Help with my Australian retirement plan

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
superaus
Posts: 2
Joined: Mon Oct 07, 2019 12:06 pm

Help with my Australian retirement plan

Post by superaus » Sun Oct 13, 2019 1:10 am

Dear all,

I have been lurking this forum for some time and learn that my current retirement planning is not optimized. Therefore, I hope you could help me with some suggestions.

Country of Residence: Australia

International Lifestyle: No

Currency: AUD

Emergency funds: Yes

Debt: None

Age: 26

Desired Asset allocation: 90% stocks / 10% bonds
Desired allocation to stocks outside your of country of residence: not sure

My investment money is with AustralianSuper, now 20k.
Bank saving account 20k (not invested)
_______________________________________________________________

Current non-investable assets
20k in bank savings account for emergency funds

Current retirement assets

General investment account, taxable
None

Retirement savings account, tax deferred (AustralianSuper account)
100% AustralianSuper balanced (pre-mixed) strategy (20k)
_______________________________________________________________

New investments

New annual Contributions
?? General investment account (not sure)
25k Retirement savings account (maximum salary-sacrifice allowed)
Note: I will rebalance my portfolio with new contribution, avoiding any tax event by selling assets.

_______________________________________________________________
Questions:
1. I am thinking of moving from AustralianSuper to Sunsuper, in order to implement this allocation
VGS: 40% - deveoped LC/MC
VGAD: 20% - developed LC/MC AUD-hedged
VAS: 20% - Australian
VGE: 10% - em
VAF: 10% - bonds (Australian)
which has been recommended by a member of this forum (clank) and I found matching my situation and risk appetite. Is Sunsuper the only superannuation fund in Australia that has Vanguard index managers (except dealing directly with Vanguard retail/wholesale)?

Edit: FirstStateSuper also has Vanguard as manager for their index single asset class option (as manifested by very low fees) but they have 0.15% fees on account size which is higher than Sunsuper's 0.10%. AustralianSuper has too much overhead fees for the Member Direct option (which has ETFs) so I dont bother to check if they have Vanguard managers.

2. How can I map these funds to what "Sunsuper individual options" allow? Reading the PDS does not indicate to me that these are the ticker underlying their options.

3. Sunsuper has +0.1% management fee based on account balance which translate to +0.1% additional fees. Their index on average cost +0.15%-0.2% in fees depending on the asset, so in total I have +0.25% to 0.3% fees on my investment balance. Can I minimize this?

4. Overall did I miss anything crucial in this plan?

Edit: added fund tickers' names and details
Last edited by superaus on Mon Oct 14, 2019 1:13 pm, edited 2 times in total.

Valuethinker
Posts: 38979
Joined: Fri May 11, 2007 11:07 am

Re: Help with my Australian retirement plan

Post by Valuethinker » Sun Oct 13, 2019 6:53 am

superaus wrote:
Sun Oct 13, 2019 1:10 am
Dear all,

I have been lurking this forum for some time and learn that my current retirement planning is not optimized. Therefore, I hope you could help me with some suggestions.

Country of Residence: Australia

International Lifestyle: No

Currency: AUD

Emergency funds: Yes

Debt: None

Age: 26

Desired Asset allocation: 90% stocks / 10% bonds
Desired allocation to stocks outside your of country of residence: not sure
In taxable accounts, there is a franking benefit to owning Australian shares (ability to claim on your taxes for the corporate taxation they have already paid - reduces the effective tax rate on dividend income). I have seen Andrew9999 here among others suggest it does not make a huge difference to returns.

In non-taxable accounts (like Super) I would argue for global equity diversification by weighting - home country bias of zero. Australia is c 3% of world markets, 80% of the index by market capitalisation is banks or natural resource companies - it is very undiversified. In addition, your state pension benefits (if any), your home equity (as & when you buy a home) and your biggest asset (your career) are all in Australian dollars - so diversification in your equity portfolio is a good thing.

So in total equities, I would limit Australia to say 20% at most in taxable accounts (to get the franking benefit). Otherwise I would be 80&-100% global equities.

If the index fund or ETF you choose does not cover Emerging Markets that's a tough question. Australia's economy is hugely linked to China, which is c 1/3 of the EM indices. Nonetheless you could split your Developed/ EM ratio in equities 85/ 15 which is roughly the world weightings.

Bonds you want an Australian government bond fund, probably, on the Keep It Simple principle.

BTW I would argue most people should be at least 20% bonds (however you could include your emergency cash in that number). You probably have not experienced a bad bear market, yet, and believe me, it is an experience.

