Superannuation Discussion + market volatility

[Radio8tiv]

I too was looking at, and have started making moves to hostplus superplus, however exelladdict if you are after LICs from Wilson asset management like WAX, WAM, WLE etc. they are not an option, you can only choose out of a very small list of 3 LICs AFI, MLT, and ARG.

 

[Buzzard]

With ING direct's super fee structure changing (adding a $60 plus 0.64% admin and 0.25%+ investment fee) at 30 June I thought it was a good time to review. I also seem to be being sent a message with three separate podcasts I listen to singing the praises of passive index funds. Jack Bogle seems to be on an online speaking tour.

Statements like "not many fund managers outperform the market average, especially when you take fees into account" now have me reconsidering semi-smsf options like Hostplus Choiceplus with fixed fees around $250pa with the thought of diverting a large portion to index ETFs with fees around 0.15-0.25%.

Questions for the brains trust:

• What additional risks would I be taking with something like the Vanguard Australian Shares Index (VAS) that I wouldn't already be exposed to?
• Would you consider indexes like this 'set and forget' or would you rebalance them yourself?
• Has anyone done anything similar and have pitfalls or stories to share?

Or perhaps more importantly: Am I falling for the 'think I know what I'm talking about' trap and I'd be better off in a generic balanced fund? Recent visits to a financial advisor with a relative reminded me that there's rarely a silver bullet, and that if something was really a fantastic deal everyone would be doing it.

I'm about to put my super into pension mode so I don't pay 15% tax on the earnings. Because I don't need the funds I need to draw down, I'm considering a range of ETFs to place those funds into.
I will rebalance annually to keep the ratio the same.

 

[CaptJCool]

The risk v reward equation.

The higher the likely reward on offer, the higher the risk.
Future Fund | How We Invest
This gives a really good summary of different investment classes and investment model in a page

Consistently over a long period of time shares were a good option because of franked dividend streams and capital gains. Where USA shares, timing of the purchase can also deliver a foreign exchange gain in addition to the capital gain. And these are core investments for the public sector superfunds
Future Fund | Investment Performance Has the underlying investment % goals... CPI Plus 4.5%...

The fees unless flat are inevitably higher where a good return is generated. Treat it as the managers performance bonus and you won't need sweat the small stuff.
You may find this resource of interest
Managed funds fee calculator | ASIC's MoneySmart

One other thing I picked up recently
Directors share sales are public data. It's the closest to being on the inside you can get
Originally found here The only insider information on ASX companies that's legal
Directors' Transactions

All those links are about a 10-15 minute read

PS I'm no financial advisor and in PS defined benefit fund so they're takin' care of business very nicely. They still charge various fees including one as a % of investment so think of paying fees to any advisor as an investment in your future passive income stream rather than a sunk cost....

 

[voulez]

What additional risks would I be taking with something like the Vanguard Australian Shares Index (VAS) that I wouldn't already be exposed to?

If you're in ING's Balanced option, the asset classes (including Australian shares) are managed passively by State Street, i.e. similar to Vanguard's VAS. The difference is with Choice Plus, you'll be responsible for your own asset allocation (split between Australian shares, international shares, fixed interest, etc.).

Would you consider indexes like this 'set and forget' or would you rebalance them yourself?

Quick illustration, if you start with $40 ETF A + $40 ETF B, and in a year, the former doubles but the latter halves - you end up with $80 A + $20 B, a significant deviation from the target 50/50 allocation. Rebalancing incurs transaction costs (brokerage) and involves selling the outperforming ETF A to invest in the underperforming ETF B (while counterintuitive, fits the adage of selling high and buying low). Should you not rebalance, your portfolio will be concentrated in ETF A which is likely out of line with your risk profile (e.g. say A was shares and B was cash). Right or wrong, financial planners generally recommend annual rebalancing.

Or perhaps more importantly: Am I falling for the 'think I know what I'm talking about' trap and I'd be better off in a generic balanced fund?

