Hello, and welcome to The Australian's Money Puzzle podcast. I'm James Kirby, the editor at The Australian.
Welcome aboard everybody, you know.
I think the most common question I get asked, and that gets asked across the broad world of investment, certainly in Australia, certainly at this time, is how much should I have in super? Now? What is the answer to that? A lot of that depends on who you are, what age you are. The short answer is, by the way, you don't need anything. Okay, you can get twenty six thousand a year from the government in the age pension
if you know super whatsoever. Zero That is not going to be enough for most people most of the time.
I know that.
And then you say, well, what did the experts say? The ASPA, the Association of Superinnovation Funds, says for a modest retirement, a person should have one hundred thousand dollars for a comfortable retirement. A person a person being a single individual. And I'll talk about when we talk about numbers throughout this show today. On this issue, we're talking about a single individual, okay, before it gets complicated with couples and everything.
Else.
So single individual comfortable retirement five hundred and ninety five thousand dollars. Okay, so that's what you're supposed to have at sixty seven. There's a lot of issues around this number. People genuinely want to know the answer. They want a simple answer. There is no simple answer. They want a quick answer. There isn't a quick answer.
Reader.
Perhaps the best answer is you know as much as you possibly can, and when you get to one point nine million, and you can start to worry. When you get to one point nine million, you can start thinking about how how you'll get around the fact that you might have to pay tax from that point on. I read a terrific piece of work, and I read on this issue all the time, but I read a fresh thinking on this issue from Ashley Owen from Owen Analytics.
He's well known in the investment space as an investment manager. Over the years, he's on various committees. He's on the Third Link Investment Committee, which you would know of course, that's the fund that funnels money to charity. Very admirable exercise going there, and I thought it'd be really good to have on the show on this subject and to answer some questions as well, how.
Are you Ashley?
Fantastic? Doing well?
Very good to have you on the show. I have a theory that we could run a piece in the Australian. I don't know what the ultimate elasticity of this piece, but I can tell you every single time we run a piece which says how much did you have in Super? It rates very very well. It seems this is endless appetite for that. Tell me what you thought of my preamble there when I was saying there's no answer, there's no warn answer?
Is that the case? How much should you happen super?
It's the number one question that everyone always asks. You raise some good points and Australia is one of the luckiest countries in the world. And we've got this index Pension for Life. Bever in mind that two thirds, sixty four percent of Australians of pensionable age are on the age pension. So despite thirty two or three years of compulsory super post ninety ninety one and it's now eleven percent and going up to eleven and a half percent this year, thirty years of that and it's a good start.
So sixty four percent of Australians of pensionable age over sixty seven years old on the Australian.
Government pension to some degree.
About half of those are on the full pension, and about half of the or a third of retirees or on the full pension, about a third of retirees or on a part pension. Bear in mind, you can still earn sixty three thousand dollars and get a pension in Australia. Well a couple can earn one hundred and six thousand dollars, so it's quite generous. Only so two thirds of Australia are on the public payroll. They've got their handout. You
and I are paying for it all. Now they can say, of course they've paid tax all their life and they've earned it. So we're not going to get into those arguments.
But basically, after thirty years of compulsory super in Australia, best system in the world, biggest system in the world if you look at them, just looking at the ACTS site now, the average or the median retirement balance superbalance for a sixty five year old in Australia today is about two hundred and one thousand dollars for females and about two hundred and eleven thousand dollars for males. Most people use that to payoff debt and go on the benson.