At your age I would probably use unhedged global equity fund (assuming I could find one) and currency hedged bond fund (ie into AUD). The global equity volatility due to exchange rates you can probably live with.
M
y investment money is with AustralianSuper, now 20k.
Bank saving account 20k (not invested)
_______________________________________________________________

Current non-investable assets
20k in bank savings account for emergency funds

Current retirement assets

General investment account, taxable
None

Retirement savings account, tax deferred (AustralianSuper account)
100% AustralianSuper balanced (pre-mixed) strategy (20k)
_______________________________________________________________

New investments

New annual Contributions
?? General investment account (not sure)
25k Retirement savings account (maximum salary-sacrifice allowed)
Note: I will rebalance my portfolio with new contribution, avoiding any tax event by selling assets.

_______________________________________________________________
Questions:
1. I am thinking of moving from AustralianSuper to Sunsuper, in order to implement this allocation
VGS: 40%
VGAD: 20%
VGE: 10%
VAS: 20%
VAF: 10%
which has been recommended by a member of this forum (clank) and I found matching my situation and risk appetite. Is Sunsuper the only superannuation fund in Australia that has Vanguard index managers (except dealing directly with Vanguard retail/wholesale)?

2. How can I map these funds to what "Sunsuper individual options" allow? Reading the PDS does not indicate to me that these are the ticker underlying their options.

3. Sunsuper has +0.1% management fee based on account balance which translate to +0.1% additional fees. Their index on average cost +0.15%-0.2% in fees depending on the asset, so in total I have +0.25% to 0.3% fees on my investment balance. Can I minimize this?

4. Overall did I miss anything crucial in this plan?
Remember than 0.1% of $100k is $100 pa. Compounded over 40 years, that's not nothing. But it is only $100 pa.

I cannot advise you as to Australian funds & ETFs & ticker coes.

andrew99999
Posts: 516
Joined: Fri Jul 13, 2018 8:14 pm

Re: Help with my Australian retirement plan

Post by andrew99999 » Mon Oct 14, 2019 12:16 am

For non-Australians on here who have a wealth of information to provide, it would be best to include what the ticker symbols are for them (feel free to edit your original post)

VGS: 40% - deveoped LC/MC
VGAD: 20% - developed LC/MC AUD-hedged
VAS: 20% - Australian
VGE: 10% - em
VAF: 10% - bonds (Australian)

I don't know whether other super funds besides sunsuper are vanguard based. My main goal would be to find index funds (to avoid manager risk) that are low fees, which they have.

For mapping these funds into sunsuper, you can see equivalent funds mentioned in this thread but adjust your amounts to your desired allocation
https://forums.whirlpool.net.au/archive/2635984

From this thread I think the fees total around 0.09 for the ER and another about the same in other fees, so for super I doubt you are going to get much cheaper.
More information in this thread
https://www.reddit.com/r/fiaustralia/co ... t_of_fees/
PassiveInvestingAustralia.com

String
Posts: 5
Joined: Sun Jul 08, 2018 11:19 pm

Re: Help with my Australian retirement plan

Post by String » Mon Oct 14, 2019 3:24 am

Valuethinker wrote:
Sun Oct 13, 2019 6:53 am

So in total equities, I would limit Australia to say 20% at most in taxable accounts (to get the franking benefit). Otherwise I would be 80&-100% global equities.
This is somewhat backwards. Franking credits act as a refundable withholding tax in both taxable and super. Due to the high 5-6% gross yield you really want to be avoiding holding Australian shares in taxable where possible while you are still working.

Valuethinker
Posts: 38979
Joined: Fri May 11, 2007 11:07 am

Re: Help with my Australian retirement plan

Post by Valuethinker » Mon Oct 14, 2019 7:02 am

String wrote:
Mon Oct 14, 2019 3:24 am
Valuethinker wrote:
Sun Oct 13, 2019 6:53 am

So in total equities, I would limit Australia to say 20% at most in taxable accounts (to get the franking benefit). Otherwise I would be 80&-100% global equities.
This is somewhat backwards. Franking credits act as a refundable withholding tax in both taxable and super. Due to the high 5-6% gross yield you really want to be avoiding holding Australian shares in taxable where possible while you are still working.
Apologies. Is my wording unclear? I think it is that I did not use commas, appropriately.

I would limit Australia to say 20% at most, [and] in taxable accounts (to get the franking benefit)

Is that clearer?

I am suggesting an overall limit of 20% in Australian equities (except as a very small proportion of a global fund). And that that would be held in the taxable account.

If the investor has sufficient "headroom" to avoid taxable accounts, they should.

Suppose though they cannot only invest in tax-protected accounts, they have to hold money in taxable as well. Then if they are holding Australian equities, they should be held in taxable accounts in preference? Because of the dividend tax credit (franking)?

