Saving | Slack Investor

Money Makes Money – and November 2024 – End of Month Update

My Dad was an amateur finance bloke and would often spend the quiet hours of the night with a notebook and reading matter that would usually have the theme of unlocking great wealth for his family. One of his sayings was:

‘Money Makes Money’ – My Dad

We were from a large family and there were always sufficient ‘outgoings’ to make sure that my Dad never really got to test the theory on his own funds. But, he believed that if only he could amass a chunk of money, then this could be invested wisely and, it would keep on growing and, he would never have to worry about money, ever again!

He had seen many examples of the rich getting richer. People with money increasing their wealth in a seemingly effortless fashion e.g. A Sydney harbourside home bought for $10 million selling for $26 million four years later. He was also a fan of Noel Whitaker and bought one of the first editions (in 1987!) of Noel’s great book Making Money Made Simple. My Dad understood the simple truth of saving more than you earn, investing these savings and letting the compounding do its work over time. Although it takes more time than harbourside investing, Noel’s advice still holds up.

I have since learned that my Dad might have got the ‘money’ quote from Benjamin Franklin who, expresses the full beauty of the compound interest process.

“Money makes money. And the money that money makes, makes money.” – Benjamin Franklin

So, it is not only the money that you invest, but all the earnings are earning too.

The one-eyed political investor

Let’s suppose you were such a committed US political investor that you only had funds in the market when ‘your president’ was in power – and, quickly withdrew your investments when the other team got in. Using 70 years of S&P 500 data shows that you might be better off if you were a Democratic investor. However, your gains would be tiny compared to the situation where you were more relaxed and just kept your money in the market – regardless of President. The lesson is, that time in the market is the key.

Investing in the US S&P 500 index from Jan 1953 to September 2024- Source Financial Synergies

It is time in the market that matters – not who you vote for!

The following pair of charts presents another way of looking at the effects of one-eyed political investing, either Democrat or Republican, over a 10-yr time frame and also, a 70-yr period. The time periods are different to the above chart and hence the different final dollar totals.

If you invested ONLY when your political party was in power, you would be much worse off.

Using S&P 500 and proxy data for 10 years and 50 years till December 2023 – Source: Steelpeak Wealth

Slack Investor has seen the shape of the green curve on the right hand side before. It echoes the hundreds of compound interest charts that I have looked at for inspiration. It starts flat and then rapidly increases with time.

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” – attributed to Albert Einstein

Let’s say you managed to save $10 000 per year and you invested the money with an average return of 10%.

The blue line indicates the value of investing $10 000 p.a. and, compounding over 30 years. The green circle is where your interest earnings start to exceed the amount of your own money invested – Source: A Wealth of Common Sense

The brown line shows savings of $10 000 p.a., for 30 years, amounting to $300 000 of your money. The grey line represents the total compound interest on your investments. For the first 15 years you think you are getting nowhere – then the compounding kicks in with the help of time – your money plus earnings on that money plus time. Using the above assumptions, the total accumulated amount would be over $1 660 000.

The 10% earnings seems a little wishful. Although, past 30-yr averages for US shares, International shares, Australian stocks and Australian Listed property are, respectively, 11.1%, 8.2%, 9.1%, 7.8%. If your investments averaged 8% p.a., the total value of your investments would be $1 233 449 – Not Bad! However, life is not really like an Excel spreadsheet.

Slack Investor’s case study of compounding

A real-life example of compounding returns can be found in Slack Investor’s own tracking of Net Worth. He has diligently tracked his Net Worth (Assets – Liabilities) for 34 years since 1990 using the free software Microsoft Money Sunset International Edition. There is no magic in this chart – except for the miracle of compounding! As a family, we achieved a savings rate (including superannuation) that varied between 20% and 45%p.a. of take home salaries. During this time we have had home loans and have always been investing.

Slack Investor’s (+Ms SI) Monthly Net Worth Chart over the 34 years of saving and investing since 1990 – Microsoft Money

Even though Slack Investor is familiar with the concept of compounding interest – he is continually astonished with the spectacular gains in net worth over the latter years.

My Dad was right … Money makes Money! Start saving and investing now and get on this ride!

November 2024 – End of month update

Slack Investor is IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

To Slack Investor’s bewilderment, in what can only be described as a ringing endorsement for Trump economic policies, the S&P 500 raged ahead by 5.7 % in November.

For the ASX 200 (+3.4%) and the FTSE 100 (+2.2%) – it has also been a great month.

Slack Investor feels it is time to tackle another valuation of the markets next post.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Auto-Diversification … and September 2024 – End of Month Update

Slack Investor tries to be a little diversified in his investing with his Three Pile Theory. Although my Investment Pile (The Slack Fund) consists mostly of Australian and International Shares, my Stable Pile (about 30% of retirement funds) consists of annuities, Real Estate ETFs, Fixed Interest products, some high dividend paying shares and some Cash. I own no bonds, Gold or Cryptocurrency. I am not very strict about rebalancing … but, that’s because I am slack! Deep down however, I’m convinced that diversification makes good financial sense.

A quick look at the yearly Vanguard diversification table below shows the percentage annual total returns for 9 different asset classes. I have only shown the last 17 years, but the 30-yr table can be found here in .pdf form.

Total returns for each asset class for the 30 years since 1992 – Check out the full 30-yr glory of the Vanguard 2024 – Importance of Diversification.pdf – Click this chart for better resolution.

For financial year 2024, the best performers were: Australian listed property returned 24.6%, US shares 24.1% and hedged ($AU) International shares 21.5%. The point of the Vanguard table is to highlight that it is very hard to try and predict the yearly winner. Slack Investor notes that International shares (particularly the US) have featured in the top 3 for a lot of these last 17 years. He also notes that Cash is a rare top performer – but, well done for 2022! It is always useful to have a look at the Vanguard Long Term Investing chart for a reminder of the compounding power of share investing.

