Makes you wonder about all the mistakes they don't fix up

DS2 has a retirement (superannuation) account with ING that I opened on his behalf in November 2006. There haven't been any transactions on the account since the initial $1,200 deposit, and the value of the account had only increased slightly to $1,289.48 by 30 June 2008. It was therefore a bit of a surprise to get a letter from ING yesterday stating that a recent "review [of] our processes, controls and systems" had "identified an additional value" of $26.80 that will now be credited to the account as an adjustment. While I'm glad that they've apparently found a mistake and are rectifying it, it's a bit of a shock that the required "adjustment" is over 2% of the account balance! It makes you wonder how many mistakes by professional investment managers go undetected.

Subscribe to Enough Wealth. Copyright 2006-2008

Seven year old saves for his retirement

From his pocket money and money earned busking before Christmas, DS1 had saved up over $350 in his "Happy Dragon" bank account. Today I transferred in some additional money from his high interest online savings account (which holds the money he earned while doing a paper round) so that there was enough to make an online contribution of $600 into the retirement savings account (RSA) he has with AMP.

I'll transfer another $400 before the end of June so that he'll have made a total "after-tax" contribution of $1000 into his superannuation account this financial year. I'm not sure if he'll get the $1500 government co-contribution this tax year, but it's worth making the contribution just in case. Before last year's changes to the tax laws, only employees were entitled to the co-contribution, so he was only eligible while he was earning money from his paper round. However, under the new rules self-employed people are also eligible for the co-contribution, so he should be able to contribute some of the money he earns from busking and get the 150% co-contribution (up to $1500) from the government.

The RSA account only offers a fixed interest option, but the rates are quite good (similar to an online savings account) and there are very low fees. The main benefit of this account is that DS1 was able to open it on his own behalf, which enables him to make contributions that are eligible for the co-contribution. His other retirement account is a so-called "child super" account which I had to open on his behalf, and which is intended for contributions made for him by parents and grandparents. There is an annual limit on how much can be contributed into a child super account, but it has a full range of investment options available, so it's a good choice for his long term retirement savings. Once he reaches 18 it will convert to a standard superannuation account.

Copyright Enough Wealth 2007

SMSF Update - New Trust Deed

ESuperFund (the administrator of our Self-Managed Superannuation Fund, or SMSF) has sent out a new Trust Deed for DW and I (the trustees and members of our SMSF) to sign. Apparently the recent changes to "Simpler Super" last June have made the original Trust Deed so out of date that there's a chance our SMSF could become "non-complying" and lose it's tax-benefited status if we don't update the Trust Deed. The new trust deed costs $199, which isn't a huge amount, but I would have expected it to be free since it's been less than a year since we setup our SMSF and signed the original Trust Deed. At least ESuperFund has promised to not make any additional charges if another Trust Deed update is required within the next five years.

Last year's SMSF tax return and member statements were very simple as I had only made a $200 undeducted contribution into the SMSF bank account before 30 June to check that everything was setup and working correctly. This year we have rolled over our most of our existing retirement savings from the BT fund (our employers fund) and have had our SGL and salary sacrifice "tax deducted" contributions paid into our SMSF bank account. Our employer sends these payments to BT "super choice" which then forwards them to our SMSF bank account. For some reason the SGL contributions for DW and myself get rolled together into a single monthly deposit, and the salary sacrifice amounts have also been sent through as a single transaction for both members. This means that I have to keep an accurate spreadsheet showing the breakdown of each transaction into member components, as ESuperFund will need this information at the end of the financial year in order to prepare the member statements and financial accounts.

Most of our SMSF balance has now been invested into the Vanguard High Growth Fund. By investing in a single Vanguard fund we will maximise the available fee rebate. Having only one cash account and one investment account for the SMSF also makes the record keeping much simpler. If we started directly investing in stocks or CFDs we would probably have to spend some extra money on SMSF specific accounting software. Since software such as MySF costs over $300 pa this would defeat the "low cost" rationale for setting up a SMSF in the first place.

The rollover statements for the money we transferred from BT to the SMSF are quite complicated, so I'll have to check the annual SMSF paperwork very carefully when it's produced by ESuperFund next August. It's important that all the information has been correctly transferred from BT to ESuperFund as there can be adverse tax consequences during retirement or when death benefits are paid to non-dependant beneficiaries.

