16 Oct 2019 IS SUPERANNUATION STILL SO SUPER?
When it comes to superannuation – amongst other things – the media and the government have a lot to answer for.
It seems that every time the world share markets have a volatile week, the headlines scream ‘Australian super funds tumble by $20 billion’ or ‘Super funds on roller-coaster ride’. Reading sensationalist headlines like these that are designed to sell newspapers, you’d be forgiven for thinking superannuation is an investment. However, superannuation is not an investment, it’s a tax structure.
Within superannuation, you can choose to invest however you like, provided it’s within the rules. It’s just that, on average, most people invest in a default Balanced fund, which would typically have 60%–80% allocation to Australian and International Shares, plus a bit of listed commercial property. So when the share market is volatile, so is the average Australian’s superannuation balance. So of course, we assume it must be superannuation’s fault, not the volatility of the underlying asset allocation.
Added to this, the government keeps changing the rules. I attended a superannuation regulation update when the last chapter of major superannuation changes was announced in 2017. At the conclusion of the session, the room of 30 superannuation advisers and accountants, who had all been practising for a couple of decades or more, were left with their heads spinning.
The government wants people to save and plan for their own retirement, but continually changing the rules, along with media sensationalism, erodes Australians’ trust in the superannuation system. It also causes most people in their 30’s and 40’s to disengage with their superannuation. People in their 50’s are typically more engaged due to their retirement looming closer and the fact that their superannuation is usually a greater proportion of their assets compared to those in their 30’s and 40’s.
So is superannuation still so ‘super’? And is superannuation still relevant to the 30- and 40-somethings?
As we covered in the section, How Much is Enough, Really?, in order for you to achieve financial freedom and get to the point where you don’t have to work for the money anymore, you will likely require significant investment assets to cover your future desired lifestyle. Remember, the government will not be in a position to help you financially like they do current retirees. What about adding in the inevitable rise in superannuation accessibility age? What does it mean when you throw this all together? It means that it’s crucial to build multiple income streams – both inside and outside of superannuation.
Recent rule changes have again lowered the amount people can contribute to superannuation pre-tax – to $25,000 from July 1, 2017. Again, the government wants Australians to save into superannuation and fund their own retirement, but, ‘Hey, don’t put in too much!’
Restrictions have also been reintroduced on the maximum amount that people can have in superannuation at retirement, taxed at 0% in pension phase. Whilst I agree with this particular rule change in principle – I believe we should all pay our fair share of tax – rule changes like this further erode confidence and trust in the superannuation system. People make decisions and advisers provide advice in good faith based on rules at the time, and then the goalposts are moved.
Yes, it’s getting harder to put money into superannuation and some of the tax benefits are being taken away. But for employees in their 30’s and 40’s – and of course, those in their 20’s – who have 9.5% of their salary contributed to superannuation as Employer Superannuation contributions, your superannuation is likely to grow to a very big sum by retirement.
Let’s say you are 40 years old on a wage of $100,000 plus super, with $150,000 already built up in your superannuation fund. Assuming 9.5% super contributions on your wages, and supposing your wages grow by the average rate of wage growth measured by Average Weekly Ordinary Time Earnings (AWOTE) and a Balanced mix of assets, you are likely to have over $1,000,000 in future dollars in superannuation at age 60. Not a bad start, keeping in mind this is without sacrificing a single cent from your salary. We’ll be examining the benefits of salary sacrificing shortly.
But as we covered previously, depending upon your ‘desired retirement spending’ for life after work, you may need around $3,000,000+ in future dollars of income-producing assets combined inside and outside of superannuation at age 60 if you plan to be financially free by then and cover your ‘desired retirement spending’ level for 30+ years. Employer super contributions cannot be solely relied upon to create future financial freedom.
And what about self-employed/business owners? I continually see self-employed clients with only minimal amounts in super when they first come in for an initial wealth strategy meeting. Specifically, these are self-employed people who don’t pay themselves a structured wage from their business. For a small business owner, superannuation is usually the last thing to be paid. It’s easier for an employee because they don’t have a choice and don’t have to think about it. Self-employed people have it harder, because they need to think about it and that takes self-discipline.
Self-employed people should actively ‘take money off themselves’ and ideally contribute a minimum of 9.5% of their income into superannuation, just as if they were an employee earning a wage or paying themselves a structured wage from their business. If you are self-employed and not doing this, you are likely falling behind. Regular, smaller amounts on a monthly basis throughout the year are the way to go, rather than one lump sum around May when you do tax planning. Consistency is the key – not necessarily when you feel like you can afford it.
