Superannuation | Slack Investor

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.

Household Comfort … and March 2021 – End of Month Update

The couch seems to be looking good for some, but not for others. ME Bank have updated the annual Household Financial Comfort Index that surveys 1,500 Australians every year to get an idea of how Australia is travelling in a money sense. Slack Investor was surprised at the research results which revealed that over the past six months, to December 2020, the “financial comfort” of Australian households has reached a record high of 5.89 out of 10. This index is 5% higher than before COVID-19! However, it is full-time workers that report the highest financial comfort across the workforce.

*The changes in the Household Financial Comfort Index since 2012 (Scores out of 10) –* ME *Household Financial Comfort Report* 2020

The high financial comfort can probably be linked with some households going into “savings mode” as the uncertainty caused by COVID-19 on the economy, and the very high levels of government support.

Although, not everyone feels the same after a year of COVID-19. About 30% of households said that their financial situation has worsened. Clubs, pubs, gyms, air transport, restaurants, education, and the creative arts were hit particularly hard – with the cohorts of casual workers and adults under 24 shouldering the burden of Coronavirus disproportionally.

Household Response to the Pandemic

*The main method that households used to ease the financial burden during COVID 19 (Columns %) and the line showing level of financial comfort associated with each method –* ME *Household Financial Comfort Report* 2020

The main ways that households chose to ease the effects of the pandemic were 1. Dipping into savings (14%); 2. JobKeeper payments (Govt. wage subsidy) (11%); 3. Superannuation withdrawal (9%); 4. Delaying bills (7%). With JobKeeper payments having now ended, the raid on super halted, and the other main methods likely exhausted, it looks like a tipping point is approaching.

“And, at $90 billion, (JobKeeper) it’s the single largest economic support program that any Australia government has ever undertaken.”
Australian Treasurer Josh Frydenberg – ABC News

The Australian government’s massive JobKeeper program ending is likely to cause a big rupture in the economy with many small businesses who have, till now, been just “hanging on “. Many of these businesses are likely to cease trading. For employees, Treasury estimates that up to 150,000 workers will move from JobKeeper into unemployment.

Financial Cushion

With tough times ahead, there will be many who would wish for a financial cushion. Slack Investor has often banged on about the need for an emergency fund of cash that will help when one of life’s inevitable bits of bad new turns up. In December 2020, about one in five households reported virtually no, or very low, amounts of cash savings (<$1000).

How much in cash savings does your household currently hold – including savings accounts, term deposits and offset accounts? – ME *Household Financial Comfort Report* 2020

As for the pandemic effect on retirement savings, the reality of individual super balances is starting to bite with the report revealing that only around 18% of households expect to fund retirement with their own superannuation and 42% expecting to use both private savings and the government pension.

“Financial comfort levels are up for now, but many households
are on the cliff’s edge. They’ve lost income, their jobs and entire
livelihoods, their wafer-thin savings buffer is dwindling, and government support is the main action stopping them from falling over.”
Household Financial Comfort Report – 2020 ME Bank survey –

March 2021 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. All Slack Investor followed markets this month had solid rises (ASX 200 +1.8%; FTSE 100 +3.5%; S&P 500 +4.2%).

In these uncertain times, especially with the high prices on the US market, I am monitoring my index funds weekly and if, at the end of the week my Index funds are below the stop loss, then I will put a post on the blog and sell at the next opportunity. All Stop Losses are Live.

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.

Three Pile Theory

– Adapted from ‘Three Mounds’ by Yoko Ono is displayed at the Serpentine Gallery on June 18, 2012 in London, England – From Getty Images.

With apologies to Yoko for interfering with her art, but Slack Investor first thought of his own “Three Pile Theory” back in 1989 when I had got myself a “Proper Job” and enough stability in my life to make the big plunge into Real Estate. At that time, I owned a few grains of dirt in my House pile (the Bank owned the rest), My income was OK, and my investments (which would later morph into the Slack Fund) contained a few thousand dollars in shares.

Now, 32 years later, Slack Investor still has these three financial pillars to keep himself steady.

