Podcast | Superannuation with Life Sherpa part 1 of 2

On board today is Vince Scully, better known as the Life Sherpa and Author of the popular book the Latte Fallacy which aims to dispel many common personal finance myths (just like that ordering a latte or smashed avocado will stop you owning a home). Vince is a licenced financial advisor, and with over 40 years experience in the industry he has only just recently reached preservation age and is set to retire.

“You should never let the insurance tail wag the investment dog”

Vince Scully, on Superannuation insurance packages

Vince and I chew the fat on wealth, Financial Independence, Retirement, and how superannuation fits into the picture. Superannuation is a pretty massive topic, so Vince and I tackle it from a few different angles – including;

  • Discussions on the evolution of Super
  • When and where it may or may not be appropriate
  • The different types and structures of super available (industry funds, Wrap accounts and SMSF),
  • The effect of fees on your super performance
  • Insurance within your super
  • Annuities and how they can fit into your retirement, and
  • sensible asset allocation for your super.

We look at the four important focus areas and decisions you have to make when selecting your super, and explore the trade-off of the tax benefits of super versus the flexibility of other investment structures. We also cover some interesting and important wealth topics such as home ownership, car loans and the concept of Human Capital and why early retirement might not be such a good thing.

Because it is such a big topic and I had such an awesome time chatting to Vince, I have broken it down into two parts. I didn’t want to cut too much away on the editing room floor, because there are so many gems in here and actually to produce this took over four hours of interviews.

Superannuation with Vince from Life Sherpa

 

Show Notes

  • Check out Vince’s book the Latte Fallacy
  • Don’t think of just returns. Think in terms of Risk Adjusted Returns over time, or return per unit risk. In the short term, defensive assets are low risk. However in the long term, defensive assets are incredibly high risk. In fact the riskiest thing you can do in the long term is not invest in shares.

Quick Super facts

  • Super taxed at 15% on contributions (up to the concessional cap)
  • Super taxed at 15% within the fund (although your total tax payable can be less depending on what actually happens within the super account)
  • CGT rate within super for assets held more than 12 months is only 10%.
  • Maximum concessional contribution (15% ingoing tax) $25K per year
  • Maximum non-concessional contribution (fully taxed at your marginal rate) – $100k per year
  • Maximum balance cap $1.6M for a tax free pension phase account
  • Aim for 100 months of living expenses in your super account at retirement as a benchmark for a good place to be – this provides around 60% of your pre-retirement income.

Vinces Approach to debt

  • Red rebt – High interest rate corrosive loans due to living above your means
  • Amber Debt – Home loan and Car loan – loans to spread the cost (amortise the cost) of enjoying these items across their lifespan
  • Green Debt – Investment loans – loans to pay for assets that appreciate faster than loan interest)

Vinces Wealth strategy

  1. Build an emergency fund
  2. Pay off any ‘Red’ debt (credit card, personal loan) – High interest rate corrosive loans due to living above your means
  3. If you have one – pay down your ‘Amber’ debt (home loan) until you are comfortably below an 80% LVR and thus have flexibility to refinance to the best deals
  4. Invest outside of super to build wealth flexibility and options (because if you put it in Super – for all intents and purposes it is GONE until preservation age)
  5. Ramp up your superannuation contributions to take advantage of compounding in a low tax environment

Vince on Investing $10K for ten years;

Vince war gamed three scenario’s for investing $10,000 over a ten year period into the three most commonly asked ‘vehicles’ and came out with some interesting answers.

1. Pay off home loan – saves you a total of $11K in loan fees (which should be grossed up as this is post tax – equivalent to about $14K or $24K in total equivalent growth) – with full flexibility and access to it immediately (if put into an offset)

2. Invest into an index fund outside super – grows into $40K – full flexibility with access to it immediately (subject to market fluctuations of course which could go up or down)

3. Invest into an index fund inside Super – grows into $77K – But no access to it until preservation age – the least flexible of all scenario’s

Vince on Asset allocation

You should have a combination of some growth and some defensive assets. For most young people, the balance is probably somewhere between 90:10. Adding some low risk Australian government bonds has a non linear effect on risk adjusted return (return per unit risk). The switch from 80:20 to 90:10 is much higher than the switch from 90:10 to 100% growth.

Vince’s Top financial tips

  1. You should have a combination of some growth and some defensive assets. For most young people, the balance is probably somewhere between 90:10. Adding some low risk Australian government bonds has a non linear effect on risk adjusted return (return per unit risk). The switch from 80:20 to 90:10 is larger than the switch from 90:10 to 95:5.
  2. Vince suggests you need to carefully consider the following six areas;
  • How you prepare for the unexpected
  • How you prepare for retirement
  • Where you live
  • What car you drive
  • How you make a living
  • Who you marry

3. Visit a financial advisor as early as possible. $500 might sound like a lot but in the grand scheme of things it is a small price to pay

Vince’s Super

  • Wrap account with BT Panorama
  • Primarily in Index funds from a mix of Vanguard, BT and Black Rock
  • 40% Australian exposure
  • 50% international exposure
  • 10% gold ETF

Vince’s top Books

The defining decade: Why your 20’s matter by Meg Jay

Vince recommends everyone should have a read of this, not just young people

Your Money or Your life by Vicki Robins

Vince likes Vicki’s concept of money being time units, and uses this book frequently with his clients. Vince recommends trying to find the original copy. Check out my detailed review of Your Money or Your life HERE

Index Funds: The 12-Step Recovery Program for Active Investors by Mark Hebner

Transcript

[00:00:00]Captain FI: Ladies and gentlemen, this is your captain speaking. Welcome aboard captain. Find the financial independence podcast.

[00:00:25] Get a welcome to an episode of captain fire, the financial independence podcast, where I opened the cockpit to some of the best and brightest in personal flights, as well as those who’ve reached or are on their way to financial independence

[00:00:42] on board. Today’s Vince Scully, better known to some as the wash-up and author of the popular book. The latte fallacy Vince is a licensed financial advisor. And with over 40 years, experience running a business in the. He has [00:01:00] actually only just recently reached preservation age himself and he’s set to retire.

[00:01:06] Vincent. I chew the fat on wealth, financial independence, retirement, and how superannuation fits into the overall picture. Now super is a pretty massive topic. So Vince and I tackle it from a few different angles, including discussions on the evolution of super when and where super may or may not be appropriate.

[00:01:32] Some of the different types and structures of super available, the effect of fees on your superannuation’s performance insurance within your superannuation. And of course, sensible asset allocation. We look at the four important focus areas and decisions you have to make when selecting yourself. And explore some of the trade-offs of the tax [00:02:00] benefits of super versus the flexibility of the other investment structures.

[00:02:06] We also cover some interesting topics such as home ownership, carloads, and the concept of human capital and why early retirement might not be such a good thing. Now, Vincent, I don’t see eye-to-eye on every topic and I learned quite a lot from him because it’s such a big topic and we had such a great time chatting.

[00:02:30] I’ve actually broken down this into two parts. My reason for doing this was I didn’t want to cut away too much on the editing room floor because there were just too many GM’s in here to throw away. It actually took over four hours of interviewing to, uh, to get the finished product. So strapping and I hope you enjoy it.