So it's been an interesting exercise, but it has been not a failure. But it hasn't built the wealth that it's got three and a half trillion dollars, which is a lot of wealth, but most of that's at the big end of town. The average balance is one and a half million, but the median balance is only two hundred thousand, which means most of the money is in the lumpy end of the multi millionaires and billionaires who
just use it for a tax dodge. Ordinary Australians have a couple hundred thousand dollars when they retire at sixty sixty five years old, which is the medium balance and super today most of the music to pay off debt and then go on to pension. So you're right in saying how much you need the enter zero because if you happen to rely on the public pension for life, then you don't need anything. It's index for life. There's
a public problems with that. First one, for example, is I've got a ninety six year old mother who's been in four nursing homes and two hospices in the last year and a half. That's costing about one hundred and fifty thousand dollars after tax, and insurance covers nothing. So one hundred and fifty thousand dollars you've got to find from somewhere after tax, and that could go on for
years and years and years, so pincuer doesn't cover that. Yes, you can tell your house and do other things, but that upset to other people and you got other family members. So it's okay to say, yes, the pension's there, but you and I know you don't want to rely on the pension. I want to rely on the welfare of taxpayers future taxpayers for the next twenty thirty years of your life. The next point is that you make very well.
Is that ASPHA, which is the Australian's Supernuation industry body, which produces a lot of numbers and a lot of people use it. If you go on to the website of any industry fund from Australian super so you know Hester and SeaBus, they all use the same numbers and they talk about the comfortable retirement lifestyle, which is about sixty four thousand dollars a year, and that requires six
hundred and forty thousand dollars, so ten. So to say, if your spending budget is sixty four thousand dollars a year, which is and they describe exactly how many times you go out to what restaurants and how many times you travel late, I itemize that if that is your comfortable lifestyle of sixty four thousand dollars as a starting point, then they say you need about ten times that I eat six hundred and forty thousand dollars to live a
comfortable lifestyle to have enough capital to afford their comfortable lifestyle. So that's not a bad starting point. And every super fund in Australia, all the banks and the amps, they all use exactly the same calculators, which a couple of things go on in there. First of all, if you look at that sixty four thousand dollars comfortable lifestyle, I wouldn't last two weeks on that, and a lot of people would not be had if you actually listen out
then items it's actually it's a pretty poor lifestyle. So sixty four thousand dollars sounds a lot, but it actually doesn't go fast, so it's a good starting point for conversations.
Okay, yes, The first step.
I always ask people is what is your spending budget? Most people I asked don't know. So now it's first week of July. You've got to wait for your statements to come before you start your tax return stuff. It's not a bad time to do two things. One is to look back at the last year to June, and so how is my funds returned? And the second point is to say, well, what am I spending or what's my spending budget? Has my spending budget gone up? Has
the increasing power bills and petrol prices? Has that actually made mind spending budget go from sixty thousand to seventy thousand? And what are my travel plans? So it's not a bad time to start your tax work. And while you're waiting for that, to start looking at your spending budget. Everyone must have a spending budget, so when you talk about how much do you need, it comes down to a multiple of your spending budget. Some people are happy
to spend fifty thousand dollars a year. Of course, you've got travel and fridge's break and cars need replacing, so you've got a budget. All that in so you're spending roughly x thousand dollars per year. If you don't have a spending budget or an estimator spending budget, that's not a bad time to spend a weekend estimating what you spent last year. Look at your credit card bills, look at your bank statements. Will work out what is your
spending budget in rough territory? What is it you need to do that because that's the starting point for how much multiple of that do you need?
Are you saying whatever that is, you multiply it by ten.
No, What I'm saying is the first variable is a spending budget. The second big variable is how many times that do you need? Now the ASPHA and all the industry funds, all the banks, all the funbanage, you use the same model, which basically says you need a round about if you're sixty to sixty five years old and ready to retire, then they say you need around ten times you're spending budget. Now, there's a lot of assumptions
in there. The first assumption, which is the key assumption, is they all assume you run down new capital to zero and then go on the full pension. They all make that assumption in their fine print on the back page. They all assume that includes the entire pension. That's not about assumption because two thirds of Australias do that, So
that's just describing what happens in real life. But it does mean that you realize that you're actually running down your capital, and the idea of running into eating into capital, running down the capital terrifies a lot of people, including myself. Yes, one of the problems is you look at the life table and the median life table. For I'm sixty five, my Australian government published median life expectancy is eighty five.
