Latest / The Money Puzzle / How much should you have in super…seriously!

Transcript

How much should you have in super…seriously! · The Money Puzzle

• 0:06
  Speaker 1: Hello and welcome to the Australian's Money Puzzle podcast. I'm
• 0:09
  Speaker 1: James Kirby, the wealth editor at The Australian. Welcome aboard, everybody.
• 0:22
  Speaker 1: You know, I think the most common question I get asked,
• 0:25
  Speaker 1: and that gets asked across the broad world of investment,
• 0:30
  Speaker 1: certainly in Australia, certainly at this time, is how much
• 0:34
  Speaker 1: should I have in super? Now, what is the answer
• 0:39
  Speaker 1: to that? A lot of that depends on who you are,
• 0:41
  Speaker 1: what age you are. The short answer is, by the way,
• 0:44
  Speaker 1: you don't need anything, okay? You can get 26,000 a
• 0:47
  Speaker 1: year from the government in the age pension. If you
• 0:50
  Speaker 1: had no super whatsoever, zero, that is not gonna be
• 0:53
  Speaker 1: enough for most people, most of the time, I know that.
• 0:57
  Speaker 1: And then you say, well, what did the experts say?
• 1:00
  Speaker 1: The ASFA, the Association of Superannuation Funds says, For a
• 1:05
  Speaker 1: modest retirement, a person should have $ 100, 000. For a comfortable retirement,
• 1:10
  Speaker 1: a person being a single individual. And I'll talk about,
• 1:14
  Speaker 1: when we talk about numbers throughout this show today on
• 1:17
  Speaker 1: this issue, we're talking about a single individual, okay? Before
• 1:20
  Speaker 1: it gets complicated with couples and everything else. So single individual,
• 1:24
  Speaker 1: comfortable retirement, $ 595, 000. Okay, so that's what you're supposed to
• 1:27
  Speaker 1: have at 67. Now there's a lot of issues around
• 1:30
  Speaker 1: this number. People genuinely want to know the answer. They
• 1:37
  Speaker 1: want a simple answer. There is no simple answer. They
• 1:40
  Speaker 1: want a quick answer. There isn't a quick answer either.
• 1:43
  Speaker 1: Perhaps the best answer is, you know, as much as
• 1:45
  Speaker 1: you possibly can. And when you get to 1.9 million,
• 1:49
  Speaker 1: you can start to worry. When you get to 1.9 million,
• 1:52
  Speaker 1: you can start thinking about how you'd get around the
• 1:54
  Speaker 1: fact that you might have to pay tax from that
• 1:56
  Speaker 1: point on. I read a terrific piece of work, and
• 1:59
  Speaker 1: I read on this issue all the time, I read
• 2:03
  Speaker 1: some fresh thinking on this issue from Ashley Owen, from
• 2:07
  Speaker 1: Owen Analytics. He's well known in the investment space as
• 2:10
  Speaker 1: an investment manager over the years. He's on various committees.
• 2:15
  Speaker 1: He's on the Third Link Investment Committee, which you would know,
• 2:18
  Speaker 1: of course, as the fund that funnels money to charity.
• 2:21
  Speaker 1: Very admirable exercise going there. And I thought it'd be
• 2:26
  Speaker 1: really good to have on the show on this subject
• 2:29
  Speaker 1: and to answer some questions as well. How are you, Ashley?
• 2:34
  Speaker 2: Fantastic. Doing well.
• 2:35
  Speaker 1: Very good to have you on the show. I have
• 2:38
  Speaker 1: a theory that we could run a piece in the Australian.
• 2:42
  Speaker 1: I don't know what sort of the ultimate elasticity of
• 2:45
  Speaker 1: this piece, but I can tell you every single time
• 2:47
  Speaker 1: we run a piece which says how much should you
• 2:49
  Speaker 1: have in super, it rates very, very well. It seems
• 2:52
  Speaker 1: there's this endless appetite for that. Tell me what you
• 2:56
  Speaker 1: thought of my preamble there when I was saying there's
• 3:00
  Speaker 1: no answer, there's no one answer. Is that the case?
• 3:03
  Speaker 1: How much should you have in super?
• 3:05
  Speaker 2: It's the number one question that everyone always asks. You
• 3:08
  Speaker 2: raise some good points. And Australia is one of the
• 3:11
  Speaker 2: luckiest countries in the world. And we've got this index
• 3:13
  Speaker 2: pension for life. Bear in mind that two thirds, 64%
• 3:16
  Speaker 2: of Australians of pensionable age are on the age pension.
• 3:20
  Speaker 2: So despite 32 or three years of compulsory super post-1991,
• 3:24
  Speaker 2: and it's now 11% and going up to 11.5% this year,
• 3:26
  Speaker 2: 30 years of that, And it's a good start. So 64%
• 3:35
  Speaker 2: of Australians of pensionable age, over 67 years old, are
• 3:39
  Speaker 2: on the Australian government pension.
• 3:41
  Speaker 1: To some degree.
