Author Topic: Australian Superannuation (401k) and Early Retirement  (Read 6711 times)

This_Is_My_Username

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Australian Superannuation (401k) and Early Retirement
« on: September 16, 2013, 12:17:30 AM »
Has anyone investigated their Australian superannuation scheme, and how it interacts with early retirement?

As far as I can tell, withdrawl before 55 (or 60, or 65) is impossible, except under rare and specific circumstances  (unreachable  for me).

I am 30 years old, hoping to retire at 40.

early superannuation withdrawl looks impossible, but has anyone found a way?

Cheers

aaronhann85

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #1 on: September 16, 2013, 12:23:32 AM »
I would just use my own funds between the ages of 40 and 67. I'm no expert, but I'm not aware of any way to use your super prior to the preservation age.

Nudelkopf

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #2 on: September 16, 2013, 03:06:22 PM »
A long way off for me, but I always assumed on having "two retirements" - one using my own savings/investments, and one using my super. But, that being said, I'm in my early 20s. I'm sure the super rules will change a butt-tonne by the time I'm old enough to take it.

travelbug

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #3 on: September 16, 2013, 03:33:22 PM »
We have decided not to add to our super fund because we feel we want access and control of our investements. The govt keeps moving the retirement age and who knows what will exist when we reach 60-70?

That said, if you find a great accountant and you have over 200k in your super fund you can roll it out to a self managed super fund that you can invest in certain assets and take out a portion of the earnings (taxed, of course, I think at 15%- which sucks) but at least you have access to it, if only the earnings from the principal.


This_Is_My_Username

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #4 on: September 16, 2013, 07:47:27 PM »
travelbug,  thanks for the response.

it looks like early access to SMSF might be a scam?

http://www.diysuperfund.com.au/ato/diy10417.htm

do you have any further information on early access to SMSF?

travelbug

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #5 on: September 16, 2013, 09:04:17 PM »
Hi

I know the rules have changed a little and they cap what you can withdraw more now, although that may change with the new govt...it may not...

But you cannot touch the principal, only the revenue from that. It all depends on if you set it up as a single/partnered entity. There are so many variables that you would need to take your personal case to a great accountant and have them let you know what you, personally, can do or not.

I helped my parents set one up afew years ago.

arrow1963

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #6 on: September 16, 2013, 09:51:16 PM »
(I'm not an accountant or a lawyer, and can't rule out the existence of any special loopholes).


To the best of my knowledge, super doesn't work for early retirement, and there's little reason to think that it ever will.

I'd think of early retirement in Aus. as having 2 parts.

First, you consume non-super assets (between the age of X and 60), eating down into your principal.  Ideally you don't totally run out of assets when you reach your super access age, at which point you ideally contribute your nest egg into super as non-concessional contributions (at this point you might need to satisfy a work test).

At that point you'll have little outside of super, but access to your super funds, consuming them (or purchasing an annuity) until death.

---

I guess the other point that I'd make is that there may be little value in super savings for an early retiree, assuming that you live a reasonably mustachian lifestyle.

Think about a couple that are in early retirement.  They've paid off their home.  Each member of the couple will face tax rates of:
0% on the first 18K of income
19% on the next 19K

So, a couple with no mortgage can make 75K a year in investment income, and only pay ~10% tax.  That doesn't include franking credits, inclusion of which could result in a net tax refund, depending on what proportion of the retiree's income are franked domestic dividends.

As far as I'm concerned, that tax environment is extremely generous towards early retirees who practice any degree of frugality.  The advantage of super won't be in the decumulation stage here, it would be in how your money is taxed before you get to this point (accumulated interest, dividends and realized capital gains while you're still working).  However, practicing a buy and hold approach to equity investing can defer any capital gains until you've retired, and dropped down to these lower tax brackets.

limeandpepper

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #7 on: September 17, 2013, 05:46:39 AM »
I won't be counting on superannuation for early retirement, as others have said, it's too difficult to access at a younger age.

I also agree with arrow1963 about the tax-free threshold being quite a boon - I was really happy when they finally raised it after having it at $6k for so many years. Having it at $18k is really great for us frugal people who would like to work less or retire early.

HappierAtHome

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #8 on: September 17, 2013, 05:56:56 AM »
I don't include super in my calculated savings rate or my early retirement plans. I do include it in my net worth calculation, but I'm not too sure why given I'm effectively assuming I won't get it.

I'm basically ignoring it and when/if I get it, it'll be a bonus.

This_Is_My_Username

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #9 on: September 18, 2013, 01:00:46 AM »
Thanks for the well considered responses, particularly arrow1963.

