With the recent changes to superannuation and contribution limits it is again important to plan for your retirement sooner rather than later.
To better see how this can be managed let’s work through a case study to see what a difference it can make to plan for retirement at an earlier age.
John is age 30 and is on a salary of $105,000 + Super guarantee contributions of $10,000. John holds life insurance cover in his superannuation fund at a cost of $2,500 p.a. John’s superannuation balance is currently $50,000 and his superannuation fund is expected to return an average of 5% p.a. (after allowing for tax and inflation) until he reaches age 65.
By age 65 John would expect to have accumulated $818,000 to retire on which is not very much to fund his retirement.
If John salary sacrificed an additional $10,000 to his superannuation fund (bringing his annual contributions to $20,000 p.a. to super) his superannuation entitlements could reach $1,585,000 by the time he reaches age 65. This may seem tough in many circumstances but if this additional contribution is in place for John he will save $2,400 in tax each year (assuming his taxable income is $105,000) by sacrificing this money into his superannuation fund instead of taking it as a wage. This is $84,000 in tax savings over 35 years that have helped build wealth for retirement.
This additional salary (after tax) may instead go towards John paying down his home mortgage or investing in other investments outside of his superannuation fund. Both these options should be considered and may be strategically right for John depending on his circumstances.
If the wage was instead taken and put towards a mortgage, due to current low interest rates, this may save some interest and repay the loan sooner but the interest that would be saved in this case would be significantly less than the uplift in John’s retirement wealth (based on the parameters in this example).
If John diverted this wage to other investments not held in superannuation he would be able to access this wealth again before retirement but in the long run he would most likely pay more tax on income and capital gains he makes when compared to the tax on his wealth held in superannuation.
As illustrated in the case study based on modest returns a person can nearly double their wealth for retirement in a tax effective structure if they plan for it well in advance. Had John waited until he was 50 to consider increasing his superannuation contributions he would be lucky to accumulate an additional $250,000 which would bring his retirement wealth to just under $1 million.
This is just a brief overview and there are many factors that should be managed and considered to ensure you do not exceed any contribution caps which will result in further tax and no savings. It cannot be stressed enough the importance of obtaining advice before entering into any transactions. This article is not intended to be advice that should be solely relied upon as it in no way considers your individual circumstances.
If you wish to discuss your own SMSF strategies, contact the specialist PKF Superannuation team in Newcastle on (02) 4962 2688 or in Sydney on (02) 8346 6000, or click the button below.
David provides clients with quality, competitively priced and efficient superannuation fund strategic and administration solutions. He has a deep understanding of both the strategy and legislation around superannuation, ensuring that he and his team find the right mix for his clients’ financial success.
David has worked within the superannuation industry for close to 10 years and is a leader within the PKF Australia network. He actively seeks to build and maintain positive relationships with his clients and their referrers - whether that be other accountants or financial planners - to ensure the best outcomes are achieved.
Since commencing a career as an accountant, David has completed a Bachelor of Business, Diploma of Financial Planning (RG146) and is a member of Chartered Accountants Australia and New Zealand (CAANZ). David is also an accredited SMSF Special Adviser (SSA) with the SMSF Association.
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