No two balanced funds are the same. ING's Balanced fund employs static allocation using passive investments (similar to VAS). Hostplus' Balanced fund employs semi-static allocation using active investments. Or you could use Choice Plus and decide on asset allocation, when/if to rebalance, etc. Fee-wise: Hostplus Balanced (at 1.4%!) > ING Balanced > Choice Plus. 12m performance to June 2017: Hostplus Balanced (13.2%) > ING Balanced (8.3%) - where would your own concoction via Choice Plus sit? Some fees are worth paying - Hostplus Balanced is notoriously expensive for an industry fund but it has delivered superior after-fee results to its peers.

"not many fund managers outperform the market average, especially when you take fees into account"

The active vs passive preference is not unakin to one's preference to risk taking. Simplistically, do you prefer a) low fees and similar returns to everyone else; or b) higher fees with the potential to both outperform and underperform. A compromise could be to split your mix, e.g. 70% passive and 30% active. Re Bogle, it's interesting to note while he initially founded Vanguard as a passive investing firm, it has since grown to US$4 trillion in asset under management, of which one third comprises active funds!

Everyone has their individual set of needs/biases/experiences, so expect a range of responses to your questions. An ideal planner would assess your needs, risk tolerance/willingness and (on the matter of investing) accordingly unbiasedly advice on the appropriate structure/product, asset allocation, active vs passive allocation, and appropriate investments within active/passive.

 

[theblank]

What's behind the choice for LICs - better returns?

I dont have the time or dedication to make my own investment research. I generally let my uncle give me some advice, as he is a full time investor and has the time and I like his methods. He introduced me to Wilson LIC's and he has taken quite a liking to them, and I have followed suit.

The one advantage Wilson has over other LIC's and managed funds is that they have no limits on how much cash they can hold. Most or all others cant do that. During the GFC, WAM went to 70% cash in their holding. If there is another 'crash' then they have the option of doing that again.

 

[cove]

Getting to $3.2 million of superannuation for a couple by the time you are ready to retire is the target. If you get there the continuing of investing should produce enough tax free pension provided you don’t become that lender called the Bank Of Mum and Dad and lose a chunk of those funds. Over time I have found investing in the stock market to be ok but it is hard to get better than 8 out of 10 calls correct.In our fund we have two small losers out of a dozen shares and bonds and they all pay interest or a dividend. I find having some losers helps make you realise that you are not a guru as that is dangerous.
I have appreciated the SMSF accountants at E Super but I am careful who I mention them to as quite a few folks cannot handle running their own self managed super fund.

 

[Deleted member 29185]

Getting to $3.2 million of superannuation for a couple by the time you are ready to retire is the target.

Without intending to question Coves wisdom, I'd just like to ask the collective as to who agrees with this statement? I've asked many people and it seems like all I really get is a talk fest of possibilities. $3.2m seems like a definite figure to aim at, but is it accepted wisdom for the majority as being a basis for a survivable retirement income, or just one persons take on what they personally may need, like, want?? (certainly not meaning to be rude, as I have no idea, but it just seems that it is a figure many, in say the 50+ age bracket, won't achieve).

 

[Jacques Vert]

Without intending to question Coves wisdom, I'd just like to ask the collective as to who agrees with this statement? I've asked many people and it seems like all I really get is a talk fest of possibilities. $3.2m seems like a definite figure to aim at, but is it accepted wisdom for the majority as being a basis for a survivable retirement income, or just one persons take on what they personally may need, like, want?? (certainly not meaning to be rude, as I have no idea, but it just seems that it is a figure many, in say the 50+ age bracket, won't achieve).

$1.6m x 2 = $3.2m

Of course 1.6m is the maximum an individual is allowed to have in the account that pays them a pension. Anything more than that can be kept in an accumulation account and taxed accordingly, or invested outside of super.

EDIT: The $1.6m limit can be exceeded by growth of the investments. This is a complex area and good advice is required. The above post is general in nature and is NOT advice (good or otherwise).

