that it is AUD 410k. In 2009 I started working at the same employer again and opened a new Unisuper defined contribution account. It now has AUD 477k in it. So, in total I have AUD 888k. Including the 5 years that I worked from 1996 to 2001 my defined benefit lump sum would now be AUD 473k. We are going to need to have a big crash to make those numbers equal...

Wednesday, September 22, 2021

FI or FIRE?

 

I wrote about FIRE (Financial Independence Retire Early) at least once before. The Retire Early bit is the problematic bit. It makes much more sense for people to use financial independence to do what they want to do rather than just stop working.

A while back I heard that Mr Money Mustache got divorced. Seems his wife wanted to spend more money given their high income. But that wouldn't fit with his frugality message. Now here is a FIRE blogger who retired with a small nest-egg - so-called "lean FIRE". His wife got tired of not spending much either and of having too much leisure time and not making "progress" in life. And here is another blogger who is tired of not having enough money. Many FIRE bloggers who supposedly retired actually work on their blogging business. They stopped being an employee and became self-employed. This is great.

With a net worth of approaching AUD 6 million we are financially independent by any reasonable definition. But I'm not planning on retiring. As I mentioned before, I like my job, at least the research part. I am hoping to not ever teach more than one course a year again. I am sacrificing more than AUD 40k to take long-service leave next year to reduce my teaching load. After that I am planning to take on a "leadership role" for a while and once I turn 60 I hope to go part-time. Also, I don't want to sacrifice the "prestige" and become a nobody. Unless we plan on moving somewhere else, it seems to make sense to do my very flexible job.

And actually I am thinking that our money isn't enough. Our older child is going to private school and the younger one probably will too. The alternative is to move to a top public school catchment area. My wife isn't happy with the public schools here, though I think they are fine. With the way the property market is going that means an AUD 2 million + house price. Or maybe move to Sydney because the best public schools in Sydney are better than the private schools here. My wife puts a big weight on education. I thought Jewish parents like my parents and me were into education. Chinese parents are at another level.

And, actually, I did the retire early bit already. I just wasn't financially independent.

Monday, May 17, 2021

Already Making Changes Based on the Investment Review

I've only done the first two parts of the Investments Review, but am already making changes to our portfolio based on it. I switched our holding of the Platinum International Fund for more units in the Generation Global Fund. The internal rate of return of the latter is twice that of the former and the alpha of the former is about zero, while the latter is around 3%. We still have a holding in the listed investment company Platinum Capital (PMC.AX). I also cancelled the automatic investment plan for Moominmama's account that holds the Generation Global Fund. Now that we are trying to get more money into superannuation, it doesn't make sense to keep putting AUD 2k per month into these accounts. Her account now holds the Generation investment (now 2.45% of net worth) and holdings in CFS Imputation (0.98% of net worth) and CFS Developing Companies (not reviewed yet).

Saturday, April 24, 2021

Career Decision-Making

My university has a big deficit currently and one money-saving move has been to ask people who are eligible to take long-service leave. Every pay period money is put into a long-service leave account. The university can't access this money unless the employee takes long-service leave. When they take long-service leave, the university stops paying their regular salary thus reducing the current deficit. I haven't yet been eligible as you need to have 10 years of service, and I started in 2011 in my current position. But I was thinking of taking long service leave in the first half of next year. I was vaguely thinking about retiring by the end of next year.

According to standard criteria we are financially independent. 3% of our net worth is AUD 150k and our annual expenditure is around AUD 120k. However, I expect our expenses to rise faster than the rate of inflation. We have two young children who my wife is determined to send to private schools (I tend to think that public schools are fine). We are spending on one private school and daycare right now. We don't get much childcare subsidy from the government because our income is high. But high school is more expensive than this.

My wife (Moominmama) is working (2 days a week), though I told her she doesn't need to if she doesn't want to. She said that holding on to the job has option value. Which I kind of agree with. Things feel very uncertain.

Now I was asked whether I could again take on a leadership position in my school (school = very large academic department in US terms - our school has 4 departments within it - think something like a business school of a university). This is probably the best of the leadership positions. I think it is kind of unfair because I spent five of the last ten years holding such positions, which are a lot of extra work, and some full professors have never done even one. The argument is that I am good at it and they're not... 

So if I started this in January, I couldn't take long service leave and it would be for two years probably. Usually, you get AUD 10-20k a year extra pay. After tax, that is half that, of course. After discussing with Moominmama she said that I should ask instead to reduce my teaching. This has happened in the past and the incoming director might be more open to this than the current school director. Moominmama also think I should hold onto my job for the "option value" and not retire. So, I suggested to her that after doing the leadership position for two years maybe I would switch to half time, which means I could keep the low teaching load. The truth is that without leadership duties my job is a very easy way to earn AUD 200k a year (including the superannuation contibutions). AUD 100k a year is also good money. So, I think I will tell the incoming director that I will do it, but only if I can teach less. I would still earn the AUD 200k a year for the next two years. I won't tell her about dropping to half time after that. Or should I just say no, because others haven't done their fair share of the work?