Big problem is that's a median. Half of us are going to live longer, yes, and half of us are going to live shorter. I mean, everyone's trying to get healthy and fit and looking at nutrition, looking at diet and exercise why to live longer, But that requires more capital. So if you're lucky enough to live longer, you're going to be in that half of people who are more than the median, and therefore we're going to live to more than eighty five years old. My mother's ninety six
and she's still going So that's the big assumption. It assumes you live to your target date on your wrist, which in my case is eighty five. If I want to live longer than that, I'm going to have more captain need more capital to actually fund that. That's a big assumption that people get wrong.
Okay, we'll just take a break there and we'll come back. I want to really want to zone in on this. It's really really good so far. Thank you very much. I had some questions pre prepared for what you're saying as sort of challenging even those, so we'll be back at.
The moment of folks.
Hello and welcome back to The Australian's Money Positive podcast. I'm James Kirby and I'm talking to Ashley Owen, analystics own is an investment manager and expert and it serves on several investment boards and a particular interest in superannuation and some of his recent work really caught my eye because on the enduring, endless and endlessly scary question of how much do you need in super We get this
question all the time. We get it on the podcast, we get it in the paper of The Australian, and I get it socially and so does Ashley. The answer is going to be a formula, and to some extent
that formula will be tailored or customized to you. Some of the points actually was making at the start of the show in the first part is that these assumptions about comfortable retirement amount five hundred and ninety five thousand dollars average age, life expectancy eighty five if you were in your early sixties right now, for instance, et cetera, et cetera. They're all fine, except that you know your
life might not be average at all. You might live to be Ashley is mentioning his mom is I think in ninety five, my dad's ninety he had no idea he was going to be retired for thirty years and his income. We still have to work on that. Every time I go back, we sit down and we go through his investments and how it's all working. So something that goes on a long time. So I want to
add on this segment. I'm going to try and look at the issue of the big questions like how long should we assume that we live and though the big funds and all the stakeholders in the industry, their assumptions assumes that we spend our core capital down to zero. A lot of people don't want to do that, and maybe they don't have to do it, so let's find out. Actually, so tell us, wouldn't it make sense to say, okay, I'll assume I live to one hundred and work backwards
from there. Is that silly or sensible?
It's not silly. The life tables, which these calculations are all based on snapshots in time. We also already talked about the fact that the meeting is only just the middle person half a lit longer and half a live less. So you got to a shoe. This is it. This is all you've got. You're on this planet once. You want to make sure you make the best of it. So you've got to plan to be in that second half if you want to be, or at least you're dependent or your partner's going to be there. So if
it's not you, it's going to be your partner. So the problem is these snapshots in time, and the ABS publishes these numbers every year. These snapshots move over time. In the average person's lifetime, that curve moves about three decades to the right. So, for example, my mother born in nineteen twenty eight. I looked at the ABS, and beauty of the ABS is you can go and get the nineteen twenty eight year book which is published on the ABS and look at the life tables on about
page three hundred. I've got it in my article. You look up somebody born in nineteen twenty eight female, Her life expectancy was sixty four years old. Today she's ninety six and she's still going, so that curve has moved three decades in a lifetime. I was born in a poor Asian country in the late fifties, and my life expectancy at birth was probably about forty or fifty at best.
I moved to Australia, which is great. Somebody born in nine fifty eight in Australia, a male, if you look at the yearbook, would have been I think sixty eight years old. Currently my life expectancy is eighty five, so it's already moved two decades to the right and I'm still going. So I could do the same thing with any person. The beauty of the ABS is they publish
yearbooks going back to nineteen oh one. You can look at your own year and say when I was born, my life expectancy table was X. What is it now? The life expectancy tables shift right. I down the old age in about three decades during the lifetime. So don't base anything on the current snapshot because it's going to move right.
Because we're probably under estimating our life expectancy, are we?
You are? I talked to a lot of clients and I have done the many many years, and I always insist on looking to the male and female together would be Jack and Jill, and I say one of you might live to one hundred. I look at Jack and say, and it ain't going to be you. It's more like you're going to be the female because often the female is younger, and often the female life tables are longer anyway, So someone's going to live to one hundred if it's
not you, at your partner. So you don't want to get to eighty five, ninety years old and running out of money. You can't get back to work, you can't earn more. This is it. This is your time on the planet. So thank on living to one hundred. If you don't, that's good. If you live longer, that's even better.
