Author Topic: Australian Superannuation (like 401k) and impact on savings rate  (Read 2898 times)

Melody

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Australian Superannuation (like 401k) and impact on savings rate
« on: September 30, 2013, 05:26:18 PM »
Hi,

Just wondering how other people count their superannuation contributions in their savings percentage. (I think superannuation is similar to the US 401k retirement accounts, at least in terms of the following features which are confusing me, so if you're not Australian but can solve this that would be great too!)

- I can only withdraw at age 60. If I can't withdraw until age 60 how does this impact the 25x annual expenditure? For example if I wanted to retire at 40, how would I split the stash (e.g. do I put 10x spending normal taxable accounts and 15x in superannuation? Is there a formula for this?)

-All of the online super calculators I have seen can't seem to handle the idea that you would stop contributing to your account for any period prior to age 60 (either because of say early retirement or a career break to have children). Has anyone found a calculator that uses the Australian tax assumptions that can handle this?

- I have been calculating my savings rate as a % of after tax income,  but I get 9% compulsory super and an additional amount paid by my employer. These amounts are only taxed at 15% (lower than my average rate of tax). How does everyone else handle the tax variations? (I'm thinking just to calculate all the amounts to be post tax and add them all together and then take spending divided by total after tax earnings (including super) to give savings %.) I want to be able to use this post http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

-Do people add their investment earnings to their income? If so how do you factor in the (daily) changes in the value of your investments. Or is the percentage of income saved only non-passive income?

Thanks for your input.

Mark31

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Re: Australian Superannuation (like 401k) and impact on savings rate
« Reply #1 on: September 30, 2013, 09:24:27 PM »
I don't work out a savings percentage, but I do include superannuation in my savings target. What with employer match and salary sacrifice reducing tax, I find that mentally a lot easier.

Depending on your age of expected FI, you should be counting super as part of your 25x. In my case, when I hit FI, I will be running down my non-super savings, while my super is going up. The total will remain the same.

As for splitting, super is taxed at 15%, while your first $20,000 or so of income is tax free. If you're not working it might be tax optimal to have ca $500,000 in the real world and the rest in super. If you're working, you'll need to work out the least amount of tax you'll pay across your years of working and not working.

My investment earnings do not count as savings in my calculations. That would be cheating!

You're right that super calculators are no use, as they don't let you tweak the most important variables. I just use Excel myself. I increment my savings by 4% a year, add on my planned savings in each year and go from there. This gives results in 2013 dollars. Use 6.5% per annum if you want it in tomorrow's dollars.

As an aside, are you aware that, by default, your super account is likely removing money for Death and TPD insurance, and possibly even income protection insurance? I'm surprised how many people at my work don't know that! The premiums for each increase each year, and you should make a decision to keep them, reduce the cover, or get rid of them entirely and review annually.

This_Is_My_Username

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Re: Australian Superannuation (like 401k) and impact on savings rate
« Reply #2 on: September 30, 2013, 09:27:15 PM »
planning for you Super depends mostly on your age.

If you are 5-10 years away from accessing super, it becomes very important.  Tax strategies become effective, e.g. a TRIP.  Locking money away for 'only' 5 years becomes attractive.

However, I am 30, and I basically ignore super for FI and Savings Rate calculations.  There is a genuine risk (legislative risk), of the govt of the day changing the generosity of super over the next 30 years.  The govt may again increase the retirement age.

However also, My current income tax rate is 38.5% for investing post-tax money, and dividend income.  The Super tax rate is 15%.  That is a big difference.

However, additional contributions to super will delay ER, because the money is locked up for 30+ years.

For an early retirement at (e.g.) 40, your calculation will go something like this:  Retire at 40 with $600k(?) of assets. Have a 5% or 6% withdrawl rate, and at age 60 you will have $300k(?).  access your $700k(?) super lump sum, for a total of $1m at age 60.  4% safe withdrawl rate from age 60 onwards.

The calcuations can quickly become complicated.  But you can do it.

Ozstache

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Re: Australian Superannuation (like 401k) and impact on savings rate
« Reply #3 on: September 30, 2013, 11:50:25 PM »
I don't work out a savings percentage, but I do include superannuation in my savings target. What with employer match and salary sacrifice reducing tax, I find that mentally a lot easier.

Depending on your age of expected FI, you should be counting super as part of your 25x. In my case, when I hit FI, I will be running down my non-super savings, while my super is going up. The total will remain the same.

As for splitting, super is taxed at 15%, while your first $20,000 or so of income is tax free. If you're not working it might be tax optimal to have ca $500,000 in the real world and the rest in super. If you're working, you'll need to work out the least amount of tax you'll pay across your years of working and not working.

My investment earnings do not count as savings in my calculations. That would be cheating!

You're right that super calculators are no use, as they don't let you tweak the most important variables. I just use Excel myself. I increment my savings by 4% a year, add on my planned savings in each year and go from there. This gives results in 2013 dollars. Use 6.5% per annum if you want it in tomorrow's dollars.

As an aside, are you aware that, by default, your super account is likely removing money for Death and TPD insurance, and possibly even income protection insurance? I'm surprised how many people at my work don't know that! The premiums for each increase each year, and you should make a decision to keep them, reduce the cover, or get rid of them entirely and review annually.

This is pretty much what I do ie. I treat super and non-super as one 'virtual' stache, investment earnings are not counted (nor are investment taxes, to be consistent), every Aussie super calculator I've found assumes you are one of the 'work til 65' borg and hence is useless, and I use Excel to work out what my pre and post super access stache amounts should be.

As tempting as it can be to factor in the nuances of super versus non-super asset accumulation, it tends to overly complicate the shockingly simple maths and turn it into, well, maths. Each such variable you add to the equation also increases the number of permutations of output possible and can lead to information overload in your analysis, especially if those variables are broad assumptions that will likely be subject to change (esp super terms and conditions).

In my view, you are best to keep to adhere to the KISS principle and use the shockingly simple maths as the rough predictor of when you can ER.

Mark31

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Re: Australian Superannuation (like 401k) and impact on savings rate
« Reply #4 on: October 01, 2013, 04:02:23 AM »
Made a mistake before - meant $300k, not $500k. In any case, I would definitely not add anything to super you've already paid tax on. Employer matches and salary sacrifice contributions to reduce tax, that might be worth your while.

I totally endorse comments about risks to when you can access super, and tax rates. The chance of some government making changes within the next 30 years is a certainty, be they major or minor changes.

Melody

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Re: Australian Superannuation (like 401k) and impact on savings rate
« Reply #5 on: October 01, 2013, 07:21:21 AM »
Thanks guys! This was helpful!

So it seems like the general consensus is:
-Only make additional contributions to the extent they are tax effective. Use excel to model scenarios of pre/post age 60 retirement to determine if it is worth making tax effective additional contributions, however you may not want to make additional contributions to Super due to risk of govt changes and the fact that if you over allocate to super it will delay ER.
-If calculating savings rate on an after tax basis (as per "the shockingly simple maths") it would be reasonable to count Super contributions into the amount saved at their after tax value (although some posters are ignoring super all together due to the above mentioned risks).
-Investment income does not count in income when determining savings rate.

Based on the below, I'm inclined to keep he value of super in my savings rate as it would allow for a higher safe withdrawl rate (and therefore smaller stash needed for ER) and therefore should have a positive impact on my time to ER. It seems that the "shockingly simple maths" can be applied using a super included savings rate, or if you were being ultra conservative you would use a super excluded savings rate when applying "shockingly simple maths".