 

[cove]

That $3.2 million for a couple merely represents a Government imposed limit of the amount that is sheltered from further income tax. You can certainly have much less or more.
Women have the biggest issue with superannuation if they have stopped work to rear children for a number of years. It is not uncommon for a woman to have little in superannuation.
New rules on contribution maximums per year do make that $1.6 million per person way harder. The 9.5% of salary certainly needs a salary sacrificed co-contribution to help make the nest egg grow and if you do that the earlier the better. Ten percent return compounding doubles the funds roughly every 7 years but we now live with low interest rates so ten per cent could put you into high risk.
I am disgusted with Phoenix employers avoiding paying the 9.5% superannuation contribution and then filing bankruptcy or liquidation.
Of course this is not financial advice.......

 

[Deleted member 29185]

Ah, thanks. That now makes it clear. So is there a figure that is generally considered to be the absolute minimum a retiree (who owns their own house and are debt free) can modestly live on? (in today's dollars)

 

[cove]

Everyone has different circumstances so there is definitely no single answer. No one size fits all.
If I am talking with young folks entering their working years and the subject of superannuation comes up I do mention that a co-contribution will certainly help.
I do also tell them to drive a car that doesn’t cost the earth and more as cars depreciate quickly. The concept of driving the least expensive car that your ego will allow came from a financial planner friend many years ago.
Salary sacrificing is a tax efficient way of contributing to superannuation in most cases but seek advice from a trained professional rather than at a barbecue or coffee shop.
This is not financial advice.....

 

[Jeffrey O'Neill]

Getting to $3.2 million of superannuation for a couple by the time you are ready to retire is the target.

One way to answer the question as to what's enough is to determine the lifestyle you want in retirement. If you want the glossy brochure version of overseas holidays and eating out every week then you're annual expenses could be around 100K a year for a couple. In a financially repressed world and wanting to avoid loses on your super you might decide to take a conservative investment tack and say budget for a 4% income stream. To achieve that gross figure would require around $2.5M in the bank.

If you're a couple who's happy with a less ambitious lifestyle you might think $60K a year for a couple is fine, which means you may only need around $1.5M in your super fund.

Now the other thing to consider is how long do you believe you'll live for. The average is just that, and is in fact artificially lowered by infant deaths, and for men by the youthful indescretions of our teen years which sees us die off young more than women. If you retire and 65 you prob need to think your money needs to last for 30ish years.

I often see people ignore the ability to draw more from their super balance than the income it generates. Often super is treated as a form of generational wealth transfer, which is fine if your finances allow this, but too often I see elderly parents living very frugally to live within the income generating potential of their assets. Maybe take the SKI approach to a degree???

Personally I question how much Govt support will be available in 20 years time. Roughly 20% of the budget already goes for spending on the aged, and this is increasing at around 7% a year, which for a country growing GNI at 1/3 that rate is not sustainable in the long term, so I'd discount much in the way of Govt assistance if you're retirement plans are 15+ years in the future. At the very least the primary residence will have to be included in the pension assets test.

 

[Pushka]

Without intending to question Coves wisdom, I'd just like to ask the collective as to who agrees with this statement? I've asked many people and it seems like all I really get is a talk fest of possibilities. $3.2m seems like a definite figure to aim at, but is it accepted wisdom for the majority as being a basis for a survivable retirement income, or just one persons take on what they personally may need, like, want?? (certainly not meaning to be rude, as I have no idea, but it just seems that it is a figure many, in say the 50+ age bracket, won't achieve).

There is no way whatsoever I could achieve that.

 

[Jacques Vert]

I agree with the comments from Cove and Jeffrey above.

I would add that a good place to start is to do a budget including everything (and I mean everything) to work out what your after tax spending is (or will be in retirement). Then divide this by 0.04 to give you the amount you need invested to produce that income (that is, 4% as Jeffrey has suggested). And this is assuming that your investments are in a tax-free environment such as a super pension when you meet the age requirements, etc.. If you have to pay tax then the amount of your investments will need to be higher (or you can reduce your spending).

Of course, this is not financial advice.

 

[CaptJCool]

Super & retirement calculators | ASIC's MoneySmart
There's some independent calculators here. Can give you guidance for spending when you no longer work.