House – Home ownership gives me great security and pleasure. The bank owned most of this 30 years ago – but now I have the upper hand! (~30% of Net Worth)
Stable Income – This used to be my job, but in retirement I have some stable income annuity style investment (~20% of Net Worth) that would pay my bills and maintain a basic Slack Lifestyle should Armageddon befall the stock markets for a few years. This income is supplemented by income from the Slack Portfolio.
Slack Portfolio Investments – (~50% of Net Worth) – Now currently in my Self Managed Super fund (SMSF) which is almost exclusively invested in growth companies. These are great businesses to be invested in if you have a long term horizon – however, stock prices can be volatile in these high Return on Equity (ROE) companies. I am currently retired and do not rely on the Slack Portfolio for stable income. Because of the stability of my other two pillars, I can be quite aggressive in the allocation of my investments in the Slack Portfolio – as I know I will not have to panic sell (for income) during any downturn.

Slack Investor didn’t really invent “Pile theory” – it has been around for a while in various guises – Three Buckets is a tried and true way to manage your retirement expenses by dividing your retirement stash into buckets of cash, conservative investments and more risky, growth investments.

House

My home may not feel like a palace to you, but to me, it is a whole Kingdom.
Prerona Chatterjee

There are some who argue that you are financially better off by renting over a 10-year period rather than buying. But for Slack Investor, the tax advantages – no capital gains tax on your own home in Australia; the leverage – banks are usually willing to lend at least 80% of the house value; the forced saving – your mortgage payment is a big monthly portion of your income which you set aside for a long period; and, the stability provided by home ownership make this a clear winner for me. “The Serenity” is just a bonus.

Stable Income

To cover living expenses and to give yourself “peace of mind” it is so important to have a slab of money that is not subject to the vagaries of the sharemarket. In Australia, if you haven’t enough super to go independently, you might qualify for a full or part pension.

If going the fully self-funded route, many advisors recommend your stable income should be in two parts. You should work out your living expenses for a year and then keep between 2 and 5 years worth of expenses in stable cash deposits – Let’s start with 3 years of expenses in accessible cash. The rest of you stable income pile can be in longer term cash deposits, bonds or REITS. Because the investments pile (Slack Portfolio) is in growth shares that can be very volatile, my stable income must be something that is not highly correlated to to the sharemarket.

Term Deposits– although interest rates are woefully low now on bank term deposits, it is still possible to get ~1% p.a. from some of the minor banks that still have the Government Guarantee for the first $250 000.

Vanguard Australian Fixed Interest Index ETF (VAF)

MER (0.20%) – Annual performance over 1/5 years – (3.81%/4.41%)

Vanguard Australian Government Bond Index ETF (VGB)

MER (0.20%) – Annual performance over 1/5 years – (4.08%/4.49%)

Challenger Fixed Term Annuity – Rates are pretty low at the moment, locking away a deposit for 5 years will earn a measly 1.65%.

Real Estate or Real Estate Investment Trusts (REIT) – these are a bit higher up the risk curve but as they produce income (rent) and can be associated with longer term leases – are usually less volatile than the share market. For example, Vanguard Australian Property Securities Index ETF (VAP) – MER (0.23%) – Annual performance over 1/5 years – (-13.3%/6.23%)

Investments – The Slack Fund

Because the Slack Portfolio is mostly in growth shares, I have steeled myself that this particular pile is volatile and changes value every day. I am prepared for a few low performing (or even negative) years in a row for this pile. Even great investors that have much more knowledge than Slack Investor have the occasional bad year – during some periods, share investments just perform poorly. I am accepting of this truth.

Because this Investment pile is mostly in my Self Managed Super Fund (SMSF), I am usually obliged to withdraw 4% of its total value each year – this percentage increases with age – but this payment is currently tax free for those over 60. I can use this income in a discretionary way. My living expenses should be covered by income from the Stable Income pile – and any other income is gravy.

Pile Rebalancing

Once you are in a house that you are happy in and hopefully will be near paying off any outstanding loans as you get into retirement – other than maintenance, you can leave this pile alone.