• 3:42
  Speaker 2: About half of those are on the full pension and
• 3:45
  Speaker 2: about half of the, or a third of retirees are
• 3:47
  Speaker 2: on the full pension. About a third of retirees are
• 3:49
  Speaker 2: on a part pension. Bear in mind, you can still
• 3:51
  Speaker 2: earn $ 63, 000 and get a pension in Australia or a
• 3:54
  Speaker 2: couple can earn $ 106, 000. So it's quite generous. Only, so
• 3:59
  Speaker 2: two thirds of Australians are on the public payroll. They've
• 4:02
  Speaker 2: got their handout, and you and I are paying for
• 4:04
  Speaker 2: it all. Now, they could say, of course, they've paid
• 4:06
  Speaker 2: tax all their life and they've earned it, so we're
• 4:08
  Speaker 2: not going to get into those arguments. But basically, after
• 4:10
  Speaker 2: 30 years of compulsory super in Australia, best system in
• 4:13
  Speaker 2: the world, biggest system in the world, if you look
• 4:16
  Speaker 2: at the– I'm just looking at the asset site now,
• 4:18
  Speaker 2: the average or the median retirement balance, super balance for
• 4:22
  Speaker 2: a 65-year-old in Australia today is about $ 201, 000 for females
• 4:26
  Speaker 2: and about $ 211, 000 for males. Most people use that to
• 4:32
  Speaker 2: pay off debt and go on the pension. So it's
• 4:35
  Speaker 2: been an interesting exercise, but it has been not a failure,
• 4:39
  Speaker 2: but it hasn't built the wealth. It's got $ 3. 5 trillion,
• 4:42
  Speaker 2: which is a lot of wealth, but most of that's
• 4:43
  Speaker 2: at the big end of town. The average balance is
• 4:47
  Speaker 2: $ 1. 5 million, but the median balance is only $ 200, 000, which
• 4:49
  Speaker 2: means most of the money is in the lumpy end
• 4:52
  Speaker 2: of the multimillionaires and billionaires who just use it for
• 4:54
  Speaker 2: a tax dodge. Ordinary Australians... have a couple hundred thousand
• 4:58
  Speaker 2: dollars when they retire at 60, 65 years old, which
• 5:00
  Speaker 2: is the median balance in super today. Most of them
• 5:03
  Speaker 2: use it to pay off debt and then go on
• 5:05
  Speaker 2: the pension. So you're right in saying how much do
• 5:08
  Speaker 2: you need? The answer is zero because if you happen
• 5:10
  Speaker 2: to rely on the public pension for life, then you
• 5:12
  Speaker 2: don't need anything. It's indexed for life. There's a couple
• 5:14
  Speaker 2: of problems with that. First one, for example, is I've
• 5:17
  Speaker 2: got a 96-year-old mother who's been in four nursing homes
• 5:20
  Speaker 2: and two hospices in the last year and a half.
• 5:22
  Speaker 2: that's costing about $ 150, 000 after tax and insurance covers nothing.
• 5:27
  Speaker 2: So $ 150, 000 you've got to find from somewhere after tax
• 5:31
  Speaker 2: and that could go on for years and years and years.
• 5:33
  Speaker 2: So pension doesn't cover that. Yes, you can sell your house,
• 5:36
  Speaker 2: you can do other things, but that upsets other people
• 5:38
  Speaker 2: and you've got other family members. So it's okay to say, yes,
• 5:41
  Speaker 2: the pension's there, but you and I know you don't
• 5:43
  Speaker 2: want to rely on the pension. You don't want to
• 5:45
  Speaker 2: rely on the welfare of taxpayers, future taxpayers for the
• 5:47
  Speaker 2: next 20, 30 years of your life. The next point
• 5:51
  Speaker 2: is that you make very well is that ASFA, which
• 5:54
  Speaker 2: is the Australian superannuation industry body, which produces a lot
• 5:58
  Speaker 2: of numbers and a lot of people use it. If
• 6:00
  Speaker 2: you go onto the website of any industry fund from
• 6:03
  Speaker 2: Australian super, so Hester and CBUS, they all use the
• 6:07
  Speaker 2: same numbers and they talk about the comfortable retirement lifestyle,
• 6:13
  Speaker 2: which is about $ 64, 000 a year. And that requires $ 640, 000.
• 6:14
  Speaker 2: So 10, so to say, If your spending budget is
• 6:22
  Speaker 2: $ 64, 000 a year, which is, and they describe exactly how
• 6:24
  Speaker 2: many times you go out to what restaurants and how
• 6:26
  Speaker 2: many times you travel there, I itemise that. If that
• 6:29
  Speaker 2: is your comfortable lifestyle of $ 64, 000 as a starting point,
• 6:33
  Speaker 2: then they say you need about 10 times that, i.e.
• 6:36
  Speaker 2: $ 640, 000 to live a comfortable lifestyle, to have enough capital
• 6:40
  Speaker 2: to afford that comfortable lifestyle. So that's not a bad
• 6:44
  Speaker 2: starting point. And every super fund in Australia, all the
• 6:47
  Speaker 2: banks and the AMPs, they all use exactly the same calculators,
• 6:50
  Speaker 2: which A couple of things go on in there. First
• 6:52
  Speaker 2: of all, if you look at that $ 64, 000 comfortable lifestyle,
• 6:56
  Speaker 2: I wouldn't last two weeks on that, and a lot
• 6:59
  Speaker 2: of people would not be happy with that. If you
• 7:01
  Speaker 2: actually list out the items, it's actually a pretty poor lifestyle.
• 7:04
  Speaker 2: So $ 64, 000 sounds a lot, but it actually doesn't go far.
• 7:07
  Speaker 2: So it's a good starting point for conversations.
• 7:10
  Speaker 1: Okay, yes.
• 7:11
  Speaker 2: The first step I always ask people is, what is
• 7:14
  Speaker 2: your spending budget? Most people I ask don't know. So
• 7:19
  Speaker 2: now it's the first week of July. You've got to
• 7:21
  Speaker 2: wait for your statements to come before you start your
• 7:23
  Speaker 2: tax return. So it's not a bad time to do
• 7:25
  Speaker 2: two things. One is to look back at the last
• 7:27
  Speaker 2: year to June and say, how has my funds returned?
• 7:31
  Speaker 2: And the second point is to say, well, what am
• 7:33
  Speaker 2: I spending or what's my spending budget? Has my spending
• 7:35
  Speaker 2: budget gone up? Has the increase in power bills and
• 7:38
  Speaker 2: petrol prices, has that actually made my spending budget go
• 7:41
  Speaker 2: from $ 60, 000 to $ 70, 000? And what are my travel plans?