Auto-Diversification

Superannuation

All of your Super contributions end up in a fund that is diversified to some extent. You usually can decide on how diversified you want it to be. For example, Australian Super offers, in their pre-mixed options: High Growth, Balanced, Socially Aware, Indexed Diversified, Conservative Balanced and Stable offerings. Even their High Growth option is split into a number of different asset classes – though their ranges seem a little ‘loose’ for full disclosure to their clients.

Australian Super ‘High Growth’ Pre-Mixed asset allocation by weight – June 2024

Slack Investor’s instincts has always been to be invested with the highest growth option … though I did reassess this a few years before retirement!

Other Investments

OK then, super is taken care of … but what if you want a diversified option for other investments that could be assured long-term growth without constant input. This is where robo advice might shine. Robo advisors usually package a mixture of low cost ETF’s into a diversified portfolio with automatic re-balancing.

Slack Investor is aware of many robo advisers that operate in Australia. ValueWalk has prepared an excellent summary article. Valuewalk compares and reviews: CommSec Pocket, Spaceship Voyager, Betashares Direct, Raiz, Sharesies, Pearler, Stockspot and InvestSMART.

Just for example, I will expand on the offerings of Stockspot as they have been going the longest and have the most assets under management ($800m). I have no financial interest in the company – though I am impressed with their results – outperforming 98% of similar funds over a 5-yr period. Depending on the risk profile that you want, Stockspot uses various combinations of just 5 low-cost ETF’s – one of which is gold.

Australian Shares – VAS – Vanguard Australian Shares Index ETF (fee: 0.07%)
Global Shares – IOO – iShares Global 100 ETF (fee: 0.40%)
Emerging Markets – IEM – iShares MSCI Emerging Markets ETF (fee: 0.69%)
Bonds – IAF – iShares Core Composite Bond ETF (fee: 0.10%)
Gold – GOLD – Global X Physical Gold (fee: 0.40%).

There is a sliding scale management fee for which all admin and rebalancing is taken care of. For example, for account balances of $200,000+, there is an annual fee of 0.528% per year.

When Slack Investor loses the ability to stock pick growth stocks effectively (or, perish the thought … shuffles off this mortal coil!), I will set up some succession plans that will move our investments onto a secure ‘minimal involvement’ platform such as robo advice.

Slack Investor is old fashioned when it comes to ETF ownership. I much prefer the robo advisers that run under the HIN system (Holder Identification Number) – where the ETF’s are registered in your own name. This makes things simple if the robo adviser should cease operations e.g. Six Park (Aust).

The alternative is the ‘custodial’ system – where the investments are held on your behalf. Although custodial models can have lower costs – I like to see my name on the ownership documents. Stockspot is one of the advisers that run under the HIN system.

Although Slack Investor is a great believer in finding out about financial things for yourself with the magic of the internet. This way is not for everyone. Let’s just be clear, for most people, if you want specific advice on wealth management, tax advice, estate planning or a multitude of other finance problems, you are best counselled to seek a qualified financial adviser.

However, if you have a lump of money that you want invested in a diversified way that suits your risk profile, then robo advice seem a relatively cost-efficient way to ensure your investments are spread across asset classes. Naturally, Slack Investor would like the fees charged by robo advisors to come down a little before he parts with his Slack funds.

September 2024 – End of Month Update

Another month with a big range of daily closing values. The ASX 200 (+2.2%) and the S&P 500 (+2.0%) are in all time high territory. The FTSE 100 languishing and down 1.7% for the month.

Slack Investor remains IN for all markets.

The recent strength of the US market has pushed the closing monthly value to more than 15% above my old stop loss. I adjusted the stop loss upwards to a new ‘higher low’ of 5119.

Weekly chart for the S&P 500 Index showing the stop loss revised upwards to the new “higher low” of 5119.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

The quarterly updates showing the shares in the Slack Portfolio have also been completed.

Free Australian Tax Gifts

Slack Investor was taught to appreciate gifts and … who doesn’t get a little bit excited when they encounter free stuff. Australia offers many lifestyle advantages to those who live here. The Australian Government also offers a few financial tax gifts … for free!

Capital Gains Tax

A capital gains tax is usually applied to the profit made from selling an asset (usually property or shares). The tax can be seen as a reasonable part of the Australian income tax system (personal earnings + business earnings + capital gains). The tax is applied in the tax year of the capital gain at your marginal tax rate – although there is a 50% concession for assets held more than 12 months.

Your own home – A ‘Partial Tax’ Gift

Slack Investor is across the difficulty of owning your own home these days – yet, it is one of the major financial goals to achieve before retirement.

There is no tax for any capital gains on your principle residence in Australia. As those lucky enough to be in the property market, tend to change houses every 11.3 years (9.6 years for units), there are opportunities to passively increase your property stake without incurring any Commonwealth taxes.

However, the cash strapped state governments have got their hands on this free gift by applying Stamp Duty (Tax) to property purchases. These stamp duties can be substantial, For a $700K dwelling , a non first home buyer will pay around $25K (NSW, Vic, Qld, Tas), and over $30K in some states/territories (SA, NT).

Your Super after 60 – A ‘Solid Gold’ Tax Gift (for now)!

For most people, an income stream from superannuation will be tax-free from age 60 – _{MoneySmart.gov.au}

Contributions and the earnings of your super fund are usually taxed, though this may be at a concessional rate. While saving your superannuation, it sits in an Accumulation account. When you retire, you can transfer some (or all) of that money into Retirement phase – an Account-based Pension. For FY 2025, the ATO have set a transfer balance cap (TBC) (limit) of $1 900 000 that can be transferred into retirement phase and remain tax free.

Up to the TBC limit – all earnings (Dividends, Distributions, Capital Gains) from your retirement phase Account-based pension are not taxable – This is a great gift to retirees!