The Stable Income cash pile might occasionally need a bit of topping up from the longer term stable Income or Investments fund. Any dividend or interest income from your investments is fair game. The investment Slack Fund usually produces 2 -3% income.

Hopefully, with 3-years worth of living expenses in the stable income pile, you can ride out a few bad years in the share market and only sell shares to top up the stable income pile when the share market has had a good run. Ideally, you would only sell share assets out of this pile when the share market is above the long term trend line. However, realistically, from the chart below (in red) there are long periods when the market is below trend. Have no fear, your basic expenses are always covered by a mixture of stable income, interest and dividends.

The long term chart of the US S&P 500 with the dotted inflation-adjusted long term trend line – from seeitmarket.com

There are other piles worthy of attention such as Health and Relationships but the finance stuff is necessary too. So get the shovel out … and start working on those piles!

SMSF is it a superpower OR Kryptonite? … and January 2021 – End of Month Update

Slack Investor hasn’t written much about Self Managed Super Funds (SMSF’s) despite his love affair with his own fund. SMSF’s are only found in Australia and represent a “hands on” way to accumulate, nurture, and eventually release your super funds as a pension or lump sum. They have the same status as a normal retail or industry super fund (e.g. Australian Super) but they are “self managed” and give the trustees (members of the fund) power over where the fund is invested. This control is a double edged sword, as it is also possible to destroy your super wealth with a SMSF by making unwise investments.

SMSF’s offer

Control
Flexibility in investments – But this can be dangerous!
Estate Planning and Taxation advantages

There are nearly 600,000 SMSFs in Australia with over a million member (March 2020). Although this represents less than 5% of Australia’s population, about 25% of the $2.7 trillion invested in superannuation is invested in SMSF’s. The average member balance for an SMSF was a whopping $678,621 (ATO Data 2018).

It is possible to structure an SMSF so that the investment fees are very low. A surprising finding from a SuperConcepts study was that the average annual expense ratio for SMSF’s was 2.8% for the over 20000 funds surveyed. This seems particularly high when compared to the Slack Investor SMSF portfolio expense ratio of 0.12% through a “no advice” online SMSF services provider like e-superfund. This suggests that most of the funds surveyed used the relatively high cost route of engaging an accountant to administer the fund. There are many SMSF providers – Slack Investor uses e-superfund which provides the legal structure and web-based audits and education. The yearly operating expenses are an amazingly low $999. The SMSF is so integral to Slack Investor’s strategy that I have set aside an SMSF page on the Slack Investor site – Alas, there is not much on there yet … but it will come!

Rainmaker are producing monthly comparisons of SMSF’s with the larger low cost My Super products offered by Industry and Retail Super Funds. The analysis can be found on their Superguard360 site.

SG360Jun17_2 — A comparison of the Asset mix of SMSF funds (left column) with MySuper funds – From Superguard360

SMSF funds (above left) traditionally hold more cash, property and less international shares than the larger Industry/Retail funds (My Super – above right). SMSF’s have outperformed MySuper since the GFC (see below, SMSF’s Blue line, My Super Red block). However, with the recovery of equities, the MySuper funds have been catching up and as at June 2017, 10-year returns from both types of funds are near identical at 4.2%. Under current asset allocations, the more diversified Industry and retail funds should overtake SMSF performance – on average.

SG360Jun17_1 — Comparison of how SMSF’s (Blue Line) have done , on average, against the default My Super Fund Index (Red Block) – From Superguard360

Self Managed Super is NOT for Everyone

“… That a little knowledge is apt to puff up, and make men giddy, but a greater share of it will set them right, and bring them to low and humble thoughts of themselves.”
From an anonymous author, published in 1698 as “The Mystery of Phanaticism”

Running a SMSF takes time and I wouldn’t recommend it to anyone that doesn’t want to be fully engaged with their financial future. Luckily, Slack Investor finds the whole finance and ATO compliance scene most interesting. Trustees of SMSF’s are held responsible for compliance with super and tax laws and there are many other risks in running a SMSF fund. A long term study of SMSF data by SuperConcepts, “When Size Matters” found that that SMSF’s below $200000 in total funds generally underperformed. However, the larger SMSF’s were comparable in performance with industry funds.