• 7:44
  Speaker 2: So it's not a bad time to start your tax work.
• 7:47
  Speaker 2: And while you're waiting for that, to start looking at
• 7:49
  Speaker 2: your spending budget. Everyone must have a spending budget. So
• 7:53
  Speaker 2: when you talk about how much do you need, it
• 7:57
  Speaker 2: comes down to a multiple of your spending budget. Some
• 8:00
  Speaker 2: people are happy to spend $ 50, 000 a year. Of course,
• 8:03
  Speaker 2: you've got travel and fridges break and cars need replacing,
• 8:06
  Speaker 2: so you've got to budget all that in. So you're
• 8:08
  Speaker 2: spending roughly X thousand dollars per year. If you don't
• 8:11
  Speaker 2: have a spending budget or an estimated spending budget, that's
• 8:14
  Speaker 2: not a bad time to spend a weekend estimating what
• 8:17
  Speaker 2: you spent last year, look at your credit card bills,
• 8:19
  Speaker 2: look at your bank statements to work out what is
• 8:21
  Speaker 2: your spending budget in rough territory, what is it? You
• 8:24
  Speaker 2: need to do that because that's the starting point for
• 8:26
  Speaker 2: how much multiple of that you need.
• 8:29
  Speaker 1: Are you saying whatever that is, you multiply it by 10?
• 8:32
  Speaker 2: No, what I'm saying is the first variable is your
• 8:34
  Speaker 2: spending budget. The second big variable is how many times
• 8:39
  Speaker 2: that you need. Now, The ASFA and all the industry funds,
• 8:43
  Speaker 2: all the banks, all the fund managers use the same model,
• 8:48
  Speaker 2: which basically says you need around about, if you're 65
• 8:51
  Speaker 2: years old and ready to retire, then they say you
• 8:55
  Speaker 2: need around 10 times your spending budget. Now, there's a
• 9:00
  Speaker 2: lot of assumptions in there. The first assumption, which is
• 9:03
  Speaker 2: a key assumption, is they all assume you run down
• 9:06
  Speaker 2: your capital to zero and then go on the full pension.
• 9:10
  Speaker 2: They all make that assumption in the fine print on
• 9:12
  Speaker 2: the back page. They all assume that includes the entire pension.
• 9:17
  Speaker 2: That's not a bad assumption because two-thirds of Australians do that.
• 9:19
  Speaker 2: So that's just describing what happens in real life. But
• 9:22
  Speaker 2: it does mean that you realise that you're actually running
• 9:25
  Speaker 2: down your capital. The idea of eating into capital and
• 9:28
  Speaker 2: running down your capital terrifies a lot of people, including myself. Yes.
• 9:32
  Speaker 2: One of the problems is you look at the life
• 9:34
  Speaker 2: table and the median life table for my... I'm 65. My...
• 9:39
  Speaker 2: The Australian government published median life expectancy is 85. Big
• 9:45
  Speaker 2: problem is that's a median. Half of us are going
• 9:49
  Speaker 2: to live longer and half of us are going to
• 9:51
  Speaker 2: live shorter. I mean, everyone's trying to get healthy and
• 9:55
  Speaker 2: fit and looking at nutrition, looking at diet and exercise. Why?
• 9:59
  Speaker 2: To live longer. But that requires more capital. So if
• 10:02
  Speaker 2: you're lucky enough to live longer, you're going to be
• 10:04
  Speaker 2: in that half of people who are more than the median.
• 10:08
  Speaker 2: And therefore, we're going to live to more than 85
• 10:09
  Speaker 2: years old. My mother's 96 and she's still going. Hmm.
• 10:13
  Speaker 2: So that's the big assumption. It assumes you live to
• 10:16
  Speaker 2: your target date on your wrist, which in my case
• 10:18
  Speaker 2: is 85. If I want to live longer than that,
• 10:21
  Speaker 2: I'm going to need more capital to actually fund that.
• 10:24
  Speaker 2: That's a big assumption that people get wrong.
• 10:26
  Speaker 1: Okay. We'll just take a break there and we'll come back.
• 10:30
  Speaker 1: I really want to zone in on this. It's really,
• 10:32
  Speaker 1: really good so far. Thank you very much. I had
• 10:35
  Speaker 1: some questions pre-prepared, but what you're saying is sort of
• 10:38
  Speaker 1: challenging even those. So we'll be back in a moment, folks.
• 10:50
  Speaker 1: Hello and welcome back to the Australian's Money Puzzle podcast.
• 10:53
  Speaker 1: I'm James Kirby and I'm talking to Ashley Owen of
• 10:56
  Speaker 1: Owen Analytics. Owen is an investment manager, an expert and
• 11:02
  Speaker 1: serves on several investment boards and a particular interest in superannuation.
• 11:06
  Speaker 1: And some of his recent work really caught my eye
• 11:10
  Speaker 1: because on the enduring, endless and endlessly scary question of
• 11:14
  Speaker 1: how much do you need in super? We get this
• 11:17
  Speaker 1: question all the time. We get it on the podcast.