Copyright Enough Wealth 2007

What If You Make Maximum Retirement Contributions For 20, 30, 40 Years? (Superannuation)

No Credit Needed did an interesting post regarding what amounts can be accumulated by Americans maxing out their retirement contributions. In this post I show similar calculations from the Australian perspective, “What If… You Make Maximum Retirement Contributions For 20, 30 or 40 Years?”

Notes about the charts -

Annual contributions are held steady at 2008 maximums ($50,000 in tax-deducted contributions [employer SGL contributions and salary sacrifice], and $150,000 in undeducted contribution]
Returns are annual and do not fluctuate
Interest is calculated using year-end-balance
I used percentages between 6% and 14% and a span of 1 to 40 years.
Tax on tax-deducted contributions is 15%. Tax on interest is calculated at 15% (it would be lower for most people as capital gains are taxed at 10% within superannuation during accumulation phase, and 0% if realised during in pension mode).



Copyright Enough Wealth 2007

SMSF Investment Update

The confirmation notices from Vanguard for our initial investments into the High Growth Fund finally arrived. The initial $5,000 investment was processed on 4 Sep at a unit price of $1.7417, and the first of our regular weekly $25,000 investments was processed the following day at a unit price of $1.7306. The weekly contributions will continue until the bulk of our SMSF balance has been invested into the High Growth fund. With the current market volatility I (we) decided to dollar cost average into the fund rather than invest all our cash at the current price. We will be watching the price with interest while these regular investments are being processed - the best outcome would be a short, sharp drop in unit prices over the next couple of months followed by a rapid rebound to current prices by the end of the year. It's just a likely that the unit price could go up over the next couple of months, in which case a lump sum investment would have been better. Whatever. Once the bulk of our SMSF fund has been invested we'll reduce the weekly investment amounts to match amount we are contributing.

Copyright Enough Wealth 2007

401K Account Balances by Age

Some interesting information about what Americans have accumulated in their 401(k)'s and how the money is invested. There are tables showing average account balance vs salary, account balance vs years of job tenure, and asset allocation for each age group - 20's, 30's, 40's, 50's and 60's. The data is based on an analysis of some 20 million participants in nearly 54,000 employer-sponsored 401(k) plans done by the Employee Benefit Research Institute and the Investment Company Institute, as of the end of 2006.

Copyright Enough Wealth 2007

SMSF - the Devil is in the Details

No wonder they call it "Self-managed". Even with the fund administration, auditing and tax returns out-sourced to eSuperFund there is a fair bit of "paper warfare" involved (at least initially).

Investing our SMSF money into the Vanguard fund is turning out to be less simple than I had initially thought. Just when I was about to apply to invest in the Vanguard Fund online through our SMSF's e*Trade account, I noticed in the fine print that e*Trade would be charging an annual 0.66% "portfolio fee" for managed fund investments. This makes a mockery of our attempt to minimise fees and charges using a SMSF, and would have come as a big shock at the end of the year if I had skimmed over that part of the "fine print". Managed fund investments made via e*Trade would be at the "wholesale" fund management rate, but this isn't a significant benefit when investing in the Vanguard Fund as the retail fees are quite low anyhow (not as low as in the US, but that's a whole other story).

For example;

Investing via e*Trade Managed Fund Service:
Amount     Vanguard Fee  e*Trade       DOLLAR
Invested   Wholesale     Porfolio Fee  COST pa
 $50,000   0.37%         0.66%           $515.00
$100,000   0.37%         0.66%         $1,030.00
$200,000   0.37%         0.66%/0.55%*  $1,950.00
$500,000   0.37%         0.66%/0.55%*  $4,710.00
*e*trade fee is 0.66% on amounts up to $100,000
and 0.55% on amounts from 100-500K, then 0.5% on
amounts above $500K. Vanguard Wholesale fee via
e*Trade is 0.37% on all amounts invested.

Investing via direct application to Vanguard
(application lodged via eSuperFund):
Amount     Vanguard Fee  DOLLAR
Invested   Retail        COST pa
 $50,000   0.90%           $450.00
$100,000   0.775%**        $775.00
$200,000   0.5625%**     $1,125.00
$500,000   0.43%**       $2,150.00
**Vanguard Retail fee is 0.90% on amounts
up to $50,000 and 0.60% on amounts from
$50-$100K, then 0.35% on amounts above $100K.

