Superannuation Discussion + market volatility

[Jacques Vert]

While I agree with your point about spending too fast in general your analysis seems to have an aim of maintaining your capital value which means you will have a substantial amount of money to pass on to your dependants. While I appreciate there might be other reasons for this (i.e.its hard to estimate how long you will live) that's not the intent of superannuation. The intent is you live those 30+ years and when you die you have spent it all. Agree that's hard to do in practice but that is still what is intended from superannuation.

I appreciate your comments. However, I come at it from a slightly different perspective.

My aim is indeed to maintain the value of our capital (in inflation adjusted terms), but the primary reason is NOT to pass on a substantial amount of money to my dependents. (They are doing fine by themselves). The primary reason for aiming to maintain our capital is be able to continue to fund our lifestyle indefinitely. The only way to do this is to maintain the real value of our capital. If we are able to maintain the real value of our capital then a secondary effect will be that there is money that will be passed on; but that is NOT the primary aim of our strategy.

We hope to NOT have to fall back on the age pension at any time but who knows.

So I would submit that my strategy does in fact meet the aims of superannuation and that one should not be expected to spend it all before one dies.

I'm enjoying the discussion BTW.

 

[cove]

I am almost at break even on Westpac. All the bad banking news didn’t help Meanwhle they are still making money and they haven’t had to ditch their CEO nor the Board of Directors so I remain positive that it will come good one day.

 

[PDog]

The primary reason for aiming to maintain our capital is be able to continue to fund our lifestyle indefinitely. The only way to do this is to maintain the real value of our capital. If we are able to maintain the real value of our capital then a secondary effect will be that there is money that will be passed on; but that is NOT the primary aim of our strategy.

Me too. Plus I intend retiring well before the traditional age, so I like to think of my retirement as 'indefinite'!

+1 to also enjoying the discussion, thanks everyone

 

[RB]

You're unique in that you hold investments and cross reside in Australia and PNG. Whilst holding investments in multiple countries isn't unique, it's more common to be a tax resident of one and for the country where investments are held to be either the UK or US, primarily just due to statistics of expats.

I'd suggest the easiest first step is finding a CFP, as you know at least they will have come across this in their studies. If they haven't provided specific advice in this area, they've at least passed a rather stringent course on the subject (albeit mixed with some other content, most of which would likely be relevant anyway). The high level strategies typically won't change depending on the location of your investments, but more so the tax treatment and thus the available strategies to deploy.

Here's the link - Find a financial planner - The Financial Planning Association of Australia

I see there's about 60 within a 10km radius of Broadbeach.

From there you can quickly spot the ones with obvious alignment to a potential source of a conflict i.e. a bank. If you have a look around and find a few you like the look of from website, bios etc. you can then e-mail or call to confirm if they are self licensed or not and ask if they've dealt with situations similar to yours / would be comfortable dealing with that scope of advice. Meet with a couple and see who you gel with and instils the most confidence in you.

Full disclosure, I am a financial adviser at a self licensed firm, who is nearing the completion of my own CFP studies and my practice has a satellite office on the Gold Coast. I did however check and neither myself or my colleagues show up in the search referenced.

I'm obviously bias towards advice from self licensed advisers with post-graduate qualifications based on my own beliefs of what financial advice is. I'm sure some disagree with me (though imagine a majority would agree), so please take what I say with a pinch of salt, given my standing in the industry.

As you say, people need to make their own weightings of experience/self licenced/local office. I think the way the industry has evolved over time also has had an impact on those weightings-commission/fee based/access to platforms etc.
I hope that people do not delete potential planners from their reckoning purely on the basis that they are not self licenced- maybe I am an old fart but I have a leaning to someone who has a few runs on the board ( and a few other hoops they need to jump through). Perhaps it is because of the stage of life I am at
Keep in mind these thoughts of mine don't just apply to the Financial Planning industry but to a lot of things in life. We are currently building a home & I have been very impressed by the knowledge of many people we have encountered yet others have left me totally underwhelmed

 

[cove]

My eldest brother has all of his superannuation funds in international shares and bonds. That is a problem if the exchange rates move against him if he doesn’t have currency hedging in place. With eldest brothers you might mention that but they are always right.