Can I ask you then about the core capital, like you were saying all those estimates when people go on all those calculators, the calculators are I won't say misleading, but they're incomplete right because they assume that you run down your capital, like you mentioned your mom. If my own dad had run down his capital, it would be a big trouble. Now big trouble this is he's been retired for thirty years solid. So what do you suggest on that issue.
I got an email the other day from a reader who says he's eighty and his wife is sixty five. They have no dependents, they don't see any charities worth getting money too. They've given two houses to his school, and this is a live question. And he said, look, I want to run down my capital. I'm eighty years old. Let's say I'm going to live to one hundred. What's my formula to run down the capital to one hundred? And I said, first of all, it's not about you.
Your wife is sixty five. She might have forty years, so it's not about you anymore. It's actually about her. So if she's sixty five years old, which is a live case, and he's planning on her living to one hundred, I said, look, the maths is not that accurate. If I'm running a portfolio for a forty year time arise and to amortize it over forty years, financially, mathematically, that's as good as running a perpetual portfolio, which I do
for charities. Charities are perpetual portfolio. So that basis is you assume you retain your capital. In real terms, life is too variable to actually calculate the lengths of the runway over forty years. So rather than trying to calculate the lengths of the runway to land at one hundred, assuming a capital is going to last forever, because forty years is effectively forever in financial terms. So that comes back to my point. You're going to live to one hundred,
You're going to rely on your capital. You're going to make sure that capital keeps growing for inflation and the withdrawals off it keep growing for inflation, which means you're running it a petual fund.
Yeah, that's your core point. Then perpetual capital not to run down on the core capital unless, of course, and our listeners would know that there are rules in super that you actually must take out a certain amount each year and compulsory drawdowns but would allow for that. Okay, So just it's very hard to do this in I think the Shaublin has been really good to do this all the same, and it's got some fresh thinking I think here on this issue of how much people should
have in SUPER. The other thing I supposed on a practical terms for younger listeners, there was a time you could put enormous amount. You could put any amount into SUPER and believe it or not, about ten years ago you could put in as much as you can put in. Today, for instance, it hasn't changed. In fact, it's shrunk and only through inflation indexing has it gone back up. What
do you recommend in terms of contributions? Do you generally recommend that people put in the max that they can if they can't.
It's a tax look, and there are tremendous tax advantages. As it's turned out, it's a tax loerk for the rich and therefore labor as they probably should are taking the big end of town. How they're doing it is interesting with the new division two nine six tax if it gets in and what will happen. But the idea is it is very tax advantageous in a lot of ways.
So you may as well take advantage of that with as much money as you can the other side of the coin is for young people who are encourage to put it as much a way as possible over and above the eleven and a half percent is they're trying to buy a house. Even buying a house is difficult these days, so there's a big move on to divert money from Super into buying a house, or even dip into SUPER to buy a house.
Yeah, there is.
It's a difficult argument to go into and it's different for everybody, but I would say, still giving you eleven and a half percent going into Super, make sure you use that as much as possible. So it's compulsory savings for employees. Unfortunately, a good part of the workforce is
not employees. There's small business and if you look at the numbers of Super coming out the other end, I'm guessing, but I'm saying most small business people it's the last thing on their plate they get to June thirty, there's cash leader they've got to find. It's the thing that
they forget on June thirty. So the people at the poor end of the SUPER scale in the median balances when they retire a people typically who've been in small businesses or self employed for thirty forty years, because it's not something that your employee does compulsorily. So the missed
out yep. So having seen that experience many many times, I would say, if you've got the chance, to make sure you use a system as much as you can, because it's locked the way, it's out of harm's way, and it's going to be there in some shape or form when you really need it when you're sixty seventy
eighty years old. If you rely on your own self discipline to do it when you're a small business operator, invariably it doesn't get done and you reach the age where you look back and say, if only had done that. The good thing is, though, that a lot of small business own two or three or four properties, and properties are just as powerful as SUPER is.
