Retirement Living Standards Aren't So Bad........

That rate of return seems low to me, can't help but think the journo has fluffed their numbers to paint a picture that's more negative than the reality.

If retiree was to want say:

• No leverage
• Lots of diversification
• (relatively) low management costs

I'm a 100% unqualified non-financial advisor armchair investor, but I would think an ETF portfolio like the following would make sense:
20% Australian shares - so a boom & corresponding inflation doesn't price you out of the local market
8% Global markets shares - track the global market
12% Global Emerging market - bit of growth
50% fixed income bonds - stability of income
10% precious metals - hedge against downward markets.

To wrap it up into brackets:
40% shares with half local, half internationally diversified
50% fixed income bonds
10% metals

That would be say age 65, then sell down (or if living below income) invest 1% more from shares into fixed income bonds / shrink metals hedge by 0.5% per year so that when you're age 80 it would be more like:
25% shares, half local, half international
72.5% fixed income bonds
2.5% metals

Age 90 would be:
15% shares
85% fixed income bonds
0% metals

Age 100 would be:
5% shares
95% fixed income bonds
0% metals

Hitting 65 and locking down all assets forever seems like a really weird approach to me, I'm not a financial planner but it just sounds wrong. I think at 65 a lot of investors are still going to potentially have 15-20+ years life ahead of them, completely exiting shares isn't smart. Diversifying across thousands of companies and both local and domestic markets as well as guaranteeing a basic level of income + hedging against a crash seems like a decent approach.


For giggles I've just mapped out the age 65 Portfolio.
I mostly stuck with Vanguard, but I would also consider say iShares IEM instead of Vanguard VGE because its been listed longer & has higher liquidity, even though its got a .2% management fee.. This is purely just a "fun" portfolio though so I'm not going to overthink selections and mostly just going to stick to good ol' vanguard. Likewise IEM might make more sense than VGS due to higher liquidity, but probably not.. still a large, nicely diversified fund.

20% Australian shares - VAS
8% Global markets shares - VGS
12% Global Emerging market - VGE
50% fixed income bonds - stability of income - VAF
10% precious metals - hedge against downward market

My 1 year portfolio performance from 04/05/2015 - 04/05/2016 is 1.15% growth.
Not great, but not surprising.
My 1 year yield is 3.48% Again. Not great, but not surprising.
I'm roughly in line with the 4% rule that a lot of financial advisors like to recommend as a ballpark though for a single year.

Given that VAS is up 100%+ over 5 years (I should've picked older funds, most of the others aren't old enough) I'd hazard a guess that the 5-10 year performance is going to be significantly better than 4.63% & will still deliver a comfortable $55,680 in dividends even in slow years like the last 12 months.

Not quite Morrison's 4x, although i think it would likely be 4x over a 10 year period to smooth out all the bumpy years like the last 12 months, but certainly way better than the numbers this journo is talking about.


the 4% rule is still quite manageable in a situation like this & with some more modeling I'm pretty confident that the 65yo retiree would comfortably able to live off dividends / sell down a fraction of a percent of their portfolio in "off' years, and still live off 2016 equivalent of $64,000 (4% of 1.6m) that should nicely keep up with inflation. I mean its not a 100% success guarantee but I'd think it would be in the 99%s and most of the failure scenarios would be due to situations like wwIII, alien invasion and or something else truly amazingly unpredictable happening.

I would rather be 65 years old knowing I can comfortably have $64k-ish a year all but guaranteed and roughly tracking inflation (so I preserve my spending power) off my $1.6m nest egg + my outside of super assets vs be dead broke, living 100% off the $22kpa pension.


Tl;dr:

• 65yos should still have some growth assets & they should shift toward fixed income as they approach proper old age
• you can live very comfortable off $1,600,000. In some years you'll generate Morrison's 5.6% portfolio return rate, but the (US centric) trinity study & a bunch more research suggests that if you pick a nice conservative number like 4%, which still gives you $64kpa for 2016 but will adjust up with inflation, chances are you're not going to have to stress about the pension or "living too long", you're going to have far more money than people 100% on the pension
• if equivalent of $64kpa (PER PERSON) isn't enough, invest outside of super.
• Should an 85yo be heavily invested into shares? No. Should a 65yo with 20+ years expected life expectancy have some of their wealth in shares? yes.

 

You're assuming no drawdown of capital. But if your fund grows by 4% and your drawdown increases by 2% you still run out of money after 20 years - not good if you choose to retire at 60. To be safe you need to draw just 48,000 (3%) - you're then OK for 40 years. It just shows that given current life expectancy, the average person with a typical super balance and nothing else is not going to have a long and comfortable retirement.

 

I thought there was a point in which you had to take a percentage of funds out of super each year, hence you wouldn't have $1.6M in forever...

 

Between 65-74 you have to pull 5%pa. its because a 4% withdrawal with most scenarios like the one I mentioned above, means you can live to 160 and you're still going to have the same spend power as when you were 65.. Which the government really doesn't want, because it allows very wealthy people to use superannuation as an estate planning tool.

