Australian Super co-contributions

[misterhorsey]

Hey there.

I've only recently started thinking about super co-contributions.  I currently don't make any additional contributions.  But I've recently been thinking about the discount for co-contributions as they are paid out of pre-tax dollars.

I've also never been able to look away from a discount. Am I stupid for turning this one down? Particularly if I'm going to stick my funds in an index anyway?  May as well stick them in with pre-tax dollars into an index hidden away in my super?

Just wondering if anyone else does the same? And what their reasons are? 

For context, I have the following reasons for not doing this.  Some are stupid, some I think are sensible:

Stupid

- I used to think Super was a con -  a vehicle to allow lazy fund managers to skim fees off the 9.5% that employers have to pay into employees super account.  This was partly because my first employer had MLC as a default manager, probably due to the kickbacks they received, and the Golden Egg used to charge ginormous annual fees.

- I've never had a problem saving. A mandatory 9.5%, or around 8% when I started working, seems ridiculous.  If they want to make it mandatory, make it at least 35%!  So the idea of forced saving seemed silly.

- The main reason tho was that you can't access it til your 55,60 - or some far off age.  My reasoning is that you can control many things in your life but one of the things you have little control over is when you might die. And you may well die well before you're 55.  So my view is that its better to have control of your assets and do with them what you will, while your fit and healthy. Investments, holidays etc.

Sensible, maybe

- I've wanted to buy a house.  Money in a PPR is pretty tax effective.  Alas, changing life circumstances, the nonstop price growth of Australian property has meant that I haven't bought in (again).  Renting seems to make sense on many levels, but the tax effectiveness of buying property to live in is hard to argue with, and something I've not benefited from. But additional money put into super would reduce equity in a house.



I appreciate its all relative to your circumstances.  For context, I'm turning 40 this year, so the far off age is getting closer.  Also, to my great and considerable surprise I've used the http://mustachecalc.com/ to find out I may have actually reached Technical FI. I consider it a technicality, as I don't believe it, and the annual income I'd generate from my stash would provide for a very frugal life and I'm not sure I want to go down that path (i.e. 63% of expenses would go on rent), even tho I'm actually living it now. So while I wouldn't have to work ever again, i'd also not really be able to go to a restaurants with any regularlity (except to use the toilet). Maybe this isn't such a bad thing, but at the moment I don't think its particularly realistic for me. Then again, if someone told me I would never have to work again....

Anyway, I guess its still relevant if I bowed out from full time work as I'd be earning super on any part time work I'd pick up.

Look forward to your insights, comments, jokes etc.

[misterhorsey]

Woops, meant to add this for reference:

https://www.ato.gov.au/individuals/super/in-detail/contributions/super-co-contribution/

[Sunnymo]

Hi Horsey(!)

I have a couple of thoughts on this...

I did do some salary sacrificing in a small way when I was younger and pre house. I switched the extra off when I got serious on the house buying front.

Remembering that compounding is the (so called) eight wonder of the world the earlier these contributions are done the better. My view would be to either:

1) Decide how much (either $ or %) you want to divert and start sending that to Super now and take advantage of the tax saving. Once the Super has reached critical mass switch off the contributions. Then, start investing that same amount into your preferred vehicle outside super, remembering that you will need to be able to get by until you are eligible to access the Super. I wouldn't want to just scrape by between retiring early and then have access to a dramatically increase income stream purely from then being able to access Super. So my preferred option would be...

2) Take an eachway bet as a variation of option 1. Select your amount and start sending some more towards Super and investing more outside Super. This will get you less of a Tax advantage but set the compounding going on your 'external' investment sooner.

You would need to do some serious modelling to take in to account:
Earning rates
Preferred retirement age
Spending rates etc

It sounds like you have already been doing some of this so this might be the challenge to set yourself around how much do you need outside Super to live the life you want with a relatively smooth income stream from potential early retirement to your Super access date.This might involve a scenario of withdrawing capital so that you pull your last cent from your external 'stache the day before Super income kicks in or you might prefer a level of overlap.

Keep us posted

[marty998]

Unlikely you will qualify for the co-contribution, quite a low income level it cuts out at.

What you are considering is salary sacrificing. Start now, up to the cap of $30,000 a year. By 55 you would have put in (30k x 15 x 85%) + compounding investment returns = lots, and saved a bucketload in tax.

Simple, cheap, easy and effective retirement planning.

[Murdoch]

Marty is right, it seems unlikely you will qualify but depends on your income.
There is much debate about what may happen to Super going forward. The only sure thing is that there will be changes in the coming decades. For better or for worse. Some changes seem very likely such as increasing access age, and possibly increasing taxation of the money at some point in the system. Perhaps this speculation is a form of market timing?

The way it stands at present, it still provides some great advantages depending on your income. Tax reduction on income, tax effective growth of savings, tax free withdrawals depending on age.

These advantages are hard to sneeze at, but do not necessarily fit nicely into a FIRE plan due to access age.
If you are in the highest tax bracket I reckon the odds are in your favour.

Murdoch

[steveo]

I find this a tough question. I'm 41 and I intend to retire in say 5- 10 years. How much should I be putting into super ? I have concerns super will get taxed more or the age raised when I can access it.

[Wadiman]

I find this a tough question. I'm 41 and I intend to retire in say 5- 10 years. How much should I be putting into super ? I have concerns super will get taxed more or the age raised when I can access it.

Steveo - you've got a lot of years ahead of you and your investments will need to last. 

So - even if the 'preservation' (ie the year that you can start accessing your super) increases beyond 60 (the current age for someone born when you were), in some ways that will be doing you a favour and ensure your super stash has a better chance of meeting your needs into your twilight years. 