Travelbug, I'll investigate early access to SMSF earnings, thanks for the tip.

Please chime in if you have any further contributions.

happy

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #10 on: September 19, 2013, 08:16:52 AM »
MMM I think, coined the terms "old man money" and young man money, referring to old man money as that which you could only access later in life like superannuation, and young man money being anything you might need before that.

I'm not an accountant but I'm old enough that I'm pretty interested in super.  I'm not sure it can be accessed early, with some extreme exceptions such as if you are dying of some awful terminal illness.

As others have said, you therefore need 2 plans - one for pre-retirement age (67 for you youngsters) and one for post retirement. Currently super left until after age 60 is incredibly tax effective.  I'm guessing that the govt will keep just sufficient tax incentives to keep people putting into super for some time (? how long). Once a significant proportion have put in 12% or more for 40 years, tax incentives won't be so necessary.

I agree with Arrow...when I toss around the figures, basically Australia is a bit of a socialist state: as long as you want to live on < 40k as a single person (maybe up to 50K), taxes fall away and life becomes a lot easier. MMM wrote a post
Quote
www.mrmoneymustache.com/.../the-lovely-low-taxes-of-early-retirement/
, which inspired me  to run Aussie numbers. Although not identical to US, there is similar value on living on a small income.

BrakeForTurtles

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #11 on: September 28, 2013, 06:34:27 AM »
So with this in mind, are Aussie Mustachians maxing out their super contributions? On one hand, extra contributions are so tax effective and will compensate for years of lost super from ER, but then it is such a long time until you can access them. I'm still studying so I have a few years until this is even an option for me.

abyss

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #12 on: September 28, 2013, 08:28:00 AM »
So with this in mind, are Aussie Mustachians maxing out their super contributions? On one hand, extra contributions are so tax effective and will compensate for years of lost super from ER, but then it is such a long time until you can access them.

I'm maxing out my pre-tax super contributions ($25K/year including employer contributions) for now. Once it reaches a certain point I'll switch to regular post-tax investments.

The tax benefits are significant, and having enough super saved means my non-super savings only need to last me until I'm 60. Basically I'm following the "old man money" strategy.

marty998

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #13 on: September 28, 2013, 05:58:13 PM »
 
We have decided not to add to our super fund because we feel we want access and control of our investements. The govt keeps moving the retirement age and who knows what will exist when we reach 60-70?

That said, if you find a great accountant and you have over 200k in your super fund you can roll it out to a self managed super fund that you can invest in certain assets and take out a portion of the earnings (taxed, of course, I think at 15%- which sucks) but at least you have access to it, if only the earnings from the principal.



Thanks for the well considered responses, particularly arrow1963.

Travelbug, I'll investigate early access to SMSF earnings, thanks for the tip.

Please chime in if you have any further contributions.

Sorry but that's really bad advice. There's no such thing as early access to SMSF earnings. The ATO will very quickly strip your fund of its tax advantaged status and will definitely slam you with a 45% tax rate.

Once you turn 55 you can start a TRAP (transition to retirement allocated pension) - and that one comes with a 15% tax hit. Your ability to take lump sums without tax penalties is also restricted. Before that age, forget about it. Just be patient and let it sit there quietly compounding.


happy

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #14 on: September 29, 2013, 05:57:43 AM »
=! to Marty. If you check THE sources, they warn against trying to access before 55.https://www.moneysmart.gov.au/superannuation-and-retirement and http://www.ato.gov.au/Super/.

You can access  a TRAP or TRIP at 55 *IF* that is your preservation age, but as Marty says it carries extra tax @15%.. But for you young'uns preservation rises successively to 60. I'm 54 and in theory I could access in a few months when I turn 55, but I am choosing not to because of the tax benefits of waiting to 60.

So with this in mind, are Aussie Mustachians maxing out their super contributions? On one hand, extra contributions are so tax effective and will compensate for years of lost super from ER, but then it is such a long time until you can access them. I'm still studying so I have a few years until this is even an option for me.

At 54 , yes I am.

For those younger, I would say yes, probably but keep an eye on the government and their reforms from now on and adjust accordingly.

The danger I see is that the the government can change the rules with regard to tax sheltering super and I'm pretty sure it will probably gradually in the coming decades. (i.e. it probably won't affect me much, but will affect my kids as they start to earn in the next 5 years or so).