[00:02:53] Can I even say yawn,

[00:02:54]Vince Scully: can I, captain is great to be here.

[00:02:56]Captain FI: It’s awesome to have, uh, someone on the show with [00:03:00] as much experience and background in the industry as you. So anyway, Hey, we’ll look at least you have here, mate. I think I’m slowly getting the Georgia stands over here. So, um, Vince mate, can you tell us a little bit about yourself and your background?

[00:03:17]Vince Scully: Yeah, as I said, I’m a bit of a gray hair in a financial advice. I’ve been doing financial advice since, since I graduated in 1983, which is probably before many of your listeners were born. Um, I grew up in Ireland in a pretty comfortable middle class existence and, uh, graduate as an engineer in the depths of the early eighties recession when, um, something like 90% of our graduating class immigrated, which was the only thing, keeping Irish, unemployment den and, uh, From there.

[00:03:51] I went and did an MBA, joined the mobile oil in their corporate finance group and arrived in Australia in [00:04:00] 1988 for a three-week assignment. And, um, 30 odd years later, 30 odd years later, I’m still here. And, uh, all of that time, I’ve been doing various finance roles from corporate institutional and my favorite bit, the individual bit.

[00:04:20] Um, so it’s so much more interesting and pleasurable when you can identify the person at the other end of the money. So as an institutional fund manager, you know, you’re dealing with hundreds of millions from super funds or, um, big investment companies. And all they want to do is make sure you lose less than the next guy.

[00:04:43] Um, but when you can actually put a, a name and a face on the person. If she owns that money, it’s just so much more interesting and challenging, which is what led me to, to create love shipper. But I guess we can talk a bit about that later

[00:04:59]Captain FI: on. [00:05:00] What do you get up through for fun in your spare time?

[00:05:04]Vince Scully: Well, now that I actually have a bit more spare time because my boys, uh, lift school and join the, uh, the adult world, um, I run swim and cycle.

[00:05:13] I am in 2011. I, uh, went from 95 kilos to 72 and I had always carried a bit of weight. And, um, I discovered the joys of portion control and exercise. And so went from 95 kilos, pretty sedentary to 72, running a half marathon in nine months. And that, that a lot of that learning ended up being in the latter fallacy book and.

[00:05:45] Methodology we use at large trip, but because the whole fitness in diet and I use diet in the nutrition plan since there are so similar. Yeah. We all narrowed that [00:06:00] to lose weight. You’ve got to eat less, move more, but there’s still 10,000 different diets and it’s the same with money. We all know we have to spend this to Marin, but there’s a, a way of doing that.

[00:06:11] That works for you. I’m

[00:06:12]Captain FI: not very good at portion control Vince. Um, but I do like lifting weights in the gym, thankfully, that kind of offsets it. Uh, but it’s very interesting parallel. I’ve found there’s so much that I’ve learned, um, particularly things like gardening, which relate so strongly to finance and diet is a, is a huge, huge one.

[00:06:34] Okay. So now Vince, we, uh, initially touched base over a post that I did about superannuation and you got in touch with me, uh, to actually give me a few tips and a bit of advice. Now I’d been meaning to track you down because as you mentioned, you’ve written a book, the latte fallacy, which has some awesome, good stuff [00:07:00] about finance in it.

[00:07:01] And of course, I want to unpack that in a minute, but, um, the, the main theme was superannuation. Not a lot of people understand superannuation. I don’t really understand superannuation. So Vince, what is super and why should we care?

[00:07:21]Vince Scully: Okay. Yeah, that’s a, that’s a great question because you know, we all, well, almost everybody has some and surprisingly 30% of the population doesn’t even believe it’s their own money and yet it will be the biggest or second biggest assets for most Australian families.

[00:07:42] Yeah. It’s either the house or the super, depending on how big a house you’ve got, which, and how old you are, which is bigger. So it’s really one of the four things that will sustain us when we are either unable or unwilling to work. And, uh, [00:08:00] yeah, that’s the biggest challenge in personal finance eats, making 40 years of income pay for potentially 80 years of.

[00:08:10] And Paul Keating, uh, Boyce’s cotton socks. Um, came up with this concept in the, was finally implemented in the very early nineties, but, um, I think 91 or 92, might’ve been the first year, but, um, it came out of a, um, an attempt to kill inflation. Um, sorry, anyone who’s lived through the seventies or eighties will know the cancer’s affected inflation has on people’s lives.

[00:08:40] And so there was a deal done between employers, government and union. We’d said, why not? We cut down on wages, growth by putting the money into super. So we then cut back some of these demand driven inflation. [00:09:00] And so the concept of everyone setting aside some of their income into. Uh, a pool for retirement was born and that sort of grown over time.

[00:09:12] So I think the first year was two or 3%. We’re now at nine and a half. And there’s some debate about whether it should go higher. And if so, how much higher?

[00:09:25]Captain FI: I have seen, uh, advertisements for some industry super funds where they are talking about it being raised now from the nine and a half. Is it up to 12 or, yeah, I mean,

[00:09:36]Vince Scully: that’s actually legislated.

[00:09:37] Um, so will, well, unless the law has changed, it will happen over the next few years. There is now some thought about throttling it back. Um, and I think we need to be very careful when we force people to do something with their own money, um, that there becomes a bit, you know, obviously [00:10:00] eat generally a good thing to set aside some money for post-work, uh, But, you know, should we, as a, or should the government, or we as a nation be forcing people to set aside nine and a half, 10, 12, 15%.

[00:10:18] Um, yeah, if some is good, more, isn’t always better. But the point about Sue branch, and it was only intended to be one of three pillars that support you in return. And the first one is obviously compulsory superannuation, and that was going to come with, um, a whole bunch of tax benefits. Secondly, you have the age pension and yet still 80% of retirees still qualify for some age pension, and that’s not going away anytime soon.

[00:10:50] And the third limb EAs investment outside, super, and I would argue that the fourth limb, which the government [00:11:00] never seems to talk about is the family harm. So if you can get. Retirement age with a paid-off harm and able to generate an income of half to two thirds of your pre-retirement income. Um, most people will be reasonably comfortable and nine and a half is going to get you awfully close to that.

[00:11:27] If you look after it will. And the looking after it well is the hard bit, because it’s a really tough decision to make. Where do I put it in? What fund do I choose? What investment options do I choose? Um, should I put extra in all as a decisions that as a nation, we are hopelessly unqualified to make and access to good advice is a difficult to find and be expensive when you do find.

[00:11:58]Captain FI: Well, I know I’ve [00:12:00] previously, um, had a couple of, I guess, bad experiences with financial advisors. When I first entered the workforce, I would tell him about this earlier. Um, somehow I got put into some conservative fund with most of my super was in like bonds and fixed interest cash. And as a, you know, as a 16 year old, like that’s, that’s not really

[00:12:23]Vince Scully: appropriate.

[00:12:24] No, but, but put yourself in the shoes of your employer. So your employer is being forced to select a default fund and there’s like no upside for him. So if he picks a, a riskier fund and risk obviously is a figure speech here, but return comes from risk. So you’ve got to take risk to get to return and you feel.

