I am lucky. I enjoy my work. A particularly pleasant part of my work week is sitting down with clients and discussing what they should be doing on the investment side of things. (If we have not done this for while please ring and make an appointment.)
In a meeting last week my client asked if I was doing what I recommended she do.
This is a fair question. If you coach you need to play, I think. In the investment advice space if you are recommending your clients do something different to what you are doing you have a problem.
So I answered her question, with perhaps more detail than she wanted. And this is what I said.
The future is not like the past
I am concerned about the future. The world is changing, and for the first time in 100 years the next generation will, collectively, find it harder going than their parents did.
Traditional career opportunities have disappeared, with some saying as many as (another) 50% of existing jobs will disappear over the next 15 years. Employment is casualized, with the gig economy’s bits and pieces replacing careers, and unpaid internships displacing paid traineeships.
Middle level management positions are almost all gone. There are a few well paid senior positions, and a lot of poorly paid junior positions (dominated by the service economy: think local coffee shop or call centre), and not much in between.
Technology and globalization have ripped the middle bit out, and sold it off to a cloud in India.
The average Sydney home price is nearly $1,000,000, and Melbourne is not far behind. A helpful partner, and helpful parents, are needed to get on to the first-home owner track. How does a single young person own a home on Sydney’s north shore, or Melbourne’s bayside belt? The answer is they probably can’t, at least without significant parental assistance.
Society is polarising on inter-generational-home-ownership lines. It will be a fully employed home owning minority versus everyone else.
Everyone is living too long
I am concerned about longevity.
We are living longer than expected. The average 50- year old can expect to live another 34 years, to age 84. Half will live longer, and many much longer. Longevity risk is real. Most will live longer than expected, outlive savings and end (long) lives in penury, a state of extreme financial deprivation.
Our children will live longer. A baby girl born today has an even chance of living for 100 years. If she does not hold a good job, own her home and enjoy good health those last 50 years will not be fun.
Growth assets are the go
I am concerned about investment risk, and low real rates of return.
Interest rates will remain low for many years yet. Inflation will too. This means everyone with money in the bank is losing every year: high taxes and inflation combine to destroy purchasing power. It compounds over time.
You must be exposed to growth assets. Shares and property. It’s too risky not to be.
Economic theory and economic history tell us over time shares and property work well as investments. The longer the time frame the more likely this is. Over the decades solid compounding returns, say 3-4% above the inflation rate, are virtually certain.
If you do not invest in property and shares and live longer than expected you will probably end up poor.
You have got to make it on your own
You cannot rely on the government. An old age pension; a state funded indexed minimum income from retirement to grave, won’t be there. By 2030 Australia cannot afford old age pensions.
You have to make it on your own. For yourself, your children, and your grand-children. No one else will.
Now for the good news
Sounds bleak, doesn’t it. Almost like Trump’s inauguration speech.
Well, the good news is some simple commonsense strategies mean you can beat the system and get ahead. And you can then go further and set things up for the next generation, and the next generation after that. It’s not hard. It’s pretty simple really. But there is no quick fix and it does take time. Decades actually.
So, what am I doing? What does my financial plan look like?
My financial plan
I invest in myself. I fear technical redundancy, and I know the best investment is my formal and informal education, with an emphasis on future skills and adaptability. You have to stay current.
I exercise every day (actually, I over-exercise every day), eat well, sleep well (perhaps too well), avoid stress and minimize lifestyle risks to maximize my health. Health is, of course, your most valuable asset. You cannot do anything without it.
I do not have life insurance. I have sufficient assets, my wife earns a good salary as a senior teacher, my adult children no longer depend on me, and we have relatively low debt. I am lucky to have good health.
I do not need life insurance. Which is great because at my age it costs a bomb, and not paying those unbelievably expensive premiums means I have more spare cash to invest every month.
I transfer $25,000 a year, in 12 lots of $2,083 pcm, to our self-managed super fund. These monies are invested in Australian index funds. Simple and low cost. Tax efficient. Liquid. If I want a bit of gearing I can select an internally geared index fund, at an interest rate better than I can get myself, and without the hassle and cost of an SMSF gearing strategy. It works well.
Seven years ago my SMSF geared a residential property in bayside Melbourne. That works well too.
My wife and I have a few residential properties. We followed McMasters’ mantra and “never sold a good property”, “kept that old property” when we traded up, and made sure we “had a home for every child”.
Over the last twenty years Australian property has averaged 10.5% a year. We lucked it.
The properties were once negatively geared; the tax break was great. They are positively geared now.
McMasters’ say never sell a good property. And we never will.
We have no non-deductible debt. It’s too expensive. We went flat out to pay it off years ago.
Excess cash flow from work, business and investing is channelled to a private investment company (taxed at 27.5%, with no Medicare levy) and invested in Australian blue-chip shares (think ANZ and Westpac), a Vanguard index fund (ASX VAS) and a Beta Shares geared index fund (ASX GEAR). We run a low-cost share buying account with NABTrade and do it ourselves. No middle man. Nothing could be easier.
I do not care if the private investment company does not get the 50% CGT discount. I expect it will never sell these shares so CGT will never be an issue. It’s all about acquiring assets for the next 100 years. Its protected against bankruptcy and divorce. It’s for my children and grandchildren, not me or my wife.
We do not own the private investment company ourselves. Its owned by a special purpose family trust.
The idea is one day the private company will pay a fully franked dividend to the family trust. It will then be distributed to family members who pay tax at less than the company tax rate (27.5%). This means all or some of the tax paid now by the company will be refunded to family members down the track.
It’s tax efficient. It could even be more tax efficient than a super fund.
Some odds and sods
My wife and I are helping our adult children buy their own homes faster than otherwise.
As my wife and I get older, say in our seventies, we will transfer control of our family’s investments to our adult children. We hope that one day they will do the same for their children.
My children are involved in the private company investments. They buy shares and properties. Good hands on experience. It’s the best way to learn.
My wife and I have wills. They are the same as the McMasters’ standard will “for a doctor with adult children.” Simple and common sensible: if one dies prematurely personal assets and super go to the survivor. When the survivor dies everything goes to a testamentary trust for the benefit of our children and grandchildren. Tax efficient and asset protected. Works perfectly.
Our SMSF binding death benefit notices work the same way.
MLA Lawyers charged me $375 a will, plus GST! Not a cent of a discount.
Don’t ask me where my will is though. I have no idea. This does not matter; it won’t be needed for 34 years. At 8% average annual growth our assets will double in ten years, double again in twenty years and double again in thirty years.
We intend to leave a lot to our children and grandchildren. To understand why, re-read the early paragraphs of this essay. The future is not like the past.