Super happiness

You chopped a whole lot of text out of my post.

What I wrote was:

If you can get total returns of 13% pa (or preferably 15% to 16%) after expenses from property, then go for it .

 

Thats brilliant

 

That was a sweet read @moridog. Thank you for posting it. Kudos for what you have achieved.

 

Agree, I thought I was allowed to do that? to answer on some of those points only?
The strategy for investing was just total control and probably totally different ways that 99.99% do it in Super?

 

Firstly I agree, property is not the best for super especially in retirement phase such as yourself, I personally prefer shares as well.

I have no doubt that you have achieved those returns over the past 10 years, but over the very long term 13% plus isn't sustainable without taking on extra risk (gearing, VC or private equity etc). It's very easy to think that 7-10 years is long term, but when talking about super we really need to talk 30-40 years!

Think about 1929-1959 where SP500 went nowhere once taking into account inflation. Same again from 1966 to 1987 (actually went backwards in that time), 2000-2013 flat again. We could have another lost decade coming up right now, or we could get over 10% pa for the next decade, who knows. As an accumulator right now it doesn't phase me, but managing a pension account is a different kettle of fish.

 

1. Aiming for a maximum balance that is as high as possible above $1.7m is a better strategy. I am not sure why people think $1.7m should ever be a limit. I would be happy to have a balance if $5m and only 34% is tax free. I wouldnt mind paying UP TO 15% tax on the other 66% and with franking the tax rate could even be negative and cap gains at 10%.. . And with further indexing $1.7m will become $1.8m and so on...... and then its each person.....
3. If interest rates are 1.5% then this chase for income at 13% comes with enhanced market exposure and risk. eg Many self funded retirees are now investing in risk rather than capital stable income sources eg deposits. In recent times many are chasing unrealistic targets and face higher overall market risk if world markets abruptly correct. Market exposure also comes with a expectancy of losses in some years but seems nobody is thinking that occurs anymore. It happended in 2008 and took until 2018 for the ASX to recover.....That is a broad index. Assuming continual and compounding increase in asset prices is illogical.

Choose your investments - Moneysmart.gov.au

 

Totally agreed.

But for some/a lot of people, $1.7M per person ($3.4M per couple) might seem unrealistic and unachievable.

That is why I posted "as close to $1.7M"; if they exceed it, even better.

Once one get above the threshold, deciding when to retire (and drawing a self-funded pension) becomes an interesting question.

Take two couples A and B. On 1-Jul-17 (when $1.6M threshold was set), let's assume:

1. All four persons are 60 years old.
2. Both couples have $4M in Super ($2M per person).
3. Both couples have exactly the same investments; hence achieve the same total return, say 11% pa.
4. Couple A decided to retire and commence drawing their self-funded pension at the mandatory rate of 4% (ignoring the COVID reductions for simplicity). Couple B decide to retire but to live on savings, inheritance, ....

Five years later (on 1-Jul-22), Couple B decides to commence drawing their self-funded pension (when the threshold is $1.7M). Based on my financial modelling:

1. Couple B's Super balance has grown to $6.74M while Couple A's Super balance has only grown to $5.74M. That is, $1M less due to paying a pension of 4% for 5 years, around $730K.
2. Couple B's pension phase balance is $3.4M but Couple A's pension phase balance has grown to $4.4M. That is, $1M more as their investments grew faster than the threshold.
3. Couple B's mandatory pension payment is $170K but Couple A's mandatory pension payment is $220K. That is, $50K more or nearly $1K per week. Couple B could withdraw $50K as a lump sum payment to equal Couple A's payments.

I trust my modelling is correct . Not saying that A or B made the better decision; just trying to forecast the differences in results.

I always believe that retirees relying on self-funded pensions should have 2 to 3 years self-funded pension payments in cash/capital stable investments.

That is why I posted:

 

I concur and the fee naysayers saying it doesn't make it viable are pushing another wheelbarrow.
3k per year accounting and auditing fees and I get to decide exactly where it's invested and how is a bargain for me.

I'm considering, as my next move, adding a triple key, turnkey residential property to the mix, paid off in 10 years using an offset account to get there and tfr from the bare trust to my SMSF once fully offset with tax-free rent pouring into my own SMSF bank account I can log on to via my internet banking and check what's going on.

Combined with LIC/ETFs this is a relatively conservative strategy that will provide for me in the winter years of my life. I believe I can add up to 20 members to the fund as well

 

You would probably do yourself a big favour if you moved away from single point estimates for your financial models and started thinking in terms of distributions.

