Author Topic: Superannuation and FIRE  (Read 6527 times)

qwerty8675309

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Superannuation and FIRE
« on: May 02, 2015, 12:00:14 AM »
I'm just interested in hearing some of your opinions on contributing to superannuation, either as part of salary sacrifice or post tax contributions, as a part of FIRE. I'm kind of tossing up whether this is a good idea at the moment.

Some of the benefits of contributing to super are:
- Salary sacrificing into super results in a 15% contribution tax on pre-tax income, instead of the amount being taxed at your marginal rate
- Income and gains are taxed at a concessional tax rate. This adds up significantly over time.

Some of the drawbacks of contributing to super are:
- Super cannot be withdrawn until the preservation age (currently 65). This age may or may not change in the future. This means that your 'stash' outside of super will need to survive until you can withdraw this super
- Super rules are continuously being changed by the government
- The fees associated with having money in a super fund are sometimes higher than the fees you pay outside of superannuation

Thinking this through, the logical thing to do would be to save just enough outside of the super system until you can get to preservation age, and then withdraw from super; however as I mentioned, there are some significant risks in this. For me, its a 34 year wait until I can access super.

marty998

  • Walrus Stache
  • *******
  • Posts: 5822
  • Location: Sydney, Oz
Re: Superannuation and FIRE
« Reply #1 on: May 02, 2015, 02:05:36 AM »
I find salary sacrificing above $80,000 works quite well (24% tax concession).

If you're in need of the extra money above that for day-to-day expenses then I hear there's this blog on the internet that might be helpful...

FFA

  • Pencil Stache
  • ****
  • Posts: 525
    • Financially Free Australia
Re: Superannuation and FIRE
« Reply #2 on: May 02, 2015, 07:05:16 AM »
you summed up pro/cons nicely but still it's not straightforward....

my personal thoughts ; if you aim to FIRE pre-40, super is not really very relevant. it depends on how conservative you are, i.e. if you have a decent buffer in your SWR assumption, such that you will be living off dividends/passive income and "never" drawing capital, then your stash should be big enough to cover you indefinitely anyway. this was my logic and so I didn't include super in my NW to make any FIRE calc's, and have treated it purely as a safety margin /old age slush fund. however, if you're wanting to FIRE asap, avoid over accumulation and willing to draw down capital along the way, then super will be more relevant for sure. How accurately you can forecast investment returns, personal expenditure, inflation rates etc that far forward is another thing to consider.

having said all that, a 24+% tax benefit is almost too good to pass up, so I would still be very tempted to look as salary sacrifice (or tax deductible contributions for self / non-employed), if you're in the higher tax brackets.

superannuationfreak

  • Stubble
  • **
  • Posts: 123
  • Location: Melbourne, Australia
Re: Superannuation and FIRE
« Reply #3 on: May 02, 2015, 06:20:11 PM »
Early retirees can't use just Super to meet their goals.  But if you plan on living past 65 (and I do) then it makes sense to make use of the tax advantages from having some investments in Super.  See this message and the follow-ups in the Australian thread for some rule-of-thumb estimates on how much to keep in and out of Super: http://forum.mrmoneymustache.com/investor-alley/australian-investing-thread/msg641797/#msg641797

The rough approach we use is the higher income earner salary sacrifices the maximum to pay 15% rather than marginal tax rate and the lower income earner (less than $37,000 p.a.) holds more investments outside super.  When both of us are earning more than $37,000 p.a. I suspect we'll both salary sacrifice.  I guess it does depend how early you're planning to retire and how large a margin of safety you want.  If you're planning on retiring 30+ years before age 65 then you'll basically want to be financially independent completely ignoring super anyway.

MsRichLife

  • Pencil Stache
  • ****
  • Posts: 539
  • Age: 41
    • Living My Rich Life
Re: Superannuation and FIRE
« Reply #4 on: May 02, 2015, 06:28:48 PM »
I'm 38 and have been contributing the minimum required amount to super for 20 years. I now have about $620K in my super account and can't see a need to add any more. Sure, the tax benefits are there, but I plan to FIRE soon and need to focus on having enough money outside super to survive the 25+ years before I can access super.