Over 10 years, there’s hardly any difference between the performance of not-for-profit funds, such as industry funds, and DIY (SMSF) funds.
SMH article (2017) summarising Rainmaker data from the ATO

Despite how well an SMSF style really suits Slack Investor – The large majority of people should not get into an SMSF – but stick with a good performing Industry Fund. Unless you are justifiably confident in your investing abilities, most people will be better of with a well diversified industry fund for long-term Super performance. It is always better to “have low and humble thoughts of ourselves” – it is too easy to destroy the value of your hard earned super.

January 2021 – End of Month Update

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

Some tested COVID-19 vaccinations have started to be rolled out internationally – but uncertainty prevails. Slack Investor followed markets all fluctuated but, overall, remained pretty flat this month. For January 2021, the Australian ASX 200 rose 0.3%, the S&P 500 fell 1.1%, and the FTSE 100 down 0.8%.

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

Retirement sweet spot – a place to live is a good start!

Slack Investor has thought a lot about retirement – a lot!

Even though I liked most aspects of my jobs, the thought of doing what I want each day was most appealing. I read quite a few blogs on financial independence and they seem to fall into two main types. The “retire at 30” types and the “building of financial skills to gradually gain financial independence” types. Slack Investor is definitely in the latter camp and, without outside help, or big slabs of luck, I can’t really see a way of avoiding the 25-35 years of work to build up your funds before you then launch your retirement.

This post sets out with two of the building blocks to retirement – a home and some superannuation. You might be just starting your working life, or be in your forties and thinking … “Well, how do I get to my retirement from here?”

The recent Australian government Retirement Income Review emphasised that if your are renting in retirement then things are tough.

In retirement, renters have higher levels of financial stress. A significant proportion of retiree households that rent are in income poverty …”
The Australian Treasury Retirement income Review (2019)

Get a Roof

So take the advice of Flo Rida and Slack Investor and make it a big priority in your life to own a place to live. I know this seems like an impossibility to many as the cost of houses in Australia is eye -watering in the big cities. However, the place you want to own might be an apartment or, it doesn’t have to be in a capital city – it can be in one of the many fantastic regional towns!

From Australia’s most liveable regional cities. Not sure why “Distance to Alcohol” is a criteria – or what it means … might be good … might be bad!- but this is a nice selection of great Australian towns.

When you have found a place that you could retire to, the next step is to get yourself into the property market by saving for a deposit and buying a place. There will now be 30 years of pain … and then you own it! But, at least you have borrowed money for a “hopefully” appreciating asset. Make sure that any property you buy makes good sense – Schools, Transport, Parks, Shops, etc.

Another way to do this is “rentvesting”. This an option where you rent your place to live near your work while your are buying a place that you might want to retire to one day. Rentvesting makes sense when the costs to rent a place is cheaper than the buying costs (Loan Interest/Rates/Stamp Duty, etc). While you are renting in a share house or apartment the extra rental income from the property you own, and tax incentives, will allow you to use any surplus funds to invest in a share portfolio. Rentvesting can also increase your borrowing power and hopefully get a better property – Just don’t over extend yourself.

Get some Super

According to Investblue, in 2018, as boomers are retiring, the average retirement super balance in Australia for men is $270,710, and for women $157,049. This is not really enough, but an “average couple” would have over $400000. Things should get better as compulsory super has only been with us since 1991 . Boomers have had many advantages during a period of rapidly increasing asset prices – but compulsory superannuation over their whole working life was not one of them.

If you are relatively healthy and own your home outright, the Association of Superannuation Funds of Australia (ASFA) have estimated the annual retirement income required for a modest and comfortable lifestyle.