 

[burmans]

My aim is indeed to maintain the value of our capital (in inflation adjusted terms), but the primary reason is NOT to pass on a substantial amount of money to my dependents. (They are doing fine by themselves). The primary reason for aiming to maintain our capital is be able to continue to fund our lifestyle indefinitely. The only way to do this is to maintain the real value of our capital. If we are able to maintain the real value of our capital then a secondary effect will be that there is money that will be passed on; but that is NOT the primary aim of our strategy.

This is where I would disagree, there are products out there which aim to give an income stream for life without preserving capital so this can be done. Essentially these are like an insurance product, i.e. some people live a long time, some a short time but by insuring a pool you get an average result.

Don't get me wrong, this is a pretty sparse area of the market and can/should be enhanced but I feel this is where the answer to this particular problem needs to be found. The alternative you propose, while it achieves the outcome desired, actually massively over achieves it and for most people is just not viable. A 4% a year indexed for life is in my view much more achievable that 7% in the current market.

 

[Jacques Vert]

This is where I would disagree, there are products out there which aim to give an income stream for life without preserving capital so this can be done. Essentially these are like an insurance product, i.e. some people live a long time, some a short time but by insuring a pool you get an average result.

Don't get me wrong, this is a pretty sparse area of the market and can/should be enhanced but I feel this is where the answer to this particular problem needs to be found. The alternative you propose, while it achieves the outcome desired, actually massively over achieves it and for most people is just not viable. A 4% a year indexed for life is in my view much more achievable that 7% in the current market.

Yes we must agree to disagree: I do not believe in loosing control of the asset.

However, I do agree that the annuity space is under-developed and they may suit those who don't want the hassle and worry of managing their own money in retirement. I note how many adds there are from industry super funds, etc.saying "give me your money" and very few adds from funds in relation to products that are designed for when you retire and stop contributing.

 

[cove]

One of the leading annuity suppliers to the market has a 1% return built into the product they sell. An actuary can work it out so just be careful.

 

[JohnK]

How many people travel in their late 70's?

If I plan on retiring at 60 then need to have a target for 16 years of spending until 76 years of age. Not sure I'd be able to travel much or play golf past that age.

If one ends up with $500,000 supperannuation savings then can plan on withdrawing $30,000 in first year (tax free?) and increase that by 2% each year whereby in the 16th year the withdrawal would be just over $40,000 which would still be tax free? Assuming a very modest return of 2% each year that leaves a little in the fund at 76. Better returns and the balance left over would be much greater.

What is one likely to spend past 76 years of age? Think the rent earned from 1 apartment should be enough?

Work in progress.

 

[get me outta here]

Also, I suspect that if it looks like Trump is losing support / credibility the US share market may move against him.

My eldest brother has all of his superannuation funds in international shares and bonds. That is a problem if the exchange rates move against him if he doesn’t have currency hedging in place. With eldest brothers you might mention that but they are always right.

 

[get me outta here]

My plan at that age would be to do the closer to home trips which may be o/s or not.

How many people travel in their late 70's?

 

[Pushka]

How many people travel in their late 70's?

If I plan on retiring at 60 then need to have a target for 16 years of spending until 76 years of age. Not sure I'd be able to travel much or play golf past that age.

If one ends up with $500,000 supperannuation savings then can plan on withdrawing $30,000 in first year (tax free?) and increase that by 2% each year whereby in the 16th year the withdrawal would be just over $40,000 which would still be tax free? Assuming a very modest return of 2% each year that leaves a little in the fund at 76. Better returns and the balance left over would be much greater.

What is one likely to spend past 76 years of age? Think the rent earned from 1 apartment should be enough?

Work in progress.

How are you planning on funding any residential care needs? You can’t control health to not have to consider this. Anything can happen.

 

[Deleted member 29185]

What is one likely to spend past 76 years of age? Think the rent earned from 1 apartment should be enough?

I think the resounding answer a few pages back when I asked the same thing was ... health care! As we age more, we tend to break more and perhaps the rental return on an apartment may not be sufficient.

Oops, apologies to Pushka. I should have checked I was actually reading the last page of replies (which I wasn't)!

 

[JohnK]

How are you planning on funding any residential care needs? You can’t control health to not have to consider this. Anything can happen.

No plan. Hoping wife and daughter can take care if me and Medicare and private health fund to cover the rest.