So we could have ended up paying a couple of thousand dollars in extra fees each year if I hadn't been paying attention.
The other problem with investing via e*Trade is that you can't choose automatic reinvestment of distributions, and any additional investments in the same fund have to be made through the same process.

Investing directly by sending an application to eSuperFund should allow the initial investment to be made direct from the SMSF via BPay. The automatic reinvestment of distributions is possible, and I should be able to 'set and forget' an automatic additional investment by BPay each month.

The other bonus of investing directly (via eSuperFund) is that eSuperFund will have electronic 'read only' access to the Vanguard account, so I won't have to forward a hardcopy of the annual fund report.

The other wrinkle I found out when I tried to transfer the $300,000 back from our SMSF investment sub-account into the main account was that the ANZ bank hadn't correctly setup the accounts. Our 100-pt ID check data was confirmed for the main V2 bank account, but hadn't been set for the investment sub-account. This meant that while I had been able to transfer funds INTO the investment account, I wasn't able to transfer the funds back OUT into the main account electronically! Luckily this won't matter until the Vanguard application form has been processed and I need to make the BPay funds transfer for the investment.

Finally, it also turns out that when eSuperFund said that the normal $5,000 account balance minimum for an ANZ V2 account was "waived" in actually just means that we get paid interest on balances below $5,000. The ANZ bank system is still setup so that the "available balance" is always $5,000 less than the account balance. This means that there will always be $5,000 sitting in the ANZ V2 account that can't be invested into the Vanguard Fund or other investments (such as direct share purchases through e*Trade). It's not a huge problem since the $5K will be earning interest, but it still means an extra 1.5% of our SMSF balance is unavoidably allocated to "CASH" on top of whatever allocation to cash exists within the Vanguard High-growth fund (around 4%).

Copyright Enough Wealth 2007

Decisions, decisions

The funds in our SMSF bank account have finally cleared, so I was able to transfer $330K into the investment sub-account which is used to settle any e*Trade transactions. I can now apply via e*Trade to make our initial investment into the Vanguard LifeStrategy High-Growth Fund. Of course I don't know if the unit prices will go up from here in the short term or maybe drop even further, but at least I can be 100% sure that the current price is around 10% off its peak from earlier in the year, and that we gained a couple of percent by being in cash for the past two weeks. I'm sure that in 20 years time the current dip won't even be noticeable in the chart. The important thing is to be invested in our chosen asset allocation and remain invested for the next 20 years. One good thing about investing all our SMSF funds in the one fund is that rebalancing between the underlying asset classes should be done automatically by Vanguard to stay close to the target asset mix for this fund. This is even better than using a mixture of Vanguard Index Funds to achieve a desired asset mix because rebalancing between funds would cost the 0.5% buy-sell spread in unit prices, although since rebalancing would generally only require a small fraction of the total investment to be moved, the effect would be negigible. All we need to do on an ongoing basis is to periodically adjust our automatic investment plan to reflect the amount of money we are depositing into our SMSF bank account each month via salary sacrifice and the SGL contribution from our employer.



Copyright Enough Wealth 2007

SMSF Update

I deposited the cheque for my transfer into our SMSF today, and the current balance showing online in the SMSF bank account is now around $340K. The funds haven't been cleared yet, but I expect that will only take three business days (the transfer from our old super account with BT was via a Westpac bank cheque). Once the funds clear I'll switch $340K into the sub-account that is linked to our e*Trade account for the SMSF, and will then be in a position to invest in Vanguard's High-growth fund. If the market continues to drop early next week I may be tempted to wait and see before investing, but the risk with doing that is that there may be a sudden 'bounce' as soon as it appears that the worst is over. Then again, I'd rather wait a bit too long and buy in a few % above the bottom of the correction, than get in too early and watch the market correction continue down another 10%...