The Association of Superannuation Funds of Australia (ASFA) retirement standards for 2018

Using the average figures, there is a big gap between existing super saved and a comfortable lifestyle

80% of retirees fund their retirement years with a combination of superannuation and the age pension
Money Magazine June 2018

It is worth some study into how the pension and superannuation systems interact. The bare minimum to aim for is the “sweet spot” where under current rules, home owning couples can have $400000 in superannuation (singles $300000) and still qualify for the full government pension. Using this mix of super and the pension, when reaching the pension qualifying age of 67, a modest to comfortable retirement is possible under current rules.

Situation	Superannuation	Drawdown from Super @ 5%	Age Pension	Total Income
Single Home-owner	$300,000	$15,000	$19,210	$34,212
Couple Home-owner	$400,000	$20,000	$33,272	$53,272

Table from Realize Your Dream and based upon 2018 values

This “sweet spot” is our first “port of call” in super terms, and meant to demonstrate that if you own your own home and have a good chunk of super … then you are going to be OK in retirement.

Slack Investor hopes that you have got onto the idea of financial independence a bit earlier than aged 40. By starting to plan in your twenties or early thirties, you can aim to fund your own retirement … and, perhaps not wait until you are 67.

April 2020 – End of Month Update … The Real Cost of Early Super withdrawl

In relaxed lock down through the courtesy of COVID-19. But the stockmarkets never sleep.

The Federal Reserve bank of Cleveland have the probability of a US recession within the next year at 20.0% but there has been some optimism in the markets that there might be an eventual end to this wicked virus crisis. Rises in all followed markets ASX200 +8.8%, FTSE100 +4.0% and S&P500 +12.7%.

The rises in the UK and US have got Slack Investor back into the market with a change in momentum on the weekly charts signaling a re-entry. But it is with much trepidation – the rapid recovery seems to have been priced in a bit early!

Slack Investor has outlined in many posts about how to get out of trades with stop losses. But has been a bit lacking in detail on when to get back IN. When trend trading, my main tool for finding a buy signal is a trend following (or momentum) system called the Directional Movement Index. There are many ways of setting up this system. Slack Investor likes the “smoothing” that is enabled by a system that looks back over the previous 11 periods – but the complexities are best left for the Resources page.

UK Index weekly chart showing the weekly price ranges at the top and Average Directional Movement Index (ADX) patterns below – From Incredible Charts

I am quite comfortable with the re-entry into the UK Index shown above, but the rapid swings for the US charts have the Slack method back IN, but so far, performing worse than the “buy and hold” method. I will continue this index market timing experiment for another 4 years (to make it a 20-year trial).

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

Super Withdrawal … should you?

“A Run On the bank” an etching from the 1930’s – from sutori.com

The Australian Government has gone into real governing mode and set up some measures to help people get through this COVID -19 crisis. They have established “JobKeeper” payments ($1500 per fortnight), doubled “JobSeeker” payments (up to $1100 per fortnight), and allowed the unemployed and people whose hours have been cut by 20 per cent to access up to $20000 of their super early. There are some rules.

Slack Investor understands that times are tough for the many who have lost their jobs, but is disturbed that 881,600 people had registered with the government for early superannuation access – and this could blow out to 1.5 million people. Unfortunately (particularly if you have credit card debt), this will be a necessary step for some. Slack investor implores those affected to exhaust all other options first – an early superannuation withdrawal does have repercussions further down the track.

Comparing potential withdrawal impacts at different ages

Investor’s current age	Years to retirement	Value of $10,000 at retirement	Value of $20,000 at retirement
67	0	$10,000	$20,000
57	10	$17,908	$35,817
47	20	$32,071	$64,143
37	30	$57,435	$114,870
27	40	$102,857	$205,714

Source: Vanguard calculations – These calculations show a significant projected eventual cost of super withdrawal. However, these raw figures do not allow for inflation. A projection allowing for inflation (2%) using the smartasset inflation calculator shows that the $10 000 withdrawal after 40 years will grow to a still significant $46578 in 2020 dollars ($102857 in 2060 dollars).

Slack Investor knows that accessing cash like this has consequences and that people should make an informed choice between their short term financial need and their long term financial position.