[00:12:50] There’s just no upside fee for your employer. Sorry. It’s this confusion of retirement savings and employment. That creates a lot [00:13:00] of that because lots of people involved in this exercise have no incentive to get the best answer for you employers in a tough position. Siren.

[00:13:12]Captain FI: That’s actually a really interesting way to frame it as in what have they actually got to benefit and who, who is actually taking the risky?

[00:13:22] Yeah,

[00:13:23]Vince Scully: that was the big difference of when we move from traditional defined benefit schemes, where your employer effectively took the risk. And it was there as a perk of office, which worked really well for people who spent 40 years with the same employer to a defined contribution system where all of the investment.

[00:13:48] Falls on the individual member.

[00:13:52]Captain FI: Uh, it’s a, it’s a big industry though. Isn’t it? Vince? I was recently

[00:13:56]Vince Scully: reading $3 trillion or thereabouts

[00:13:59]Captain FI:[00:14:00] 3 trillion. So with that much confusion, uh, and you know, people not really understanding where their money’s going. That’s an awful lot of money to be just shuffling

[00:14:10]Vince Scully: around.

[00:14:11] And that’s my point of band, you know, when you fall as a nation and we’ve all voted for this, um, we are forcing the individual to say, we know better than you. You need to put nine and a half or 12 or 15% of your income aside from day one. And yet we haven’t actually provided the framework to help them make that those decisions.

[00:14:46] And he will gets tied up in a whole bunch of ideology. I’ve never bought into this industry fund, good or bad retail fund, good or bad. Um, there are good and bad funds on both sides. And I don’t think it’s helpful to have that sort of ideological arguments. This is [00:15:00] people’s retirement we’re talking about, and it is unfortunate that it does get caught up in that, um, a left versus right argument and knew so many vested interests.

[00:15:13] Um, you know, whether, whether it’s the, the unions or employer groups or government, and, um, there’s a temptation for people to treat it as a honeypot to create jobs or build nations. Um, it’s actually got one role and that’s building your retirement and, um, you gotta be very careful when people are saying, look, we’re going to, we’re going to invest billions of this in rebuilding the nation after COVID.

[00:15:45] Great concept, but is that really what you want your retirement money doing?

[00:15:50]Captain FI: Well, it is a very interesting concept and that whole idea of, you know, moving the goalpost or dipping into the honey pot, that was something that [00:16:00] really spooked me and being on the path to, I guess, uh, conventional fire or, you know, financial independence.

[00:16:08] I saw that the super was just soil far away and there was no guarantee that I was actually going to actually get any of it, which is why I’m aggressively now investing outside superannuation, despite the, I guess, loss of the tax

[00:16:27]Vince Scully: incentive. Yeah. I mean, this is a trade-off between return, flexibility, certainty and ease.

[00:16:35] Um, so you, one of the questions we get asked a lot is. Pied and my Homeland, should I invest outside super or should I make additional super contributions, which is so the three big things you can do with spare money. And there’s no doubt of Bandon making additional, super funds. Sorry, super contributions will give you the best lifetime outcome because of the tax benefits.[00:17:00]

[00:17:00] You’re giving up flexibility and access to the money, and it’s a bit more complicated to set up, whereas paying off your Homeland is the easiest thing to do. It’s pretty certain what the outcome’s going to base pretty flexible, but with interest rates where they are, it’s going to give you a very low return because investing assets super sort of is the middle ground and all of that.

[00:17:23] So for younger people, and by that our main, you know, people who in terms of their lives, you know, They haven’t got to pay down their, their home to good level. They’ve still got kids, the flexibility of investing in an sod, super trumps the text deduction in my book. So I did some numbers, um, yeah, just to illustrate this new.

[00:17:50] So, so if someone starts with 10 grand and wants to invest $500 a month, they do that for 10 years. Um, they’ll make about 11 [00:18:00] grand in profit by paying down their Homeland. They’ll make about 30 grand. If they invested it in something like the Vanguard high growth fund, but they get 67 grand if they, um, put it in the super fund.

[00:18:14] But so it’s obviously if you do it for a longer period, the advantage of super does close up a little bit, but it’s a massive difference because you’re starting with a much bigger Paul because you’re investing pre-tax effectively and you’re paying less. And then you get to draw tax free income when you do actually retire.

[00:18:35] So massive tax benefits. Um, but you’ve got to give her access to it until you turn 60. And if your plan is to retire early, then actually you need another pile as, as well. And depending on how early that you planning on retiring, you need more of you on the inside. Stupid. So [00:19:00] a lot of the rhetoric, um, that you read in the paper, so focuses on that tax benefits and ignores a lot of these other things.

[00:19:11] So it has, what’s called personal finance because the answer is different for everybody.

[00:19:16]Captain FI: That’s all right. It’s very specific to your particular

[00:19:19]Vince Scully: goals. Yeah. So usually we’ll say that, you know, you start off, you paid annual Homeland until you got your payments. Equity position to somewhere that you feel comfortable with.

[00:19:30] They not focus on investing outside supra until I’d got enough to give me the flexibility I need, whether that’s paying for your kid’s education, whatever it is that you want to do, um, retire early, or have a holiday start a business, whatever it is that your, your goal is. And then, you know, later in life, um, focus on the super, I mean, for me, I’ve just hit my preservation edge.

[00:19:56] So it’s just a pure tax arbitrage. [00:20:00] So I would just be leaving money on the table if I wasn’t making $25,000 contributions.

[00:20:06]Captain FI: Ah, well, congratulations on reaching preservation age.

[00:20:10]Vince Scully: So I’m, I’m in that transition period when it, uh, when it moves from 55 to 60. So everyone born after 1964, the answer is. Um, but I’m in that sort of period where they’re shading it from 55 to 60.

[00:20:25] The answer about super ancient is each just a tech structure that tech structure can give you huge benefits. You still have to make the decision as to what I’m going to invest it in. And it’s the thing you invested in that makes the real difference. But the comparison I just made was investing in the same thing inside super and outside, super.

[00:20:47] And so the big decision you need to make is what, what, what do I actually want to invest in? And that’s driven by your goals, risk tolerance, time horizon. [00:21:00]

[00:21:01]Captain FI: So Vince, you just mentioned, uh, that you were putting in 25,000 a year. So is that the limit

[00:21:10]Vince Scully: twenty-five thousand is the most in a single year, you can get a tax deduction for, so either.

[00:21:16] So the combination of your employer contribution. Any salary sacrifice in any other contributions that you claim a tax deduction for is $25,000. You can also put in another hundred thousand for which you don’t get a tax deduction and you can bring forward three years of that to get 300,000 in one guy.

[00:21:40] Oh,

[00:21:41]Captain FI: so other in maximum limits in the fund.

[00:21:44]Vince Scully: Yes. Um, there’s been a recent introduction of a total balance cap at 1.6 million. So now if you don’t have 1.6 million already [00:22:00] the most you can. So once you hit 1.6 million, you can no longer make a contribution of any type. Wow. So again, $1.6 million will provide for quite a decent retirement and most people will not get it anywhere.

[00:22:19]Captain FI: Um, my mom just recently retired, uh, and I think she was, she was very fortunate. I mean, even as a single mum, uh, she raised me and my siblings by herself, uh, which was, you know, no, no easy feat. Um, and so she ended up with, I think just under half a million. Um, now she, she was very fortunate. She had a defined benefit scheme and, um, basically use that to pay off her house.