Copyright Enough Wealth 2007

All Cashed Up and no where to Invest (yet)

The cheque for transferring $280,000 from my old retirement account into our Self-managed Superannuation Fund arrived in the post today. I'll deposit it at the bank tomorrow, and I expect the funds will clear by the middle of next week. As soon as that happens I can use our SMSF money to invest in the Vanguard High-growth fund, which is mainly invested in Australian and International stock indices. Only trouble will be deciding WHEN to make the investment. Today the Australian market was down 5%(!) by mid-afternoon, before bouncing back to be down "only" 1.3% at the close. I won't be surprised if the US market also drops further this evening, which will cause further drops tomorrow. Where the market will be heading by the middle of next week is anyone's guess. A "normal" correction during a bull market is around 10%-15%, and we're already down 11%. However, the Australian bull run had lasted over three years already, with gains of over 20% for three years in a row, so this could easily be a severe correction of 20% or more, or even the start of a small bear market if the global economy is affected by the incipient credit squeeze.

BTW - the Reserve Bank just raised interest rates another 0.25% last week in expectation of an overheating economy and accelerating inflation next year. If there is a global credit squeeze and economic slow-down caused by the US sub-prime fiasco spreading this may turn out to have been one rate rise too many.

Copyright Enough Wealth 2007

A Nice Opportunity for Beginning Investors

It's a pity that I already have several online savings accounts and mututal fund investments, because the new offering from rabobank looks very attractive. They offer an online savings account with no fees or minimum balance with an interest rate of 6.6%, and from this account you can invest in wholesale mutual funds for a low entry fee of only 0.75% (compared with up to 5% entry for retail funds going direct or via a planner, or 0% for a retail fund investment via a discount broker). They are offering 0% entry fee, but only until the end of July. But the 0.75% fee is still good value as it gives access to wholesale funds (which usually charge lower management fees than their retail fund equivalents) with a minimum investment of only $250.

I'd try out this account and fund investment option if I didn't already have more accounts than I know what to do with. They do offer the account for use with a DIY Superannuation account (SMSF), but I'll have to check carefully how their costs and range of available funds compares with accessing mutual fund investments via e*Trade (I already have an e*Trade account setup for use with our SMSF). One benefit of making out SMSF mutual fund investments via e*Trade is that eSuperFund (which administers our SMSF) has access to transaction data from our e*Trade account. If we invested for our SMSF via Raboplus we'd have to send copies of all the relevant financial info to eSuperFund each year.

I was also thinking about opening a Raboplus account for DS1 and/or DS2, but unfortunately you can't open a raboplus account if you're under 12, so the kids will have to make do with their St George bank accounts and Commonwealth Bank 'dollarmite' savings accounts. It's funny how some banks and Superannuation funds have no problem with opening accounts for a minor (with an adult having authority to operate the account), while others either don't handle accounts for minors at all, or insist on the account being opened in the name of the adult trustee(s).

Copyright Enough Wealth 2007

Tax File Numbers Still "optional" for Superannuation Accounts After 1 July

One of the changes made in the change to "Simper Super" went relatively unnoticed until now. All the media attention was around Retirement account withdrawals being tax free for retirees over 60 under the new rules, and the last minute opportunity to contribute up to $1 million into super before the new contribution limits come into effect on 1 July. It's only now that people have started to realise that under the new rules you will be hit with a 46% contribution tax rather than the usual 15% tax on pre-tax contributions if you haven't given your TFN details to your super fund manager. You also won't be able to make any undeducted contributions into a super fund after 1 July if you haven't given them your TFN - which would mean you can't get the co-contribution.

The media seems to have bought the government line that this change is all to do with making it easier to find the owners of "lost" super accounts. I think it has a lot more to do with clamping down on tax avoidance - the fact is that there have been a lot more tax file numbers issued to individuals than really exist in Australia. In the early days it was possible to open bank accounts under false names (no 100 point worth of ID was required back in the early 80s), and it was also fairly easy for someone to get multiple TFNs when they were first introduced (often by using a copy of a birth certificate obtained for a deceased person). These extra TFNs (under false names) were used to avoid tax. I'm sure there are still quite a few people working multiple jobs and using a different TFN for each, thereby getting the benefit of multiple tax free thresholds and low marginal tax rates. Up to now each of these jobs would have paid compulsory SGL amounts into a super account under those same false names. If the TFNs are provided for these super accounts the data matching used to find "lost" super accounts could help identify where one person appears to have multiple TFNs in use. If a TFN isn't provided for an account it could be a trigger for the ATO to check if the account appears to be legit. At the very least the lack of a TFN would mean any future contributions into the account would attract the top marginal tax rate.

I'm amazed that anyone in the media has swallowed the line that the requirement for TFNs will be used to reunite "lost" super accounts with their owner. After all, if the owner knows about the account and provides the TFN, it can't be "lost".