Using the Super Balance Detective calculator from Superguru, you can see exactly how your super balance is tracking. ABC News have an excellent article How does my super compare to others? where references are made to the ASFA ‘comfortable retirement’ standard. All of these sources were used to make the following chart to measure how your current super balance measures up for retirement.

The Red line was generated as a track towards a $1.9m super balance at retirement. Although the red line super numbers are, admittedly, ‘heroic’. Readers of Slack Investor would always like to aim high for an independent retirement – and try to get at least towards the $1.9m in super at retirement that will maximize this tax-free gift.

A chart to see if you are on track for a ‘Comfortable’ Retirement (Yellow Line), or on a path for maximum allowable tax-free income (Red Line). The Red Line was calculated using an earnings figure of 6% p.a. The Green and Blue Lines are the average amounts of super that Men and Women have (ATO Figures 2021) – Click image to enlarge.

Thanks to compulsory super, people with a solid employment history will be on track to have a super balance for a ‘Comfortable’ retirement (Yellow Line). This comfortable retirement definition assumes that you own your own home and have access to the full (or part) aged pension.

Using the 4% rule, a $1.9m super balance at retirement will generate a $76 000 tax free income each year. This would be a ‘Very Comfortable’ retirement – but there may be a few changes in the wind.

But Wait … Division 296

This all sounds too good to be true … You’re right! The legislators are coming after this gift.

The Australian government is considering a very muddled legislation known as Division 296 – which aims to target large superannuation balances. They reference Total Superannuation Balance (TSB) for this proposal. The sum of any accumulation accounts plus any pension accounts. The legislation is currently held up in the senate.

Division 296 tax is imposed at a rate of 15 per cent on a percentage of earnings equal to the percentage of superannuation balances that exceed $3 million – _{treasury.gov.au}

The concept behind this is very reasonable. Slack Investor doesn’t object to the idea of tax on large super balances. Super should ultimately be all about funding your own retirement – and not be used as a tool to preserve wealth for your estate.

However, in a sensible world, some amendments to the current form of the bill should be made. They include:

The $3 million threshold for the application of Division 296 needs to be indexed
In its current form, Division 296 unusually proposes taxation on unrealised gains – rather than being based on the actual taxable income. This is a first for the Australian tax system – it does not make sense and needs to be rectified.

No Guru, No Method, No Teacher – and August 2024 – End of Month Update

Van Morrison’s 1986 album No Guru, No Method, No Teacher – One of his best. Try a meditative sample – In the Garden

Van Morrison is said to have echoed the thoughts of Jiddu Krishnamurti when naming this great album back in 1986 – after 38 years, it still stands up!

“…there is no teacher, no pupil; there is no leader; there is no guru; there is no Master, no Saviour. You yourself are the teacher and the pupil; you are the Master; you are the guru; you are the leader; you are everything.” – Jiddu Krishnamurti, Indian Philosopher (1895 – 1986)

At the time, Van was influenced by his teachings and, in an Eighties interview, Van said “I feel the meaning of Krishnamurti for our time is that one has to think for oneself” . This is just the way that Slack Investor feels about the whole world of finance – and one of the defining reasons for this blog.

The ultimate aim for Slack Investor readers is to fund your own retirement, but for most Australians, there is still work to do. The latest available ATO statistics (FY2021) indicate that the median superannuation balances for ages 65-69 are $213,986 (Male) and $201,233 (Female).

According to the Association of Superannuation Funds of Australia (ASFA) estimates – the minimum Superannuation balances required to achieve a comfortable retirement are set out below – and these figures rely on a couple of big assumptions. You need to own your own home and have access to the aged pension, or part-pension, to make this sum work.

Couple	Single
$690,000	$595,000

ASFA Minimum superannuation required for a comfortable retirement (Assumptions: Own Home and Aged pension assistance)

To retire independently (i.e. no government aged pension), a greater lump sum would be required! Things are slowly getting better with recent increases in compulsory superannuation. By 2050, the expected percentage of “comfortable retirees” should be 50%. This is outlook shows promise – but there is a need for more Australians to take action for themselves – Right Now!

Currently, (only) around 30 per cent of couples and singles reach or exceed the ASFA Comfortable Standard (in retirement savings) – ASFA Update – November 2023

No Guru

Slack Investor is no guru, the steps to financial independence are no secret – and are set out by many well known financial educators. There are so many great resources, for example: Rask, Aussie Firebug, Equity Mates, Making Money Made Simple, Strong Money Australia. For a step by step guide, nobody does it better than The Barefoot Investor. Buy his book, or try the The Barefoot Steps or, read Rask Media – The Journey to Financial Independence.

Slack Investor would add to this wonderful guidance:

Educate Yourself in the ways of finance – The internet and financial independence books are your friend here. No-one will represent your interests better than you
Take charge of your Own Financial Independence – Ride Your Own Bike
Automate your savings – Into superannuation and your own investments – What you don’t see, you wont spend
Your Savings Rate is a very important number – my savings rate while working and raising a family fluctuated between 20% and 45%. Far more heroic rates are documented by F.I.R.E. enthusiasts e.g. Strong Money Australia – this will accelerate your journey
Have a plan to buy your own place to live
Pay full attention to fees for financial services
Let time be your partner in long-term investing – start as early as you can.

The Slack Investor path was more of a climb up a cobbled street than a path. It involved lots of different strategies. Trying to maximise my superannuation contributions, buying a house to live in, using home equity to gear into individual stocks and ETF’s. In the last 10 years, I have been trying to invest mostly in growth stocks, without too much trading. This has been a good fit for my temperament.

Long term Investing

The real business is to be invested at least somewhere in appreciating assets – and let time do its work. Below is an extract from the Vanguard 2024 long-term investing chart. The numbers on the right are the results of investing $10,000 in the Index funds of the indicated asset classes for 30 years. It is Slack Investors favourite chart.

