Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.
Question
Hey AFB,
Just wanted to hear your thoughts on superannuation…
I think its an important piece of the FIRE puzzle. I know the money is locked away until were old but in the meantime, it is a great opportunity to stash cash away and pay less tax! And let’s face it, we’ll need money when were old anyway.
I contribute up to the $25000 cap via salary sacrifice and trust it’s saving me a fair bit of tax as I am earning over $80k.
Plus host plus has a balanced index option and costs just 0.02% (plus a $78 annual fee).
I’d love to know your thoughts…!
Thanks heaps for all your material.
Kindly,
Emma
Firebug’s Answer
Hi Emma,
This one pops up every week and it really comes down to two things.
- When do you want to retire?
- How long until your preservation age?
There is no better tax efficient vehicle than Super. It’s the best way to invest and, all things being equal, will generate the most amount of wealth for any Aussie investor due to the tax advantages.
But it won’t enable you to retire early!
If I were 50 and could dip into my Super at 60 then the choice would be easy. I’d be maxing out the SS cap of $25,000 every year until preservation age. Because at that stage, even if I did decide to retire at 55, I would keep enough cash to last 5 years until I reached the pot of gold at the end of the rainbow.
But I’m only 29. And having that much money locked up for another 35 years makes me nauseous 🤢. And what’s to say that the government don’t change the rules and push back the preservation age even further?
I think most people can find a peaceful middle ground and SS some amount. But I hope to have built the retirement income long before I hit my preservation age. Super can just be a safety net at that point.
-AFB
Question
Hi firebug,
Loving the new podcast. Just a question re: AFIC vs Beta shares A200. The A200 has the lower MER 0.07% compared with AFIC and VAS of 0.14% but AFIC/VAS seems to have the better dividend yield of the two (3.86%/4.27% compared with 0.2% with the A200) how much is dividend yield a factor for you? (figures pulled from etfwatch.com.au)
Cheers,
Jamie
Firebug’s Answer
Hi Jamie,
Because the fund was only created this year, the yield is not a true representation of what a full year will look like. Comparing the A200 to VAS is a good example because of how similar the returns have been and the fact that the bottom 100 companies in the ASX300 only represent about 3% in terms of market cap.
If we look at what the ASX300 returned over the last 10 years vs the ASX200 we get the following.
Source: https://au.spindices.com/indices/equity/sp-asx-300
The ASX top 200 has actually returned a slightly higher return than the ASX top 300. But the above graph does not factor in dividends. Given the results though, it’s easy for me to choose BetaShares A200 because of how similar the two indexes are and BetaShares offers one at half the price of the other.
Speaking of AFIC, you got me curious as to the yield because 3.86% seems too low for AFIC. Does this factor in franking?
I pulled up the data (that also factors in franking credits) from the last 10 years and came up with the following.
And VAS for comparison since A200 has not been around for 10 years.
And before people start commenting that VAS has not been around exactly 10 years and that AFIC has a disadvantage because VAS missed the tail end of the GFC… I already know!
But we are measuring the dividend yield not the growth, and AFIC’s first dividend payment in the above graph is on the 10th of February 2009. The same year as the first dividend payout for VAS too (July 2009) so it is a fair comparison for dividend yield (not growth).
The conclusion I reach from the above is that VAS has slightly outperformed AFIC over the last 10 years in terms of dividend yield (VAS: 5.53%, AFIC: 5.29%).
Given that we have already shown the incredibly similar returns of the ASX300 vs ASX200 and the fact the BetaShares A200’s MER is half the cost of both VAS and AFIC… I would conclude that the A200 yield should be extremely close to VAS and AFIC moving forward. And given that no one knows the future, I’m going with the lowest management fee options every day of the week.
-AFB
Question
Thank-you for your blog.
It is amazingly satisfying to have a joint financial goal with your partner, which, although alternative to the norm, you both believe in. I should have started investing early enough that I would have a dividend income during maternity leave.
I know this is a time many women feel dependant on their partner for income. Once I understand investing and see the effects myself, I would like to make a women-focused blog, encouraging investing for alternative income for women of all ages.
-Pia
Firebug’s Answer
Hi Pia,
Thanks so much for the kind words.
We weren’t always on the same page but I struck gold because she was naturally frugal and a pretty good saver in general. It took me years to unplug her from the matrix and really believe that what we’re doing is actually possible. It’s a lot harder to do that when you invest in real estate because of the poor cash flow. Once we started investing in shares, it was easy to show her the dividends each quarter and with some degree of certainty explain that if we just had $X amount invested it would produce $Y of income.