Enough Wealth

What Asset Mix to use in our Retirement Account?

Now that our Self-Managed Superannuation Fund (SMSF) has been setup and the initial $200 contribution was processed OK via the ANZ V2 bank account, I'm starting to plan what asset mix the SMSF should contain, and what specific investments to make when our retirement savings are transferred into the SMSF next financial year. One complication of using a SMSF is that it will pool the retirement savings of DW and me, although the balances are reported indivdually based on each members contributions.

We currently have separate accounts with BT Employer Superannuation, and have slightly difference asset allocations in our accounts. Luckily our personal asset allocations are close enough to be able to get by with one asset mix that will suit us both in the SMSF:

            Au Shrs   Int Shrs   Fixed Int   Property
Overall     48.82%    39.33%      2.19%       9.67%
Me          48.11%    40.46%      0.59%      10.83%
DW          52.64%    33.18%     10.81%       3.37%
SMSF Plan   50.00%    40.00%      0.00%      10.00%

Another consideration with the SMSF will be ensuring that the investments are easy to monitor and can automatically provide the required transactional details to the SMSF administrator. eSuperFund (the administrator of our SMSF) can access transactional data for any investments done via the e*Trade brokerage account that was setup for out fund. Therefore I plan on buying any individual stocks using e*Trade and to also make mutual fund investments via e*Trade. Fortunately e*Trade rebates 100% of fund application fees (typically around 4%), so there's no issue with investing in mutual funds via e*Trade.

As the whole point of shifting our superannuation from BT to a SMSF was to save on fees we'll probably invest mostly via the CDF Australian Index Fund (which has a MER below 1%) and Vanguard Index Funds - Australian Shares Index , Global Shares Index, Property Securities Index. However, Vanguard charges around 0.90% MER on the first $50K invested in a fund, 0.60% on the next $50K, and 0.35% on any amount over $100K in that fund. Putting all our SMSF investment in just the Vanguard LifeStrategy HighGrowth fund would reduce the overall MER from around 1% to around 0.50% initially, and it would trend towards 0.35% as our SMSF value increased over time.
Fortunately the Vanguard LifeStrategy HighGrowth fund has an asset allocation close enough to our desired mix:

            Au Shrs   Int Shrs   Fixed Int   Property
HighGrowth  48.00%    32.00%     10.00%      10.00%

A Projection of our SMSF Starting Balance, Contributions and ROI shows roughly how much the fees will be over time:

                               Assumes
                               10% pa   
             '000       '000    '000    '000      Fees as     Fees as
FinYear      Start      Add     Earn    End      % of SMSF   % of ROI
2007/2008      $360      $54     $36      $450     0.57%       7.15%
2008/2009      $450      $54     $45      $549     0.53%       6.49%
2009/2010      $549      $54     $54      $658     0.50%       6.02%
2010/2011      $658      $54     $65      $777     0.48%       5.66%
2011/2012      $777      $54     $77      $909     0.46%       5.38%
2012/2013      $909      $54     $91    $1,054     0.44%       5.16%
2013/2014    $1,054      $54    $105    $1,214     0.43%       4.98%
2014/2015    $1,213      $54    $121    $1,389     0.42%       4.83%
2015/2016    $1,389      $54    $139    $1,582     0.41%       4.71%
2016/2017    $1,582      $54    $158    $1,794     0.41%       4.60%
2017/2018    $1,794      $54    $179    $2,027     0.40%       4.51%
2018/2019    $2,027      $54    $203    $2,284     0.39%       4.44%
2019/2020    $2,284      $54    $228    $2,567     0.39%       4.37%
2020/2021    $2,567      $54    $256    $2,877     0.38%       4.31%
2021/2022    $2,878      $54    $288    $3,219     0.38%       4.26%
2022/2023    $3,219      $54    $322    $3,595     0.38%       4.22%
2023/2024    $3,595      $54    $359    $4,009     0.37%       4.18%
2024/2025    $4,009      $54    $401    $4,463     0.37%       4.15%
2025/2026    $4,463      $54    $446    $4,964     0.37%       4.12%

It's interesting to see how large a chunk of the annual investment earnings are being consumed by fees, even in this low fee arrangement.