[00:22:50] Uh, and, but yeah, so it is interesting to see how much people people have because, um, I’m sort of finding out that, you know, a lot of people don’t [00:23:00] have much in this super when they retire. That’s the

[00:23:02]Vince Scully: biggest one I’ve seen was 300 and something, um, which apparently is in the top 10 funds in the country.

[00:23:09] Wow. I have actually seen that fund. Um, but. Those sorts of things will, will not happen in the future. Because if you go back to the late eighties, early nineties, when complying funds, 1991, I think is the superannuation industry act, which created the super fund. As we know it, um, back then there were no limits.

[00:23:39] And then they brought in. So you could put as much as you want in, um, and there were limits on how much you could take out tax rate thing called a reasonable benefit limit. And in the Costello budget, introduced tax-free income on the way out and kept the amount that you could put in. And that cap [00:24:00] is slowly being reduced.

[00:24:01] You’re one of the top, we’ve got a benchmark that we use, which looks at how many months pay you should have in your super fund based on your age and at retirement sort of a hundred months on. Place to be aiming for, and that will give you yeah. 60% of your pre-retirement income. So

[00:24:23]Captain FI: should people be that 1.6 million cap, should people be trying to target that?

[00:24:30] Or how do you make sure, how can we make sure that we’re getting the maximum benefit from our super,

[00:24:36]Vince Scully: I mean, there’s a lot of people wander in 1.6 million in their entire lifetime. So I think we need to put that in, in context. Um, but once you’ve got the flexibility beat provided for, then clearly we should be maximizing it as a general rule, but know for most people that’s going to be later in life.

[00:24:59][00:25:00] Yeah. Forties. Um, so I, I wouldn’t be recommending that most 25 year olds put extra payments into the super fund that they would be better off generally. Paying off the debts, building an emergency stash and putting a deposit in there has to get it. Um, it’s when you get older, then the trade up the flexibility trade-off becomes, um, much less of a problem and then just go for the return.

[00:25:32] Um, so that will be mine. That’s my general take on this one. Yeah. Um,

[00:25:38]Captain FI: well, yeah, I would a hundred percent agree with you, Vince. I think, you know, getting rid of non tax deductible, toxic debt, like credit credit cards and car notes. I think that’s probably spot fires that need to be put out. I would disagree with you on

[00:25:53]Vince Scully: the car big, but certainly all that other stuff.

[00:25:56] Um,

[00:25:57]Captain FI: I don’t mind the old card on [00:26:00] it. Well,

[00:26:01]Vince Scully: um, the, the, one of our most popular articles on our website is called why paying cash for your car could be a big money mistake. Uh, Is that the thing, and we’ll get a bit of track here, but the thing that matters about buying a car is how much you pay and how long you keep it for the interest cost is actually less than 10% of the cost of owning the car.

[00:26:26] Now, this is not an excuse to go and borrow, pay 40% interest, but reasonable homeless at reasonable loan rights, which are yo one or 2% above, um, Homeland rights. You, the thing that that does is it puts the depreciation into your cashflow and the depreciation is 40% of the cost of owning a car or more.

[00:26:49] And if you pay cash, you, you suffered the pain of loss of the cash at the same time, as you get the pleasure of [00:27:00] that new car smell, and you forget about it when yeah, the car is not quite so new and doesn’t quite smell so. Until you then go buy the next one. Whereas if the depreciation turns up in your cashflow every month, it reminds you of how much these cars actually costing you at the time that you’re consuming it.

[00:27:18] So that’s reasonable one of behavior, which is sort of the same reason why paying off the smallest debt first gets you better answers than paying the highest interest rate. One offers, even though mathematically it’s doesn’t make sense. And then for most people, um, you borrowing the money anyway, because if you have 30 grand in your pocket, um, your choices, do I pay off my Homeland or invest, or do I pay cash for my car?

[00:27:47] So by choosing to put that $30,000 into your car, you are increasing the amount of homeowner interest you’re going to pay, or you will foregoing an investment [00:28:00] opportunity. And, uh, That can be particularly material as a case study. We do on the, uh, in that article where if you were going to buy a home in the teas, after you buy the car, the amount of, and you diverted your deposit to paying for your car, you could actually increase your lenders mortgage insurance bill by as much as the price of the car.

[00:28:26] So it does come back again to the point we made earlier about it being personal. Um, but I divide debts into three types. I don’t buy the good debt, bad debt argument. Um, I talk about red debts, which are generally credit cards and personal loans that arise mostly because you’re spending more than you’re earning.

[00:28:49] And they generally have high interest rates in the January, not tax deductible. So they are corrosive. So if you were paying 20% interest on your sofa, um, that. Johnny [00:29:00] eat up a lot of cash that you could spend on something else. Um, and they’re harder to get rid of because, because you’re incurring them B because you’re spending on yearning, you first of all, have to reduce your spending.

[00:29:12] But the excess in 10, you have to reduce it a bit more in order to start eating into the principal. So that’s why they’re so corrosive. The next one is sort of Amber dates, where I would put your home loan and your car loan, and they are about spreading the cost of an asset over the period. You’re going to use it

[00:29:34] and it’s consumption. But what matters in both Kasians is how much you buy. And the third category, Denny’s the green debts, which is sort of investment dates and your hex. And I would repay them in that.

[00:29:55]Captain FI: So my solution and you might laugh at this. I just drive a shit [00:30:00] COVID it doesn’t

[00:30:00]Vince Scully: really, oh, sorry. I was not using that to justify going and buying a fresh car.

[00:30:05] As I said, what really matters is how much car you buy. And most of the financial stress that I see is people who bought too much house or too much car. You know, we’ll probably talk about this later, but that’s one of the fallacies that go along with the latte fallacy, that the things that you read in the paper about what’s good for your wealth or good fuel money health often either just plain wrong.

[00:30:31] It’s driven by vested interests or eat was true 40 or a hundred years ago. Um, but he’s no longer truth. And that’s why the book is called the latte. Fallacy that giving up your morning coffee or your smashed avocado is not, what’s keeping you out of the house. The example that I always give. When I talk about that is if you go and buy a house, when apartment you walk in and what is the agents, or the agent says, this will [00:31:00] sell in the low seven hundreds, right?

[00:31:02] That’s a phrase you hear agents use. And that’s what a code for somewhere between 700 and 750. Well, the difference between paying 17 and paying 7 35 will pay for a lifetime of lattes, and nobody thinks twice about that extra 25 grand

[00:31:19]Captain FI: puts it in perspective. Doesn’t it? So it’s sort of back to back to superhero.

[00:31:28] I mean, I guess we kind of talked a little bit about the priorities, um, about which you might choose to pay off debt, pay down a mortgage, invest outside, super. Um, but obviously even an early retirement. Contains a conventional retirement in the end. So it’s not something that we should completely

[00:31:50]Vince Scully: discount.

[00:31:51] Oh no, I would, you know, it’s obviously a key plank in your planning. I’m just suggest saying that you should think [00:32:00] very carefully about the trade-off you’re making between tax benefits and the flexibility you will giving up.

