Superannuation Discussion + market volatility

[JohnK]

What is that interest rate based on? It's only slightly above CPI for the past 10 years (2.66%) and so the interest in your calculation is almost eroding your balance before you even get a chance to. I've seen anywhere from 5-8% generally depending on investment choice, and I'd personally just use whatever the 10 year average your Super Fund uses in your statements/portal, but if you were deliberately subtracting CPI from the returns to show "real" returns, perhaps that is a reasonably accurate figure?

The interest rate I use is based on some made up figure.

My recent Super returns have been at around 7%-8% but I'm not sure what sort of returns to expect in pension phase.

 

[33kft]

My recent Super returns have been at around 7%-8% but I'm not sure what sort of returns to expect in pension phase.

I couldn't tell you the average, but you're being conservative imho. Let's say you earn 8% on your balance per year pre-pension, and you dropped to say 5% in pension phase due to a more conservative investment option, you'd be in real terms up 6.5% in my reckoning, because you're not paying the 15% tax on earnings in Super while in pension phase.

(This makes some big assumptions about your super being a straight up accumulation account)

Others may have a better way of calculating this, but the fund returns advertised are pre-tax rather than post-tax, so I'd definitely adjust the returns to account for that, so that you're looking at it like-for-like.

You also won't have as much/any in the way of contributions so that might impact how the curve looks visually, but you're switching from accumulation to allocation so the mechanics of what drives account balance are quite different.

 

[Pushka]

The interest rate I use is based on some made up figure.

My recent Super returns have been at around 7%-8% but I'm not sure what sort of returns to expect in pension phase.

Higher returns in the pension phase because the tax doesn’t get factored in to the price, assuming you kept the same investment portfolio.

 

[JohnK]

Higher returns in the pension phase because the tax doesn’t get factored in to the price, assuming you kept the same investment portfolio.

True. Haven't yet decided. Currently on the 60's option which I think is defensive but still has some shares.

Need to discuss with financial advisor.

 

[CaptJCool]

True. Haven't yet decided. Currently on the 60's option which I think is defensive but still has some shares.

Need to discuss with financial advisor.

Yes best to do that

If the accumulation phase of super is taxed at 15% and still delivers on average 6-8% pa
Then in pension. Phase of super where it’s taxed at 0%
It must earn more (subject to the transfer balance cap & the proposed $3 million tax)

All the media articles suggest few people do more than spend the accumulated earnings each year during pension phase leaving the bulk of the capital sum at retirement intact and available for inheritance (potentially subject to the tax levied upon death on the inheritors if under 60 years of age)

 

[tgh]

We have lived well ( and travelled J ) on our super pension + some private income and the capital values have increased every year.

I created many "what if" spreadsheets prior to early retirement @55 and , in hindsight, most were more conservative than reality.

We pay not one cent more in external fees than we must; all management and guidance is interior.

Inflation is the major challenge as the headline figures do not reflect reality ; it is not weighted sufficiently by almost everyone offering advice (IMnsHO)

Herewith endeth the sermon...

 

[RAM]

Yes best to do that

If the accumulation phase of super is taxed at 15% and still delivers on average 6-8% pa
Then in pension. Phase of super where it’s taxed at 0%
It must earn more (subject to the transfer balance cap & the proposed $3 million tax)

All the media articles suggest few people do more than spend the accumulated earnings each year during pension phase leaving the bulk of the capital sum at retirement intact and available for inheritance (potentially subject to the tax levied upon death on the inheritors if under 60 years of age)

Under the rules there is a minimum % (related to your age at the time) that you need to take out from your pension balance over time.

Taking 10% out each year from the start is why the balance drops so rapidly. If you have a look at the age-based requirements - the starting % for most.

Under 65 yrs = 4%, 65-74 = 5%, 75-79 = 6%, 80-84 = 7% - you get the picture.

There are a number of free pension calculators online, such as various industry fund sites, most where you can change every underlying assumption to reflect your views (or best/worse/likely cases).

The way I look at it is by working out exactly what has been our spending over the last 3 to 5 years (on a rolling basis). Typically, survey after survey, shows that the 'average' respondent spends anywhere from 3 to 35x as much planning holidays as they do their future financial position.

No, this is not just about planning for their retirement but their finances in the future. The last one I saw had less than 8% had EVER looked into their actual spending over a multi-year period. Around 14% had done this once or twice but just for a single year and mostly when they were looking into getting a mortgage.

Can you (people reading this) say to within a couple of thousand how much you spent last year, the year before etc?

Without knowing these figures & how its broken up then it is very hard to work out what cash flow you'll need in retirement. Equally your spending patterns may change such as decreased/increased spending on transport, lower/higher mileage for cars etc etc.

