Before I begin, I'm sure you have all seen this add on the telly by Industry Super Funds.
If not, here it is
I have to say, surprisingly for a financial planner, I do love this for a number of reasons.
Firstly, it is true to a certain extent - fees matter a lot!
More importantly, it highlights very clearly how one took action and the other did not.
Now before I see steam come out of the Retail Super funds product teams, and superannuation selling Financial Planners, it's hard to argue with the numbers.
Industry Super Funds have been some of, if not the best performing funds for not just one year but the last five and ten years. Great financial advisers acknowledge that, poor ones argue with it, either way it is the truth.
The main reason is fee. Fees make a huge difference to your returns and by having low fees you are giving yourself the best chance to get a good return. Simples.
But this article is not a boring Superannuation article, there's enough experts out there pretending they know the best super fund but that's actually pretty easy.
I want to help you make a much bigger decision. I want to help you take meaningful action that will do more for your future, then any super fund.
I want to compare the real pair for you.
The one decision you really need to make every year - to salary sacrifice or to not.
The reason I bring this up now, is that it is already March. Yes apparently two months have already ticked over and you now only have four months to get moving on whether you decide to salary sacrifice before June 30 or let another year tick over forever.
To give you a bit of background knowledge, in the last budget in May, the government took unprecedented action against the superannuation system. It made a stand and it decided enough was enough.
It had big plans in mind and heavy hand to enforce major change to the future of the super system. It got took aim at two things and it's clear what their longer term plan is.
The first thing they decided to do is start taxing families with more than $1,600,000 in an individuals super fund. Sure that sounds fair and it is in my book. The good news is that a couple can still have $3,200,000 in todays dollars and not pay a penny in tax.
So really it's not a huge concern to those who worry that they do not have enough in super.
What they decided to do is lift the tax rate from 0% to 15% on any gains or incomes on balances more than $1,600,000. Not bad really and most of the financial planners I know support this tax because personally it's a fairer system.
The second thing to me is much more concerning. The government have decided that they really do not want us to put much more in.
Superannuation is a great system, sure it's been a ship full of holes but overall the ship is a good thing. The pie just keeps on getting bigger and is now over $2 trillion. That's a lot of money and it is the envy of the world really.
Now I know you hate, don't trust or like Super but you will one day.
One day, your fund won't feel meaningless and have a few more numbers on the end.
The government, excluding politicians are not silly and greedy however. They know that one day it will be $10 trillion and that is a lot of money growing at low or zero tax rates, they want to be paid too.
This is what I want to focus on here.
Currently, when you are employed, your employer pays 9.5% of your salary in to Super.
This amount forms part of your Concessional Contribution. The concessional contribution is taxed at 15% and you are allowed to put more up to a limit if you wish.
To put in more you speak with your employer and ask them to salary sacrifice some of your salary in your fund. The good news, is that if you do, you get an instant tax saving and have better protected your future life.
The bad news is that limit you can put in up to has dramatically reduced over the past 10 years.
I sadly cannot see this rising again and the new reality is - use it or lose it.
Back in 2009, you could salary sacrifice $100,000 in to your super fund if you were over 50 years old and $50,000 if you were under 50.
When you salary sacrifice, you pay 15% tax instead of roughly 40% or 50%. For example, lets say on you topped up to $100,000 in 2009, you would have saved $35,000 roughly in income tax. If you were a couple, $70,000 perhaps.
But since 2009, things have tightened up and now the maximum you can put in your super fund post 1 July this year is only $25,000.
That's a far cry from the $100,000 and personally for people closing in on the wonderful time, supposedly called retirement they need to put in a lot more than $25,000 a year. If you are over 50, I think this is not fair at all and you really need to get moving on a plan B.
That's a pretty clear trend and you can bare in mind that inflation has been ticking along as well since 2008.
$25,000 in a couple of years, could be the same as $15,000 in 2008. Something a government in debt loves ;)
Now instead of me kicking up a fuss about injustices in this world, the new rules are the rules. It's not a maybe or a could be, it will happen.