Its case all of "all roads lead to Rome" with regards to income tax/super etc.  no matter how you come at it, IF you can live on 20k yr/single, 30k yr couple (this is equal to OAP currently)...kiss taxes goodbye. If you have a single income of 40k you only pay about 3k tax.  So *IF* you learn your Mustachian lessons well, and can live happily on this level of income,  you've hit the sweet spot Down Under. The govt will provide all the excellent Australian amenities: health care, education, road, schools , police etc etc basically for FREE.  As soon as you get above 40k, you start to lose efficiency since you will start to pay more tax.

Note that the max  tax concessional cap for super is 25k.  Over 40 years working that equals the big 1mill. Now as Mustachians, we know that 1mill  is 40k a year at 4%SWR. (hmmm has govt been taking MMM lessons?).  If you earn 100k a year, then you look forward to 12k a year super when we hit 12% compulsory contributions in 2019.  12k for 40 years  at 5% return = about 1.5mill in todays dollars. But if we use 2.5% to allow for 2.5% CPI we get 800k ie 32k @4% SWR. Or about the OAP for a couple.  4% is a bit generous since the govt uses a minimum of  5% on a super income stream if you are between 60-64 years. ( but 100k is a bit above average wage).

Now the reason for tax sheltering super is to entice Aussies into becoming self-funded retirees, reducing the govts ever increasing OAP cheque. Also once you put the money in there, the govt (within electoral popularity limits) can change the rules and get its hands on the proceeds of the money invested via taxation.

FWIW, my opinion is that once we hit 12% compulsory contributions, , super will start replace the OAP, since thats what 12% will generate.  Once we are 40 years into 12% super will replace the OAP by and large (except for low income earners who are tax sheltered anyways) and  there will be NO need for the govt to provide tax sheltering. So if you are 50 like me, super is good. If you are 20? NOT so  sure. Certainly *everything* you contribute /invest privately in you early 20s  is *very* important since after 30years, and approaching 40years compounding returns are magic. But should everything you put aside in your early 20s be maxed into super?...don't know the answer but wonder if it would not be wiser to hedge and put 50% super and 50% private. If you can afford it obviously max super AND invest privately for the time being. If you are trying ER, then the math is different again.

1 million in super seems to be a magic number. I keep a close eye on the 2 websites above, and there was, well hidden to be sure, definite mention of a lifetime tax effective  cap of around 1mill. I spent a lot of time trying to find this for this post to make sure I described it accurately  and it seems to have disappeared. In my searching I did come up with some political debate about this concept.  So I would watch for a max tax effective cap that might come in... i.e. again super after 60 will effective up to about 40k a year.

I'm not financial expert, but I have spent a lot of time on the above web sites. The money smart team are quite helpful at answering general questions.  For example I emailed and discovered that  the contributions tax of 15% referred to not just my contributions (my understanding), but my returns that were re-invested ( who'd have thought that interest was a "contribution?").

Ok a couple of glasses of red and a day in the sun by the sea listening to music.....a long post, hopefully coherent. Any comments, corrections, insights welcome


BrakeForTurtles

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #15 on: October 09, 2013, 05:57:58 AM »
Thanks for that happy, I found it very useful (and coherent). I'm 27 and still at uni so I won't be earning real money for another few years. I had planned to max out super contributions once I start and your reasoning certainly backs that up, depending on how the tax situation changes. Interesting that there is a maximum cap on contributions. If your reinvestment returns are counted as contributions for the purposes of tax, do they also count toward the lifetime limit?

Melody

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #16 on: October 09, 2013, 06:23:47 AM »
I think I should count it in my savings rate, as I am also using the old man, young man thinking... However haven't been counting it to date as I never thought about it when I first started tracking savings rates, so now it's hard to go back and see changes over time.  However I don't put any extra in, because my employer already makes extra contributions and I don't want to be over invested in super due to the risk of the government changing the rules and the fact that I am still >40 years away from 65! Great point around deferring tax via capital gains... something to think about for sure. The only issue is it only lets you defer tax on your investment income, not your day job income... whereas salary sacrifice to super lets you reduce the tax on your day job income. Still a valid point though when considering the investment mix. Thanks!

happy

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Re: Australian Superannuation (401k) and Early Retirement
« Reply #17 on: October 09, 2013, 06:47:06 AM »
As I say I tried to find the info on lifetime contribution tax sheltered cap, but couldn't, so I wonder if its been changed or pulled. Maybe check with an accountant or email the moneysmart team. As far as the reinvestment returns... I don't know the answer..thats why I was trying to find the info to check what it actually meant. I didn't pay a huge  lot of attention as I'm not likely to exceed a million in super before I retire. 

Since I've started to pay more attention to financial matters, I've noticed the govt does make tweaks to benefits/ taxes etc every budget, that may go largely unnoticed if they are not picked up by the press. The press only publicise what makes a good story.