At the start, she was encouraging but I don’t actually think that she thought we were legit going to have the option to stop working before 35 (maybe 30 for her). And this was the natural and normal response since what I was proposing sounded like a fantasy. But the more we met others that had already reached the goal and seeing those dividends roll in, the more she started believing.
The income stream during children is a massive motivator for both of us. Not only will it alleviate pressures and stress from fulltime work, but it will also allow us to direct all our investment income to Mrs.FB since she definitely won’t be working, which will mean big tax efficiencies. Even if you don’t hold your investments in a trust, even having half the income going to someone that’s not working is huge.
A woman focussed blog would be awesome! Drop us a line when it’s up as I’d love to read it 🙂
-AFB
Hi Firebug, You make valid points about super. However, I also think an important consideration is the tax benefits too. I wrote about my thoughts on super on a blog post:
https://thefifofireman.com/2018/09/18/what-is-superannuation-and-should-i-salary-sacrifice/
Key bit for me is, if your income allows for some extra room to salary sacrifice into super, then its normally pretty beneficial to do so tax wise. I myself max out the $25,000, as it saves me many thousand in tax that would otherwise go to the tax man. True I cant access it until i am into my 60’s, but with the average Australian living well past 80 now, probably 90 by the time I get there, then i see Super as a very useful investment tool.
Anyway, my thoughts 🙂
I generally agree with that principle. But this site is those who want to retire early. Super is not going to help FIRE chasers out unless you’re nearing your preservation age. It will save you tax though, no doubt about it.
I love reading these Q&A blog posts each week. I really resonated with the last point as I am currently at the stage of life where I am trying to plan out all the details of future maternity leave. Would love to keep updated on this topic and even have Pia guest post with her progress? Keep up the amazing work.
Another reason for me to look forward to Friday’s now, FIREBUG. Love the podcast/Q&A. My question is re: A200 vs the likes of VAS – excuse my ignorance and lack of own research but are there any differences between the A200 tracking the more recent Solactive Australia 200 Index rather than the S&P index? I read on etfwatch that it’s very likely the reason A200 is cheaper is because Solactive is cheaper than the S&P? Here is the link to what I am referencing: http://www.etfwatch.com.au/blog/betashares-australia-200-etf-a200-brings-extreme-low-cost-etfs-to-australia.
There is a difference in how they calculate certain things but I not too fussed. 99% will be the same, it’s only those right on the fringe that may be different depending on how you measure market cap and when you measure it etc.
What are the dividends payments like for VEU and VTS quarterly since they cant be on a DRP? They must be decent for your lady to be on the same page as you?
Actually, they are terrible haha. Right now for us, the dividend yield for VEU is 3.25% and VTS is 1.75%.
But both VEU and VTS has outperformed VAS since I’ve been investing because the capital gains have been so good.
Following your response to Jamie, (and at risk of being a real doofus), if investing the same $x would give you less number of shares in A200 over AFIC and the dividend paid is at $x cents/share, how does one get their head around the entry price difference per share? Am I clearly missing something? Does it have something to do with one focusing on growth, the other income and that’s the trade off?
The higher value shares have higher dividends per share. If you look at the percentage dividend (yield) per share they will be similar but the difference can still be significant. A200 might have higher dividends when things are going well and lower when things are going badly but we can’t really be sure how things will go.
I’m not 100% sure of your questions.
But basically, if A200 trades at $104.30 per share and AFIC trades at $6.24
$5,000 would buy you roughly 47 units of A200 and 800 units of AFIC (factoring in brokerage)
A200 next payment is for Oct 16th and pays a dividend of $1.13 per share = $53.11
AFIC paid $0.14 per share on the 8th of Aug this year = $112
A200 pays a quarterly dividend whereas AFIC pays biannually.
So they are very similar (which is to excepted).
I hope this makes sense.
You don’t seem to like having a big variety of holdings but is there any good reason if you’re investing a few thousand dollars a few times a year not to decide each time from a list of the 10 or 12 most effective choices whichever looks good at the time. For example I might look at AFI, ARG, MLT, BKI etc. to see if any are significantly undervalued and then look at whether the ASX (so A200) or US VTS or IVV or IJH or IJR or rest of the world VEU seems to be undervalued and if none of them appear to be just diversify with any of the reasonable choices. If you get it wrong every time none of these are bad places to invest money in the long term, I haven’t chosen these ETFs and LICs at random, but is there any reason to think that choosing what you perceive to be the best option at the time isn’t going to be better on average than going with the plan from 18 months ago.