• 11:19
  Speaker 1: We get it in the paper, The Australian. And I
• 11:22
  Speaker 1: get it socially, and so does Ashley. The answer is
• 11:26
  Speaker 1: going to be a formula. And to some extent, that
• 11:28
  Speaker 1: formula will be tailored or customized to you. And some
• 11:31
  Speaker 1: of the points Ashley was making at the start of
• 11:33
  Speaker 1: the show, in the first part, is that these assumptions
• 11:36
  Speaker 1: about comfortable living Retirement amount, $ 595, 000. Average age life expectancy,
• 11:43
  Speaker 1: 85 if you are in your early 60s right now,
• 11:46
  Speaker 1: for instance, et cetera, et cetera. They're all fine, except
• 11:50
  Speaker 1: that your life might not be average at all. You
• 11:53
  Speaker 1: might live to be, Ashley's mentioning his mom is, I think,
• 11:57
  Speaker 1: in 95. My dad's 90. He had no idea he
• 12:00
  Speaker 1: was going to be retired for 30 years. And his income,
• 12:04
  Speaker 1: we still have to work on that every time I
• 12:06
  Speaker 1: go back. We sit down and we go through his
• 12:08
  Speaker 1: investments and how it's all working. So it's something that
• 12:11
  Speaker 1: goes on a long time. So on this segment, I'm
• 12:14
  Speaker 1: going to try and look at the issue of the
• 12:17
  Speaker 1: big questions like how long should we assume that we live?
• 12:21
  Speaker 1: And though the big funds and all the stakeholders in
• 12:25
  Speaker 1: the industry, their assumptions assumes that we spend our core
• 12:28
  Speaker 1: capital down to zero. A lot of people don't want
• 12:31
  Speaker 1: to do that. And maybe they don't have to do it.
• 12:34
  Speaker 1: So let's find out. Ashley, so tell us, wouldn't it
• 12:38
  Speaker 1: make sense to say, OK, I'll assume I live to
• 12:40
  Speaker 1: 100 and work backwards from there? Is that silly or sensible?
• 12:44
  Speaker 2: It's not silly. The life tables which these calculations are
• 12:49
  Speaker 2: all based on. Snapshots in time, we already talked about
• 12:53
  Speaker 2: the fact that the median is only just the middle person.
• 12:56
  Speaker 2: Half will live longer and half will live less. So
• 12:59
  Speaker 2: you've got to assume this is it. This is all
• 13:01
  Speaker 2: you've got. You're on this planet once. You want to
• 13:02
  Speaker 2: make sure you make the best of it. So you've
• 13:04
  Speaker 2: got to plan to be in that second half if
• 13:06
  Speaker 2: you want to be. Or at least you're dependent or
• 13:08
  Speaker 2: your partner is going to be there. So if it's
• 13:09
  Speaker 2: not you, it's going to be your partner. So the
• 13:12
  Speaker 2: problem is these snapshots in time, and the ABS publishes
• 13:15
  Speaker 2: these numbers every year, these snapshots move over time. In
• 13:21
  Speaker 2: the average person's lifetime, that curve moves about three decades
• 13:27
  Speaker 2: to the right. So, for example, my mother, born in 1928,
• 13:33
  Speaker 2: I looked at the ABS. And the beauty of the
• 13:35
  Speaker 2: ABS is you can go and get the 1928 yearbook,
• 13:38
  Speaker 2: which is published on the ABS, and look at the
• 13:40
  Speaker 2: life tables on about page 300. I've got it in
• 13:42
  Speaker 2: my article. You look up somebody born in 1928, female,
• 13:45
  Speaker 2: her life expectancy was 64 years old. Today she's 96
• 13:54
  Speaker 2: and she's still going. So that curve has moved three
• 13:57
  Speaker 2: decades in her lifetime. Yeah. I was born in a
• 14:01
  Speaker 2: poor Asian country in the late 50s and my life
• 14:04
  Speaker 2: expectancy at birth was probably about 40 or 50 at best.
• 14:07
  Speaker 2: I moved to Australia, which is great. Somebody born in
• 14:10
  Speaker 2: 1958 in Australia, a male, if you look at the yearbook,
• 14:14
  Speaker 2: would have been I think 68 years old. Currently my
• 14:18
  Speaker 2: life expectancy is 85. So it's already moved two decades
• 14:22
  Speaker 2: to the right and I'm still going. So I could
• 14:25
  Speaker 2: do the same thing with any person. The beauty of
• 14:26
  Speaker 2: the ABS is they publish yearbooks going back to 1901.
• 14:29
  Speaker 2: You can look at your own year and say, when
• 14:31
  Speaker 2: I was born, my life expectancy table was X. What
• 14:34
  Speaker 2: is it now? The life expectancy tables shift right, i.e.
• 14:39
  Speaker 2: down the old age in, about three decades during a lifetime.
• 14:43
  Speaker 2: So don't base anything on the current snapshot because it's
• 14:45
  Speaker 2: going to move right.
• 14:47
  Speaker 1: Because we're probably underestimating our life expectancy, are we?
• 14:51
  Speaker 2: Yeah, you are. I talk to a lot of clients,
• 14:54
  Speaker 2: and I have done many, many years, and I always
• 14:56
  Speaker 2: insist on talking to the male and female together. It
• 14:59
  Speaker 2: could be Jack and Jill. And I say, one of
• 15:04
  Speaker 2: you might live to 100. I look at Jack and say,
• 15:07
  Speaker 2: and it ain't going to be you. It's more likely
• 15:09
  Speaker 2: going to be the female because often the female is
• 15:12
  Speaker 2: younger and the female life tables are longer anyway. So
• 15:15
  Speaker 2: Someone's going to live to 100. If it's not you,
• 15:17
  Speaker 2: it's your partner. So you don't want to get to 85,
• 15:20
  Speaker 2: 90 years old and running out of money. You can't
• 15:22
  Speaker 2: go back to work. You can't earn more. This is it.
• 15:25
  Speaker 2: This is your time on the planet. So bank on
• 15:28
  Speaker 2: living to 100. If you don't, that's good. If you
• 15:30
  Speaker 2: live longer, that's even better.