[00:32:07]Captain FI: Flexibility is a huge part of my motivator right now. And that’s why I’ve stopped making additional, super contributions.

[00:32:15] Yeah.

[00:32:15]Vince Scully: My financial independence retire early or far. Um, I mean, I’m a huge fan of the five bit, um, because everybody, no matter when you plan on retiring needs to achieve five and we all start adult life with an abundance of human care. Which is largely embodied our ability to make a living. So that’s education, personal attributes skills.

[00:32:44] So I mean, you can really do stuff to improve it by getting a pilot’s license or, um, getting a qualification. Um, and over our life working life, we need to convert enough of that human capital into financial capital [00:33:00] to pay for the bills when we’re either unable or unwilling to work. And so the fire beat is really just arguing about how fast we make that conversion.

[00:33:16]Captain FI: If we’re diving into particular types of super I’ve heard the term self managed super fund

[00:33:24]Vince Scully: self-managed super fund has a specific meaning. And that’s a structure where you become the trustee of your own. And they’re regulated separately under different, um, regime. They’re regulated by the tax office rather than by opera.

[00:33:42] And that’s taking on a lot of the responsibilities for both the compliance and administration, as well as the investment side of things. And there are UN three-quarters of a million of these, um, and [00:34:00] 20, 20 years ago, it probably was the white to get control, but it comes at a cost and an administrative overhead.

[00:34:10] Um, yeah, it’s pretty difficult to run a self managed super fund for less than $1,500 a year. Um, my mine, I spend $1,200 on admin and I pay the ATL levy of 300 and something on mine. Um,

[00:34:32] So if you just work at what, 1500 ease. So on a hundred thousand dollars, that’s one and a half percent. So you need a reasonably substantial pool to make it cost effective. And now there are lots of ways you can get the same level of control. We then have having their hassles of a self managed super fund.

[00:34:52] So there’s a whole bunch of platforms, um, or rapid hands that give you, and even some of the [00:35:00] industry super funds are now allowing you to directly choose individual stocks. So then you real reason why you’d need a self-managed super fund is if you want to invest in something special, like you want to invest in your business premises, which was very common among small business people and is who often.

[00:35:28] Practice building in new Silverman Superfund, or you want to invest in your exotic assets by query whether they’re actually good investment decisions, but that’s a sort of a separate point, but you can get most of the benefits using some of these rep products with out much of the cost and admin hassle.

[00:35:52] And if you intend on going overseas, having a self managed super fund is really problematic because you can’t actually have a self-made super fund if [00:36:00] you’re not a tax resident. So if you planning on retiring overseas, that’s a bit of a problem. So they have their place and you know, it’s probably a third of all super fund money is in them.

[00:36:15] But yeah, I see an awful lot of people with very small balances, um, being sold a self-made super fund to invest in.

[00:36:27] And it almost always ends in tears on, on the bulk of cases. I see. Um, it doesn’t work at very well.

[00:36:38]Captain FI: Okay. So it could be a, maybe a bit of an overly complex structure for the,

[00:36:43]Vince Scully: but for small business people. Um, they, they have their place. Um, so I had the, um, and don’t try this at harm. Um, there was a lot of structuring went into these, but part of my old business that I sold to bark Boris was owned by [00:37:00] myself.

[00:37:00] So self-made super fund. And now that that’s all unwind, I’m actually in the process of winding up myself in Superfund because it’s just too much hassle, but he had a specific role and small business people. Um, there are lots of advantages.

[00:37:20]Captain FI: So you, Vince, you touched on, um, the fees, uh, of, uh, S M S F

[00:37:27]Vince Scully: it’s a hard word to say, isn’t it.

[00:37:30]Captain FI: You touched on the fees being need to have a certain balance for it to basically be worthwhile. Um, I’ve seen, you know, I’ve seen the articles, I’ve seen the headlines about the effect of fees, but just how powerful, uh, are the effect of ongoing fees on our super balances,

[00:37:49]Vince Scully: a huge difference. Um, and when you look at that comparison between yeah, [00:38:00] normal, super, and self-made super, you gotta be careful what you’re comparing, so you can get all of the air trading stuff you could possibly want in a you’ve gone on a platform.

[00:38:15] And if you take that comparison, the breakevens more like six or $700,000 as a balance to make it. Um, if you’re comparing it to, um,

[00:38:33] something like a small opera fund, they, the breakeven might be lower. So you’ve really got to look at if I’m, if I’m trying to achieve something that isn’t investing in normal investment products, I shares ETFs bonds, managed funds, um, like real estate, gold collectibles, um, [00:39:00] businesses, peer to peer lending crypto.

[00:39:04] Um, then self-made Superman. Doesn’t give you anything that a rep doesn’t do, but if you want to do one of those things, it’s the only answer. So it really is horses for courses, but most of what I say. Could just as easily be done on a wrap platform. And, um, there’s just a heap of admin and cost involved. I mean, I keep my cost down because I do all of the accounting.

[00:39:37] So I just hand over the accounts to the Edmund service at the end of the year. And they do all the lodgements and tax return.

[00:39:45]Captain FI: I’m just talking generally here for someone who doesn’t need an a self-managed super fund and who can use one of the, sorry, you called it a wrap. Um,

[00:39:56]Vince Scully: and that’s a bit of technically they’re called invested [00:40:00] directed portfolio services.

[00:40:01] That’s the technical service, but they, they colloquially referred to as rapid cans and it’s gained, it’s just another structure. So it really just delivers the superstructure and the main players in that are, uh, you know, colonial, um, Netwealth hub 24 premium BT Macquarie. As God, there’ll be a dozen normal products.

[00:40:28] And it’s really just, uh, uh, is in the UK. They call them investment supermarkets, which I think is probably a better word, which is really, um, you know, when you go into Allie, you get to choose whatever products on the shelf and Ellie and put in your basket. And so it is with one of these, um, represents that you can effectively, they take the role of the trustee of the super fund and they will have, uh, an RSE responsible superannuation registrable [00:41:00] superannuation entity license, and they will, um, you say, actually, I want you to buy 20,000 BHP shares using my super, and those shares are held for you in there, your, that you will be HP shares.

[00:41:17] And what other people on the rep do doesn’t really affect your area?

[00:41:24]Captain FI: Okay. So that’s essentially a, almost like a broker, but for your superannuation.

[00:41:30]Vince Scully: Yeah. Um, and it’s, but it’s just a structure. So eat it is a super fund in which you make all the investment decisions and instruct the trustee to do what you tell them to do and they go and do it.

[00:41:43]Captain FI: So then these are, then are these different from the default funds that we might? Yes.

[00:41:49]Vince Scully: None of them will qualify as a default fund. So you will need to positively make a decision, but you can tell your employer to put your SGC [00:42:00] contribution into your net wealth account or into your hub 24 account or your BT Panorama account.

[00:42:06] Um, buying them is not, I mean, if you think choosing a Superfund is hard, um, working out, which of these platforms to use, um, ease and even. Discussion, and then you still have to make the investment decision as to what it’s actually going to be invested. And that’s the thing that really matters. The rest is around, um, fees and structures.