Murdoch

  • Stubble
  • **
  • Posts: 110
  • Location: QLD, Australia
Re: Superannuation and FIRE
« Reply #5 on: May 02, 2015, 09:30:03 PM »
Another advantage of Super is that is it somewhat protected in the situation you are sued.

I include Super in our net worth, and we both salary sacrifice to the limit. We also add some after tax contributions when lump sums arrive in our accounts.

Whilst I want the option to FIRE, I don't necessarily have a fixed position on whether I will, or when.
For us, it is presently easy to fund Super to the concessional limit, and save in taxable at the same time.

Your personal marginal tax rate, current age, and planned retirement age, are all vital in determining Super's role in your own financial plan.

Murdoch

qwerty8675309

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Superannuation and FIRE
« Reply #6 on: May 02, 2015, 11:11:46 PM »
Thanks for all the replies! I do intend to live past 60 like most people, but I'm not sure if I'll be able to enjoy my money as much as I would earlier in life.

My current allocation inside of super is probably a bit low - 350k outside of super, and 70k in super (17% in super), so I do think there is a benefit in propping this up, and having a bit more of a balance, but there's always that feeling in the back of my mind - what if those politicians change the system again?

I am in the fortunate category where I'm earning over 80k when I include investment income, and a 24% tax benefit sounds very inciting, along with the additional compounding over time. I suppose now its just a matter of working out how much to salary sacrifice.

marty998

  • Walrus Stache
  • *******
  • Posts: 5822
  • Location: Sydney, Oz
Re: Superannuation and FIRE
« Reply #7 on: May 03, 2015, 03:26:25 PM »
but there's always that feeling in the back of my mind - what if those politicians change the system again?


It's a given that change is always going to happen. You can't go through your life worrying about changes to Super, when there's just as much change outside of Super.

Best thing to do is to accumulate as much as you need in a variety of different asset classes and structures. If you have enough Capital then you have more choice when change occurs.

qwerty8675309

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Superannuation and FIRE
« Reply #8 on: May 09, 2015, 06:14:35 AM »
I'm just trying to simulate the benefit of salary sacrificing different amounts into super over time using some spreadsheets. How is capital gains taxed within super? For instance, lets say a super fund has all their funds invested in the ASX200 index. Lets say that over the year, the capital amount has increased 5%. Do these gains -

1. Get taxed on a financial year end basis
2. Get taxed when I withdraw the money from the super fund
3. Don't get taxed at all?

There doesn't seem to be much information I can find around this, other than capital gains being taxed at 10% for assets held over a year, and 15% for assets held under a year.

marty998

  • Walrus Stache
  • *******
  • Posts: 5822
  • Location: Sydney, Oz
Re: Superannuation and FIRE
« Reply #9 on: May 09, 2015, 07:09:27 AM »
Don't get taxed until sold. Unless the fund has made a TOFA election (Taxation of Financial Arrangements) which is highly unlikely, in which case it would pay tax as you go on unrealised gains.

Unlikely to be taxed when you withdraw either - there is always a small amount of cash on hand in any industry or retail fund (contribution that have come in from others, cash dividends received, tax refunds, cash held to pay tax liabilities etc)

An SMSF is another matter however as you can imagine.

qwerty8675309

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Superannuation and FIRE
« Reply #10 on: May 09, 2015, 08:11:09 AM »
Thanks Marty. With no capital gains tax, and the way franked dividends are treated, it sounds very tax advantageous to have money in super!

dandypandys

  • Bristles
  • ***
  • Posts: 392
  • Age: 42
  • Location: USA
Re: Superannuation and FIRE
« Reply #11 on: May 10, 2015, 03:14:36 PM »
ok I'm new, can't find an acronym thread, can you tell me what FIRE means.. google did not help me http://www.acronymattic.com/FIRE.html 
lol+thanx

bigchrisb

  • Handlebar Stache
  • *****
  • Posts: 1114
Re: Superannuation and FIRE
« Reply #12 on: May 10, 2015, 05:54:49 PM »
The treatment of capital gains (and being able to let them sit un-realised for decades) is one of the significant reasons I chose to set up a SMSF.  I was with one of the industry funds (CBUS), and after much reading of their annual reports, and questioning them over the phone, I couldn't get a straight answer on how capital gains were treated.  I'm being a buy and hold forever investor.  I don't want to prop up the capital gains/losses positions of others who are trading, swapping asset allocations or drawing down capital.