• 15:32
  Speaker 1: Can I ask you then about the core capital? Like
• 15:35
  Speaker 1: you were saying, all those estimates, when people go on
• 15:38
  Speaker 1: all those calculators, the calculators... are, I won't say misleading,
• 15:43
  Speaker 1: but they're incomplete, right? Because they assume that you run
• 15:47
  Speaker 1: down your capital. Like you mentioned your mom, if my
• 15:50
  Speaker 1: own dad had run down his capital, it would be
• 15:54
  Speaker 1: a big trouble now. Big trouble. He's been retired for
• 15:57
  Speaker 1: 30 years solid. So what do you suggest around that issue?
• 16:01
  Speaker 2: I got an email the other day from a reader
• 16:05
  Speaker 2: who says he's 80 and his wife is 65. They
• 16:09
  Speaker 2: have no dependents. They don't see any charities worth giving
• 16:13
  Speaker 2: money to. They've given two houses to his school. And
• 16:18
  Speaker 2: this is a live question. And he said, look, I
• 16:20
  Speaker 2: want to run down my capital. I'm 80 years old.
• 16:23
  Speaker 2: Let's say I'm going to live to 100. What's my
• 16:25
  Speaker 2: formula to run down the capital to 100? Oh, yeah.
• 16:28
  Speaker 2: And I said, first of all, it's not about you.
• 16:31
  Speaker 2: Your wife is 65. She might have 40 years. So
• 16:35
  Speaker 2: it's not about you anymore. It's actually about her. So
• 16:39
  Speaker 2: if she's 65 years old, which is a live case,
• 16:41
  Speaker 2: And he's planning on her living to 100. I say, look,
• 16:45
  Speaker 2: the maths is not that accurate. If I'm running a
• 16:48
  Speaker 2: portfolio for a 40-year time horizon to amortize it over
• 16:51
  Speaker 2: 40 years, financially, mathematically, that's as good as running a
• 16:54
  Speaker 2: perpetual portfolio, which I do for charities. Charities are perpetual portfolios.
• 16:58
  Speaker 2: So that basis is you assume you retain your capital
• 17:02
  Speaker 2: in real terms. Life is too variable to actually calculate
• 17:07
  Speaker 2: the length of the runway over 40 years. So rather
• 17:09
  Speaker 2: than trying to calculate the length of the runway to
• 17:11
  Speaker 2: land at 100, assuming our capital is going to last forever,
• 17:15
  Speaker 2: because 40 years is effectively forever in financial terms. So
• 17:18
  Speaker 2: that comes back to my point. You're going to live
• 17:20
  Speaker 2: to 100. You're going to rely on your capital. You're
• 17:22
  Speaker 2: going to make sure that capital keeps growing for inflation
• 17:25
  Speaker 2: and the withdrawals off it keep growing for inflation, which
• 17:27
  Speaker 2: means you're running a perpetual fund.
• 17:29
  Speaker 1: Yeah, that's your core point then. Perpetual capital. not to
• 17:34
  Speaker 1: run down on the core capital, unless of course, and
• 17:38
  Speaker 1: our listeners would know that there are rules in super
• 17:41
  Speaker 1: that you actually must take out a certain amount each
• 17:43
  Speaker 1: year and compulsory drawdowns, but would allow for that.
• 17:48
  Speaker 2: Okay.
• 17:49
  Speaker 1: So just, and it's very hard to do this in
• 17:51
  Speaker 1: a single show, but it's been really good to do
• 17:53
  Speaker 1: this all the same. And it's got some fresh thinking,
• 17:56
  Speaker 1: I think here on this issue of how much people
• 17:58
  Speaker 1: should have in super. The other thing, I suppose, on
• 18:02
  Speaker 1: a practical terms for younger listeners, there was a time
• 18:06
  Speaker 1: you could put enormous amount, you could put any amount
• 18:08
  Speaker 1: into super. And believe it or not, about 10 years ago,
• 18:11
  Speaker 1: you could put in as much as you can put
• 18:13
  Speaker 1: in today. For instance, it hasn't changed. In fact, it
• 18:16
  Speaker 1: shrunk and only through inflation indexing has it gone back up.
• 18:20
  Speaker 1: What do you recommend in terms of contributions? Do you
• 18:23
  Speaker 1: generally recommend that people put in the max that they can,
• 18:27
  Speaker 1: if they can?
• 18:27
  Speaker 2: It's a tax lurk. And there are tremendous tax advantages.
• 18:34
  Speaker 2: As it's turned out, it's a tax lurk for the rich,
• 18:36
  Speaker 2: and therefore Labor, as they probably should, are attacking the
• 18:39
  Speaker 2: big end of town. How they're doing it is interesting
• 18:42
  Speaker 2: with the new Division 296 tax, if it gets in
• 18:45
  Speaker 2: and what will happen. But the idea is it is
• 18:48
  Speaker 2: very tax advantageous in a lot of ways, so you
• 18:52
  Speaker 2: may as well take advantage of that with as much
• 18:54
  Speaker 2: money as you can. The other side of the coin
• 18:57
  Speaker 2: is for young people who are encouraged to put as
• 19:00
  Speaker 2: much away as possible over and above their 11.5% is
• 19:02
  Speaker 2: they're trying to buy a house. Even buying a house
• 19:06
  Speaker 2: is difficult these days. So there's a big move on
• 19:08
  Speaker 2: to divert money from super into buying a house or
• 19:12
  Speaker 2: even dip into super to buy a house.
• 19:16
  Speaker 1: Yeah, there is.
• 19:18
  Speaker 2: It's a difficult argument to go into, and it's different
• 19:20
  Speaker 2: for everybody, but I would say still, given your 11.5%
• 19:23
  Speaker 2: going into super.