[00:42:32] Um, so buying VDH G or Vanguard high growth fund on the Netwealth platform will give you exactly the same result as buying it on hub 24. But for the difference in phase team, the same thing in a Sunsuper yeah. Out of the site, the Sunsuper index options, the only difference between them is [00:43:00] phase and structure.

[00:43:03]Captain FI: So Vince, how did the structures differ? So for example, uh, to use these wrap accounts, versus some of the default funds, like, you know, you see it’s, sunsuit, uh, Rest, uh, host pass those kind of players. What are the, what are the differences between those?

[00:43:22]Vince Scully: Yeah, the main difference, um, ease that they will not be default options.

[00:43:30] So in order to be a default option, you need to qualify the fund needs to be a, my super qualifying fund, which is a standard the government set up, which says, you’ve got to have a, you got to meet all these criteria. You’ve got offered some insurance, you’ve got to, uh, some pretty arcane rules you’ve got to meet.

[00:43:54] And that then allows you to qualify as a default, which is either chosen by your employer [00:44:00] or as a result of some industrial relations agreement, either an enterprise bargaining agreement or an award. And if you don’t make a choice, that’s where your money will go and that’s designed. Yeah, catch all those people who are just not engaged that the money just doesn’t disappear.

[00:44:23] The 9.5% will go somewhere and it will be into a fund. That’s had some form of fitting. It’s not a guarantee of performance. It’s not a guarantee that it’s good value or that it’s the right allocation for you. But at least it’s met some basic tests and they’re largely around insurance structure. And so you will actually have to positively make a decision.

[00:44:51] And when it comes to making decision, um, the first thing that matters, you know, there’s probably four things that really matter when you’re making a decision on [00:45:00] the supervision. The first thing is asset allocation. So what am I, what assets am I actually going to invest this thing in? And that’s a function of age amount, risk profile goals, and objectives.

[00:45:14] And, um, Sorry, you be familiar with terms like balanced growth, high growth they’re labels that sort of indicate how much of your money is going to get invested into what an anonymous growth assets and they’re things that over time can outpace inflation, which generally means shares and real estate as a, as opposed to defensive, which generally means bonds, cash and cash.

[00:45:47] And the balance between the two is what generates your return. So as a young person, generally, you need as much growth as you can tolerate [00:46:00] and enough defensive to help you sleep at night.

[00:46:06]Captain FI: So most people, uh, who aren’t really familiar with super are probably gonna find themselves in one of these. Default my super

[00:46:16]Vince Scully: and most of those that my superversion will usually be a so-called balanced fund.

[00:46:24] Now balanced, when I started in this industry meant 50, 50. Um, today it usually means 70 to 80% growth, at least in the PDs world, what it’ll mean. And for many people, particularly many younger people that is likely to be too conservative. Um, and of course you don’t always get what it says on the pack. Um, so for example, the house balanced option in the PDs says it’s a six 76% growth, [00:47:00] 24% defensive, but it gives itself a range, which means theoretically, you could end up with a hundred percent growth or 35%.

[00:47:11] And it would still comply with what it says in the funds. And given that this is the most important decision you can make with your super, um, it’s the first thing you should look at. So work out what you need and then find a product that delivers it. Um, and with the case of host, plus, you know, if you go and look at the opera, um, reports that shows 93% growth for the house, plus a balanced option, despite the fact that they’ve stayed in the PDSs, we’re targeting 76, 24,

[00:47:43]Captain FI: how do you decide that Vince, you mentioned that it’s, you know, for young people, you generally want as much growth as you can tolerate and enough defensive to help you sleep at night.

[00:47:53] Yeah. But how do we make that personal decision? And, you know, what’s your opinion on a hundred percent growth. [00:48:00] Um,

[00:48:01]Vince Scully: this comes back to the whole theory of. Portfolio construction. So a lot of the work that I’m Eugene Farmer. Now this is relatively new technology. Most of the portfolio construction academic works was done in the 60 seventies, eighties.

[00:48:17] Like it’s quite, it’s in my, in my adult lifetime. A lot of this work was done and that’s about what, how do I put together a portfolio that meets my requirements? And your goal is generally to maximize return for the level of risk you can, you can prepare to exempt. Now, not that that’s not Cy BT index or maximize returns, eats maximizing returns for any given level of risk.

[00:48:52] And that means. Not a portfolio winners. It’s like a footy team, a [00:49:00] team of champions doesn’t make a champion team. And so it is when it comes to a portfolio. So you can just go and say, well, what are the, you know, I need some diversification. Let we pick the five highest returning funds and put a 50 into each of them.

[00:49:16] Um, what matters is how they behave relative to each other. And that’s where these defensive assets come in. So traditionally bonds, which are really debts of governments and B corporates behave differently to shares, which are interesting companies. So usually when economies are booming shares, arising, bonds will generally behave less.

[00:49:55] And vice versa. So when the economy tanks share process fall, [00:50:00] interest rates often fall because governments want to stimulate economies, therefore bond prices rise. So that opposite behaviors, the thing that actually gives you the benefit. So a bond is not the same thing as putting money against your Homeland, even though they both might pay 3%.

[00:50:16] It’s because of that change in capital. So as interest rates, fall, bond prices rise. And so last year, if you’d invested in a government, Australian government bond, ETF you’d have made 4%. Despite the fact that government bonds were paying 1% and that’s because as interest rate falls, bond prices rise. So it’s this opposite behavior.

[00:50:41] So you could actually construct a portfolio that gave you a bigger return than either of the things you put in it. Does that make sense? So by buying 90%. ASX 210% Aussie government bonds, even though ASX returns, [00:51:00] call it eight and a half over lengthy periods, bonds, maybe two today. Um, but add the two together can actually give you a better overall answer.

[00:51:12] So this is more proof that if some is good, more is not better when it comes to investing that some ASX 200 is good, but a hundred percent ESX 200 is not good, but there is a right number. So you need to have a mixture of both growth and defensive. Um, and for younger people, the 90 10 is often a bit of a sweet spot that you, you gain a bit of, um, return pickup and you lower your volatility.

[00:51:44] So your return per unit risk actually goes up and that’s what matters. So it’s not. Absolute return is Izzy’s what Matt disease, what return did I get for the liver of risk? I took [00:52:00]

[00:52:01]Captain FI: now that is a very interesting concept. The risk adjusted return. So for young people that might have 40 years or so until preservation age short, should they be happy to accept a higher level of risk?

[00:52:18]Vince Scully: I a risk if you’re going to get higher return SAR, and that’s the distinction I make between higher returns and better returns. So you could find that the extra risk, the extra return you get for taking that extra 10% of risk, doesn’t give you the same bang for your buck as going from 80 to 90. Okay. Now there’s a, it’s not a linear relationship.

[00:52:43] It’s also not as precise as the academics make it out to be. Um, so there is a. In terms of improving your risk adjusted return by adding some defensives. And [00:53:00] if you’re going to add defensive, you want to add as risk-free defenses, as you can, which in an Australian context means Australian government bonds that’s as close as we get to our risk-free asset.

[00:53:13] That doesn’t mean it’s got no risk, but it’s the benchmark against which all other risks are measured. So bonds, not all bonds are created equal. So if the purpose of adding bonds to your portfolio is to smooth out returns and give you a bit of correlation benefit, taking risk in the bond component makes zero sense.