Enough Wealth

Get A Perpetual Income Stream for just 3% of Salary

What happens if you save "too much" for your retirement, as a recent MSN Money Article suggested was a possibility following conventional financial planning "rules of thumb" such as the 4% retirement withdrawal rate? Nothing too disasterous it turns out - just an accumulation of wealth and a perpetual income stream for our descendants, and/or a legacy to leave to one's favourite charity.

Plugging some "typical" figures into a retirement savings planner from AMP, it turns out that someone on a reasonable salary of $50K from 20-65, who saved the 9% SGL plus an extra 3% via salary sacrifice would end up with a retirement income of $33,333 that would last well beyond their expected life span - until the ripe old age of 150 years!

Calculator data entered:

Current retirement savings $ 0
Your age now years: 20
Your expected retirement age years: 65
Expected annual contribution increase: 3%
Expected rate of return before retirement: 8%
Expected rate of return after retirement: 7%
Expected annual inflation rate: 3%
Current gross annual salary $ 50,000
Your yearly contribution: $ 0
Your employer's yearly contribution: $ 4,500
Yearly retirement income required (% of current salary): 65%

Output:
Amount saved upon retirement $ 2,217,233 ($ 586,322)
Which would provide the required retirement income of $33,333 until age 94, which is considerably more than the expected life expectancy (81 years for a male).

But wait, just saving an extra 3% of salary each year via salary sacrifice (ie. pre-tax) would result in the following:
Output:
Amount saved upon retirement $ 3,086,723 ($ 816,249 in today's dollars)
Will last almost indefinitely (until over 150!)

Any higher savings rate would result in the retirement account actually accumulating wealth during retirement at a rate greater than 65% of pre-retirement income, so you would leave a perpetual income stream for your descendants.

In reality you're unlikely to get a steady 8% return pre-retirement and 7% during retirement, even if you invest in an asset allocation that is expected to average these rates. Similarly, inflation won't stay at 3%. For these reasons most people will choose to be conservative in their modelling, and the chances are good that you'll end up with an even larger perpetual income stream, plus the ability to draw a larger income stream during your retirement years.

Enough Wealth

Contented Retirement is a State of Mind

Canadian Financial Stuff has a post Retirement? Not Likely for me that seems to suggest that only the baby boomer generation will be lucky enough to get to enjoy a real "retirement". I must admit that I think this view comes from a perception that most modern consumers combine of lack of taking ownership for their own retirement funding with an inflated expectation of what lifestyle retirement should offer them. From personal experience "retirement" has been enjoyed by most people in the developed countries for the past couple of generations, and isn't about to disappear for anyone that makes a serious effort during their working lives to fund their retirement years:

My grandfather was a plumber, retired at 65 and lived on the UK government pension until he died at age 92 - 27 years of "retirement".

My father was an pilot, retired at 58 and lives as a self-funded retiree. He's 75 and going strong - so far 17 years in "retirement".

I'm a scientist/middle manager, and will probably be able to "retire" any time after 58, though I'll probably choose to work 'til 65 or 70, and then spend my time managing my investments. Hopefully I get to spend 20-30 years in retirement.

My kids already have retirement funds setup by me, and adding a thousand dollars a year into their accounts from birth until 18 will mean they're very likely to be able to "retire" any time after 58 that they choose, without having to sock too much away during their working lives. I've no idea how long they'll spend retired. Advances in health care may extend their healthy lifespan so much that retirement is postponed indefinitely by choice. Adding just a few extra years to your working life makes it MUCH easier to accumulate enough for a very comfortable retirement lifestyle - just compare the results you get from any retirement calculator with a retirement age of 60 vs. 65 or 70...

I think the only thing stopping many people in the current and future generations in the developed world from having a comfortable retirement will be "consumption inflation". Like locusts many modern consumers gorge on current consumption and put nothing aside for their own retirement.

Another aspect is that people these days often aim for a "lifestyle of the rich and famous" in their retirement. In my grandparents day all you needed for a "comfortable" retirement was a one bedroom house with a roof that didn't leak, enough money for food and utilities, and membership of the local library and church. Throw in a radio and a small garden to tend and they were more than happy. These days this existence would be labelled as living "below the poverty line"!