For me, full control of these, along with 100% transparency were the main reasons for moving to a SMSF.  Now that I've been running one for a couple of years, the balance is such that its cheaper than having my money in an industry fund.

Last time I ran the numbers the all in cost of my SMSF (accounting fees, brokerage, underlying MER on ETF/LICs held) was about 30 basis points, or about $750/year lower than having my money in a equivalent "high growth"allocation with an industry fund.   On top of this I squeeze a bit more value out of the SMSF by having my highest yielding shares in there (average gross yield in my SMSF is a bit over 7.5%, portfolio average is about 5%).  With a SMSF balance of about $250k, that yield difference puts an extra $6250/year of income into a lower tax bracket (15% super vs 30% company rate), for a tax saving of about $940 a year. Between the two of these, I'm significantly better off running the SMSF than using a retail or industry fund.

To boot, I have full control and visibility of my funds, and remove any potential for my money being used for political purposes - something that 50% board representation by union members in industry funds makes me very wary of!

Dandypandys - FIRE = Financial Independent Retire Early.
The FI being when your passive income covers your costs of living (you don't need to work).
RE = stop working!

qwerty8675309

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Superannuation and FIRE
« Reply #13 on: May 11, 2015, 05:33:41 AM »
Bigchrisb, I've had a look briefly at using an SMSF. From what I've read, they recommend around 500k or more before it is worth setting one up. I'm not sure how reliable that number is (I'm sure there's a lot of self-interests in the super game). What do you think would be the smallest amount you would need before setting up an SMSF?

Given my small balance of 70k, I've tried to minimise the fees. Currently I'm with SunSuper (thanks to an article on superannuationfreak's blog), 50% invested in the the Australian share index, and another 50% in the International share index (average 0.3% p.a, plus $78 a year). With a 70k balance, it adds up to $288 in fees, which I suppose isn't too bad. Anybody found anything better than this?

dandypandys

  • Bristles
  • ***
  • Posts: 392
  • Age: 42
  • Location: USA
Re: Superannuation and FIRE
« Reply #14 on: May 11, 2015, 06:22:02 AM »

Dandypandys - FIRE = Financial Independent Retire Early.
The FI being when your passive income covers your costs of living (you don't need to work).
RE = stop working!
thanks! you guys do need an acronym area for newbies :) and some of the threads are so confusing even without it! I will catch on though i am sure.

FFA

  • Pencil Stache
  • ****
  • Posts: 525
    • Financially Free Australia
Re: Superannuation and FIRE
« Reply #15 on: May 11, 2015, 07:10:59 AM »
Bigchrisb, I've had a look briefly at using an SMSF. From what I've read, they recommend around 500k or more before it is worth setting one up. I'm not sure how reliable that number is (I'm sure there's a lot of self-interests in the super game). What do you think would be the smallest amount you would need before setting up an SMSF?