P.S. How can you possibly plan for something like aged health care? I'm not a multi millionaire. Do you plan for worst case scenario, moderate or not so severe? Worse case is to sell up investments and hope for the best. I love my daughter but she can't have everything. She may have to work 6-7 years in her 20's then retire.

 

[Pushka]

No plan. Hoping wife and daughter can take care if me and Medicare and private health fund to cover the rest.

P.S. How can you possibly plan for something like aged health care? I'm not a multi millionaire. Do you plan for worst case scenario, moderate or not so severe? Worse case is to sell up investments and hope for the best. I love my daughter but she can't have everything. She may have to work 6-7 years in her 20's then retire.

While I plan on never entering aged residential care I would not want family members caring for me either. I need a magic bullet. Having seen what care elderly need then no way would I want family doing that.

 

[JohnK]

While I plan on never entering aged residential care I would not want family members caring for me either. I need a magic bullet. Having seen what care elderly need then no way would I want family doing that.

I wouldn't want to be in Aged care facility either. Is not easy being a burden but I think my wife would look after me. She has taken care of elderly before.

P.S. I also promised that I would take care of mum and dad if needed.

 

[Fifa]

I have a similar plan to get me outta here with the addition of luxury hotels where I can relax and enjoy the club lounges .

 

[Deleted member 29185]

How can you possibly plan for something like aged health care?

I think this is a good discussion point. How do you? We can plan for necessary living expenses based on what we know, however health care is something we don't know until it happens. I know in both of my grandmothers cases, the sale of their home and their pensions paid for ongoing aged care and Medicare and perhaps health insurance (?) paid for their health care. One passed away in a retirement village and one in a nursing home. My own father passed away suddenly with only death expenses and my mother now lives in a retirement village (which she loves), which was paid for by the sale of her home and is one of those places one buys into, but is told not to expect anything on the sale of the property at the other end. I'm not quite sure how that works, but what it does mean is that she is enjoying a great lifestyle now and is actually cheaper in outgoings than her own home was. I have no idea what happens if she ends up needing more health orientated aged care into the future (eg. a nursing home).

One of the problems with aged care and super for that matter, is that the goal posts seem to continually move. How does one plan with any certainty, or is the concept mainly to stash a great wad of cash and hope it lasts?

 

[cove]

I think the superannuation stash should come from two sources to get to the highest tax sheltered level. Firstly make sure your employer is correctly paying at least 9.5% of your ordinary time earnings. Next and only if you can afford it do a salary sacrifice to bolster the contribution. In most cases that can be tax effective.
Getting your non tax deductible home loan to zero or about $100 balance is a target for everyone who has a home loan. Leaving a balance so that you can redraw the loan can be helpful and once you are at that point make sure your home is insured for the correct value.
Interest rates in 2017 are modest so you should use this time period to save and reduce your debt rather than taking on more debt because you can afford the payments.
How’s that for a conservative view.......

 

[voulez]

My eldest brother has all of his superannuation funds in international shares and bonds. That is a problem if the exchange rates move against him if he doesn’t have currency hedging in place. With eldest brothers you might mention that but they are always right.

There's some merit to your brother's wisdom! Unhedged FX introduces a new source of risk to the portfolio, but potentially increases diversification (reduces the overall level of risk), especially if the asset class you're looking to hedge is more volatile than FX. E.g., if I was an Australian investor expecting cash-like returns from a US term deposit, I'd fully hedge the USD exposure (ignoring transaction costs for the moment). Conversely, international shares exhibit higher volatility to FX movements so leaving the FX exposures unhedged may result in overall risk reduction.
An investor who expects a rise in AUD should hedge his FX exposures, since a high AUD results in lower overseas returns once translated back to AUD. Vice versa.
Another factor to consider is home currency bias. The AUD has historically been correlated with international shares (both tend to move in the same direction). If I view international shares as expensive and bound for a correction, leaving my FX unhedged provides a cushion for the expected correction since I am expecting a corresponding fall in AUD. A Japanese investor may do the opposite as the JPY (safe haven currency) tends to move in opposite direction to international shares.
Most international shares strategies offer both unhedged and hedged options. It is not uncommon for advisors to recommend a 50/50 split, or maybe a 80/20 in a doomsday scenario. Bond strategies, on the other hand, do not offer hedging options as FX decisions are usually made by the portfolio managers.
TLDR: FX hedging should be treated as an asset allocation decision, dependent on risk/return assumptions.