When nothing in life is guaranteed, how does a guaranteed instant return of 40-60% sound?
Salary Sacrifice is fundamentally choosing to save more for your retirement today and leaving significantly less work in your later years. In reality, you are giving up some of your lifestyle today, putting more in to your super fund that will give you a greater lifestyle in the future. The government understand that is hard for us to give something up today, we naturally want it all in life; so to encourage taxpayers to save for their retirement while also leaving less of a burden on their future budgets; The ATO reward taxpayers who salary sacrifice by offering large tax concessions on Super Contributions.
The general strategy of most Australians is to pay off their home loan as fast as possible; and generally if you can afford to do nothing else - that is the right strategy. However with home loan interest rates at all time lows and an increase to the amount you can salary sacrifice, this strategy has become almost a no-brainer for higher and top bracket tax payers.
As you can see below by simply deciding to inform your work payroll to move a portion of your salary in to your super fund rather than placing it in your bank account, just this simple decision will make you a guaranteed return straight away of $2,000 to $5,000. This is equivalent to getting your money to instantly grow 40-60%
With expected interest rates under 5% for the next five years at least, the benefit to pay down your home loan is at the lowest it has ever been. I have based my figures on an interest rate of 5.5% and in that case it would take 10 years for you to break even without any growth from the super fund at all. If the super achieved a measly 4% it would take 30-50 years.
I think it is safe to say, that this strategy in itself makes a lot of sense if you are comparing to paying off your home loan and if you can afford it from your cash flow a great idea.
What makes it even wiser is the power of compound growth in a low tax environment (Superannuation).
If a 40 year old on the top tax bracket salary sacrificed $10,000 gross per year or roughly $5,300 net income – equivalent to $440/mth. Just this one decision would turn contributions $440/mth in to $370,000 more savings for their retirement. (based on 7% growth).
If you are interested to discuss the ins and outs of Salary Sacrifice further, feel free to call any time.
Please note: my figures are for people under the age of 50. If you are over 50 and working, the benefits are only greater and even more powerful. This is GENERAL ADVICE and is not to be viewed as personal advice.