This is what a 4% withdrawal rate if invested in US shares looks like for 2009-2019 (last data point available) plotted in with all other historical 10-year period for which there is data.

Most recent 10 year period would be up around the 90th percentile.



Single point estimates for planning when the range of historical results is so wide renders model results to be nothing more than Garbage In Garbage Out.

 

If I wanted to use a single point estimate, I would have used a calculator, not a financial model .

I used a financial model because I wanted to input any one of the following variables including:

1. Starting Point Total Super Balance
2. Starting Point Pension Phase Balance (any extra is in Accumulation Phase)
3. Total Returns set by year (including negative growth)
4. Pension Payment Percentage set by year (to cater for COVID reductions, etc)
5. Starting Point Year and Age (sets mandatory minimum pension payment)
6. End Point year and Age

A financial model enables one to easily change any one of the above or to change any combination of the above and record the outcome.

Running many, many iterations of input variable changes allows one to undertake scenario planning, stress testing and sensitivity analysis of one's possible Super outcomes.

The numbers in my earlier post were just one iteration in my scenario planning.

My guess in that you already knew that .

And I am guessing that you already knew that I knew that .

Totally agree.

That is why I conduct scenario planning, stress testing and sensitivity analysis. When there are lots of unknowns, using modeling to undertake scenario planning, etc gives one some confidence in making decisions and the possible future outcomes of those decisions.

That is another thing COVID has taught the world, the power of modelling in uncertain times.

 

Everything in your model is pivotal on your assumption of 11%. This is the single point variable that I think should be replaced with a historically realistic distribution for the time frame you are considering.

The chart I provided showed the return distribution for drawing down at 4% over 10 years. It's a wide distribution so using a single point average makes no sense. Your model should show range of potential outcomes from reasonably assumed distribution. Not just outcome from single guess about future return.

For example try using say -5% as your return because that is as likely a realised equity return outcome as 11% over any single given five year period

 

Just found a couple of screenshots…. My gosh! Early Covid super dropped to $280k, but it’s now approx $426k about 15 months later
And Oct 2016….

 

Did you not read/comprehend my post:

To elaborate/clarify this point, for say a 30 year time period, I can input 30 different total return percentages (a different one for each year) into my model and they can be any combination of negative or positive.

I can’t see how you say:

• Your model is pivotal on your assumption of 11%.
• This is the single point variable.
  
• An outcome from single guess about future return.
  
• …

 

Responded to something I hadn't read, doesn't seem plausible.

Must be a lack of comprehension.

Moving on.

 

Still, I found this a good reminder that expected returns of even a globally diversified portfolio of equities over shorter durations (really anything less than 40 years) can vary dramatically from the long term average returns.

 

In my model, I highlight three time periods:

• 10 years (when I will be 75)
• 20 years (85) and
• 30 years (95)

In 40 years, I will be happy to be alive and probably won’t give a bugger about my investment returns

 

Rule from the grave

 

I really am confused now. Where do you show the outcomes for multiple time frames.

I re-read your post #87 which I referenced when suggesting using a distribution of realistic assumptions to get a range of possible outcomes and on a second read still only see 1 time frame of 5 years and 1 return of 11% in that post.

My comprehension must be worse than I thought.

 

Post #87 was about two fictitious couples A and B, using some simple input parameters, to arrive a two different likely/possible outcomes.

It was about the outcomes; nothing more, nothing less.

I didn’t. That was never my intention.

You may need to re-read Post #90.

I listed all of the input parameters; differing timeframes was one of them.

It would take me a White Paper to fully document the model, all the scenarios one could run, etc.

Frankly I don’t have the time.

That might explain everything

 

In which case it's fortunate that you've accounted for variation on expected returns over those periods. Appreciate both your and @dunno's posts. Rare that I don't learn something!

If I'm lucky, I've got quite a bit longer. Even so, my aim is to have 'enough' to be able to continue to invest with a 40+ year timeframe even when I'm 75+, and hopefully bring my future beneficiaries along for that "behavioural journey".

But, plans can change, market returns might be terrible over the next 30 years in which case I'll just adjust, if I feel I need to. I'm willing to take that risk.

I'm also aware that we are terrible at forecasting how our future selves may feel about things. I think I'm probably better than most in that regard, but I'm conscious that might just be wishful thinking.

Now if only it would stop raining