Yes, there just two points there we might make to listeners. Actually is talking about eleven and a half percent. If you record eleven and a half percent, the amount you must put into SUPER on a compulsory basis from July one that's just passed.
Now.
The maximum you can put into SUPER on a pre tax basis is thirty thousands. So what you do is you can put in whatever eleven and a half percent of your salary is that goes into SUPER, and then there's a gap between that and thirty thousands, you can put that amount in. So let's say you're eleven and a half percent works out at fifteen thousand, then in theory you can put in another fifteen pre tax into SUPER. That's the real tax advantage. So keep that in mind, folks.
And also a lot of people now in consultants, gig workers in any way that you might be not if you are employed outside the traditional staff employer type situation where you simply get a pay packet every month, but you're super in it. As Ashley said, be careful there and if you can it's I know it's hard to be self disciplined, but to be able to contribute to SUPER you.
Can do it.
You can do it just like anyone in staff can do it. You simply just make an application and you put in the amount into SUPER on the same terms. And of course, obviously people who have property in the business, that's a different business. The direct real property can be
included into super fund. It's one of the great tricks for small business and any small business who can do it, that can get their building that they own and their business into it, and that business in building into their superfund.
It's a fabulous it's.
A fabulous thing if you're able to do it. They call it direct property in the super circus. Okay, that's about as far as we can go on this issue. I'm sure we'll come back to it. I'm sure we'll have lots of questions. I wanted to raise it. I wanted to give our version of what the answer is to how much you should have in super I think Ashley's idea about how much you spend a year and then thinking about the multiples of that as a guidance
it is very useful. Also his idea that whatever the calculators say, do your own calculations and don't assume that you're going to spend down your core capital because you might live a lot lot longer than you ever expected. All right, well, take a short break. We've got a great question to be back in a moment. Hello, Welcome back to the Australians Money Puzzle podcast. James Kirby talking to Ashley Owen Analytics. I've got three questions here, folks.
Two interesting enough around super and one is kind of on super I'll just read the first one. It's from Rohan who says, a few weeks ago you had Chris Joy on the show and he said he expects consolidation in the superfund sector. It seems to me consolidation is in the interest of every super fund member, especially for people in poorly performing funds. Do you think the government
should be accelerating this consolidation. Well, I think it's a market, and the more the government encourages their market to act as a market in super the better. And I think very quickly we are getting lots of consolidation in super I wouldn't actually fancy being in some super funds when they do merge with other ones behind the scenes, I
think there's often problems that don't get highlighted there. But the other thing is, I don't know about you, actually, but it seems to me in the end we're going to have about ten megafunds that will really dominate everything.
What do you think.
I don't really have a view. There are a dozen megafunds and there are dozens of smaller ones. Now it should be a free market and the market should desire. But it's not a free market because it's compulsorily taken out of people's pay from when they're sixteen, eighteen to twenty years old, bits and pieces half cents in court of sense. No one cares or looks at it. Even today, the number of people who actually don't know how to find their balance little and what it is and what
it means or whether it's enough. It's just mind buggling. So it's not something that they have any interest or knowledge of. It's compulsorily taken out. It disappears somewhere and they look at it maybe once every ten years, and they get they start to look at it seriously when they're about fifty years old. So the fact that it's out of sight, out of mind, means it's free for all who want to do what they want with it.
So I'm in favor of regulation and oversight because simply it is so far it's three trillion dollars, which is completely out of people's minds or side or knowledge out what to do with it or how to fix it or whether it actually needs to be fixed. So I'm in flavorance of regulation. There's a lot of tests nowadays that OPRA apply to performance for super funds, and those that fail the test a couple of years in a
row get closed down and get told to merge. The test itself is a very blunt instrument and it's very strange how the test works and how it can be gamed, but it has closed down dozens of funds that are poor performing on their particular measures for that particular period. It's a blood instrument. It's probably not a bad idea to clean out the poorer performers. The measurement should be much more sensible and inclusive, and it's easy to game
the measurement currently, but it'll improve over time. There's people that say, look, why don't you do what Singapore and Norway do and just have one fund run by the government. We've got one called the Future Fund, and the Future Fund's done a pretty good job over twenty seven years. Yes, no industry fund has beaten the Future Fund. It's got funny rules and disclosure requirements, and it's got funny things
that go on in the Future Fund. But basically something like that is big and ugly, or was he super There's one or two big ones which you've got to say, why don't you just use that one? But of course if that blows up, then you've got no others. So you relying too much on one institution looking after twenty million Australians.
