Yes, you heard me right, salary sacrificing into your super fund can be sexy, unless you believe you have no future…
Salary sacrificing is the main contribution strategy we use with clients to help them with their retirement planning so they can ensure they can live the lifestyle they want when they give up the rat race and retire. However, the landscape has changed somewhat which means starting earlier is more important than ever.
We are going to discuss the ins and outs of salary sacrificing so you have the information at hand to help you build your retirement nest egg.
Now, I did say salary sacrifice was sexy? This strategy is no different than what’s needed to getting fit or studying.
You’re doing the hard yards with the expectation you are going to get a payoff in the future.
My trainers keep telling to earn your weekend. That is work hard in your workout so you can enjoy yourself on the weekend without any guilt, now that sounds pretty good to me.
You could be keeping fit to look good, you would have studied to get a job and progress into your career which both provide an end benefit you can enjoy, one happens to be health related while the other income related.
In the last few weeks, I have had some detailed discussions with clients who are retired and talking about what it is that they still haven’t accomplished. One, in particular, we were talking at lunch recently. They are in their early 70’s, live a pretty active life and we discussed what else they wanted to tick off their list. I was surprised with the answer.
They still had a number of overseas trips planned, they were ticking a once in a lifetime one off this year to Antartica, however, the wife wanted to see polar bears in real life.
Other clients have travel plans as well, some want to ride horses, some want to travel around Australia in a caravan with no fixed return dates.
I have one couple who have recently retired in their mid 40’s to sail the south pacific with no fixed return date.
Now that all sounds pretty sexy to me, I know I’m jealous.
You may be someone who has no major plans but just wants the flexibility to pursue your own interests and provide options when you retire, thats ok, everyone is different.
But, here’s the thing, none of this happens without some hard work.
One of the strategies we use to help clients build their retirement nest egg is salary sacrificing. Now to most super is pretty boring right, it’s enough to put you to sleep and I hear you, the govt keeps changing the rules. I’ve heard every excuse under the sun why people don’t implement this strategy but there are a couple of powerful reasons why you should be doing it.
1. It’s going to fund your lifestyle in retirement… You know all the countries you want to visit, the dining out or sports an interests you want to partake in or just having a great time. Now, that sounds pretty sexy to me. But like most things in life, there’s a little hard work involved. Yes, you’ve got to give a little today to provide for tomorrow but nothing is served to us on a silver platter anymore.
2. You save some tax… It’s an Australian past time to save as much tax as we possibly can and this is one way you have the government help contribute to your super fund. Here’s the thing you contribute to your super fund and instead of paying tax at your marginal tax rate you pay 15% tax. Now for most that’s way less than the tax you are paying.
3. You get a fantastic return on your money… Most don’t see this part of it, they see it as not having the money to spend now. In most cases, it’s a minimum 30% return before you invest the money. Not sure where you can get a guaranteed return like that these days.
Let’s look at an example. Let’s say you contributed an extra $100 pw into your super fund via salary sacrifice. That’s $5,200 over the entire year and let’s look at a 10yr time frame.
If you are on the 34.5% tax rate (earning under $87,000pa). If you invested this money outside super out of the $5,200 you would have $3,406 to invest. By salary sacrificing you would have $4,420 to invest, an extra 30% more to invest. Invest that at an average return of 6.5% and you would have approx $54,645 inside super instead of $45,562 if invested outside super. That’s an extra $9,083 at end of 10yrs. Might not sound a lot however it’s only cost you a $100 a week and one of the best returns you will get on your money.
If you are on a tax rate of 39% (earning between $87,001-$180,000) and you invested the same way, an extra $100pw you would have $4,420 to invest inside super compared to $3,172 outside super. That’s nearly 40% more to invest. Invest over a 10yr period and at the end of the 10 yrs you would have $54,645 inside super instead of $42,804 invested outside super. That’s an extra $11,841 at the end of 10yrs.
Start to increase the amounts and start a lot earlier and these amounts start to really compound over a longer period of time. It’s why we encourage clients to start earlier than ever and let the natural wonder of compound do its thing over a long period of time. This is not sexy, but the hard work will lead to a sexy outcome…
Oh yeah, and another benefit inside super is the ongoing tax rate of 15% and it’s capital gains tax free if you sell an investment when you are retired and income phase.
4. You get to take advantage of Compounding… One of the great wonders of the world. Small contributions over a long period of time compound, and they compound at a greater rate the larger the balance. Now for a finance person like me, this is pretty sexy, but it can boring to most, but Rome wasn’t built in a day.
So, let’s look at why you wouldn’t do it…
- The government keeps changing the rules… That may be right but superannuation is still the most tax effective structure going around today. You may as well use it to your benefit while you can.
- My money is a risk of being lost, ie like the Global Financial Crisis… I get it, all super funds perform badly. Are you kidding me, superannuation is a tax structure first which then invests in different types of investments. If you want to hold it in cash you can, I wouldn’t though as your retirement fund/super is an investment that will go on for 20yrs plus in most cases. It needs to be treated as such. You may want to read my article that talks about how you should be invested through market downturns. >>CLICK HERE to read the article>>
What are the rules and what you need to know?
- How much can I contribute? This all depends on how much your employer contributes to your super fund. Under current rules, your employer must pay 9.5% of your salary into your super fund throughout the year. You are also able to contribute via salary sacrifice and now you can make a personal tax-deductible contribution rather than salary sacrifice on an ongoing basis. You can currently contribute up to $25,000 pa. This includes your employer contributions, any salary sacrifice contributions and any personal contributions for which you expect to claim a tax deduction for.
- When can you contribute? As of this year you able to contribute a personal contribution and claim a tax deduction at any time throughout the year. Just make sure you remember to claim this contribution in your tax return. Make sure its done in plenty of time prior to 30 June, it’s counted when received by your super fund.
- What if I go over the limit? No problem. The rules have been watered down if you over contribute. The excess will be included in your assessable income and taxed at your marginal tax rate. You have the option of withdrawing the excess or leaving it in your super fund. If you leave it in your super fund it will be included in your non-concessional contributions.
If you would like to know more you can download our Super Changes Cut Through Ebook. >>CLICK HERE to download>>
Whether you are considering Salary Sacrifice or not, it is something that should be on your radar, it’s the best investment you will make and given the government has reduced your ability to contribute larger amounts later on in life it is more important than ever to start earlier with this strategy.
The earlier you start your planning for your lifestyle in retirement the better placed you will be and less work to be done later on in life.
Hope that’s been useful.
Are you concerned you will not be able to maintain your lifestyle in retirement? Then take the next step, call us and arrange a time to sit down with us and we will help you build your own roadmap to achieving your lifestyle in retirement.
Make it a great life!
Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth
Mob: 0401 253 729
Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at May 2018. This is an online information blog. It does not imply an offering of securities.