Extract from the 2024 Vanguard Index chart (Just the 2007-2024 portion is shown) – the dollar values on the right are the results of investing $10,000 in index funds in each asset class for 30 years (since July 1994). *– Check out the full 30-year glory of the* Vanguard 2024.PDF chart *– Click image for better resolution of this portion.*

August 2024 – End of Month Update

Slack Investor is IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

The S&P 500 (+2.3) continues its enthusiastic progress. Slack Investor is pleased to go with the flow but remains nervous for the US markets.

For the ASX 200 (+0.0%) and the FTSE 100 (0.1%) – things have ended up dead flat. Although, all markets have shown a lot of variation this month.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Super, a home, and the Pension … a fruity mix! – and February 2024 – End of Month Update

Even Superman has his limits – Is it Kryptonite OR Brussell Sprouts?

Slack Investor writes a lot about Superannuation because it is a fantastic component to have in your armoury to establish financial independence – in a tax-effective way.

The ultimate aim for Slack Investor is to fund your own retirement, but in reality, according to the Association of Superannuation Funds of Australia (ASFA) estimates, a minority (43% ) of Australians of retirement age would be self-funded by 2023 – this percentage should increase as the compulsory superannuation system matures.

On 31 March 2023, 63% of the population aged 65 and over were receiving the aged pension (full or part), or other government-funded income support.

As so many Australians rely on a mix of both their super and the aged pension for retirement, it is worth revisiting the perverse ways in how superannuation interacts with the pension under the Assets test devised in 2017.

Your own Home

Before we get to this mix, by the time you retire, you do want to have a place to live and be free of landlords. This may sound impossible to some at the moment – but it is a vital part of financial independence. It can be a “tiny home”, an apartment, a place in a regional area …. as long as it is yours!

Tiny Homes – This 20 sq m little bewdy will set you back $32 000 – however, you still have to find land for it – and connect to services.

It is so important to aim to own your own home by the time that you retire – even if it is a 1-br apartment. Admittedly, this is so much harder than it used to be! Looking at the figures below, it is vital to get as large a home deposit as you can to reduce your borrow amount – this should be one of your early financial goals. However, without help, a multi-bedroom home near a capital city now seems near impossible.

If you dont have a deposit, October 2023 data showed that Australians need an income of more than $300,000 a year to buy a median priced home. Household incomes required were considerably less, but still “eye watering”, for outer suburbs and regional cities. e.g. Geelong $243,333, Brisbane $223,333. Apartments are usually less expensive – and require less income to service the home loan.

Things are really bad at the moment for future home owners. It was assessed that for the home market to “affordable” home prices needed to be on average 3.0 times the average median income. Currently, Australia’s housing market has a median multiple of 9.1! I am hoping that future governments will adopt policies that will reduce house prices – But I am not holding my breath.

Super and the Aged Pension

At its most basic level, superannuation is forced retirement savings for all working Australians. A compulsory contribution of 11.5% of your salary (from 1 July 2024) that will compound till your preservation age (between 55 and 60).

According to Treasury projections, about 60% of retirees will have less than $250 000 in super in 2024. This amount of super is not enough to fund a comfortable retirement. $250 000 in pension mode at the official Age 67 drawdown rate of 5% generates only $12 500 income per year. Clearly, many Australians will need to rely on a mix of their super and the aged pension for retirement income. The Aged Pension is available to Australians over 67 – but, it is means tested.

The bare minimum to aim for is the “sweet spot” in the aged pension asset test where your assets are a bit more than the maximum allowed for the full pension. Under current rules (2024), home owning couples can have $451 500 in assets (singles $301 750) and still qualify for the full government aged pension (at age 67).

In 2020, the Alliance for a Fairer Retirement System pointed to a super sweet spot of around $400,000, which can see a pensioner (home-owning) couple “earning $1,000 a month more than a couple with $800,000 in savings.”
Nicola Field (Using data for 2020/21)- Canstar

The first chart shows 20 different amounts of superannuation that you might have saved up by the time you are ready to retire – ranging from $150 000 to $1 100 000 above chart – from saveoursuper.org.au.

This next chart is far more interesting, it shows your total income from different amounts of superannuation (shown in the above table) mixed with the aged pension – for a home owning couple. For simplicity, these tables assume your only non-home assets are in super and the aged pension rates were those applicable in 2021 ($34 777 per couple). The essence of the table is still valid.

Total amount of retirement income – **for a home owning couple** – Combination of Part-Aged Pension (orange) and 5% of Superannuation Balance (Blue) for each of the 20 amounts of Superannuation Balance shown in the first chart (Using data for 2020/21)- saveoursuper.org.au

Bizarrely, there is a point on the total retirement-income (couple) table corresponding to around $400 000 in assets/super where an increased assets/super balance does not lead to an increased total income due to the asset test pension taper rate. Above that point, for those on the part-pension/super mix, the more super you have, your total income actually goes down. This strange anomaly exists for assets/super between $400 000 and $800 000 (2021/2020 data).

Clearly, the current assets test to qualify for the aged pension is unfair and provides a disincentive to save -and should be changed. But, until then, a major retirement goal is to use your super to get your total assets to near the sweet spot before you reach age 67.

(It)is not fair that people who forgo consumption and save more to increase their living standards in retirement and reduce their reliance on an Age Pension should instead get less retirement income. This is the perverse outcome for a large range of savings under the 2017 assets test.
Jack Hammond and Terrence O’Brien – saveoursuper.org.au

How the Assets test works (in real life) for the aged pension (2024 Data)

According to Services Australia, for the aged pension, assets are property or items you or your partner own in full or part – this does not include your home! It does include Financial Investments (Bank accounts, shares, managed funds, annuities, etc), Personal assets (Home contents and vehicles), Superannuation and Real Estate.