In the equivalent UK situation they abolished the ability to claim back the tax, within a tax-protected retirement account.

Valuethinker
Posts: 38979
Joined: Fri May 11, 2007 11:07 am

Re: Help with my Australian retirement plan

Post by Valuethinker » Mon Oct 14, 2019 7:04 am

andrew99999 wrote:
Mon Oct 14, 2019 12:16 am
For non-Australians on here who have a wealth of information to provide, it would be best to include what the ticker symbols are for them (feel free to edit your original post)

VGS: 40% - deveoped LC/MC
VGAD: 20% - developed LC/MC AUD-hedged
VAS: 20% - Australian
That seems to be to be way over what is prudent, given Australia is 3% of world index and is sectorally very concentrated. Exception is if it is to get franking credits. If I understand the other poster, they do not apply to holdings within a tax protected account (ie superannuation)?
VGE: 10% - em
VAF: 10% - bonds (Australian)
There's a question whether an Australian needs to hold EM given the exposure of the Australian economy & currency to China in particular and SE Asian in general. It's probably not material either way.

andrew99999
Posts: 516
Joined: Fri Jul 13, 2018 8:14 pm

Re: Help with my Australian retirement plan

Post by andrew99999 » Mon Oct 14, 2019 7:46 am

Valuethinker wrote:
Mon Oct 14, 2019 7:04 am
That seems to be to be way over what is prudent, given Australia is 3% of world index and is sectorally very concentrated. Exception is if it is to get franking credits. If I understand the other poster, they do not apply to holdings within a tax protected account (ie superannuation)?
No, they apply in both, but since you have no earned money in super, you get all of the tax paid back, whereas outside super you get a credit for it but since it will often be around your marginal tax rate, you end up not getting it back because you would have had to pay tax on it anyway.
Valuethinker wrote:
Mon Oct 14, 2019 7:04 am
VGE: 10% - em
VAF: 10% - bonds (Australian)
There's a question whether an Australian needs to hold EM given the exposure of the Australian economy & currency to China in particular and SE Asian in general. It's probably not material either way.
Agreed but I would still hold it. I don't think it's impossible for Australia to have a recession or even a downturn where the rest of the emerging markets doesn't.
PassiveInvestingAustralia.com

Topic Author
superaus
Posts: 2
Joined: Mon Oct 07, 2019 12:06 pm

Re: Help with my Australian retirement plan

Post by superaus » Mon Oct 14, 2019 1:37 pm

In taxable accounts, there is a franking benefit to owning Australian shares (ability to claim on your taxes for the corporate taxation they have already paid - reduces the effective tax rate on dividend income). I have seen Andrew9999 here among others suggest it does not make a huge difference to returns.
@Andrew99999 would you mind link me the post you wrote on this point (of @Valuethinker)? If Sunsuper's indices are accumulation I would pick them over dividend paying to avoid dividend tax; if they are dividend-paying indices I have no choice but put them inside superannuation for global equities to lower my gross income and hence my income tax (bracket).

Edit: found your website in the signature, and it has a page on franking credits that is quite useful.
In non-taxable accounts (like Super) I would argue for global equity diversification by weighting - home country bias of zero. Australia is c 3% of world markets, 80% of the index by market capitalisation is banks or natural resource companies - it is very undiversified. In addition, your state pension benefits (if any), your home equity (as & when you buy a home) and your biggest asset (your career) are all in Australian dollars - so diversification in your equity portfolio is a good thing.

So in total equities, I would limit Australia to say 20% at most in taxable accounts (to get the franking benefit). Otherwise I would be 80&-100% global equities.
Noted @Valuethinker. I see that the home bias is quite strong so better to diversify into global equities more.
Remember than 0.1% of $100k is $100 pa. Compounded over 40 years, that's not nothing. But it is only $100 pa.
Unfortunately this seems lowest for my current portfolio size, and also for what I want to do which is freedom of choosing indices and rebalancing myself. If portfolio size is bigger than 100k I could go Vanguard wholesale.
I don't know whether other super funds besides sunsuper are vanguard based. My main goal would be to find index funds (to avoid manager risk) that are low fees, which they have.
Thanks @Andrew99999 for emphasizing the main goal again. I got lost in details and over think it too much.
There's a question whether an Australian needs to hold EM given the exposure of the Australian economy & currency to China in particular and SE Asian in general. It's probably not material either way.
As for this question probably only Vanguard research can answer us!
No, they apply in both, but since you have no earned money in super, you get all of the tax paid back, whereas outside super you get a credit for it but since it will often be around your marginal tax rate, you end up not getting it back because you would have had to pay tax on it anyway.
I think I get it now. So for Australian shares (franking credits) the preference of allocation is still within superannuation account than in a normal taxable account. To summarize, if I can put my whole portfolio within super I should do it! but the problem is sometimes the fund, like Sunsuper, does not have the right instrument for my portfolio allocation (and hence I have to use instrument outside).