• 19:26
  Speaker 2: Make sure you use that as much as possible. So
• 19:29
  Speaker 2: it's compulsory savings for employees. Unfortunately, a good part of
• 19:33
  Speaker 2: the workforce is not employees, it's small business. And if
• 19:35
  Speaker 2: you look at the numbers of super coming out the
• 19:37
  Speaker 2: other end, I'm guessing, but I'm saying most small business people,
• 19:40
  Speaker 2: it's the last thing on their plate. They get to
• 19:43
  Speaker 2: June 30, there's cash flow, they've got to find. It's
• 19:46
  Speaker 2: the thing that they forget on June 30. So the
• 19:48
  Speaker 2: people at the poor end of the super scale in
• 19:51
  Speaker 2: the median balances when they retire are people typically who've
• 19:54
  Speaker 2: been in small businesses or self-employed for 30, 40 years
• 19:56
  Speaker 2: because it's not something that your employee does compulsorily. So
• 20:00
  Speaker 2: they've missed out. So having seen that experience many, many times,
• 20:03
  Speaker 2: I would say if you've got the chance, make sure
• 20:06
  Speaker 2: you use a system as much as you can because
• 20:09
  Speaker 2: it's locked away, it's out of harm's way, and it's
• 20:11
  Speaker 2: going to be there in some shape or form when
• 20:14
  Speaker 2: you really need it when you're 60, 70, 80 years old.
• 20:16
  Speaker 2: If you rely on your own self-discipline to do it
• 20:19
  Speaker 2: when you're a small business operator, invariably it doesn't get done,
• 20:23
  Speaker 2: and you reach the age where you look back and say,
• 20:25
  Speaker 2: if only I'd done that. The good thing is, though,
• 20:27
  Speaker 2: that a lot of small business own two or three
• 20:29
  Speaker 2: or four properties, and properties are just as powerful as
• 20:32
  Speaker 2: super is.
• 20:33
  Speaker 1: Yes. There's just two points there we might make to listeners.
• 20:38
  Speaker 1: actually it's talking about 11.5%. If you recall, 11.5% is
• 20:41
  Speaker 1: the amount you must put into super on a compulsory
• 20:45
  Speaker 1: basis from July 1, and it's just passed. Now, the
• 20:49
  Speaker 1: maximum you can put into super on a pre-tax basis
• 20:52
  Speaker 1: is 30,000. So what you do is you can put
• 20:54
  Speaker 1: in whatever 11.5% of your salary is, that goes into super.
• 20:58
  Speaker 1: And if there's a gap between that and 30,000, you
• 21:00
  Speaker 1: can put that amount in. So let's say your 11.5%
• 21:03
  Speaker 1: works out at 15,000. then in theory, you can put
• 21:06
  Speaker 1: in another 15 pre-tax into super. That's the real tax advantage.
• 21:11
  Speaker 1: So keep that in mind, folks. And also a lot
• 21:14
  Speaker 1: of people now in consultants, gig workers, in any way
• 21:18
  Speaker 1: that you might be not, if you are employed outside
• 21:21
  Speaker 1: the traditional staff employer type situation where you simply get
• 21:25
  Speaker 1: a pay packet every month, but you're super in it.
• 21:28
  Speaker 1: As Ashley said, be careful there. If you can, I
• 21:30
  Speaker 1: know it's hard to be self-disciplined, but to be able
• 21:33
  Speaker 1: to contribute to super. You can do it. You can
• 21:37
  Speaker 1: do it just like anyone in staff can do it.
• 21:39
  Speaker 1: You simply just make an application and you put in
• 21:42
  Speaker 1: the amount into super on the same terms. And of course, obviously,
• 21:46
  Speaker 1: people who have property in the business, that's a different business.
• 21:49
  Speaker 1: The direct real property can be included in your super fund.
• 21:51
  Speaker 1: It's one of the great tricks for small business and
• 21:54
  Speaker 1: any small business who can do it, that can get
• 21:56
  Speaker 1: their building that they own and their business into it
• 21:58
  Speaker 1: and that business building into their super fund. It's a
• 22:01
  Speaker 1: fabulous thing. It's a fabulous thing. If you're able to
• 22:04
  Speaker 1: do it, they call it direct property in the supercircles.
• 22:07
  Speaker 2: Okay.
• 22:08
  Speaker 1: That's about as far as we can go on this issue.
• 22:10
  Speaker 1: I'm sure we'll come back to it. I'm sure we'll
• 22:11
  Speaker 1: have lots of questions. I wanted to raise it. I
• 22:14
  Speaker 1: wanted to give our version of what the answer is
• 22:16
  Speaker 1: to how much you should have in super. I think
• 22:19
  Speaker 1: Ashley's idea about how much you spend a year and
• 22:22
  Speaker 1: then thinking about the multiples of that as a guidance
• 22:26
  Speaker 1: is very useful. Also his idea that whatever the calculators say,
• 22:31
  Speaker 1: Do your own calculations and don't assume that you're going
• 22:34
  Speaker 1: to spend down your core capital because you might live
• 22:36
  Speaker 1: a lot, lot longer than you ever expected. All right,
• 22:40
  Speaker 1: we'll take a short break. We've got some great questions.