Bear in mind age pension for two is around $34,000 plus carer's allowance of $7,000 which means you'd need $1 million to self-fund !!

plus of course health Medicare is free plus {{meta.og.title}}.
These you must make an income based contribution for upto 6 years. On age pension, it's $10 a day, $70 a week, $$3,640 a year. {{meta.og.title}}

 

[QF WP]

I dont have the time or dedication to make my own investment research. I generally let my uncle give me some advice, as he is a full time investor and has the time and I like his methods. He introduced me to Wilson LIC's and he has taken quite a liking to them, and I have followed suit.

Hello cousin

The one advantage Wilson has over other LIC's and managed funds is that they have no limits on how much cash they can hold. Most or all others cant do that. During the GFC, WAM went to 70% cash in their holding. If there is another 'crash' then they have the option of doing that again.

An unconstrained approach to asset allocation - first really pushed in the Australian market by Kerr Neilson (Platinum Asset Management) and has become more popular in recent times of lower performance expectations in growth markets.

 

[QF WP]

I'm about to put my super into pension mode so I don't pay 15% tax on the earnings. Because I don't need the funds I need to draw down, I'm considering a range of ETFs to place those funds into.
I will rebalance annually to keep the ratio the same.

Then I hope you have considered annual income payments from your pension (as you don't need the income, it will give the portfolio longer time to grow) and dependent on your age and retirement status, whether you have considered a re-contribution strategy (income received contributed back into super and then back into pension phase)

 

[QF WP]

Super & retirement calculators | ASIC's MoneySmart
There's some independent calculators here. Can give you guidance for spending when you no longer work.

Bear in mind age pension for two is around $34,000 plus carer's allowance of $7,000 which means you'd need $1 million to self-fund !!

plus of course health Medicare is free plus {{meta.og.title}}.
These you must make an income based contribution for upto 6 years. On age pension, it's $10 a day, $70 a week, $$3,640 a year. {{meta.og.title}}

Plus the ASFA Retirement Standards: Retirement Standard - ASFA

What is considered a modest and comfortable retirement lifestyle for retirees?
A modest retirement lifestyle is considered better than the Age Pension, but still only able to afford fairly basic activities.

A comfortable retirement lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.

Both budgets assume that the retirees own their own home outright and are relatively healthy.

 

[QF WP]

Getting to $3.2 million of superannuation for a couple by the time you are ready to retire is the target.

That is the ultimate objective now espoused, but only reached by ~5% of the population. Most people (like some have already noted here) see it as unattainable given their balance, future contributions and lack of time & inclination (and supposed high cost of advice).

If you get there the continuing of investing should produce enough tax free pension provided you don’t become that lender called the Bank Of Mum and Dad and lose a chunk of those funds.

Now a problem for the Baby Boomers. Hopefully they have sufficient sitting in cash to operate the Bank, without having to dip into their pension funds

Over time I have found investing in the stock market to be ok but it is hard to get better than 8 out of 10 calls correct.In our fund we have two small losers out of a dozen shares and bonds and they all pay interest or a dividend. I find having some losers helps make you realise that you are not a guru as that is dangerous.

A very high target @cove, as most active fund managers hope to achieve in the vicinity of 60-65% and are never looking to enter at the absolute bottom or exit at the absolute top. My father has always quoted "leave something in it for the buyer, lest you have no buyer"

 

[QF WP]

Everyone has different circumstances so there is definitely no single answer. No one size fits all.
If I am talking with young folks entering their working years and the subject of superannuation comes up I do mention that a co-contribution will certainly help.
I do also tell them to drive a car that doesn’t cost the earth and more as cars depreciate quickly. The concept of driving the least expensive car that your ego will allow came from a financial planner friend many years ago.
Salary sacrificing is a tax efficient way of contributing to superannuation in most cases but seek advice from a trained professional rather than at a barbecue or coffee shop.
This is not financial advice.....

Co-contribution makes sense up to the point that the Government contribution is paid (co-contributions stop when income exceeds $51,813): for reading up on this, start here: Super co-contribution

For income over that threshold (or even less depending on individual circumstances), from 1 July 2017 personal contributions can now be tax deductible (which may give a better "return")

Completely agree, a car is a depreciating asset so invest as little as practicable in those assets.