It's well worth locking away a 90 minute to 2 hour period once a week for however long it takes you to 'audit' your spending and enable you to have an informed position to work out your financial requirements & position going forward.

'An ounce of prevention is worth...'

 

[Pushka]

True. Haven't yet decided. Currently on the 60's option which I think is defensive but still has some shares.

Need to discuss with financial advisor.

We only moved to pension phase in February because I'd wanted to delay drawing down on super. It seemed counter intuitive to start spending that money. I started first, and almost immediately I understood why doing so impacts so positively. I'm spending super in drawdown but it is increasing so much faster than I'm drawing down. It's the taxes. It's always the taxes. Of course if the market fails, as it will, things will change but am enjoying it while I can. Within a month I'd also got MrP to do the same. We plan on only taking out the minimum. Currently. 5%. The amount we draw down from July has increased from last financial year because of the growth since the last assessment (usually June/July) but for us that was Feb/March when we started.

Our major spend is on Travel. If needs must, that can be curtailed immediately. Likely health will do that anyway. And I'm holding out hope that circumstances allow us to minimise the tax debts that anyone inheriting what's left will pay.

 

[JohnK]

We plan on only taking out the minimum. Currently. 5%. The amount we draw down from July has increased from last financial year because of the growth since the last assessment (usually June/July) but for us that was Feb/March when we started.

We all want different things out of retirement. We all have different spending habits.

I don't eat out. I don't drink. I don't smoke and I gamble occasionally. No movie subscriptions. Plus I want to buy 1 more used car in 5-6 years time which should take me through.

My goal is $4000/month retirement income which I'm assuming is going to be close to tax free if that is my only income source. This should be a comfortable lifestyle and I think I can use half or $24000 on 2 trips to Thailand a year. I actually think I can also save money as well.

I can finish on $500,000 super balance at 67 years old and in my mind it's just about enough and can take me through to 80 years old. I also think that at 75 years I won't be spending same money as I'm spending today.

But I also may keep working until 70 years old and wife is 10 years younger and she wants to keep working until 60 years old.

My numbers are not perfect but I'm constantly working on them. I see some calculators mention couples need $84000 for comfortable lifestyle. That's too much for our simple lifestyle.

 

[Pushka]

We all want different things out of retirement. We all have different spending habits.

I don't eat out. I don't drink. I don't smoke and I gamble occasionally. No movie subscriptions. Plus I want to buy 1 more used car in 5-6 years time which should take me through.

My goal is $4000/month retirement income which I'm assuming is going to be close to tax free if that is my only income source. This should be a comfortable lifestyle and I think I can use half or $24000 on 2 trips to Thailand a year. I actually think I can also save money as well.

I can finish on $500,000 super balance at 67 years old and in my mind it's just about enough and can take me through to 80 years old. I also think that at 75 years I won't be spending same money as I'm spending today.

But I also may keep working until 70 years old and wife is 10 years younger and she wants to keep working until 60 years old.

My numbers are not perfect but I'm constantly working on them. I see some calculators mention couples need $84000 for comfortable lifestyle. That's too much for our simple lifestyle.

And you can draw down on super in a pension fund and so minimise tax (so the fund value 'increases free of tax'), while having the accumulation fund for super contributions still continue operating and salary sacrifice your salary into super (as much as you want) and so further reduce your personal tax and Medicare payments.

Depends on your age of course.

 

[andye]

We all want different things out of retirement. We all have different spending habits.

I don't eat out. I don't drink. I don't smoke and I gamble occasionally. No movie subscriptions. Plus I want to buy 1 more used car in 5-6 years time which should take me through.

My goal is $4000/month retirement income which I'm assuming is going to be close to tax free if that is my only income source. This should be a comfortable lifestyle and I think I can use half or $24000 on 2 trips to Thailand a year. I actually think I can also save money as well.

I can finish on $500,000 super balance at 67 years old and in my mind it's just about enough and can take me through to 80 years old. I also think that at 75 years I won't be spending same money as I'm spending today.

But I also may keep working until 70 years old and wife is 10 years younger and she wants to keep working until 60 years old.

My numbers are not perfect but I'm constantly working on them. I see some calculators mention couples need $84000 for comfortable lifestyle. That's too much for our simple lifestyle.

I missed where the age pension fits in to those calculations as with it you shouldn't need a 10% super drawdown for your desired income

 

[SydneySwan]

And you can draw down on super in a pension fund and so minimise tax (so the fund value 'increases free of tax'), while having the accumulation fund for super contributions still continue operating and salary sacrifice your salary into super (as much as you want) and so further reduce your personal tax and Medicare payments.

Depends on your age of course.

