Eureka Correspondence

The million dollar savings plan, super challenges.

The million dollar savings plan

Scott Francis is a great guy who writes very useful articles, but I can’t help but comment on the latest article, The million dollar savings plan.

Scott says: “Indeed, if you had invested $15,000 into Australian shares 40 years ago (starting January 1, 1973 through to December 30, 2012), and had earned nothing more than the average market return of 11% a year over that time (source: Vanguard) it would have turned into $1 million.”

I bought a house in Glebe, Sydney, in 1972. It cost us $19,500. The bank told me I could borrow $17,000. If I had somewhat more I could have bought our dream home in Glebe Point. It was $26,000. I drooled over it but it was beyond reach, even with a second mortgage. Scott seems to have totally forgotten what $15,000 was in 1973. My salary was $6,000. A Holden cost $2,000 or so. $15,000...? Forget it!

All the best

AA

Scott’s response: Thanks for the letter.  It is always interesting to read about the change in costs over time. 

In the article, I referred to the $15,000 initial investment (1973) as being 2 times the average wage at the time (consistent with your figures) and increasing to the present where the $1 million is ‘13 times the average wage’ now.  This is one way to account for the change in the value of money over time – compare it with the average income of the time.  As you point out, it is important to think about the value of $15,000 then and $1 million now – and this is a pretty good way of doing that.

Super challenges

Robert Gottliebsen’s article, Three super challenges for Sinodinos, refers to the ALP proposal to tax super funds in pension mode when the pension exceeds $100,000 per annum. All the calculations I have seen comment on a fund with over $2,000,000, with a distribution rate of 5%. It is my understanding that the required distribution rate rises to 6% at 75 and as high as 14% very late in life. If I am correct this tax could cut in on a fund with as little as $715,000. It would be good to keep this in mind to attack the policy if it again comes up. Please comment.

Name withheld

Robert Gottliebsen’s article, Three super challenges for Sinodinos, missed one vital element: the unfair mandatory percentage pension drawdowns pensioners have to make each year. The actuarial tables on which these percentages are based are out-dated, since many are living longer and require their superannuation monies to last longer. At the current rates of age-determined drawdowns, many will have no super left for some considerable years but only their normal taxable income derived from money they have been forced to draw from their super. This is grossly inequitable and needs to be urgently addressed.

Name withheld

Robert’s response: Thanks for the correspondence. Under the ALP plan it was not the superannuation pension that was being attacked – that remained tax free. It was the actual income of a fund or funds. That is affected by many factors but as a person gets older the higher pension reduces the amount in the fund and so (all other things being equal) it cuts the income, taking it under the $100,000 level faster than would otherwise be the case.  Best wishes Robert.

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