There is also the effect on your insurance with the withdrawal of super … if you go to a zero balance, your super-related death and disability insurance will cease. Even if you return to work, it will not automatically reinstated until your account balance reaches $6000.

A real-life example from the Slack Investor chronicles. A long long time ago in 1982, a 25-year old Slack Investor wanted to travel overseas for the first time. Funds were a bit short and he had saved some money … but not enough for a whole year travelling. I had a superannuation balance of $3500 (This would be worth almost $10000 in 2020 dollars using the smartasset inflation calculator).

Back in those days, prior to compulsory super, you were allowed to cash your super in – and I stupidly did. To save up this kind on money would have taken another 3 months of saving and working – I chose the instant gratification.

Slack Investor is a great believer in the “tried and true” problem solving method of

Research – Weigh up the pros and cons …
Make a decision
Move On … No Regrets – you have made the decision with the available facts.

However, the pulling out of my super when I was in my twenties is one of the few things that brings me just a tinge of regret.

The Hesta Retirement Balance Projection Calculator shows that my $3500 would have grown to nearly $31000 at my 62-year old retirement date (Assumptions: at 8% growth and 2% inflation). Slack Investor likes this calculator as it allows you to set assumptions that help account for inflation as well as growth.

Perhaps if I had just delayed my trip by a few months and worked a bit longer, I might have been able to retire just a little bit earlier. Ah well … we make our decisions and … such is life.

Be safe, be kind … and make an informed decision about releasing your super early.

January 2020 – End of Month Update … and Super Australia

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. The ASX probably had a bit of catching up to do and put in a big month (+5.0%) – These type of rises make Slack Investor nervous! There was also an opportunity to revise upward the stop loss for the ASX 200. When the share price gets to be 20-25% above a stop loss on the monthly charts, I usually look for a sensible place to put a new stop loss at a higher value. The ASX 200 is still in an uptrend – and a “Higher Low” had been established at 6396 on the monthly chart. The Stop Loss was moved upward to 6396.

The FTSE100 (-3.4%) lost last month gains and the S&P500 was flat at (-0.2%). Both are still well above monthly stop loss levels.

The Federal Reserve bank of Cleveland have the probability of a US recession within the next year at 25.9%. There has been not much change in the past 3 months. There was a peak at 41% five months ago. The current value exceeds the Slack Investor threshold of 20% and my monthly stop losses for Index funds are still “switched ON”

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

The introduction and growth of Australian Super

Former Australian Prime Minister and Treasurer, Paul Keating introduced compulsory Australian Superannuation and often used “cut through” language. In this case, to reporter Richard Carleton. Background on what constitutes a “pissant” can be found at grammarist.com

Not really a fan of insulting language but sometimes it is necessary to cut through, and Paul Keating was a master of this art. Imagine what it was like back in 1991 – where Keating, with the help of Trade Union Leader Bill Kelty, was able to convince Australian unions and workers that an overdue 3% pay rise should go into compulsory savings. Instead of going into worker’s pockets, he argued that the payrise should go into a retirement scheme called “superannuation”. ABC economist Peter Martin describes this incredible feat of persuasion as a means to avoid inflation at a critical time in Australia’s economy.

The most excellent compulsory Australian super has been going since 1992, accounts for 9.5% of workers income, and now stands at 2.9 trillion AUD . According to ASFA, Australia is the 4th largest holder of pension fund assets in the world. But the Productivity commission says that super fees are still to high and that some super funds are duds. For most of your working life, you should be in a “growth” fund that is not a dud!. The Chant West compiled funds below have an excellent track record over 10 years – a good place to start.

From Morningstar, using *Chant West growth funds data, (61 – 80 per cent allocation to growth assets).* *Performance is shown net of investment fees and tax.*

New Australia Day please

In contrast to many current day politicians, Paul Keating was a real leader, prepared to argue the case for a proposal – even if it wasn’t initially popular.