I agree with Sunnymo re having two investment streams - super and outside super - you just need to decide on the allocation but many max out super and invest the balance in taxable investments.  Remember that if we are talking equities and an index approach for the outside of super investment that you will be minimising capital gains as the index funds (eg the Vanguard ETFs) have relatively low turnover.

[misterhorsey]

Thanks guys.  Again, much to think about!

Yes, I meant Salary Sacrifice up to $30k.  Not co-contribution! At least in this instance I was generally across the concept, but the terminology let me down.

I work for a not-for-profit so I'm already salary sacrificing my rent  so I've managed to wrangle some tax relief.  But as a single human non-home owner with no dependents, not much relief is readily available.

I quite like the split option. Say if I were to buy a house in the next few years, I could benefit a little from the tax effectiveness of owning a PPR, and a little from the salary sacrifice.

Although I'm dreaming about transitioning from full time work to part time or contract work.  I'm managing to live happily on $23k expenditure at the moment. No car. I bike everywhere. Happy reading books and riding my bike, and would love the idea of spending more time dreaming and being creative rather than working.  So I need to factor in that.  But that's doable while youngish and healthy maybe, and also perhaps a subject for another thread.

[This_Is_My_Username]

i recommend against salary sacrifice in your circumstances, because it will delay your FIRE date.


you need the maximum outside of super to live off the dividends until age 60.

[Luckyvik]

I salary sacrifice 5.5% on top of my employer contribution of 9.5%. This gives me a tax savings of 19.5% on my contribution at my tax rate. At this rate I will have enough in super to retire at 60 when I can access my super. Apart from that all my savings go to my mortgage offset account, after I pay off that I will start saving in indexed funds outside of super to live on till age 60. This should happen conservatively by age 50 but if I increase savings/earn more I'm hoping to FIRE by 45, I'm 37 now.


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[misterhorsey]

i recommend against salary sacrifice in your circumstances, because it will delay your FIRE date.


you need the maximum outside of super to live off the dividends until age 60.

That was my thinking too, originally.

But if say if my investments and my super are effectively in the same index fund (not that they are, yet), does it really matter? Aren't they just one pool of funds? While the the super component fenced off til I hit 60, does it matter if I the non-super component is enough to sustain me.

So for example, if I run down the non-super investments as I approach sixty, but the super is preserved, then when I hit sixty the two pools are joined?

[marty998]

Yeah thats the idea. You just need enough outside of super to get you to the preservation age, then the choice is yours.

[misterhorsey]

Thanks marty.  Now i need to do more thinking and solve my property dilemma.  Do I try and buy a property and use that as a base or pursue a non-residential property owning path to FIRE?

I may have to start another thread to see if there's anyone non-property owning Australian early retirees mooching about.

[Gremlin]

Yeah thats the idea. You just need enough outside of super to get you to the preservation age, then the choice is yours.

The issue is that your preservation age may not be what you believe the preservation age is today, nor what the preservation age appears to be when you RE.  I'm doing broadly what you described in building my stache but one thing I've assumed I don't get to access my super until 70 and that it's taxed on exit.  I figure if I can have enough outside of super so that it works for me under those assumptions, I can count my super towards FIRE.

[deborah]

Maybe preservation age will be 70, maybe more, but there are plenty of people who are really decrepit by this time - work injuries... If preservation age is raised past 65 the government would need to pay a lot more in disability pensions, rather than having people use their super as a top gap between the age these people are clapped out and aged pension age.

[Luckyvik]

Maybe preservation age will be 70, maybe more, but there are plenty of people who are really decrepit by this time - work injuries... If preservation age is raised past 65 the government would need to pay a lot more in disability pensions, rather than having people use their super as a top gap between the age these people are clapped out and aged pension age.

You can get your super out early if you are permanently disabled at any age  on top of any tpd ( total and permanent disability insurance) you might have within super.

I think if(when) they raise preservation age it would be staggered like it is now ( age 55 to 60 depending when you were born) so that anybody over 30 now is unlikely to be affected, it would be too unpopular.


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[This_Is_My_Username]

I think if(when) they raise preservation age it would be staggered like it is now ( age 55 to 60 depending when you were born) so that anybody over 30 now is unlikely to be affected, it would be too unpopular.

yes, i agree

[urbanista]

We max out our super, clear up about 50K each year.

The trick to protect yourself from raising the preservation age, is to invest in your primary place of residence. This investment is wonderful as it completely tax-protected. If one has a paid off house, who cares if the preservation age is increased from 60 to 70? With median price $650,000 in Melbourne, reverse mortgage will provide at least $2000 monthly for 5 years. Or just downsize.

My view is that one should own one property as a primary place of residence. If you are single, just get a roommate to help paying off the loan.

[misterhorsey]

We max out our super, clear up about 50K each year.

The trick to protect yourself from raising the preservation age, is to invest in your primary place of residence. This investment is wonderful as it completely tax-protected. If one has a paid off house, who cares if the preservation age is increased from 60 to 70? With median price $650,000 in Melbourne, reverse mortgage will provide at least $2000 monthly for 5 years. Or just downsize.

My view is that one should own one property as a primary place of residence. If you are single, just get a roommate to help paying off the loan.

Good sensible advice urbanista.

As a single person I can't quite bring myself to buy a PPR at the moment. If we accept that property prices are cyclical, its reasonable to suggest that valuations are stretched by the abundance of very cheap money and there are better times to buy than now. 

Having said that, if I had a partner and other mouths to feed, my horizon would be quite different and I'd buy for lifestyle reasons and do it for the long term.   But as a single person you're faced with the flatmate scenario as you've suggested, or buying a small but premium priced place (you don't get much value for money at the entry level), or going bigger and buying a place that is bigger but which has empty rooms not being utilised.  Neither scenario really makes too much (financial) sense.