Enough Wealth

Banking Black Holes

The $200 I transferred direct from my Credit Union account into my new ANZ "V2 Plus" account that was recently set up to receive contributions into our Self-Managed Superannuation Fund (SMSF) has disappeared (temporarily I hope). Although there's often a three day "hold" on funds transfers between different financial institutions in Australia, this is usually manifest as a difference between the "account balance" and "available balance" figures for the destination account ie. the funds immediately disappear from the source account, and generally appear in the destination account the next day, but aren't available until the three day holding period expires. It seems odd that the $200 I transferred last Thursday hadn't appeared at all in the ANZ account yet - if it doesn't turn up tomorrow I'll have to phone ANZ to try to work out where the money has gone. It raises an interesting side issue - at least when transferred funds appear immediately but are "unavailable" you still earn interest on the money during those three days. With funds that disappear for three days someone else must be earning interest on my money in the interim.

Enough Wealth

Transferring Funds into our new SMSF

After completing the 100-point identity check for DW and myself at the ANZ bank nearest my workplace, I checked with our payroll department on what paperwork was needed to start making the employer SGL payments into our new SMSF. I was advised that it would be best to get the new details entered into the pay system now, but my employer would prefer to not commence payments into the SMSF until the new financial year (ie. after 1 July) so that it was easy to reconcile this years payments. This is fine by me, it just means that we can't send in the paperwork to exit DW from the old BT Superannuation fund until after all this years payments have been processed. As I'm going to leave some money in the old fund in order to retain my life insurance policy, I can still send in the form for making my partial fund transfer next week. Meanwhile I did a $200 direct payment into the new SMSF bank account from my credit union account, just so they'd be some financial details reported for the SMSF this financial year. I want to check out what the member reporting looks like.

I was a bit interested in how various payments made into our SMSF through the one ANZ bank account could be identified by eSuperFund - ie. which member the contribution belonged to, and whether the payment was a deducted or undeducted contribution, employer SGL payment or salary sacrifice. I rang the eSuperFund help line and they advised that the deposit should note which member the deposit was from in the lodgement reference, and that employer contributions should be identifiable because they would be regular deposits from the same source. Anyhow, at the end of the year eSuperFund will send us a contributions summary for the trustees (DW and I) to check for accuracy before it is finalised. They also mentioned that it would be possible to check these details online in future, but that this was still "in development". This is another risk with moving from the BT fund into our own SMSF managed by eSuperFund - if eSuperFund ever went out of business we may find that the required record keeping hasn't been up to scratch. Hopefully tha annual compliance checks by the ATO will ensure that everything is meeting the required minimum standards.

The next step is to check what investment mix DW and I currently have in our BT superannuation accounts, and decide on what combined asset allocation we want in the SMSF, and how to meet this allocation - eg. direct share investments or CFDs, ETFs, actively managed mutual funds, index funds or whatever. One drawback of using the SMSF for DW and myself is that the assets are all managed in a "pool", and just split into member balances pro-rata the contributions into the SMSF. This means that we have to decide on the investment mix jointly as trustees, rather than being able to choose our individual investment mix as we do in our existing BT funds. This isn't a big problem as we have similar risk tolerance and investment time-frame. In practice, the SMSF balance will comprise around 80% or more my contributions, and I enjoy doing paperwork more than DW, so I'll probably make the investment selections and just get my choices approved by DW.

Enough Wealth

Setting Up A Personal Retirement Fund

The paperwork from eSuperFund confirming the establishment of our Self-Managed Superannuation Fund (SMSF) arrived today. Overall the process has been very quick and efficient. The initial online application only took five minutes to complete and gave a false sense of simplicity - when the actual "paperwork" to create the SMSF arrived it was a very thick package with FIFTY of the little, yellow "sign here" stickers attached! Anyhow, the paperwork has now been processed by the ATO (Australian Tax Office) and everything is now in place. In total we received:
* A TFN (Tax File Number) for the new fund from the ATO
* An ABN (Australian Business Number) for the new fund
* A "V2 Plus" Bank Account with the ANZ (to handle all deposits into the fund)
* A Share Trading account with E*Trade for the fund
* A second ANZ Bank account to hold funds to settlement of SMSF share trades

The next step is to visit the local ANZ Bank branch and present passport, drivers licence etc. for myself and DW (the trustees of the SMSF) to complete the 100 point identity check required for any new bank account. At the same time I'll get a CRN (Customer Registration Number) and "telecode" from ANZ so we can register online for online access to the ANZ Bank accounts.