Australia Day is currently celebrated on January 26th – The anniversary of when Captain Arthur Phillip took formal possession of the colony of New South Wales in 1788. This date does not sit well with many indigenous people who understandably see this as a commemoration of “invasion day”. It is time for a new date! – the anniversary of the opening of the first Federal Parliament in Melbourne, 9 May 1901 has been suggested.

May might be a bit cold though. Noel Pearson suggests the more inclusive celebration of both the 25th and 26th of January. The first day a recognition of the 65 000 years that indigenous Australians occupied the land – and a putting to bed the false idea of “Terra Nullius”. The second day, a celebration of modern Australia.

Nice work Noel … I am sure Paul Keating would approve – and two holidays instead of one … very Australian.

*Some thoughts from Paul Keating (and his speechwriter Don Watson) in his landmark Redfern Speech in 1992* from NITV 25-year anniversary of this address.

What’s that smell? … Banks!

With great thanks and acknowledgement to the insightful and talented Randy Glasbergen

KPMG have just reported that banks are starting to lose their shine and the big 4 banks in Australia have reached a “turning point”. Slack Investor would argue that, after a pretty good recovery post the GFC, Australian Banks have been in decline since early 2015. NAB is the last to confess this reporting season … They are all businesses that will find growth difficult.

With its full-year profit of $4.8 billion, down 13.6 per cent, it joined ANZ, Commonwealth and Westpac in announcing a big decline in earnings.
From abc news

The ASX Bank Index since 2000. Except for the GFC 2008/9, the banks have performed well – as well as paying high dividends. Things changed in March 2015 where, despite temporary recoveries, there has been a general decline in share price. From Investing.com

Self Managed Super Funds are a great place to park your super money for the hands-on investor. But, they are not for everyone. You really need to have a real interest in investing and at least $200 000 in your super savings. According to ATO Data, at 31 December 2017, the most commonly held SMSF share investments (by investment size) are below: There are a lot of banks!

Commonwealth Bank
Westpac Banking Corporation
National Australia Bank
Magellan Global Fund
BHP Billiton Limited
Platinum International Fund
ANZ Limited
Telstra Corporation
CSL
Wesfarmers

Not a bad portfolio for the past 10 years … but, the tide for the banks has already turned with low interest rates affecting margins, increased competition from the more nimble digital banks, the Hayne Royal commission “blowback” forcing the banks to separate from their profitable wealth management businesses, and recent dividend cuts announced. A closer look at the top 5 SMSF shares with financial statistics from the excellent marketscreener.com. The 1-yr returns over the past year for each stock are lifted from marketindex.com.au .

SMSF 2017 Top 5 Shares		P/E 2020	Yield %	ROE %	1-yr Ret %
Commonwealth Bank	CBA	15	5.5	13	12.4
Westpac Bank	WBC	14	5.9	11	-3.7
National Bank	NAB	12	6	12	16.7
BHP Billiton	BHP	12	5.3	22	10.9
ANZ	ANZ	12	6	12	-3.9
Average		13	5.7	14	6.5

Slack Investor can understand the lure of juicy bank dividends for SMSF funds. But, if the dividend is coming with a reducing share price due to the bank business shrinking – then this is not a good deal – and perhaps look to higher yield industrial shares or industrial/office REITs for that cherished income rather than banks.

Sing the praises for Return on Equity (ROE) and Earnings per Share (EPS) Growth

This is one of the first financial statistics that I look at when deciding on a company to buy. Return on Equity is a company’s Net Profit ÷ Average Shareholder Equity. If a company had a net worth of $10 million and made a profit of $2 million, its ROE would be 2/10 x 100 = 20%.

High ROE companies generate a lot of cash – this cash they can then use to grow their business. If they also have a good increase in their Earnings Per Share (EPS) – Slack Investor would classify them as “Growth” Companies.

CSL Earnings per Share- and projected EPS for 2022 -2024

Generally, companies with a ROE of >15% get Slack Investor’s attention but some businesses require lot of infrastructure before they can generate profit. For this reason ROE is best used to compare companies in the same industry. For contrast with the 2017 SMSF, let’s have a look at Slack Investor’s Top 5 stocks from the Portfolio page (This is not advice!). Data gathered from marketscreener.com and marketindex.com.au .

