New Era in Moomin Valley

In a few months we will reach "financial independence" - our annual spending will be feasible with a little less than a 3% p.a. withdrawal rate. About 60% of this was due to our own efforts working, saving, and investing over the last 24 years and 40% from inheritance. I never depended on receiving the inheritance, which is why I saved so hard. Because I knew finding an academic job could be very hard when my initial short-term contracts ended, I saved up to 50% a year at times. This allowed me to live for a year in 2001-2 without working for pay, traveling around the world looking for work. Similarly, when we moved to Australia, I could experiment with trading in the financial markets while exploring alternatives.

On the other hand, I think I was willing to take more risk based on the probability that we would receive a substantial amount. In the case of the financial crisis in 2008-9, I took on too much risk. The pressure of trying to make a living from trading with a small amount of capital combined with the volatility of the financial crisis was too much and I decided to stage an academic career comeback, which has been very successful.

The other half of the financial independence equation in the blogging community is usually "retire early". I don't have any plan to do that any time soon. I like the research side of my work and I have my teaching etc organized so that going forward it shouldn't be too hard - I only need to teach during one half of the year for now. As things are at the moment, it would be hard to find a better job than this. So, it doesn't make any sense to sacrifice my salary. I am actually exploring a potential career move to another bigger city. That job would have more admin and maybe no teaching. Introspection tells me that I wouldn't like to retire currently.  On the other hand, Moominmama is pretty frustrated with her work at the moment and so now has options to take a break and consider alternatives.

On the other hand, our spending is growing by more than the rate of inflation and I expect that to continue. So the current 3% withdrawal rate would become more than a 3% rate over time unless investment returns are very good, which does not seem likely. Continuing to earn some money does sound good in those circumstances.

Is continuing to work limiting our location choices? At the moment, I don't think there is another location that we would both agree on and which would make practical sense. We have to consider education opportunities for little Moomin. So, moving to a small town in Australia does not sound like a good move from that perspective. The nice parts (with good education) of the two biggest Australian cities are extremely expensive and would take us out of the financial independence zone. We definitely would never move to Moominmama's home country (she doesn't even want to visit at the moment). Moominmama is not enthusiastic about moving to either of my home countries. One is too cold and dark as far as she is concerned (Northern Europe) and the other too foreign and dangerous (Middle East). That leaves Southern Europe as a sensible or feasible alternative, but I don't think we want Moomin to grow up speaking Spanish or French? I think it would be hard for Moominmama to learn those languages too, though not difficult for me. So, continuing to work is not stopping us from making a move to another location that we could or would want to make.

So, for now not much will change, but this blog will change. I plan to stop reporting actual earning, spending, and net worth figures. Going forward, all numbers will be in percentage terms only. When the vast majority of our net worth was the result of our own work and effort I was happy to report those numbers, and reporting, even though it is mostly anonymously, helped keep us on track. But now that so much of our net worth has not come from our own efforts and we don't have the goal of achieving financial independence anymore, I don't want to report the numbers any more. On the other hand, I'm not going to erase the existing blog.

Our long term goal now is to pass on at least as much wealth in real terms to the next generation as we received from the previous one. My parents also inherited more than 2/3 of their eventual net worth, though they also saved and worked hard to build up wealth in earlier years. They eventually passed on what they inherited.

Perth Mint

The Perth Mint (Western Australian government corporation) looks like the best way to invest in gold. There are no fees for trading or storage for Australian and NZ residents for accounts greater than AUD 50k, though there are fees to trade online. This is assuming that you only want to have an interest in a pool of gold rather than own specific gold bars. Alternatively they have an ETF trading on the ASX with a management fee of 0.15% p.a. (PMGOLD.AX). This is lower than IAU or GLD.

Other alternatives are to actually hold physical gold in a bank vault or trade gold futures. The problem with futures is if the price of gold does go up, you will have to pay short-term capital gains taxes continuously as the contracts expire (and buy and sell contracts every few months). And I don't really like the idea of getting delivered a bunch of gold bars, taking them to the bank, and then paying storage fees.

Gold has historically been a reasonable hedge aganst inflation but only in the very long run. It is actually more useful as an asset that is negatively correlated with the stock market and useful as an emergency fund in a stock market crash.

Target Portfolio

Following up on my previous post where I tested the performance of an idealized portfolio, here are some more ideas about an actual implementation. In total, 50% would be allocated to stocks, half of that Australian and half of that international. A fifth (maybe more) of the Australian category would be allocated to small cap stocks. Of the remaining 20% portfolio allocation half would go into unhedged funds/stocks and 10% into hedge fund type funds, probably mostly listed hedge funds, such as Cadence Capital (CDM.AX). Of the 25% in international stocks, half would go into hedge funds, primarily Platinum Capital (PMC.AX), which pays franked dividends. Then 25% is allocated to managed futures, probably mostly Winton Global Alpha Fund. This should mostly be held in a superannuation account for tax reasons – pay 15% tax on distributions instead of 47%. That means I am going to need a self-managed superannuation fund.

5% is allocated to gold. This would be held in a taxable account as it doesn't pay dividends. On the other hand, the long-term capital gains rate in superannuation accounts is 10% (and zero after going into pension mode) and my current long-term capital gains rate is 23.5%. If Labor get into power, which is likely, and implement their program, which is less likely, that will rise, though in retirement I expect my marginal tax rate will fall back into the 32.5% bracket but with Medicare tax and Labor's proposal, I would still be paying more than 25% for long-term capital gains. So it makes sense to get more money into superannuation, which is zero taxed in pension mode for the first $1.6 million for each partner. I plan to initially invest about $900k in the SMSF. This will come from rolling over my superannuation fund now at Colonial First State and adding $300k - you can invest 3 years of contributions at once - for each of Moominmama and myself.

The remaining 20% is allocated roughly equally to (mostly direct - i.e. not listed) real estate, bonds, private equity, and cash. Then the whole thing is levered up a bit, with the overall exposure adjusted for market conditions. I expect that debt will be roughly equal to the value of our house ($840k).

To summarize, this is the asset allocation (not including our house):

We are quite a long way from that - in particular very overweight long Australian shares and underweight hedge funds, managed futures, and gold.

Safe Withdrawal Rates

Interesting simulations of safe withdrawal rates over longer time horizons by ERN. The lowest withdrawal rate simulated is 3% p.a. Ed Thorp states that 2% is actually the safe capital preserving withdrawal rate. Our current spending is about 2.75% of estimated total net worth including the inherited money. But I expect our spending to continue to increase faster than inflation for a long time to come.