You cannot salary sacrifice as much as you want into super. The limit this FY is $30k (2023-4 it was $27.5k).

 

[JohnK]

I missed where the age pension fits in to those calculations as with it you shouldn't need a 10% super drawdown for your desired income

No age pension for me. Well not unless I reach 80 years old.

 

[Pushka]

You cannot salary sacrifice as much as you want into super. The limit this FY is $30k (2023-4 it was $27.5k).

Yes. Of course. You are right. I had in my mind that people moving into retirement wouldn't be working full time hence the lower salary supplemented by pension, likely in JohnK future scenario. And mine now. And that amount includes the SG as well.

Post automatically merged: Jul 21, 2024

I missed where the age pension fits in to those calculations as with it you shouldn't need a 10% super drawdown for your desired income

The aged pension is pretty much out of reach for most people these days. Maybe seniors health care card is it. No assets test there.

 

[Buzzard]

The aged pension is pretty much out of reach for most people these days. Maybe seniors health care card is it. No assets test there.

+1 and I have the health care card.
It doesn't get you a lot, even some specialists don't accept it. It is however better than nothing.

 

[Pushka]

+1 and I have the health care card.
It doesn't get you a lot, even some specialists don't accept it. It is however better than nothing.

I spend a lot on prescriptions each month. Around $100. That will cut back to $25 I think. But dealing with Centrelink is exhausting.

 

[andye]

Yes. Of course. You are right. I had in my mind that people moving into retirement wouldn't be working full time hence the lower salary supplemented by pension, likely in JohnK future scenario. And mine now. And that amount includes the SG as well.

Post automatically merged: Jul 21, 2024

The aged pension is pretty much out of reach for most people these days. Maybe seniors health care card is it. No assets test there.

I'm sure the AFF demographic is skewed to ineligibility but I thought there were a lot of people receiving at least part pension

 

[Pushka]

I'm sure the AFF demographic is skewed to ineligibility but I thought there were a lot of people receiving at least part pension

I don't know of anyone in my circle who qualifies. Of course the couples worked all of their lives, so that accumulates assets, like a house , but that working career pretty much precludes them from qualifying. Some of my friends you'd expect not to qualify (specialists etc) but it has surprised me of others who don't. Maybe singles qualify more easily?

So I just did a dummy calculation.
Couple with $600,000 each in super. Income per year of $10000 each. Home but with mortgage. Personal assets - furniture car etc of $20,000 Savings of $30,000. Is this couple rich? Nope. No pension.




I tried again with Zero income. So only the super fund balance. Still no.

It seems like anything more than $450,000 super (total for couple) cuts you out of pension, with minimal cash in bank and 'assets'

 

[RAM]

I don't know of anyone in my circle who qualifies. Of course the couples worked all of their lives, so that accumulates assets, like a house , but that working career pretty much precludes them from qualifying. Some of my friends you'd expect not to qualify (specialists etc) but it has surprised me of others who don't. Maybe singles qualify more easily?

So I just did a dummy calculation.
Couple with $600,000 each in super. Income per year of $10000 each. Home but with mortgage. Personal assets - furniture car etc of $20,000 Savings of $30,000. Is this couple rich? Nope. No pension.
View attachment 398668



I tried again with Zero income. So only the super fund balance. Still no.

It seems like anything more than $450,000 super (total for couple) cuts you out of pension, with minimal cash in bank and 'assets'

Which tallies with several 'Planning your retirement' seminars we've attended put on by various industry funds.

Given how low the Aged Pension is - shouldn't everybody's aim be to achieve the highest retirement savings subject to being able to sleep at night (aka not worrying constantly about exactly what you're invested in & whether the markets are about to crash). When I've talked with friends etc I always describe the Aged Pension as disaster insurance than we pay a small premium for through our working life. Just like any insurance - the best outcome is never having to claim.

The financial planners presenting the 'Preparing for retirement' virtually always talk about aiming to maximise your access to the age pension seemingly as the No.1 goal of retirement planning.

Sadly, there was an almost identical type of tunnel vision I encountered with Super fund trustees (both Industry fund and company funds) and their 'advisors' except it was directed at paying the least tax on earnings. I always countered with the real life example of AMP No.2 Fund vs BT Australia Retirement Fund (no longer the case since the early 1990s but relevant example).

For the period from 1969 to 1989 the AMP No.2* Fund paid less tax (most of the time there was no Super Tax of course) than BTAR did. However a series of mandatory redeemable preference share private placements I arranged ended up cutting the amount of Super Tax BT paid by around 40% for a number of years.

* IIRC #1 fund was for Life Insurance & #2 was for Superannuation, it's been a while.

