Once you start earning an income on a regular basis, it’s important to consider wealth-building options that are relevant to your situation. The best part about superannuation is that it’s a long term strategy that requires you to make regular contributions and that means you’re less likely to tinker with it, and at the same time get the magic of compound interest working for you.
Superannuation is a time-tested, sure-fire retirement strategy with tax benefits, though I’d like to open your eyes to the downsides of that being your ‘only’ financial strategy. When it comes to saving your surplus income, diversity in investment is the key to ensure you have access to capital when required, as opposed to putting all your eggs into one long-term retirement basket. Here we look at some of the most common questions we’re asked regarding superannuation and building wealth.
Why is Superannuation such a popular way to build wealth?
Superannuation is designed as a vehicle to help Australians save for their retirement. Accountants or financial planners will always highlight how superannuation is taxed at a lower rate than your average earnings – making that a big positive. Another reason why it’s so popular is because it just happens in the background. Every week or month that you earn a wage, just under 10% is tucked away on your behalf into a superannuation strategy. It’s an out-of-sight, out-of-mind kind of investment.
How does the Superannuation tax benefit work and how is it effective?
Depending on your wage, you will be paying a tax rate anywhere between 19 cents in the dollar to maybe more than 45 cents in the dollar. Superannuation is taxed in such a way that you’re not going to be taxed on your wage until you have $1000 in your Super fund. So, if you have $1000 in superannuation, the fund is only going to levy a tax of 15%.
As a result, if you fall into the top tax bracket, there’s going to be a hefty saving there. Even if you’re at the rate of 30 cents in the dollar or thereabouts, you’re still going to be saving 15 cents of every dollar that’s contributed.
What are some of the downsides of putting wealth in Super?
If Superannuation is your only strategy and you’re a younger investor, it’s a long way to go before you can access the fund, which is why it’s important to have some balance. Unless you’re really monitoring your fund, there are a couple of pitfalls that you need to look out for. There are a few levers to make sure you drive your superannuation dollar a little bit harder. You don’t need to over-analyse these on a monthly basis, but you need to review its functionality at least once a year.
This is to make sure you’re not spending too much in fees for your superannuation administration and that your investments are in line with your time frame and your comfort zone. For instance, if you’re 35, it makes no sense for you to have half of your investments in cash and term deposit strategies.
When it comes to superannuation, you should also look at steadily but surely topping up your fund year on year. Don’t just forget about it and leave it to grow, do some research into your financial strategy and fine tune that along the way.
What are the other ways you could go about building wealth?
Superannuation, investment property, regular investment in blue chip shares and even setting up your own business are common wealth-building options people consider. Quite often, it’s a combination of one or more of these. We see that those individuals who focus solely on one often stumble, so it’s important to have some balance in your strategy.
How do you work out how much to put into different strategies and whether Superannuation is the right strategy for you?
From a financial planning perspective, we believe that it all begins and ends with cash flow. So, it’s important to make sure that you consistently spend less than you earn. If you can barely make ends meet with your earnings, there’s no point in putting more and more into superannuation. So, the first step is to make sure you spend less than you earn, and then, invest the difference between the two wisely.
The second step is to shore up your personal cash reserves to make sure you’ve got money for all the fun stuff and also for any emergencies that might crop up. Once you’ve got that short-term strategy up and running, then we can start to look at topping up your superannuation and investigating other strategies like a portfolio of blue chip shares or an investment property. This ensures that you’ve got at least one investment working properly for you and that it’s debt free by the time you retire.
In terms of the larger picture, a regular saving strategy into blue chip shares, a debt free investment property and your accumulation superannuation balance is what we commonly define as your retirement (or nest-egg) assets. Super isn’t just the superannuation fund that you have, it will cover all the nest-egg assets that you’ve been able to accumulate over a period of 5 to 20 years, or more.
Why is it important to have those different strategies given the tax benefits, why wouldn’t you put all your money into Super?
Firstly, superannuation laws are always being tinkered with by governments, regardless of how much they say they won’t – they can’t seem to help themselves. With the introduction of the 2017 budget the government has, once again, made a few changes to superannuation, in terms of how much money people can put in.
We like a balanced approach when it comes to financial strategies because if you do require access to capital and you’re younger than your preservation age (the age at which you can access your Super) you’ll find yourself in a bind, with no access to capital savings.
What are the preservation ages typically?
The number that we typically work towards is 65, so people will be permanently retired by that age and will be able to access their superannuation. Which is why regular savings and other investment strategies are required to ensure that you have some cash reserves that will help you tide over the times you need capital.
You must also remember that investing only in illiquid assets like property will not give you access to capital when required. For instance, if you’ve got a 2-bedroom apartment, you can’t sell one of the bedrooms to raise capital, can you?
Compound interest is a favourite topic among financial advisers. Is that encouragement enough for younger people to start putting money away earlier?
Compounding interest can have an enormous impact, and I think it was Albert Einstein who flagged it as one of the ‘wonders of the world’. History shows that if you’ve started putting aside money early, implemented some good financial habits and maintained them, you are well and truly ahead of the curve in terms of the assets that you have.
It also means that the market forces do most of the work for you; all you’re doing month-in and month-out is putting a little bit of money aside – you’re not trying to pick the top of the market or the bottom of the market or select the very best asset to go into. You just need some consistent, repeatable habits that are going to give you some proof in your accounts.
Do the changes made in the 2017 budget regarding superannuation inspire confidence, considering so many people invest in it?
As a system it’s been up and running for a couple of decades and is certainly a fantastic vehicle for people to save for their retirement. Caution should come into play for very young investors who put too much of their capital into superannuation. If you’re 25 or 35, it’s smart if you can put away a little of your money into a Super Fund, though it’s not wise to put all your eggs in one basket.
With Super, is it also about the uncertainty of the time frame and what you’re going to do during that time frame?
It’s a combination of both, depending on what changes the government might make. I don’t have concerns about them extending the age at which you can access your money, it’s just that people’s circumstances change.
One thing I’ve learned as a planner is that while you might implement a long-term financial plan today, it’s actually designed for a period of 5, 10, 15 & 20 yrs. On an annual basis, people often fine-tune things, modify their strategies or slightly change their goals; so it’s important that you’re able to adapt along the way.
Where can you go for more information or what should the next step be if you’re thinking about superannuation?
Unashamedly, I would say that the first place to start would be Team Evalesco. We’ve got a number of professionals here who have a variety of skill sets, abilities and areas of specialty. So, regardless of whether you 25 or 65, one of our team members can definitely assist you. We also run workshops on superannuation and many other topics.
If you want a financial planner outside Team Evalesco, I would look to one of the industry bodies such as the AFA or the FPA to find someone that is credentialed and well-respected.