There is nothing to stop you re-investing that money once you've pulled it from super, which is basically just a tax advantaged holding structure nor is there any requirement that you spend the money.

pulling an extra 1% for 9 years isn't realistically going to mean that most people run out, it means they can't pass on as much to the next generation... That is as long as you don't just go "free money! woohoo!" if you're age 95 right now, both your parents made it to 105, you think you'll hit 108+, its probably not advisable to develop whatever the geriatric equivalent of a cocaine habit is because the government is now making you pull 14% into your regular accounts per year & because it makes watching Dr Phil so much more exciting.

The government also bumps it up over time. as previously mentioned, at 95+ you have to pull 14% per annum. its combatting estate planning via tax advantaged mechanisms like super, not forcing people to spend every cent. Otherwise everyone would leave every cent they were planning on passing on to the kids into their lovely flat taxed superannuation account while it compounds & grows nicely, until they die... Would be good for the kids, not so good for the government, as those tax concessions are meant to help people fund their retirements, not make their kids rich.

The problem with it though, is that it encourages people to do stuff like hit retirement age, make a lump sum withdrawal, upgrade to a bigger PPOR or dump it into renovations.

That way they bury their $$ in a capital gains advantaged, pension asset assessment exempt asset.. Which is why there are so many aussies with $1m+ net worth collection part pension . Gotta love welfare for millionaires, I'm sure that's sustainable.. *cough*.

 

@Plutus - Does that make any old f@rt more inclined to borrow to the hilt on an exempt ppor knowing that t hey will have to draw an ever increasing amount from super as they age with no chance of spending all of it or do you simply gift it to your heirs/park it in the bank?

 

superannuate (v.)
1640s, "render obsolete," back-formation from superannuated. Meaning "impair or disqualify by old age" is from 1690s. Related: Superannuating.

 

I had planned to make a significant super contribution at some point; I'm semi-suprised you didn't / don't think you would hit that ceiling, @sash.... or maybe that's a concious thing, ie you were never planning on using super as a major part of your investment/retirement plan.

My initial reading of the $1.6m cap is that it's a limit on how much you can have in pension phase, is that others' understanding as well? eg if you have a total of $5m in super, you can only move/have a total of $1.6m in pension phase at any one time, so the rest of it has to remain in accumulation phase....?

 

Probably because I will have pulled up stumps well before then....

 

Before when??

Super has been around for a fair while.... just saying I am surprised you don't think you would have hit $500k non-concessional contributions within your working life (even if you plan on "retiring" soon).

 

My understanding is that it will remain in accumulation where earnings are taxed at 15%. As now, you will be able to make lump sum withdrawals as wanted once you reach the relevant age.
Marg

 

We had planned to live off rents. We were both working when Alan died at 62. He had been working part time and doing the maintenance and improving the rental houses. We had various loans at the time, as we had expanded the total number of properties. On his death, I left work and sold down to clear all the mortgages. I was hit with an enormous CGT.

I returned to work after 18 months and worked until I was 68. Although I was receiving the rents, the expenses were so high that I did not have sufficient money to do all the things I wanted, eg travel, etc. I sold down and now have 5 houses and some capital. I have some of the capital in shares and the balance in a low rate account, that I can draw on to live.. It works for me. I am maintaining the capital as value in the houses. They have all appreciated significantly in the past 2 years. Rents are fine but the expenses really bite into the rents.

It doesn't actually cost me much to live. Food, gym, car, etc. don't cost that much. My money goes on travelling, which is what I want currently.

Alan was self employed and did not have super. We used properties as our super. I am so glad we did.

 

@Chrispy - I know a few in various outcomes of retirement & preretirement who are/were self-employed. Depending upon their accountant's advice (if it was sought) some have adequate super, others have it all tied up in their businesses.

The biggest advantage that was spruiked to some was - the low tax environment and zero tax in retirement. For some of the others who didn't take out super, they haven't followed the basic tenet of 'pay yourself first' - those that did and invested are ok those that didn't are finding it difficult to sell their 'business' so although good in theory that they can sell this cgt free if rolled over into super they will get little if anything for the business.

 

I would say it doesn't necessarily encourage them to borrow to the hilt, but it certainly does provide huge incentive to pull it out of super as a lump sum and upgrade. The government is going to force it out of your super anyway and as we all (hopefully) know, capital gains in property, especially in PPOR's are a pretty good way to continue to build wealth.
If you hit retirement age and your options were:

A: 100% self fund
B: Get a partial pension, pensioner concession card & all the other trimmings (utilities allowance, free stamps! etc) topping your income up to roughly the same level AND you can live in a nicer house... wouldn't you?

I don't blame anyone doing it, the government gets to set the rules & its their fault if they don't do anything to stop people from creatively structuring.

 

most won't achieve A, next best option B, this is commonly spruiked by financial planners