I had a recent example of filling in an assets form for a close relative. Her bank statements and investments were easy to quantify. We were advised that personal assets should be valued according to what we could get if we were “keen sellers”. It was suggested to us that, other than vehicles, most peoples personal effects would amount to between $5000 and $10 000. This proved to be near the mark as most furniture and home items end up having to be donated when finalizing a deceased estate.

For the table below, the aged pension and asset limits are current values* and correct at February 2024. Using 2024 data, the “sweet spot” for assets is now near $451 500 for couples ($301 750 for singles). If you had $250 000 in super, and your “other assets” added up $60 000 (Car $13 000, Bank Ac’ts/Shares/Funds $35 000, Home Contents $12 000). Your Total assets would be $310 000.

For a couple with similar “other assets” and a combined super of $400 000, your total assets would be $460 000.

Situation	Asset Limit	Other Assets*	Super	Drawdown from Super @ 5%	Age Pension	Total Income
Single Home-owner	$301 750	$60 000	$250 000	$12 500	$28 514	$41 014
Couple Home-owner (Combined)	$451 500	$60 000	$400 000	$20 000	$42 988	$62 988

Table based on a single home-owner with $310 000 total assets ($60K + $250K) and a couple home-owners with $460 000 total assets ($60K + $400K) – using Feb 2024 values for the Aged Pension and Asset Limits.

Using this mix of super and the pension, when reaching the pension qualifying age , a modest to comfortable retirement is possible under current rules when you own your own home. Also, under the Work Bonus Rules, singles can earn up to $5304 (Couples $9360) in a part-time job without affecting their aged pension.

Comfortable lifestyle (p. a.)	Modest lifestyle (p. a.)
Couple $71,723	Couple $46,620
Single $50981	Single $32,417

ASFA calculated annual retirement requirements for those aged 65-84 (September quarter 2023) for both “comfortable” and “modest” lifestyles

February 2024 – End of Month Update

Slack Investor is IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

Little movement this month for the ASX200 (+0.2%) – but, it is testing new all-time highs. Nothing happening with the FTSE 100 (0.0%) at the moment.

The S&P 500 (+5.2) and the NASDAQ 100 are hitting new record highs and Slack Investor is pleased to go with the momentum but remains nervous for these markets.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Savings Rate and … December 2023 – End of Month Update

My last post on “Salary Sacrifice” got me thinking on the other things that I did to help myself on the journey towards financial independence. I have before stressed the importance of your savings rate as the primary tool in the box – and, more than anything, this is the number that will affect when you become financially independent.

This figure can be calculated a few ways, but for simplicity, let’s define it as your retirement savings as a percentage of your take-home pay (disposable income after taxes and deductions) – this can be calculated using fortnightly, monthly, or yearly data.You can work out your own savings rate or, if you are in a stable relationship with a combined goal, include your partner’s savings and take-home pay.

SAVINGS RATE (%) = 100 x (Total amount of Savings put aside for Retirement/Take-home Pay)

This savings rate is the percentage of your after tax income that you must be putting towards retirement – and it defines the number of years that you have to work until you can sustainably generate your expenses from your investments. There are some assumptions for the following chart:

Your investments earn 5% after inflation
You can live from the “4% safe withdrawal rate” after retirement.

This magical curve is presented below to bring a bit of clarity to your goal. The object is to get to the stage when your annual return on investments (Passive income) cover 100% of your expenses. This represents the beautiful state of financial independence.

From The Escape Artist – using the conservative assumption of a 5% return on your retirement portfolio after inflation.

In Australia, with compulsory superannuation, 10% of your gross salary is deducted from your wages. Taxation rates will vary, but lets just say that 10% of your gross salary is the equivalent of about 15% of your net salary (disposable income). You add your superannuation to any other retirement saving that you are doing to get your total amount of savings put aside for retirement.

Starting from scratch, from the above graph, if you worked continuously, and only relied on compulsory superannuation you enter the full-time work force and you are 42.8 years away from a retirement – where your living expenses are covered by the passive income from your retirement savings. In other words, if working continuously, a 22-year old starting full-time work will have enough passive income to cover expenses when reaching the age of 64.8 – relying solely on compulsory super.

In Australia, there is also the aged pension to kick things along after age 67. Obviously, if you want to retire sooner and have a bit extra for holidays, and to allow a bit of a safety margin, and be financially independent – You will have to do some extra savings towards retirement yourself.

How are people going with their savings rate?

For Australians, the compulsory superannuation system provides a sound base for retirement savings (with a working life of 42.8 years). This doesn’t factor in the government funded aged pension – subject to a means test. Currently the pension (September 2023) is $28,514 per year for a single person – But who knows if this will still be available at present levels in the future. It is best to plan for your future without it – and then accept it as a bonus if you qualify.

Although this sounds OK, any disruption to your working life (ill health, family, education, retrenchment, etc) will be a real setback to your retirement plans – Any work breaks will require additional savings for your retirement. In the US, the “average” savings rate was between 5-10% for many years. Despite some impressive savings rates during COVID-19, in July 2023, the personal saving rate in the United States amounted to 4.1 percent.

Statistic: Personal savings as a percentage of disposable income in the United States from June 2015 to August 2023 | Statista

From Statista

You would have to say … this does not bode well for a satisfying retirement for the “average” US Citizen.

What was the Slack Investor Savings Rate?

Rusted on followers of this blog will recall that I had a bit of a delayed start to thinking about retirement. I had just arrived back in Australia after a 6-year working holiday overseas. I was aged 30, broke, and the only thing I knew was that I didn’t want to continue working in the field that I was trained in – high school teaching.

Clearly Slack Investor had a bit of work to do. Once I was in regular employment again, I set about getting the financial building blocks in order. Emergency fund, house deposit … and then savings for my retirement. I did this mostly using salary sacrificing into superannuation and building up my own private share portfolio.

There is nothing Slack Investor likes more than burrowing into my financial history using the excellent and free “Sunset” international release of Microsoft Money. I use the Australian Version. I have been using this software to track my finances since 1990 (33 years!)