Wednesday, March 10, 2021

ATO Audit of SMSF Applications


I didn't know that the Australian Taxation Office (ATO) audits applications for new Self Managed Superannuation Funds (SMSF). This guy from the ATO office in Perth phoned me yesterday and asked me a bunch of questions about my responsibilities as a trustee and the purpose of opening the SMSF and whether the admin company had approached me about opening a fund and how I picked them. He also wanted me to lodge my tax returns from 2002-07. I was in the US then and so not resident in Australia. So, I went on MyGov (the Australian government portal) and submitted a "don't need to submit a tax return" notice for each of those years. He sent me now by email an approval letter confirming that I passed the audit. Initially, I thought it was some scam when he left a message on my phone. But I checked the "switchboard phone number" on an ATO website and it checked out and so I phoned him back. The whole thing didn't sound very "professional".

Saturday, January 23, 2021

Started SMSF Process

I made it my new year resolution to finally set up an SMSF. This is the next step in our financial restructuring process. The final step will be estate planning. The idea is to put relatively high tax investments into the SMSF. Also, we will put direct holdings of US stocks into the fund, so that they aren't part of our estate. Yes, there is a tax treaty between Australia and the US, which would mean that we wouldn't pay any tax at the moment. But it is likely that the threshold for inheritance tax in the US will be reduced under the Democrats and there is still paperwork to do.

I have now started the process with SuperGuardian who seem to provide a lot of service with a lot of flexibility and have very good recommendations. All I've done so far is send in the client engagement form. The decisions I made so far are to use a corporate trustee and to use a Macquarie CMA as the fund's bank account. Apparently, one third of SMSFs use a Macquarie CMA and SuperGuardian's representative said a lot of their clients do too. A corporate trustee is a little more complicated and expensive in the short run, but seems more sensible in the long run. An SMSF with only individual trustees must have at least two trustees, while the corporate trustee can have a single director. As I am 11 years older than Moominmama, it's likely that she will end up being the only trustee/director unless we bring our children into the fund, or she involves at outside person as an additional trustee. She would also have to deal with all that and she currently isn't at all interested in any of this financial stuff.

Thursday, May 30, 2019

Cancelled my Income Protection Insurance

Unisuper are raising the cost of income protection insurance by 43%. I can't see why I am paying for this insurance any more, and, so, I cancelled it. That's AUD 2,400 more a year that will be going into my superannuation account. I kept the death and disablement insurance as it costs much less, though I'm not 100% sure that I should be paying for that either. The death insurance pays out AUD 1/4 million and costs about AUD 50 a month.

Wednesday, April 24, 2019

Updated Post on Labor's Tax Increase Proposals

I had forgotten about one of Labor's proposals to increase tax. Limiting tax free pensions to $75k per year. I've now added it to the list. It's number 13.

P.S.
Another one - limiting deductions ofr tax advice to $3,000 per year. Now 14 proposals on the list.

Friday, April 05, 2019

Restrictions on Withdrawing Cash at Interactive Brokers

If you move money to Interactive Brokers through the American banking system, they put a hold on your money so that you can't withdraw it to another bank for 44 days. This works in a very strange way. If you have more than the amount on hold in US dollars you can obviously withdraw that excess money in US Dollars. But if you want to withdraw money in Australian Dollars you also have to have more than that amount in Australian Dollar cash! Well, this is what an IB representative just told me to explain why I can't withdraw any money in Australian Dollars despite having cash in that account, including cash I received from dividends that absolutely wasn't transferred from a US bank.

This will slow down my financial restructuring plan. I don't want to buy that many Australian Dollars all at once, though I could use futures contracts to retain exposure to the US dollar... but for psychological reasons I find that harder to do. And I would have to sell the US corporate bonds I bought to do it. The only thing that I really want to do that is time bound is to make a non-concessional contribution to superannuation before the end of the financial year. I guess I will sell some Australian managed funds to come up with the money.

Wednesday, March 27, 2019

Reduced Incentive to Access Superannuation as Early as Possible


Currently, Australian superannuation earnings are taxed at 15% and 10% for capital gains while you are in the "accumulation" phase (before you retire). When you retire you can switch up to $1.6 million of assets into pension mode and then the earnings are taxed at 0%.* The downside is that then there is a minimum payout ratio every year which increases with age. Unlike the U.S., there is actually no requirement to make any withdrawals from super. But making withdrawals is incentivized by the reduction in tax rate.

But if you have shares that pay franking credits, you can use these franking credits to offset the 10-15% tax. You might not pay any net tax on your super fund in the accumulation phase. When you switch to pension mode you will get cash refunds of the franking credits.**

Labor plans to abolish these refunds of franking credits. This means that there may actually be no net change in tax due when switching from accumulation to pension mode. The incentive to switch disappears. This means that if you have assets outside super you probably should spend them first in retirement as they are relatively highly taxed. Only if you run out of such assets, should you access your super.

* Any excess remains in accumulation mode.
** You might even get some cash refunds in accumulation mode if you have enough shares paying franked dividends.