Eureka Correspondence

The millionaire lifestyle

I was very interested in the recent article by Scott Francis (Pity the poor millionaire retiree) which suggested that one needed a retirement fund of $1.6 million to maintain a comfortable lifestyle. If I read that article correctly, the purpose of having that level of retirement funding was to enable an income generation of $72,000 per year based on an average 4.5% return on the investment. However does that hypothesis assume that there would never be any allowance for a draw-down on the capital sum invested? If I intended to live forever, I might like to never ever have to draw down on my retirement capital. However I don't think that situation will be the case and I will one day shuffle off my mortal coil when the Good Lord decides that my time is up. I have already given my children their "inheritance" by way of a good education and a financial kick-start when they commenced their working careers. Hence apart perhaps from the stress of watching my retirement capital dwindle, it would not really matter if I had to gradually draw down on my retirement capital so long as there were sufficient bucks in the kitty to pay my funeral expenses when I finally carked it! So in essence, am I correct in my presumption that Scott Francis's analysis assumes that there would never be any draw down on the target $1.6 million retirement capital? I would just like to clarify that point for my own peace of mind. Many thanks for your advice.

Raymond

Scott Francis' response: Hi Raymond, Thanks for your letter. In practice, a 4.5% drawdown rate in Australia would tend to mean that a person (who is not paying too much in fees) would be mainly spending the income that is generated by the investment portfolio.

The challenge with drawing at a higher rate that includes taking some capital each year is, I think, twofold. The first is that we don't know how long we are going to live, and taking and spending more than a fairly minimal amount of capital eats into the ability of a portfolio to provide income for a longer period. The second is that once we start to draw some capital from the portfolio we have two forces acting to reduce the balance of a portfolio – the withdrawal of capital and inflation.

On that basis I think that caution has to be shown in planning to withdraw capital from a portfolio – and some fairly careful thinking through what happens over time if investment returns are lower than hoped, carefully thinking around inflation. That does not mean that it should not be done – just that being aware of those factors is important. Of course, carefully reviewing and checking the strategy over time means that you can alter things at any stage if you think the withdrawal rate needs to be reduced – or increased.

More on millionaires

Hi, interesting article by Scott Francis (Pity the poor millionaire retiree). What if you are single – how much super is needed?

Greg

Scott Francis' response: Hi Greg, Thanks for your letter. The retirement standards that set out the amounts needed for different scenarios are available here. For a single person to enjoy a comfortable lifestyle they estimate the cost to be $42,400. It would take $950,000 of capital to fund an extended retirement assuming that a drawdown rate of 4.5% per year is used. Let's assume that the ‘millionaire' lifestyle sees an individual spend an extra $10,000 per year above this – for a nicer car, more entertainment expenses and more travel. That takes the annual income to $52,400 (basically $1,000 a week – which in retirement should be tax free).  It would take a portfolio of $1.16 million to produce this amount of money.

Medibank Private float

Have you or will you be reviewing the Medibank Private IPO? I can't find it in any of your recent articles.

Brett

Editor's response: Thanks so much for your letter. The Medibank prospectus only became available this week, so Robert Gottliebsen has written on it today (see Medibank IPO first impressions: Expensive and low yielding). You can also read some general thoughts from Alan Kohler in his October 11 weekend briefing here.

Fossil fuel divestment

Can we have a voluntary listing of SMSFs where their portfolios have divested out of fossil fuels? If universities and various funds can do it, how about us showing our support? Our SMSF is proud to invest in renewables and won't be investing in fossil fuels now or in the future.

Alan Card

Editor's response: Thanks so much for your letter. The timing of your comments is spot on, as we have today published an article about the ethical investments that are outperforming the market (see Ethical funds' surprise wins).

Supermarkets

Very good article on October 15 by Elizabeth Redman re investing in Woolworths and Coles! This article (No longer unstoppable? Coles and Woolworths brace for battle) deals with competition between Australian companies that pay company tax at the 30% rate in Australia and overseas competitors that deliberately use structures to avoid paying more than trivial amounts of company tax in Australia or any other jurisdiction in the world. This means that the overseas companies have a significant unfair advantage in competition. It also means that tax is not paid to national governments (ours or others).

I consider that this key issue for ethical Australian businesses and investors should be mentioned (at the very least) in such an article.

Russell

International investing

I am interested in embarking upon a portfolio of international equities. I do not wish to directly purchase equities but would prefer to invest via managed fund(s). I seem to remember that there have been a couple of reports on this subject over the past 3 or so months but I cannot locate them.
Perhaps it is time for an update on your pick of managed funds or recommendations anyway. I am mainly interested in income although I realise this may not be all that easy from an international viewpoint. Thanks.

Editor's response: Thanks for your letter. Our coverage of international investing is available here. For a guide to investing overseas, see Buying overseas stocks: A Eureka guide, although this is focused on equities.

Ridley

Ridley Corporation RIC has been under review for several months now. When will the recommendation be confirmed or changed (or discontinued)? I lost a heap on UBI and am becoming anxious about this one. Thank you.

Robert

Editor's response: Thanks for your letter. We are working on an update and expect to be able to share this with you soon, likely next week.

Netcomm

Simon Dumaresq's coverage of Netcomm is impressive for its thoroughness and its objectivity. This is a fine piece of investment writing and if his BUY recommendation proves to be correct then his report should be nominated for an award by the Investment Writers Guild, or some such body. Well done, Simon.

Kevin Meagher

International investing webcast

I enjoyed listening to your recent webcast with Kerr Neilson etc. I would like to be able to watch this video again but I notice it no longer appears in your library.

Bernard

Editor's response: Thanks for your letter. The webcast is available by clicking here.