• 22:42
  Speaker 1: We'll be back in a moment. Hello, welcome back to
• 22:48
  Speaker 1: the Australian's Money Puzzle podcast. James Kirby talking to Ashley
• 22:52
  Speaker 1: Owen of Owen Analytics. I've got three questions here, folks. Two,
• 22:58
  Speaker 1: interestingly enough, are on super and one is kind of
• 23:00
  Speaker 1: on super. I'll just read the first one. It's from
• 23:02
  Speaker 1: Rowan who says, a few weeks ago, you had Chris
• 23:05
  Speaker 1: Joy on the show and he said he expects consolidation
• 23:09
  Speaker 1: in the super fund sector. It seems to me consolidation
• 23:14
  Speaker 1: is in the interest of every super fund member, especially
• 23:17
  Speaker 1: for people in poorly performing funds. Do you think the
• 23:21
  Speaker 1: government should be accelerating this consolidation? Well, I think it's
• 23:26
  Speaker 1: a market. And the more the government encourages their market
• 23:30
  Speaker 1: to act as a market in super, the better. And
• 23:33
  Speaker 1: I think very quickly, we are getting lots of consolidation
• 23:36
  Speaker 1: in super. I wouldn't actually fancy being in some super
• 23:40
  Speaker 1: funds when they do merge with other ones. Behind the scenes,
• 23:43
  Speaker 1: I think there's often problems that don't get highlighted there.
• 23:46
  Speaker 1: But the other thing is, I don't know about you, Ashley,
• 23:48
  Speaker 1: but it seems to me in the end, we're going
• 23:49
  Speaker 1: to have about 10 mega funds that will really dominate everything.
• 23:53
  Speaker 1: What do you think?
• 23:55
  Speaker 2: I don't really have a view. There are a dozen
• 24:01
  Speaker 2: mega funds and there are dozens of smaller ones. Now,
• 24:06
  Speaker 2: it should be a free market and the market should decide,
• 24:08
  Speaker 2: but it's not a free market because it's compulsorily taken
• 24:12
  Speaker 2: out of people's pay from when they're 16, 18, 20
• 24:15
  Speaker 2: years old. Bits and pieces, half cents and quarter cents,
• 24:20
  Speaker 2: no one cares or looks at it. Even today, the
• 24:25
  Speaker 2: number of people who actually don't know how to find
• 24:26
  Speaker 2: their balance, let alone what it is and what it
• 24:28
  Speaker 2: means or whether it's enough, it's just mind-boggling. So it's
• 24:32
  Speaker 2: not something that they have any interest or knowledge of.
• 24:36
  Speaker 2: It's compulsorily taken out. It disappears somewhere and they look
• 24:39
  Speaker 2: at it maybe once every 10 years and they start
• 24:41
  Speaker 2: to look at it seriously when they're about 50 years old.
• 24:44
  Speaker 2: So the fact that it's out of sight, out of
• 24:46
  Speaker 2: mind means it's a free-for-all who want to do what
• 24:49
  Speaker 2: they want with it. So I'm in favour of regulation
• 24:53
  Speaker 2: and oversight because simply it is so far, it's $ 3 trillion,
• 24:56
  Speaker 2: which is completely out of people's minds or sight or
• 24:59
  Speaker 2: knowledge about what to do with it or how to
• 25:01
  Speaker 2: fix it or whether it actually needs to be fixed.
• 25:03
  Speaker 2: So I'm in favour of some regulation. There's a lot
• 25:06
  Speaker 2: of tests nowadays that APRA apply to performance for super
• 25:11
  Speaker 2: funds and those that fail the test a couple of
• 25:14
  Speaker 2: years in a row get closed down and get told
• 25:16
  Speaker 2: to merge. The test itself is a very blunt instrument
• 25:19
  Speaker 2: and it's a very complex strange how the test works
• 25:22
  Speaker 2: and how it can be gamed. But it has closed
• 25:25
  Speaker 2: down dozens of funds that are poor performing on their
• 25:28
  Speaker 2: particular measures for that particular period. It's a blunt instrument.
• 25:32
  Speaker 2: It's probably not a bad idea to clean out the
• 25:34
  Speaker 2: poorer performers. The measurement should be much more sensible and inclusive,
• 25:38
  Speaker 2: and it's easy to game the measurement currently, but it'll
• 25:42
  Speaker 2: improve over time. There's people that say, look, why don't
• 25:46
  Speaker 2: you do what Singapore and Norway do and just have
• 25:48
  Speaker 2: one fund run by the government? We've got one called
• 25:51
  Speaker 2: the Future Fund, and the Future Fund's done a pretty
• 25:53
  Speaker 2: good job over 27 years.
• 25:55
  Speaker 1: Yes.
• 25:56
  Speaker 2: No industry fund has beaten the Future Fund. It's got
• 25:59
  Speaker 2: funny rules and disclosure requirements, and it's got funny things
• 26:02
  Speaker 2: that go on in the Future Fund. But basically, something
• 26:05
  Speaker 2: like that is big and ugly or Aussie super. There's
• 26:08
  Speaker 2: one or two big ones, but you've got to say,
• 26:09
  Speaker 2: why don't you just use that one? But of course,
• 26:11
  Speaker 2: if that blows up, then you've got no others. So
• 26:13
  Speaker 2: you're relying too much on one institution looking after 20
• 26:16
  Speaker 2: million Australians.
• 26:17
  Speaker 1: Yeah, that's the thing.
• 26:18
  Speaker 2: So- I'm in favor of regulation and scrutiny and cleaning
• 26:22
  Speaker 2: out bad operators, but I'm also wary of one behemoth
• 26:25
  Speaker 2: fund which has got everyone's savings.
• 26:28
  Speaker 1: Yeah, I take your point. All right. Yeah, and I
• 26:30
  Speaker 1: would certainly agree with that. I think if it does
• 26:34
  Speaker 1: end up that we have 10 huge funds and they're
• 26:36
  Speaker 1: all damn good, then that will be fine.
• 26:39
  Speaker 2: All right.
• 26:40
  Speaker 1: Final question. There was two questions on Division 293 tax.
• 26:43
  Speaker 1: Division 293 tax, by the way, is the tax you...
• 26:47
  Speaker 1: We were talking about super contributions and the tax concessions.