I guess thinking “it will probably even out” seems to me a perfectly good reason to have a go at getting the best result at the time but once you’ve done that to completely forget about it.
There’s no right answer.
What I like about having a simple split and sticking to it (rebalancing each buy) is that it sort of makes you buy the most undervalued each time.
If VAS and VEU do really well one month and VTS’s weighting drops significantly, this means that we will now buy VTS during the dip. It ensures that you never buy the split that has done really well from the previous month unless they all have which is unlikely.
But do whatever makes you feel comfortable. I don’t see any real issues with what you have proposed.
Emma’s question is one we will be asking ourselves when we finish up our big UK adventure. We currently have $80K tied up in Super, and without doing anything more than allowing our 9.5% contributions to be taken out – we should be very conservatively expecting at least a million dollar pot when we hit preservation age.
I’m leaning towards your train of thought around forgoing to tax benefits in favour of being able to invest the money in vehicles that we can access in EARLY retirement. A top up at 65 or 68 or 79 – whatever the preservation age is by then will be a welcome addition to a pot that, realistically, shouldn’t need any help anyway.
As you said, when the funds are almost in out grasp our approach may change, but for now FIRE is our plan
Loving the Ask Firebug segments man. Keep up the great work.
Pia’s comment is exactly me right now. I’m 25 and 6 months pregnant and soon I will be on maternity leave. In order to minimise the financial hit I’m planning to go back to work after 9 months. Luckily these 9 months will be paid, albeit at a lower rate to my normal salary (I have 1.5 months annual leave saved up, plus my employer pays 3 months at 75% of pay, plus 4.5 months of government paid parental leave at minimum wage). As a woman I had to make a trade-off between having children early vs delaying it to grow wealth but at the expense of reduced fertility starting from age 31. I chose the former, but to me this just means a small delay in my progress to financial independence. I have started a blog to document my journey to financial independence now, during pregnancy and afterwards.
Hi Buggy! I am mainly a property gal but since I met you…. things may change! Just a question on investing within my SMSF. We currently have about $150k in a Macquarie Wrap within the SMSF. I am starting to think it may be better to get rid of the wrap and transfer into an EFT, like the A200. 1. Can I do this in a SMSF and 2. I assume the fees will be significantly lower in the EFT vs the Wrap platform? Nb. We set up the SMSF to purchase a commercial property that my business leases back from my SMSF, hence why we have one set up. Thanks so much!
Hi Nicole,
I don’t know too much about SMSF (I’m trying to get a Super expert on the podcast). I would also assume that going directly to the source (ETF) would save you money vs the wrap. Do you know how much the wrap is charging?
Thanks so much- a SMSF expert will be great to hear from! Especially on how do I transfer out of what I currently have into say SelfWelf ETFs? Based on 2017-2018 fin year of $133k in the SMSF Macq Wrap, I paid $331 in Admin Fees and $1129 in ‘Adviser’ fees. We will be adding $50k per year for the next 10 years and I don’t want it all sucked up in fees! Thanks for all the work you do, you are TRULY changing lives xx
Hostplus have super that is 78 per year to run and 0.02% investment fees. They are index funds aussie and international
Also there is choice plus option for 180 per year you can transfer money to whatever etf lic you want inside Ur super.
Thanks Andy- I will check it out
It’s coming Nic. A lot harder than I thought to get someone on but I will!
Hey FB!
This has been my favourite AFF yet, keep it up!
I have been considering and drafting up ideas to start a financial blog as well, with the focus on minimum wage (in Australia) and empowering young women to take control of their money as well, I’m a 24yr female and work full time in a bar and find no one around me takes this stuff seriously other than my partner and would love to help people realize that it can be done!
Do it! One of the best things I’ve ever done.
Hi Mr Firebug,
Just have a question regarding one of your answers:
“Even if you don’t hold your investments in a trust, even having half the income going to someone that’s not working is huge.”
If you don’t have a trust, how are you able to distribute income? And also, is this just for investment income?
Cheers,
barydos
I don’t believe you can. And yes, it’s only for income generated from assets within the trust.
Thanks for clarifying!