What's clear is that the government only wants to allow us to put in a lower amount every year and it is not a lot.
Simply,, we all have an opportunity to put a small amount in extra every year but it is no where near as much as it used to be. Is it enough? Maybe if you're 30 and you do it. If you're 50, maybe not.
The most important idea I want you to get clear on here is that it you use it or lose it.
Every year right now you have a chance to put $25,000.
If you are 30, you have 35 years to your retirement.
If you are 40, 25 years.
The problem is there are only limited years and every time July 1 ticks over you will have lost another year.
If you are in your 50s, it will be a no brainer to put the full $25,000 but what I want you to consider is that while it's a no brainer for most people in their 50s, my gut is saying that we will all one day wish we did it in our 40s, 30s and 20s.
To be upfront, if you are in your 50s or 60s now, you probably would be all over this already. If you are not, you're missing a trick and get moving.
The people I want to touch with this article are in their 20s, 30s and 40s.
Thinking about the future
When you are young it's hard to think what life will be like in 5 years, let alone 40. It's hard to understand what you need to be doing for your future self and family. Planning is hard because we are not naturally good at vision, but it is highly important in life to get the things you want out of it.
One way, I use is to learn from people older than me. From years of speaking to the older generations, they say the same thing, "I wished I did more for my later life in my early life"
Whether that be health, wealth, work or family, giving advice to yourself is hard. It's hard to listen to what you know you should do and it's hard to stop yourself sabotaging yourself.
My advice is don't make that mistake.
Give more to your future self today.
Not sold? The real compare the pair
BIG WARNING: TO BE UPFRONT THIS IS JUST A HIGH LEVEL EXAMPLE.
DO NOT CONSIDER THIS AS PERSONAL ADVICE.
YOU NEED TO SPEAK TO A PROFESSIONAL ADVISER FOR TAILORED ADVICE.
EVEN THOUGH I DO THIS EVERY DAY, YOU HAVE TO TAKE ANY FORECAST WITH A MASSIVE GRAIN OF SALT. THINGS CAN ALWAYS CHANGE BUT I PERSONALLY BELIEVE SOME OF THE BIGGEST CHANGES HAVE ALREADY HAPPENED.
IF YOU ARE CONSIDERING DOING IT, SPEAK TO A QUALIFIED FINANCIAL ADVISER BEFORE YOU TAKE ACTION.
ALL GOOD ADVISERS SHOULD UNDERSTAND THIS.
Now that the warning is out of the way.
In order to demonstrate the massive advantages of salary sacrificing long term, I am going to do a real compare the pair.
- The two people at 30 years old
- They have $100,000 in Super
- They earn $120,000
- They stop working at 65
- They withdraw an income in todays dollars of $100,000 a year from 65
- Their salaries rise at 4%
- Investment rise at 6% - net of all fees
- Inflation is 3%
- SG Contribution rise to 12%
- Contributions limits rise with inflation in $5,000 lots
- The only difference is Julie decided to salary sacrifice and Rachael did not.
The numbers are in.
Bare with me and take your time, there's a lot in these numbers to take in.
At 65, Rachel had invested $450,000 in to her super out of her own pocket. She now however has $1,800,000 more in Super, some 60% more then Julie.
Sure that it cool, but what does that really mean?
When they retire, they both like to live the same life and both spend $100,000 a year in todays terms.
By 75, it's really starting to show and as Rachel can spend freely, while Julie starts to be forced to make cutbacks.
At 80, Julie is out of money but Rachael still has $4,000,000.
At 90, Rachael basically runs out but if you add in the income and left over balance it is nearly $5,500,000 more than what Julie got.
Baring in mind, a 30 year old today has a high chance of hitting 100 I believe with health innovation that will likely come in the next 50 years, you do need to be planning to 90 at least.
In summary, by investing $450,000 in to her super over 35 years, Rachel ended up getting $5,500,000 back in some way.
I know it all sounds pie in the sky, but the truth is the more you can do earlier on, the better.
Take action and give yourself a big present in the future.