andrew99999
Posts: 516
Joined: Fri Jul 13, 2018 8:14 pm

Re: Help with my Australian retirement plan

Post by andrew99999 » Mon Oct 14, 2019 9:36 pm

On franking credits -

Franking credits - how much more are you really getting

For example

If Australian shares are 70% franked and yield 4%, then it would give Australian resident shareholders 2.8% franked dividends, and since 30% tax was paid, you would be considered to have earned 100/70 * 2.8% = 4% and therefore credited as paid 1.2%.

So if you assume a return of 4% dividends and 4% growth, then this should bump your return from 8% to 9.2% (On Australian shares for Australian residents)

This would be accurate except for the fact that the market knows of this free money, and as a result, when dividends are paid out, the share price drops more than the value of the dividend paid out, so you are not getting this extra 1.2% once this is accounted for.

You can check the references in the above link which estimates that you lose around 40-80% of your franking credits due to this pricing-in

If we guess it is 60% priced-in, then your 1.2% bonus drops down to about 0.5%

So if you have 100% of your investments in Australian equities, and an expected 8% return, this means it would become 8.5%.

I think it would be a lot of concentration risk to have 100% of your investment in the highly concentrated Australian market, so if you have 40% Australian equities (which I'd consider to be a lot), then the added benefit of franking would be about 0.2% so an expected return of maybe 8% becomes 8.2%.

So basically, a lot of it is priced-in meaning you are losing most of your return in a way that you don't notice (price drops), and beyond that you're making a decision of whatever is left of franking credits vs the concentration risk of how much you have in Australian equities.
PassiveInvestingAustralia.com

andrew99999
Posts: 516
Joined: Fri Jul 13, 2018 8:14 pm

Re: Help with my Australian retirement plan

Post by andrew99999 » Mon Oct 14, 2019 9:38 pm

superaus wrote:
Mon Oct 14, 2019 1:37 pm
I think I get it now. So for Australian shares (franking credits) the preference of allocation is still within superannuation account than in a normal taxable account. To summarize, if I can put my whole portfolio within super I should do it! but the problem is sometimes the fund, like Sunsuper, does not have the right instrument for my portfolio allocation (and hence I have to use instrument outside).
Well, I don't think super affects franking.
The main thing is that super is tax advantaged, but you can't access it until you are 67 (?) and who knows if the government changes the rules regarding age or if they increase tax payable in super in the future.
It's a hard one to answer, but definitely make sure you have enough outside super to last until you are maybe 67.
PassiveInvestingAustralia.com

Beecee83
Posts: 5
Joined: Thu Sep 13, 2018 1:40 am

Re: Help with my Australian retirement plan

Post by Beecee83 » Mon Oct 14, 2019 10:26 pm

probably a little off topic but super is accessible from 60 if permanently retired, will it change, who knows, but i do not believe there will be extreme changes, the last changes took around 20 years to take effect.

i think the introduction of lifetime caps for the pension has solved a lot of the major issues with it being used as a tax haven without necessarily providing a pension.

My opinion is to put as much into super as you are comfortable with as it will always be a better structure than taxable, with the caveat that there may be some changes to make it someone open to government tinkering. The negatives are likely investment choices but it appears that more and more funds are allowing access to low cost index or or lowish cost active funds with access to investments such as unlisted infrastructure, property and PE if that takes your fancy.

retiremefast
Posts: 10
Joined: Sun Sep 22, 2019 4:37 pm

Re: Help with my Australian retirement plan

Post by retiremefast » Mon Oct 14, 2019 10:57 pm

Beecee83 wrote:
Mon Oct 14, 2019 10:26 pm
probably a little off topic but super is accessible from 60 if permanently retired, will it change, who knows, but i do not believe there will be extreme changes, the last changes took around 20 years to take effect.
I second that statement.
Not saying that other options may not be better (I wouldnt have the appropriate background and knowledge to sustain that) but for one like me, looking to start investing as early as possible, learning the processes along the way, a safe way may be better than an experimental one. I am talking here about Vanguard managed funds and Super options. Yes, both come with extra fees and taxes, but I don't see any reason to not start with a safer and a bit more expensive approach and be able to fine-tune and switch when your are more experienced and you actually understand the full logic out of the precious advises received from users like the ones above my comment.

Either way, I bookmarked this topic. Great value and super insights for a rookie investor.

Post Reply