Including superannuation contributions, my savings rate for retirement fluctuated between 20% and 45%. From the top graph, this represents a shifting rate that was equivalent to an overall retirement goal that required between 36.7 years and 19 years of working. Since “ground zero” at aged 30 and some extra education, I ended up working mostly full time for 28 years. Luckily, I had found a job as meteorologist that I really enjoyed.

This is not the “hard core” road to financial independence (i.e retire at 35, etc) – but Slack Investor thinks a reasonable compromise with the competing priorities of raising a family and buying a house.

Savings Rate is so important. Determine what your own savings rate needs to be to achieve your retirement goals – and automate your savings deductions as much as possible – and get cracking!.

December 2023 – End of Month Update

Happy Days. The year closes and, Slack Investor was definitely not naughty … a big December “Santa Rally” this month. All followed markets rose. The ASX 200 up a mighty 7.1%, the FTSE 100 up 4.0%, and the S&P 500 up 4.4%,

Slack Investor remains IN for the FTSE 100, the ASX 200, and the US Index S&P 500.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.

Things a Financial Advisor might tell you … and May 2023 – End of Month Update

Slack Investor has blogged about financial advice before – and although an advocate of trying to do as much as you can by researching finance world yourself, it can be a very difficult journey to be across all the fields of saving, mortgages, investment loans, insurance, superannuation, taxation, and investment.

Most people want financial advice but the problem is that it is so expensive. MoneySmart.gov.au outline a case study where “Rhett” has $400 000 to invest – He might be hit with fees of $13 600 in his first year of advice . These fees include a Statement of Advice and Insurance premiums and layers of platform and investment advice fees.

Where to invest your money is the easiest thing to sort out for yourself – with the key words being diversification and low fees. There are cost-effective ways of investing in a diversified way that will suit your risk tolerance without involving a financial advisor (e.g. Stockspot, Pearler). But some people (Not Slack Investor Readers!) need a trigger to just start investing. Finance world is much more complex than just investing your money. Slack Investor can see the need for finance professionals

Things a Financial Advisor might tell you

Firstlinks have trawled the data to determine the most recommended strategy used by financial advisers – the most common of these are listed below.

Let’s just have a look at some of these in more detail.

Rollover Your Super – “Rolling Over” your superannuation is just a way of describing the transfer of your “protected” super into another protected super fund. Slack Investor readers will be all over this one – Of course it makes sense to put all of your super with one provider to avoid multiple administration fees. Combine your super into one fund – preferably an industry fund (lowest fees) with a good 5-10 yr performance record.

Retain Your Super – This is again good advice for the long-term accumulators of wealth. Unless under extreme hardship, resist all attempts for early access to your super. During the COVID-19 outbreak, $4 billion was paid out to 456,000 people under the early super access scheme. This would have helped distressed businesses and individuals in the short-term but may not have been a great idea in the longer term.

Super Contributions – This is a more complicated area and, it might be good to have advice on when, and by how much ,you should boost your super contributions above those which are compulsory. This is tricky when you have competing loads on your take-home pay (Family, Mortgage, etc). Slack Investor was big on maximizing his super contributions once he had a firm grip on his home mortgage.

Apply for Insurance – When you have a family or debts (home loan?) to cover, life and disability insurance is a good idea. You don’t need an advisor to tell you this. Insurance through your super fund is usually the most cost effective way to do this.

Estate and Aged Care Planning – This area is really complicated for the layman. Professional Advice, or much research, needed.

Commence, Rollover, Retain Pension – You may need advice here if planning to mix aged-pension and super to fund retirement. If there are no aged-pension issues, Slack Investor believes that it is best to start an account pension (from your super) as soon as possible and re-contribute any surplus funds as non-concessional contributions.

Commence, Rebalance Investment – An old truth – Best time to start investing? 20 years ago. Next best time to start investing? Now! Rebalancing can be done automatically with cost-effective platforms e.g., Vanguard Super, Stockspot.

What Types of advice Do You Really Need?

The current financial advice system is complicated by well-meaning regulations that are in dire need of reform. In 2022, the Australian Treasury provided a consultation paper seeking feedback on changes to the regulatory regime that would allow financial advice on specific matters without the obligation that the advisor should know everything about your financial situation – No need for the expensive Statement of Advice (SOA).

Ideally, in a future world, you could get advice at various stages in your life from finance professionals at an hourly rate – perhaps in the same way you would consult a medical specialist about a problem. For Instance

Early/Mid-Career Advice: Am I on track with my savings, super contributions and retirement plan? What strategies should I employ to achieve my goals?
Pre-Retirement: Am I ready? Taxation Issues? Aged-pension/Super mix?
Estate and Aged Care Planning: Complicated – Many issues to discuss here.

Alternatively, you could just turn your financial future into a hobby (Like Slack Investor did), and use the internet and books to educate yourself.

May 2023 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. It was a dreary month for the Slack Investor followed markets. The ASX 200 performed poorly this month – down 3.0%, and the FTSE 100 even worse – down 5.4%. The S&P 500 was flat (+0.2%) for the month.

In this month of turmoil for stock indexes, the Slack Portfolio did quite well. This is because it is heavy with technology stocks that are having a moment in the sunshine. The Nasdaq 100 index was up 7.7% for the month of May.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Greed and Fear – Battling the human condition

Sick Bacchus - Caravaggio Self Portrait — “Sick young Bacchus” a self portrait by Caravaggio (circa 1593) showing himself as the Greek God Bacchus, the god of wine. It is thought that Caravaggio painted this portrait when he was not well – probably suffering from malaria. From the Borghese Gallery, Rome.

Fear and greed are part of the human condition, these traits have evolved over time.