Longevity of Generation X and Generation Y
As recent life expectancy reports show, life expectancy for Australians is gradually increasing. And some good news for us Generation X and Generation Y blokes is that the gap between female and male life expectancy is narrowing, (possibly because we are looking after ourselves better than we used to and doing fewer stupid things as we get older).
Life expectancy for the average Generation Xer is now around 88 and increasing steadily. But regardless of current trends, I personally feel that with the acceleration of technology and medical advancements, life expectancy for Generation X and Generation Y within the next 10 years is likely to exceed 100 years.
Provided their health is strong, I’d say most people would love to crack a century. However, from a financial perspective, the greatest risk for most people is that they will outlive their money.
And it’s at this point where I believe superannuation is more relevant than ever.
Linked to longevity risk, the two reasons I believe superannuation is more relevant than ever for people in their 30’s, 40’s and 50’s are:
- The power of compounding
- A low tax environment
As mentioned earlier, Einstein called compounding the eighth wonder of the world. Many people don’t contribute extra money into superannuation because they can’t access it until retirement. However, in most cases that’s a good thing!
The main reason most people don’t create significant assets outside of super is because they choose to access and spend the money instead – causing them to miss out on the opportunity to grow these assets into the future.
Funds inside of superannuation are left to grow and compound over the long term, creating a significant asset to help in building towards your future financial freedom. Plus, at a lower tax rate of a maximum of 15% in Accumulation phase and 0% tax in Pension phase (as illustrated below), all things being equal, assets inside of superannuation are likely to build at a greater rate versus those outside of super. There is much less tax being paid on the earnings, meaning more of your money is left to work hard for you over time.
Should You Make Additional Contributions into Superannuation?
Whether or not you should make further pre-tax contributions over and above the 9.5% on wages depends upon cash flow and your overall situation. However, a person in the 39% tax bracket (earning $80,000–$180,000) saves 24% tax by making pre-tax contributions into super. For $10,000 per annum of extra super contributions, that’s $2,400 tax savings per year and an extra $8,500 – after 15% contributions tax – growing and compounding for your future financial freedom. Sure, there is $6,100 less in the person’s after-tax income, around $500 per month, but this probably would have just been spent anyway. The more we earn, the more we spend.
One thing I know for sure is that if you choose to contribute extra money into superannuation in addition to the 9.5% of your wages – or equivalent for self-employed people – your future self will thank your current self during ‘life after work’.
Whilst I’ve been making extra super contributions for a while now, three years ago my wife and I started maximising our super contributions. I must say my beautiful wife is still not overly thrilled in having a lot less money in her monthly pay, but she will no doubt be happy about it in the long term after experiencing the dramatic positive impact this will have on our future lifestyle. Just think of all those extra future holidays, Bella!
The table below shows the additional benefit to your projected super balance from contributing extra into superannuation. It will always be worthwhile adding in extra. If you aren’t currently contributing anything extra into super and are unsure if you can afford it, it can be a good idea to just do it – but start off small and build up. Start with $100 per month, then work up to $250 per month, until you are comfortable with $500 per month or even more. You’ll find the money and after a few months you won’t even notice the cash flow shortage, which is exactly when you can consider increasing your contributions to the next level.
As per the table below, putting an extra $500 per month into superannuation over a 30-year period can potentially give you an extra $600,000 in super at retirement, over and above what you would have otherwise had.
Will the rules keep changing? Absolutely. Will investment volatility continue? Without doubt. However, if you are in your 40’s, 30’s or even younger, this shouldn’t cause you to disengage with superannuation. In fact, we should all embrace the idea that time and the power of compounding are on our side.
With longevity likely to increase dramatically, superannuation is more relevant to all of us than ever. However, as we’ll cover later in the section, How Should You Invest Your Money?, superannuation should be only one of a handful of options you should pursue as you strive to build towards future financial freedom. Either way, you are unlikely to regret pushing yourself to ‘take money off yourself’ and contribute extra into superannuation.
Below, we’ll cover the pros and cons of the four main superannuation fund options to choose from, including: Industry, Retail, Wholesale and Self-Managed Super Funds.
Resolve to re-engage with your superannuation as part of your overall wealth creation strategy, as it is likely to grow into one of your greatest assets. And start seriously considering contributing extra. Remember, your future self will thank you!
If you’d like to find out more about your superannuation and how to utilise it to your advantage, contact Matthew and his team via firstname.lastname@example.org or (03) 8888 4000.
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