Yeah, that's the thing.
So I'm in favor of regulation and scrutiny in cleaning out bad operators, but I'm also wary of one behemous fund which has got everyone's savings.
Yeah, I take your point, all right, Yeah, and I would tend to I would sortually agree with that. I think if it does end up that we have ten huge funds and they're all damn good, then that will be fine. All right, final question, But there was two questions on Division two nine three tax. Division two nine three tax. By the way, is the tax you if we were talking about super contributions and the tax concessions, the problem is if you are in more than two
hundred and fifty thousand, there's a clawback. Would you believe on the on the concessions that you get in Super? So Greg asked about judges and their special place in Super. That's that's that's another show.
Greg.
A lot of most judges are on defined benefits and they have their world within a world, and they are going to hang out to their Super really hard, and you can see them lobbying desperately not to get caught in the three million tax net which is coming through. That's called division two ninety six. On the basis of division two nine three, the one that matters here, Rob says, I listen every week quite often I hear your guest
talk about catchups Super. This makes sense, of course. My understanding is capital gains and concessions SUPER contributions are considered for division two nine three. This may catch many people out, given the threshold for division two nine three is two hundred and fifty thousand.
Is this correct?
Yes, it is, It's correct, Rob, And I suppose the worst situation is if you were bang on two fifty thousand and you were contributing to Super at the max, and you you just bring yourself over the two fifty by doing so, maybe some profit on that anything else around, it would certainly find yourself in division two nine three. And it's a clawback. It's not index to either. Is there anything you want to add to that?
Actually?
About division two nine three, do people realize, you know, what about us? And do they read those there's an extra super tax that we really hardly ever hear about col Division two nine three.
Yes, it's been around for decades. The idea that you pay an extra fifteen percent. You pay fifteen percent on concessional contributions on the way in into tax, and then you if your income including super for particular year is over two fifty thousand dollars, which any trading would be on. So it's quite widespread nowadays.
Well and maybe not all of them, but a hell of a lot of them.
Yeah, then you get tax an extra fifteen percent on your concessional contribution. It used to be something that's for rich people only, but it's not index so two fifty now catches a lot of people, and so they just get paid thirty percent. It's still not bad because the marginal rate is higher than thirty percent, so it's not bad. It's a small taxt break, but it is an additional tax you pay based on your entire income including super for each particular year.
Yes, so basically, folks, if you make two hundred and fifty thousand or more, the tax advantages of contributing to Super are pinched basically by this tax. And as actually was saying, once upon a time when they designed this tax, it was designed for the rich per se these days, of course, because it's not indexed, every year, more and more people get into the net what they call bracket creep.
And on this particular case, you might call it superannuation tax bracket creep, which is just as insiduous as all the other bracket creep. Income tax bracket creep is the main one, of course we hear about all the time. Hey, thank you very much, Ashley Owen of Owen Analytics. That was very very interesting. It really met people think there's no simple answer for how much you should have in super.
There are key principles you should think about, including how long you will live, what sort of lifestyle do you want? How is that link to how much do you spend at the moment each year? Do you know how much you spent? Can you achieve that in super? And also you're probably going to live a lot longer than than you think, certainly our parents did.
All right, hey, thank you very much, Ashley.
My last little closing point would be bracket creepy is only one of the many creeps in camera.
Thank you very much.
All right, folks, that was Ashley over and over and analytics.
First time on the show and now the last time. I'm sure all right.
Do keep those pieces of correspondence coming in. I have lots of questions on property at the moment. I could do with more and happy to answer more on wider issues. So there's a call out the money puzzle at the Australian dot com dot au.
Talk to you soon.
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