Superannuation Guarantee has, since its birth in 1992, been the ‘teenager’ of the finance world. It’s often complicated, misunderstood and ever-changing, but although it’s a drain on your disposable income at the moment, it’s yours, and with some attention and care this long-term investment will eventually pay back the many thousands of dollars you have invested over your working life.This is obviously quite a tongue in cheek description of the superannuation industry, but the fundamental concept of investing now to provide later certainly holds true.
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.” Despite an understanding, unfortunately the majority of Australians will at some stage of their lives be required to pay it, whether it is via a home mortgage, credit card or personal loan debt. However once these debts have been extinguished and investors have progressed to the ‘saving’ stage of their investment lifecycle, there is no better vehicle through which to accumulate wealth than superannuation. This is where not only compound interest but the numerous tax concessions within superannuation can be of great advantage to investors over the long term. Should cash flow allow, contributing additional funds to superannuation can have a significant effect on your final balance when it comes time to leave the workforce.
For example, a 40 year old employee with a salary of $100,000 will as of 1 July 2019, contribute $12,000 before tax to superannuation. Assuming their salary increases only with inflation moving forward, a superannuation balance of $200,000 and conservative average growth of 5%, they could expect a future superannuation balance at age 65 of approximately $650,000.
If the same employee were to increase their pre-tax contributions to superannuation through a “salary sacrifice” strategy to say $20,000 per annum, their balance at retirement would be more in the vicinity of $1.1 million. Obviously this does not take into consideration potential market movements, fees and taxes etc. but what this illustrates is the potentially dramatic effect this could have on the comfort and lifestyle of your retirement.
Strategies such as this become even more attractive at preservation age (find your preservation age here) where you can supplement the income you sacrifice to super with pension payments that are not only tax effective in your personal name, but result in a virtually tax free environment for the pension portion of your superannuation. This strategy is called a Transition to Retirement or TTR. In layman’s terms, you will receive the same take home pay, and once you commence a pension any capital growth and income derived from your superannuation balance is completely tax free.
Like our teenager from earlier, these strategies may seem complex on the surface and not worth dealing with… After all you’ve just come home from a hard day’s work and the rigmarole of attempting to engage is just not worth the trouble.
Teenagers are one thing, but in terms of your personal finances, this is where the advantage of professional advice can ensure you utilise your superannuation in a way most appropriate to your personal situation. With the turn of the financial year just behind us, now is a pertinent time to speak to a financial adviser and engage in an investment that will over the next few years become 12% of your income and in the future likely be your main source of funds for retirement.
Charles Green
Corporate Adviser
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