Is the super system doing its job?

Stay on top of your finances by mapping out the annual income you can expect to earn from your shares

Retirement depends on a formula that goes something like this. Assume a 4.5% yield from the stockmarket. Now look at the table of capital and dividend returns (below) from the All Ordinaries index over the past 40 years.

Forget the capital return – that’s not the focus. In retirement, the focus is on dividends. As you can see, the average contribution to the All Ordinaries total return from compounded dividends, before franking, is about 4.5% over any time period in the past 40 years. Franking adds another 1.4%, but let’s not factor that in yet (you’ll see why).

Assuming 4.5% in a tax-free environment, if a retiree wants to earn $100,000 a year in income from shares, they will need more than $2.2 million invested in the All Ordinaries. And $100,000 a year is a standard income expectation. Wealthy retirees will be living off $200,000 a year. If you have enough capital to earn $200,000 or more a year in income without eating into the capital base, you are well off relative to a lot of retirees. Obviously not everyone has $1 million or wants to invest in equities and take that risk; it’s just an example.

Many retirees also open a separate bank account for dividends. For every stock they buy they direct the share registry to pay any dividends into this account. It empties and fills during the year and the amount of money in there is what makes retirees feel rich or poor.

There is an established pattern of dividend payouts from the equity market during the year. Large companies tend to go ex-dividend and pay their dividends on the same day of the same week every year. Shareholders like this certainty and the companies oblige.

Because of that, retirees can map out their income through the year depending on the dividend calendar. They know this because they can see it in their Microsoft Excel spreadsheets. Most of them have one called “our dividend income”, but if you don’t yet then this is how to create one.

Open an Excel spreadsheet. Create a worksheet tab for every financial year. Each one will have two tables and one bar chart.

The first table monitors share price performance. It has a series of columns called: Stock code, number of shares, price paid, price now, and capital gain/loss, with totals at the bottom.

The second table is the big one. Call this table “dividends – actual and expected”. This table runs in date order starting from July 1 onwards and goes for one financial year, at which point you move to the next worksheet tab. It has the following columns: date, stock code, type of dividend (announced or forecast), net amount “c”, franking %, gross amount “c”, net amount $ and franking credit $. All with totals at the bottom.

The two most important columns are “date” and “net amount $”. After highlighting these columns you then click “insert > bar chart” and the map of your income for the year ahead appears. And this is your focus. Once a week or month you might open this spreadsheet, replace any forecast dividends with announced dividends for that week or month – and that’s it. Here sit your income expectations.

Back to franking. The other big number on your spreadsheet is the total at the bottom of the “franking credit $” column. This is the lump sum you can expect to receive, assuming you are in pension phase (and there are a few other assumptions), from the government when you put in your tax return as soon after June 30 as you can.

It is your franking credit refund.

Most retirees don’t budget on this franking credit refund; they see it as a bonus, a one-off, something to be spent on an event: a holiday, a kitchen refurbishment, a car refresh. It is a lump sum and not factored into the day-to-day spending.

Retirees need certainty and, if you can follow the prompts, this spreadsheet will provide that for you. You are now equipped. Enjoy.