Without the right dose of fear, we would expose ourselves to unreasonable threats and, without the right dose of greed, we would forego opportunities to secure the resources that we need to live.
Fear and Greed: a Returns-Based Trading Strategy around Earnings
Announcements

The fluctuations of the stock markets are just a symptom of these traits. There is a lot of general panic and selling when the stock market starts consistently falling. Stock owners become fearful of further losses and press the sell button. This sets up a chain reaction and the markets fall even further.

A “Herd Effect” exists in the financial markets when a group of investors ignore their own information and, instead, only follow the decisions of other investors.
The herd effect in financial markets – Quantdare.com

It is easy to see how herd behaviour evolved as copying what other individuals are doing can be useful in many situations. For example, if there is an immediate threat, that you haven’t noticed and the herd has – it might save your skin to follow the herd.

Then, of course, there are the good times when the stock market is pumping – the buyers start piling in regardless of the fundamental foundations of the stocks. Asset bubbles often result and a good example of this greed was the “dotcom” bubble in the late 1990’s when big prices were paid for any company that mentioned the internet in its prospectus. Nobody wanted to miss out on, what looked like, easy money.

But these herd behaviours are the opposite of what the astute investor should be doing. We must fight these evolved traits and develop our own behaviours that keep us on the right path.

Savings Automation and Dollar Cost Averaging

Slack Investor has written before about automating your savings. There are also huge advantages to automating your investing – particularly when you are just starting out in the investing world. The first stumbling block that new investors face is to start investing. Then they must develop the habit to keep on investing. There is always a reason to use the money somewhere else or, you might think that right now is not a good time to invest. This “paralysis” must be over come and the best way to do it is through automation.

With auto investing, you don’t have to make the decision when to invest, it just happens automatically when your savings reach a pre-determined point. This opens up the delights of “Dollar Cost Averaging” where, if the market is relatively expensive, you will buy few shares – and if the market is undervalued at the time, your set amount of dollars will buy more shares.

You are buying in the good times and bad . This doesn’t matter – the important thing is that you are buying into companies and accumulating your wealth. Your purchasing is relentless, no decisions, no procrastination – Warren Buffet would be proud!

By investing regularly, in this case, $417 per month, you accumulate shares regardless of the share price. Dollar Cost Averaging buys you more shares when the share price is cheap and less when they are more expensive. – From SeekingAlpha.com

Pearler and Auto Investing

A new kid on the block in the broking business for Australian and US shares is Pearler with distinguishing points of a flat $9.50 brokerage charge and the use of the Chess system for attributing shares to individuals. This means that you are issued with a Holder Identification Number (HIN) and you have direct ownership of your shares. Slack Investor likes this model rather than the custodial model of many other new broking players. Pearler also offers free brokerage on the purchase of selected ETF’s (provided that you hold them for a year).

However, Slack Investor thinks the absolute best feature of the Pearler platform is that it encourages Auto Investing and makes the process simple. If you are serious about your investing journey, you need a broker and why not make it Pearler.

There are some well researched and comprehensive reviews of Pearler and its many features by Captain FI and AussieDocFreedom.

Auto Invest through Pearler is an excellent way to combat the cycles of fear and greed and take the emotion out of your investing decisions.

Other than just opening an account with them, Slack Investor has no affiliation with Pearler.

Ride Your Own Bike

Like Sally, one day the realization will come that your best interests rely on you steering your own bike – in the direction that you want to go!

The ultimate goal is to get your three substantial piles going – house, income and investments. But before any of this happens you have to develop a mindset … I want to be in control of my financial life.

You must gain control over your money or the lack of it will forever control you. —
Dave Ramsey – Author of The Total Money Makeover

If you don’t take control, perhaps you’re plan is to take all your affairs to a financial adviser one day. Most people will feel the need for financial advice at some stage but only 20% of Australians have a financial advisor. The current structure makes getting advice a difficult step – and it’s not the financial advisors fault.

The pricing problem of Financial Advice in Australia

64% of survey participants agreed that financial advisers were too expensive.
ASIC Survey August 2019 – Financial advice: What consumers really think

The Australian Government passed a piece of legislation known as the Future of Financial Advice (FoFA) in 2012. FoFA was a series of laws that were supposed to improve the quality and transparency of financial advice. One of the main purposes was banning conflicted remuneration – where advisers were recommending products that gave them good commissions. While FoFA and the Hayne Royal Commission were well intended and vital in restoring some trust in the sector – there have been some unintended consequences.

(The Financial Services Royal Commission) identified the problem of conflicted remuneration without providing a mass market solution.
Graham Hand, Firstlinks – FoFA, the Failure of Financial Advice

There has been a huge rise in regulatory red tape and the associated compliance costs for financial planners. A combination of these costs, the big banks dumping their financial advice arms, and the need for upgraded qualifications has put this sector in crisis. The total number of licenced advisers is set to drop by a third in the next few years.

There is broad recognition that financial advisors have expertise that the normal punter does not have. However, the biggest barrier to getting financial advice is the expense. One of the big problems is that when you engage a financial advisor, they are obligated to present you with a full Statement of Advice (SOA). On the surface this makes sense, the client would want a document that takes into account your own circumstances and outlines the fees and risks of each strategy. However, according to one planner, the SOA has turned into pages of jargon, repeated disclosure and boring generic graphs. These statements are weighty tomes that take many hours to prepare. Sadly, they seem to confuse the actual advice and provide no real value to the client.

A full Statement of Advice (SOA) runs over 100 pages and the need to review all circumstances and develop a plan takes 10 to 15 hours and costs between $3,000 and $5,000 depending on complexity.
Graham Hand, Firstlinks – FoFA, the Failure of Financial Advice

From FirstLinks – FoFA, the Failure of Financial Advice, Take 2

James Kirby from The Australian uses the example of paying annual adviser fees fees of $3000 and he supposes that the structured advice that you receive will match the 4.3% pa return of the new Magellan retirement income product Magellan FuturePay (FPAY). He points out that for an investment of $500 000 and an expected FPAY return of $21 500, your advice fees would be 14% of your earnings. This does not make sense to him … or Slack Investor.