AMP did not pay a smaller relative amount of tax because of clever management, in fact the exact opposite. AMP underperformed BTAR for every rolling 3 year period within that 20 year period, in fact for a company (as many Australian companies did thanks to some creative marketing by AMP) that had placed the same amount with each in 1969 (for example) - by the end of 1989 they had 2.5x the balance (IIRC) with BTAR than AMP BUT had paid less Super Tax on the money with AMP.

Which is the better outcome?

The first few times we rolled out this graph and following slide showing the 3, 5, 7, 10, 15 and 20 yr cost (after all fees & taxes) to a company due to having AMP instead of BTAR - every Wholesale Consultant attedning the Trustee Board meeting said we were wrong. Many Companies sacked those consultants shortly thereafter but we never mentioned that every Wholesale Consulting group (Mercers, Towers Perrin, Forster Crosby, Russell, Aon, etc etc) had done exactly the same with their clients.

Post the early 1990s - the wheels fell off BT. Believing your own PR is always fatal, equally the team size went from 27 (IIRC) on the Investment side (including 2 marketing) to over 50 (5+ marketing) by the mid 1990s.

Just coincidentally, of course, I left in June 1990. Kerr Neilson a few years later but he'd moved out of wholesale some years earlier to focus solely on the Retail Equity fund business, situated around other side of Level 44 next to the retail admin & marketing team.
______________________________________________________
If you never get to access the Age Pension then you've done well!

Just like if your family never collects on Life Insurance.

 

[Pushka]

Which tallies with several 'Planning your retirement' seminars we've attended put on by various industry funds.

Given how low the Aged Pension is - shouldn't everybody's aim be to achieve the highest retirement savings subject to being able to sleep at night (aka not worrying constantly about exactly what you're invested in & whether the markets are about to crash). When I've talked with friends etc I always describe the Aged Pension as disaster insurance than we pay a small premium for through our working life. Just like any insurance - the best outcome is never having to claim.

The financial planners presenting the 'Preparing for retirement' virtaully always talk about aiming to maximise your access to the age pension seemingly as the No.1 goal of retirement planning.

Sadly, there was an almost identical type of tunnel vision I encountered with Super fund trustees (both Industry fund and company funds) and their 'advisors' except it was directed at paying the least tax on earnings. I always countered with the real life example of AMP No.1 Fund vs BT Australia Retirement Fund (no longer the case since the early 1990s but relevant example).

For the period from 1969 to 1989 the AMP No.1 Fund paid less tax (most of the time there was no Super Tax of course) than BTAR did. However a series of mandatory redeemable preference share private placements I arranged ended up cutting the amount of Super Tax paid by around 40% for a number of years.

AMP did not pay a smaller relative amount of tax because of clever management, in fact the exact opposite. AMP underperformed BTAR for every rolling 3 year period within that 20 year period, in fact for a company (as many Australian companies did thanks to some creative marketing by AMP) that had placed the same amount with each in 1969 (for example) - by the end of 1989 they had 2.5x the balance (IIRC) with BTAR than AMP BUT had paid less Super Tax on the money with AMP.

Which is the better outcome?

The first few times we rolled out this graph and following slide showing the 3, 5, 7, 10, 15 and 20 yr cost to a company due to having AMP instead of BTAR - every Wholesale Consultant attedning the Trustee Board meeting said we were wrong. Many Companies sacked those consultants shortly thereafter but we never mentioned that every Wholesale Consulting group (Mercers, Towers Perrin, Forster Crosby, Russell, Aon, etc etc) had done exactly the same with their clients.

Post the early 1990s - the wheels fell off BT. Believing your own PR is always fatal, equally the team size went from 27 (IIRC) on the Investment side (including 2 marketing) to over 50 (5+ marketing) by the mid 1990s.

Just coincidentally, of course, I left in June 1990. Kerr Neilson a few years later but he'd moved out of wholesale since early to mid 1989 to focus solely on the Retail Equity fund business.
______________________________________________________
If you never get to access the Age Pension then you've done well!

Just like if your family never collects on Life Insurance.

We are with HESTA. Whenever they do their online projections about my finances, they ALWAYS factor in the aged pension even though they are inserting my current balance which automatically disqualifies me.

We had a good accountant in the 90's. He set up our SMSF way back then. His goal was to ensure that none of his clients qualified for the aged pension.

But the way the advertisements for all kind of aged care products factor in, no, assume that the aged pension is 'enjoyed' by most is annoying.

Until you start doing the actual calculations I think most younger people assume once you hit the pension age, then bingo.

And this is why we have a level of older people who may be asset 'rich' but are struggling with the cost of of living as they get no relief from the Govt unless on the aged pension. And they did not get the full employment cycle of SG payments until well into their career.