[00:53:38]Captain FI: So that would be if you were to get junk bonds or

[00:53:41]Vince Scully: risks or global bonds. So adding currency risk, um, doesn’t make a lot of sense. Sorry. If you are a, you know, a 90, 10 or 95, 5 type invested, and your only adding the 10 to give you that [00:54:00] risk adjusted benefit, you want to make sure you’re not taking any risk in there.

[00:54:03] So you wouldn’t include overseas bonds in there. You wouldn’t include junk bonds, as you say, but if you’re adding bonds for income, then maybe you do. Um, so someone who’s in retirement and has got 30, 40, 50% bonds, they now want to get some return from that component. Whereas if you’re only adding it to dampen the volatility, you want to make sure you’re not taking it any risk.

[00:54:38] And therefore in Australia, that means generally government semi-government bonds and you wouldn’t buy offshore bonds.

[00:54:49]Captain FI: Most people might be in these default, my super funds, um, will this be automatically taken care of? Like, will we, will they be investing in the Australian bonds [00:55:00]

[00:55:00]Vince Scully: picking on house? Plus particularly I just happened to have the PDs open Frank discussion.

[00:55:04] Um, their balanced fund has zero to 15% in cash,

[00:55:15] zero to 20% in diversified fixed interest, uh, which I would assume would include some global stuff. And it’s got zero to 20% in what they call credit. Now credit is code for higher risk. Um, credit usually means lower righted and often structured debt, um, like mortgage back securities, asset backed securities.

[00:55:45] So if you’ve watched the big short, young you’ll know what that is. Um, so now they’re not all the same size, but that’s not a, don’t take that as saying you shouldn’t be investing it, but very little of that is actually [00:56:00] performing the role that you would expect your little bit of bonds to be delivering in a predominantly growth portfolio makes a lot of sense.

[00:56:10] So we were constructing a portfolio for someone who is looking to retire on it. You obviously do want to include some global bonds because you want diversity of issuer and diversity of yield. You would probably hedge it back to Australia, which will give you a bit of a improvement when you returned, because Australian straits are higher than of shore rights generally.

[00:56:36] And, um, it gives you greater choice in the little. Credit writing. There’s not a lot of lower credit rating issue is in Australia. I, once you get below the yeah, single, I write AA righted B Corp. It’s a big hope. It’s like [00:57:00] four to ski mining, uh, blue scope BHP, um, borrow. There’s not a lot of lower quality issue is here.

[00:57:10] So if you want to move up the risk curve in Australia, you’ve really got to take bank hybrids. Whereas you get a much greater choice of shore and then hedging it back, gives you a bit of a return enhancement. So a retiree looking for their bonds to provide income would want to do that. But if you’re buying bonds to give you smoothing, you don’t want to be taking any risk.

[00:57:36] So you want to be buying Australian government bonds and. You just can’t tell from reading this, but I would expect that diversified, fixed interest means would include some global.

[00:57:48]Captain FI: I thought Hostplus seemed like a really good choice. So I actually opened an account. My parents opened accounts, um, because it looked like, okay,

[00:57:59]Vince Scully:[00:58:00] you and $2 billion of other Australians.

[00:58:02] You’re certainly not alone. Yeah. Well

[00:58:04]Captain FI: the, so what drew me in personally was the indexed options, because I keep hearing about how important the fees are and if I can get an indexed option and instead of paying 1.2%, you know, I can’t remember off the top of my head, but I think it’s like 0.06 or something, or point 12 for the international.

[00:58:28] Um, that just seemed like an incredible option. So I’ve, um, you know, maybe I need to rethink the strategy after our chat about defensive.

[00:58:39]Vince Scully: I mean, we started with. Yeah, step one of the four steps in choosing a Superfund. So asset allocation is the number one driver of returns. So start with your asset allocation and then find a, a fund that actually delivers that.

[00:58:53] And yeah, if you, were you talking about index? I mean, people, the reason people buy index funds is because they [00:59:00] know that the efficient, that markets are efficient and that as a general rule, active fund managers don’t perform those benchmarks. Yeah. There’s no end of academic research that would support that.

[00:59:16] So if you were then going to go and buyer an index, one where the manager is trying to time the market by moving your S allocation round, why do you think they can do a better job at picking asset asset allocation than they can do picking shares? So if you, the. Buy index funds is because you believe that markets are efficient and therefore you don’t want to waste money, paying someone to actively try it.

[00:59:43] So why are you paying someone money to actively trade asset allocation? That makes zero logical sense.

[00:59:52]Captain FI: Okay. So that’s, if you were in the balanced,

[00:59:55]Vince Scully: well, even in the index balanced fund, um, [01:00:00] it’s got big ranges for its S allocations as well. So it could in theory be anywhere from a hundred zero to 50 50, and yeah, the target is 75, 25, where it actually is according to the annual report

[01:00:16]Captain FI: specifically, what I’ve done is I’ve done that step one and I’ve picked, okay.

[01:00:23] I want to be 100% growth. So picked, um, 50. The Australian index shares. And I think that’s the IFM manager and then I’ve gone 50% indexed international. Yeah.

[01:00:37]Vince Scully: So you’ve now taken away the manager’s ability to trade us allocation. So you’ve gone and said, I want 50 global, 50 domestic. You know what index is?

[01:00:51] They’re supposed to be tracking and corner how they’re doing it, but you certainly, so your what, sorry, that is [01:01:00] obviously an asset allocation decision that you’ve made and the manager doesn’t have any discretion around that, which brings us onto the so number two is transparency. So can you pick up these documents and know what you were getting?

[01:01:17] So if you were saying, I want to invest in Australian shares and I want an index innovation. Do I know what index is being tracked? Do I know how. Index is being replicated. Is it a hundred percent physical shoes? Is it sampling or is it some other mathematical algorithm and the index, the, the name of that IFM fund is called enhanced passive something, which we don’t know what it is, but [01:02:00] it would suggest to me that there’s some algorithm, India, that’s not a pure market capitalization index.

[01:02:08] So the question you’re gonna ask yourself is, do I know what I’m invested in? Has the document clearly articulated there? And can I explain it to my partner? If the answer is no, then you need to ask small question. And some of these funds are better than others, of an answering those questions. Sorry. I mean, you’re probably familiar with case against rest where the guy wanted some information on how rest took into account environmental issues.

[01:02:44] And he was fobbed often had to go to court. Um, so transparency and transparency then moves also beyond that. So if you’re in the balanced fund, for example, it’s investing in infrastructure, private equity and real estate, um, how are they being valued? [01:03:00] So when you get to the end of the end of the month, um, so you’re buying BHP.

[01:03:05] All, you have to look on the screen and you know, how much it’s where that every instant you go and buy a, a, um, a 20% share of Brisbane airport. The only time you actually know what that’s worth is when someone else tries it. And until then, the valuation is based on. Uh, financial model, that’s probably run by a graduate analyst and having done this in a previous life.

[01:03:35] Um, I know all the tricks you can get up to one, those valuations, as you change a GDP assumption, you change your inflation assumption. You change it, you tweak all these assumptions and you can, you can make those models, tell you whatever valuation you want. Um, we used to have a sign that says, if you torture the numbers for long enough, they will eventually confess.