James Kirby suggests that a better model for the regulators to adopt would be that you could approach a financial adviser for advice that you need at the time … and pay the financial adviser for this “niche” advice. This is not possible under current legislation.

Take charge

So, with full service financial advice gravitating towards high net wealth clients, what is the average punter supposed to do? Robo-advisors such as Stockspot could be part of the solution. This automated service can provide help with allocation of assets other services that will suit your age and risk profile. But there are so many more financial questions you might want to handball to your financial adviser if you could afford one. Well, if you can’t … it’s up to you.

Decide what you want to achieve in the finance sense. Go through the savings basics and get your savings rate up. Take charge on where your money goes, get your superannuation set, reduce any unnecessary fees that you are paying, set a target on your financial piles.

Educate yourself on things financial. There are some great books. The Barefoot Investor is an excellent start. Some fabulous podcasts The Australian Finance Podcast will get you going and there are heaps of other Slack Investor favourites. Get involved and start to enjoy the immense freedom and satisfaction of riding your own bike.

Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.
Franklin D. Roosevelt

Two Very Important Numbers

There are many numbers to note in finance world – Fees, Investment returns, etc. However, there are two extremely important numbers when it comes to financial independence. Both are percentages and the first one is the 4% “rule of thumb” and the second is your savings rate.

The 4% Rule

All followers of finance blogs would have heard of this often quoted “rule” Slack Investor acknowledges that this magic number is arguable and depends on individual circumstances but, it is an excellent way to estimate how much you will need to retire. The 4% rule is a way to “roughly” link assets with income. For example, as an estimate, if you would like to generate a $40 000 yearly income, you would need to have investments assets of $1 000 000 to earn this income using the 4% rule (4% of $1 000 000 = $40 000).

Another way of looking at this 4% rule is that you need to save 25 x your annual spending for your retirement fund so it can generate an income to cover your spending. So, if you spend $30 000 a year, you need a portfolio of $750 000 (25 x $30 000). To get an idea about what your expenses are it is important that you track them over a year using a spreadsheet or finance software. If necessary, this investment income can always be supplemented by a government pension or a part-time job.

Bill Bengen originally came up with this “4% safe withdrawal rate” in 1994. He developed it by backtesting a conservative US portfolio with data dating back to 1920 and tried to get a safe withdrawal rate that would generate an income for at least 30 years. He is the first to admit that the 4% number was always treated too simplistically and has since updated the rate to be closer to 4.5%.

Slack Investor is a bit old fashioned in liking to hold on to most of the capital that is earning the money and has a flexible approach to how much to extract from investments each year. In a good year for the stock markets, I am happy to dig deep into the investments pile – using dividends, distributions and even some capital gains as income. When the market performs poorly, it is more complicated and I have to dip into my stable income pile. Most of the Slack fund is in Australian Investments and in 2021, the Australian Index has a 12-month forward dividend yield of 3.5% . Hopefully, the shares will also increase in value over time. Over the past 10 years, Australian shares had a total return of almost 7% – with growth shares you can aim higher, but prepare for volatility. In the good years, I will also take out a bit of capital gain for extra spending. All of this is in addition to the stable income component of my investments.

Your Savings Rate

“Wealth consists not in having great possessions but in having few wants.”
Epicetus

Using the 4% rule we estimate how much will give us a sustainable retirement. But there is another number to add to our arsenal.

Just as in Lord of the Rings there is ” one ring to rule them all…”, there is also one “percentage” to rule them all in the Financial Independence world – and that is the Savings Rate percentage.

The annual expenses is critical here as this is the figure you are trying to generate out of investment income. Lets have a look at the effect that savings rate has on the number of years that you have to work until you can sustainably generate your expenses from your investments. The table below is from the great financial blogger Mr Money Mustache. There are a few assumptions used to generate this table

Your investments earn 5% after inflation
You can live from the “4% safe withdrawal rate” after retirement.

Here’s how many years you will have to work for a range of possible savings rates, starting from a net worth of zero:

Table from “The Shockingly Simple Math Behind Early Retirement” – From the one, the only, Mr Money Mustache

At a saving rate of 10% you will have to work for over 50 years – we have to do better than that! There are some pretty heroic savings rates amongst financial bloggers e.g Aussie Firebug 61%; Dividends Down Under 61%; I have admiration for these savings rates and note that these bloggers are in a hurry to get to financial independence – and retire early. At 60% savings you can retire after 12.5 years of working and saving – but that sounds pretty hard.

Slack Investor was on a much slower train and lucky that he quite enjoyed his job – and didn’t mind spending 30 years saving for his retirement. I have always been a good saver but, when looking at my past savings rates, it was usually around the 30-40% level and, some years had dropped down to 20%. Raising a family and holidays are a delightful interference with savings and you just have to find a balance. In Australia, we have compulsory superannuation which currently adds a welcome 9.5 % to your savings rate.

A beautifully presented calculator at Networthify shows how the savings rate works and gives a yearly breakdown. It also shows some interesting OECD statistics for average National savings rates (e.g. The US 6%, and India 32%). The aim is to eventually save enough money to invest in a way that you average (at least) 5% return on your investments after infation. If you withdraw from this retirement pool at the rate of 4% and have enough to cover 100% of your expenses – you become financially independent – the retirement pool keeps on giving!

Automate your savings

One of the best financial habits that I formed was to take the thinking out of saving and set up automatic recurring transfers from my work money to my savings or investment accounts – Pay Yourself First. I also took full advantage of “concessional contributions” to my super account which were taxed at 15% rather than my then marginal rate of 37%.

So, automate your savings. Investment returns are important and we hope that we can exceed the 5% after inflation returns that the above table and 4% rule are based on. However, the number you have most control over is your savings rate – and that is most important.