Slack Investor Top 5 Shares		P/E 2020	Yield %	ROE %	1-yr Ret %
CSL Ltd	CSL	38	1.2	35	38.3
Altium Ltd	ALU	46	1.6	31	44.9
Cochlear Ltd	COH	41	1.7	38	26
Macquarie Group Ltd	MQG	16	4.4	16	11.5
REA Group Ltd	REA	40	1.3	35	27.9
Average		36	2.0	31	29.7

The average ROE for the Slack Portfolio is much higher than for the 2017 SMSF top 5 (31% vs 14%) . They also all have a projected increasing Earnings per Share (EPS) – and this indicates the Slack preference for growth companies.

However, with growth comes volatility and the Slack Investor top 5 would not suit those who rely on their investments for income. The Slack portfolio would probably suit an investor with a longer term view and a separate income. If you are still working and want to grow your wealth through shares … then the ROE should be one of your guiding lights for company selection.

The Real October 2019 – End of Month Update … and Australia’s debt binge

Apologies to my faithful email subscribers, two days ago an unfinished version of this post was released into the ether. Slack Investor has rudimentary skills in the blogging arts and didn’t know how to recall the post. Anyway … this is what it was supposed to look like – with all information updated!

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. The Slack Investor followed overseas markets are a mixed bag with a flat ASX200 (-0.4%), and a dropping Brexit plagued FTSE100 (-2.2%). The good old US has shrugged off chants of “Lock him up” for their president and the S&P500 has had a monthly increase of 2.4%.

The Federal Reserve bank of Cleveland have the probability of a US recession within the next year at 31.0%, this has been gradually dropping since a peak at 41% two months ago. However, the current value exceeds the Slack Investor threshold of 20% and my monthly stop losses for Index funds are definitely “switched ON”

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

Household debt – the couch is getting a little uncomfortable

According to 55,000 respondents to the ABC’s Australia Talks National Survey, debt is a major problem for the nation.

On an individual level, 37 per cent are struggling to pay off their own debts, with almost half of millennials reporting that debt is a problem for them personally …
Australia Talks National Survey

Australia may not be in the top four countries for Rugby these days but we are one of the world leaders in terms of household debt. In fact, we are second only to Switzerland. I am ashamed to say Australia’s Household Debt is world class and edging towards 200% of income. With such a big chunk of our disposable income leaking to debt, it is no wonder that recent interest rate cuts are not having much effect on the economy as Australian consumers try to tighten the belts. According to the Reserve Bank, it seems that, with stagnant wages growth, most are coping with their debt by reducing their consumption.

Basically, the Australian economy is facing a long period of sluggish demand growth as our record high household debt becomes a giant millstone around the economy’s neck.
From macrobusiness.com.au

Debt can be multi-headed with mortgage, credit card, personal loans and education components. The ME Bank survey has found that there is stress in some parts of the community. If your employment income is steady, in these reducing interest rate times, the fortunate have been able to keep up existing monthly payments to reduce overall debt. This is a good strategy. Most Australian homeowners are ahead of their payments – so there is a bit of a buffer. RBA statistics show that the average borrower is almost 36 months ahead of their required payments. Though, there are worrying signs in some households.

Of households with debt, there was an increase in the
number expecting they ‘will not be able to meet their
required minimum payments on their debt’ and ‘can just
manage to make minimum payments on their debt’ in
the next 6–12 months – 43% combined compared to
38% in December 2017.
ME Bank survey

With the number of mature-age Australians carrying mortgage debt into retirement increasing rapidly, many are intending to use a portion of their super (which was supposed to fund retirement!) to try to extinguish their debts when they retire. The ME Bank Survey found that even with compulsory superannuation, only around 18% of households expect to ‘fund retirement with their own super’ (down four points in the past six months). The proportion of households expecting to ‘use both private savings and the government pension’ increased two points to 42%.

I hope that our politicians have a plan for all of this – although, as this involves a bit of thinking beyond the next election, I doubt it!