[01:03:56] And you have no [01:04:00] idea how these things are valued, which is a bit of a red flag for me. And that’s not, that’s not just a host plus a problem. That’s a general problem with investing in illiquid unlisted assets, Brisbane airport we’ll have a whole bunch of restrictions on it. So usually the other investors get.

[01:04:24] If you want to sell it, the other investors get to have freeze DBS on an, um, so it’s often very hard to know what they they’re really worth. And there aren’t that many bars. So if you, if you, on 20% of Brisbane airport, there’s probably less than a dozen buyers around the world. Sorry. It’s, it’s very difficult to scrape away and say, what is this actually worth?

[01:04:51] And that’s why one of the other attractions of index ones that, you know, precisely what’s in there. So you can go on the BlackRock or by the chaise website [01:05:00] and download precisely what’s in your, um, ASX 200 ETF. Whereas if you’re in a yeah, a fund, that’s got some unlisted assets, they might list the big ones, but you get no idea how they’re valued and you have no.

[01:05:22] Whether that’s realistic or not.

[01:05:25]Captain FI: So, yeah, and for that exact reason was why I wanted to personally avoid the infrastructure funds. Um, and that’s why the Australian shares fund seemed attractive to me

[01:05:39]Vince Scully: take that takes the transparency box. Well, he goes a long way to taking the transparency box. Um, but you actually don’t know what algorithm is being used in this enhanced passive strategy.

[01:05:52]Captain FI: Yeah. With that being said, um, to get the full level of transparency, should we be, I mean, I [01:06:00] say, should we, I said to get more transparency, could you use something like these rap?

[01:06:05]Vince Scully: So you could buy a 50% Ozzy sheers ASX 250% MSEI were world X, Australia where, you know, precisely what’s in it. Uh, In super, that would be a bad point.

[01:06:26] Tip the fund that we would use, um, will be about 0.3, 8% with no fixed fee. So the, and the fixed fee that dollar 50 a week, that doesn’t sound very much, but it’s 1% on a $7,800 balance. It’s 30 basis points on a $25,000 balance, which is a typical balance for a 20 something. So you do have to look at the overall cost that admin fee, which is a dollar 50 a week for most of the big funds [01:07:00] or 2 25 for Ozzy super, um, is actually material for smaller balances.

[01:07:06] And doesn’t get counted in the return because it’s a fixed fee. So when you look at your return, that return is before the $78. So, so that would be one way of doing so you could take. I rapport, a master trust and select individual funds that meet the requirements we want. So you could buy it ASX 200 index fund and a MSEI world ex Australia managed fund or index fund.

[01:07:40] And you would know precisely what you had.

[01:07:44]Captain FI: And again, going back to the step one, if you wanted to have that 90 10 or 95, 5, or however you want it to break down your allocation, you could then go ahead and buy. 5% into a bond fund, something [01:08:00] like that,

[01:08:00]Vince Scully: whatever.

[01:08:03]Captain FI: Hey guys, going to wrap part one up here, Vince and I are going to continue our discussion on superannuation in part two.

[01:08:11] Um, we’ll pick up our discussion halfway through the four steps to selecting your super fund. Uh, the first one here we talked about was asset allocation, the second being transparency. Uh, and so we’re going to pick up the chat from the next point, which is structure. I hope you got a lot out of this episode, really looking forward to getting part two out to you guys soon as I can.

[01:08:37] Uh, so we can basically wrap up everything for you. Thanks very much for listening. And as always, uh, you can check out the website for the show notes. I’ll have links to things that Vince and I have discussed on the show, uh, as well as some more information from him and links to his book and articles that he’s written for his.

[01:08:58] Thanks guys. [01:09:00] Thanks for listening to another episode of the captain for financial independence podcast. So read the transcripts or check out the show notes, head over to www. So captain fire.com for all the details. If you have a question for the captain, make sure to get in touch, you might even make it on the airwaves.

[01:09:22] You can reach me online through the captain fire contact form. Get in touch through the socials. I’m active on Facebook and Instagram as well as a number of online finance and investing forums. And. Remember the information presented on the show and the links provided, oh, for general information purposes only they should not be taken as constituting professional financial advice.

[01:09:49] You should always do your own research when making any financial decisions and make sure it’s appropriate for your personal

[01:09:56] Vince Scully: circumstance.[01:10:00]

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3 thoughts on “Podcast | Superannuation with Life Sherpa part 1 of 2

  1. Hi Captain FI!

    There’s one thing Vince said that I’d like to follow-up on…

    In regards to discussing the transfer balance cap (TBC), that is the formally $1.6mil now $1.7mil cap that can be transferred from an accumulation super account into a pension super account, Vince said that once this cap has been reached you are unable to make any further contributions of any kind (circa 23min mark of 1st ep).

    From my study, my understanding is that once your super balance reaches $1.7mil, you’re not able to make any further non-concessional contributions. But you are able to continue making concessional contributions, which includes those paid by your employer on your income, such as the 10% guarantee and any salary sacrificed amounts, again up to the concessional contribution cap ($27,500) that applies to everyone.

    The reason I’m looking at this maybe niche topic (they’re aren’t many who will get to the TBC cap) is because I’m considering strategies for long-term wealth creation. I’ve effectively paid my PPOR (equity + 100% offset) and I have reached a passive income balance to cover my current expenditure, so I’m looking to split my ongoing income (not retiring) into different investment options. While still making some into outside super investments, I am considering maxing out non-concessional super contributions ($110,000/yr) up to the TBC ($1.7mil) so that I have as much as possible in super at the youngest age in order to maximize those investment returns in a tax-friendly environment. At $1.7mil, (I would be ~42yo), I would then just continue maxing out concessional contributions, and then at preservation, consider my options of what to do with the TBC amount and the excess.

    Kind regards,
    Michael

    1. Sounds like a good plan! I am not au fait with the rules about maximum caps, but thats awesome you can keep contributing, it sounds like you are going to be in a very comfortable position whenever you should choose to retire. Do you just really love your job or something? What are you going to use all the money for out of interest?

      1. I’m not an expert on super rules either, but have recently researched a lot (your pod included, thank-you) as I’ve changed from being apathetic and relatively dismissive to excited about the potential long-term wealth creation benefits. That scenario in your pod still bounces around my head, that one of investing $10,000 initial and $500/mo over ten years and comparing the growth between the investment options of your home vs. non-super assets vs. super assets. Take that but apply $1.7mil over 30 years and it’s hard to ignore super!

        I’m a doctor. Like most, there are things I love and things I don’t about my job. The main problem atm is I’m trading high hours for high pay. So I want to lower the hours and live a more fulfilling life, but would like to maintain my income and keep achieving financial goals (exploring one, sources of passive income, and two, different avenues of work). I feel I live a FI/RE life in terms of consumption, low expenditure and high savings/investing, but the wealth creation in the long-term I am considering for the purposes of one of more of; 1) fat FI/RE retirement, 2) family with the option for higher affluent suburbs and private schooling, and 3) inter-generational wealth and opportunity creation. These are not necessarily good things to aspire to, but at least having the options is what I consider the power of finance, freedom and opportunities, whether you choose them or not.

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