This should all be in place by next week, at which time I can do the paperwork required to transfer funds out of our current Employer-sponsored Superannuation fund (run by Westpac/BT) and into the new SMSF. DW has around $50K in her account, so we'll transfer the entire amount and arrange for future SGL (Superannuation Guarantee Levy) amounts to be paid from our employer into the new account. This will mean she loses the current life insurance cover we have via the BT Super Fund, but she only had a nominal amount of cover anyhow. I have a $400K policy through the BT Super Fund, so I'll probably transfer the majority of my balance into the new SMSF, but leave a small amount there to maintain my life insurance cover. I'll also let my future employer SGL deposits go into the 'old' BT account to cover the ongoing insurance premiums. I can always withdraw the remainder of the balance if I change jobs or have a large balance build up in that account. I wouldn't want to do too many transfers out of the BT Fund though, as they charge $35 for each withdrawal! There will also be the ongoing annual member fee if I keep my BT Super account open (around $55 pa), but at least I'll be avoiding the fairly high fund management fee of around 1.25% (even after our employer's fee rebate has been applied). Overall, with a combined Super balance of around $350K in the SMSF we'll save around $3,500 each year in management fees, even after deducting the $600 pa management, audit and reporting fee charged by eSuperFund on our SMSF.

In the future we will probably add any future savings into the SMSF as the tax benefits are considerable, especially under the new "Simpler Super" changes that apply from 1 July. With a maximum annual contribution limit of $400K ($50K each of pre-tax contributions (SGL and salary sacrifice), and $150K each of post-tax contributions) we would be able to put all our future investments into the SMSF if we want to (the only significant draw back of this strategy is that we can't get money back out of superannuation until we reach 60).

Enough Wealth

Superannuation Arrangements and Dividends

The cheque for my $34,000 withdrawal of money from my retirement account arrived today. As it was an undeducted, unrestricted, non-preserved component of my super account balance there wasn't any tax deducted and I don't expect it to be subject to any income tax (although the Eligible Termination Payment statement that accompanied the cheque looks like its something that has to be attached to this year's tax return). I emailed the payroll office at work a few days ago to organise a salary sacrifice increase to $1600 per fortnight next financial year, so I'll be using the $34,000 as supplementary income for the next couple of years. For that reason I think I'll just leave it in the high interest online account with my Credit Union (earning 6.10%) and transfer $650 each fortnight into my main Credit Union account where my pay gets deposited.

A dividend payment notice arrived today from David Jones for a fully franked interim dividend of $180, with a $77.14 franking credit.

So far this financial year I've received the following dividends from my Australian share portfolios:

            UnFranked   Franked     Franking Credit  TOTAL
FY 06/07    $1,607.90   $10,408.32  $4,460.68        $16,476.90

Enough Wealth

Budget Night Benefits

The Australian Treasurer handed down the annual budget tonight, and, as expected in an election year, there are some generous handouts to "middle Australia" (ie. swinging voters). Those of personal interest are:
* A "one off" doubling of the government superannuation co-contribution for the 05/06 financial year. This means that DW and DS1 (who both made $1000 undeducted contributions into their superannuation accounts that year), will get a total of $3,000 in co-contribution, rather than the expected $1,500.
* Tax cuts at the "bottom end" starting from 1 July 2007. The threshold for the 30% rate has been increased from $28,000 to $30,000, and the low income earners tax rebate has increased from $600 to $750, which means anyone with taxable income less than $30K will pay 0% tax on the first $11,000 of income (the 15% tax rate normally applies above $8,000).

Having recently withdrawn $34,000 of unrestricted, undeducted, non-preserved money from my superannuation account (prior to the rule changes taking effect on 1 July), I'll now be able to salary sacrifice a large fraction of my salary for the next two years. This will
a) save tax on the sacrified amount (super contribution tax rate is 15% rather than the income tax rate of 30% which would otherwise apply)
b) reduce my taxable income down to around $30,000, so I'll be eligible for the $1,500 government superannuation co-contribution if I make a $1,000 undeducted super contribution (it may even end up being $3,000 if this year's "one off" increase ends up being repeated!)
c) substantially reduce our combined family taxable income so we are eligible for some Family Tax Benefit payments.

The others changes won't immediately affect us, but the childcare rebate changes should be good once DS2 starts preschool in a couple of years.

Enough Wealth