• 26:51
  Speaker 1: The problem is if you earn more than $ 250, 000, there's
• 26:55
  Speaker 1: a clawback, would you believe, on the concessions that you
• 26:59
  Speaker 1: get in super. So Greg asked about judges and their
• 27:05
  Speaker 1: special place in super. That's another show, Greg. A lot of,
• 27:12
  Speaker 1: most judges are on defined benefits and they have, they're
• 27:14
  Speaker 1: a world within a world and they are going to
• 27:16
  Speaker 1: hang on to their super really hard. And you can
• 27:18
  Speaker 1: see them lobbying desperately not to get caught in the
• 27:21
  Speaker 1: 3 million tax net, which is coming through. That's called
• 27:23
  Speaker 1: division 296. On the basis of division 293, the one
• 27:27
  Speaker 1: that matters here, Rob says, I listen every week. Quite
• 27:30
  Speaker 1: often I hear your guests talk about catch-up super. This
• 27:33
  Speaker 1: makes sense, of course. My understanding is capital gains and
• 27:37
  Speaker 1: concessions to super contributions are are considered for division 293.
• 27:42
  Speaker 1: This may catch many people out given the threshold for
• 27:45
  Speaker 1: division 293 is 250,000. Is this correct?
• 27:49
  Speaker 2: Yes, it is.
• 27:50
  Speaker 1: It's correct, Rob. And I suppose the worst situation is
• 27:54
  Speaker 1: if you were bang on 250,000 and you were contributing
• 27:58
  Speaker 1: to super at the max and you just bring yourself
• 28:02
  Speaker 1: over the 250 by doing so and maybe some profit
• 28:05
  Speaker 1: on that or anything else around, you'd certainly find yourself in...
• 28:09
  Speaker 1: Division 293, and it's a clawback. It's not indexed either.
• 28:12
  Speaker 1: Is there anything you want to add to that, Ashley,
• 28:15
  Speaker 1: about Division 293? Do people realize, do they know about it,
• 28:19
  Speaker 1: and do they realize there's an extra super tax that
• 28:21
  Speaker 1: we hardly ever hear about called Division 293?
• 28:25
  Speaker 2: Yes, it's been around for decades, the idea that you
• 28:27
  Speaker 2: pay an extra 15%. You pay 15% on concessional contributions
• 28:32
  Speaker 2: on the way in, into tax, and then if your income,
• 28:36
  Speaker 2: including super tax, for a particular year, is over $ 250, 000,
• 28:39
  Speaker 2: which any tradie would be on. So it's quite widespread nowadays.
• 28:44
  Speaker 1: Maybe not all of them, but a hell of a
• 28:46
  Speaker 1: lot of them, yeah.
• 28:47
  Speaker 2: Then you get taxed an extra 15% on your concessional contribution.
• 28:52
  Speaker 2: It used to be something that's for rich people only,
• 28:53
  Speaker 2: but it's not indexed. So $ 250, 000 now catches a lot
• 28:57
  Speaker 2: of people, and so they just get paid 30%. It's
• 29:00
  Speaker 2: still not bad because their marginal rate is higher than 30%.
• 29:02
  Speaker 2: So it's not bad. It's a small tax break. But
• 29:05
  Speaker 2: it is an additional tax you pay based on your
• 29:07
  Speaker 2: entire income, including super for each particular year. Yes.
• 29:12
  Speaker 1: So basically, folks, if you make $ 250, 000 or more, the
• 29:18
  Speaker 1: tax advantages of contributing to super are pinched basically by
• 29:22
  Speaker 1: this tax. And as Ashley was saying, once upon a
• 29:26
  Speaker 1: time when they designed this tax, it was designed for
• 29:29
  Speaker 1: the rich per se. These days, of course, because it's
• 29:32
  Speaker 1: not indexed, every year more and more people get into
• 29:36
  Speaker 1: the net, what they call bracket creep, and on this
• 29:39
  Speaker 1: particular case you might call it superannuation tax bracket creep
• 29:42
  Speaker 1: which is just as insidious as all the other bracket
• 29:46
  Speaker 1: creep income tax bracket creep is the main one of
• 29:49
  Speaker 1: course we hear about all the time hey thank you
• 29:51
  Speaker 1: very much Ashley Owen of Owen Analytics that was very
• 29:54
  Speaker 1: very interesting it really made people think there's no simple
• 29:57
  Speaker 1: answer for how much you should have in super But
• 29:59
  Speaker 1: there are key principles you should think about, including how
• 30:04
  Speaker 1: long you will live. What sort of lifestyle do you want?
• 30:07
  Speaker 1: How is that linked to how much do you spend
• 30:09
  Speaker 1: at the moment each year? Do you know how much
• 30:11
  Speaker 1: you spend? Can you achieve that in super? And also,
• 30:15
  Speaker 1: you're probably going to live a lot longer than you think.
• 30:19
  Speaker 1: Certainly our parents did.
• 30:20
  Speaker 2: All right.
• 30:20
  Speaker 1: Hey, thank you very much, Ashley.
• 30:22
  Speaker 2: My last little closing point would be bracket creepy is
• 30:25
  Speaker 2: only one of the many creeps in Canberra.
• 30:28
  Speaker 1: Thank you very much. All right, folks, that was Ashley
• 30:32
  Speaker 1: Owen of Owen Analytics. First time on the show and
• 30:35
  Speaker 1: not the last time, I'm sure.
• 30:37
  Speaker 2: All right.
• 30:38
  Speaker 1: Do keep those pieces of correspondence coming in. I have
• 30:42
  Speaker 1: lots of questions on property at the moment. I could
• 30:45
  Speaker 1: do with more and happy to answer more on wider issues.
• 30:49
  Speaker 1: So there's a call out the money puzzle at the
• 30:52
  Speaker 1: Australian dot com dot au. Talk to you soon.
• 31:00
  Speaker 2: Thank you.