Given my small balance of 70k, I've tried to minimise the fees. Currently I'm with SunSuper (thanks to an article on superannuationfreak's blog), 50% invested in the the Australian share index, and another 50% in the International share index (average 0.3% p.a, plus $78 a year). With a 70k balance, it adds up to $288 in fees, which I suppose isn't too bad. Anybody found anything better than this?
I've also seen 200k mentioned as a threshold for smsf's. But in my case, I concluded industry funds are they way to go, even if I had 7 figures. I think it depends how sophisticated and active an investor you are, in addition to the balance. If you're like bigchrisb and really focused /optimising, then there's more value in a smsf. But if you're index investing as you describe (which is also my case), then I don't think the maths will ever stack up. I'm also with sunsuper. Hostplus balanced index is hard to beat if you don't mind that particular asset allocation. Superannuationfreak's blog has it well covered.

bigchrisb

  • Handlebar Stache
  • *****
  • Posts: 1114
Re: Superannuation and FIRE
« Reply #16 on: May 11, 2015, 05:57:07 PM »
My take is that the structural and taxation benefits of different entities can be optimised when you can control the assets within them.  Lets say someone had a total portfolio of $400k, had half their money in super (200k in super and 200k outside of super).  They are boglehead, and have their portfolio split 50/50 between AUS and international shares.  They own $200k of VAS, $100k of VTS and $100k of VEU.  They are a buy and hold investor with a very long time frame - so no realised capital gains. VAS pays 5% (including franking credits), VTS 1.85% and VEU 3%.

Lets say our case study has a taxable income of $80k from earned income.  Hence their personal marginal tax rate is 39% (37% plus 2% medicare / NDIS etc)

Case 1 - hold even assets inside and outside of super. i.e.

Super:
VAS: 100k, annual income $5000
VTS: 50k annual income $925
VEU: 50k annual income $1500
Total income: $7425, tax payable in super $1114

Personal:
VAS: 100k, annual income $5000
VTS: 50k annual income $925
VEU: 50k annual income $1500
Total income: $7425, tax payable in personal $2896

Total tax payable on investment income: $4010, after tax investment income = $10,840

Case 2 - hold higher income funds in super:

Super:
VAS: 200k, annual income $10000
Total income: $10000, tax payable in super $1500

Personal account:
VTS: 100k annual income $1850
VEU: 100k annual income $3000
Total income: $4850, tax payable in personal $1891

Total tax payable: $3391, after tax investment income = $11,459

Total tax saving = $619, (6% extra post tax income, or 15 basis points additional return on the $400k)

Worth thinking about this sort of tax entity asset allocation, irrespective if you are using SMSF or super providers. 

FFA

  • Pencil Stache
  • ****
  • Posts: 525
    • Financially Free Australia
Re: Superannuation and FIRE
« Reply #17 on: May 11, 2015, 07:33:25 PM »
indeed, I try to tilt my AUS shares higher in personal, and global shares higher in super. But I wouldn't go all the way as need to preserve some diversification in each bucket as an early retiree and with super stuck until 65. In your example maybe the maximum I would tilt is 67/33 and 33/67 (vs 100/0 and 0/100). Just to protect against some unlikely scenario where Australia economy and share market collapses (relative to rest of world).

bigchrisb

  • Handlebar Stache
  • *****
  • Posts: 1114
Re: Superannuation and FIRE
« Reply #18 on: May 11, 2015, 07:43:03 PM »
indeed, I try to tilt my AUS shares higher in personal, and global shares higher in super. But I wouldn't go all the way as need to preserve some diversification in each bucket as an early retiree and with super stuck until 65. In your example maybe the maximum I would tilt is 67/33 and 33/67 (vs 100/0 and 0/100). Just to protect against some unlikely scenario where Australia economy and share market collapses (relative to rest of world).

What's your rationale for putting more international in super and more Aus in personal?  Isn't that putting more realised income into the higher tax entity, and moving things in the wrong direction?

FFA

  • Pencil Stache
  • ****
  • Posts: 525
    • Financially Free Australia
Re: Superannuation and FIRE
« Reply #19 on: May 12, 2015, 04:07:07 AM »
Maybe i didnt think it through enough , but my reasoning as Aus shares are tax advantaged (franking) keep more of them outside super. Also as i need adequate income now, having retired early.

I thought in previous discussions on asset location this was the majority view, but i take your point too re: keeping higher income assets in super.

potm

  • Pencil Stache
  • ****
  • Posts: 549
Re: Superannuation and FIRE
« Reply #20 on: May 12, 2015, 04:28:51 AM »
In the previous discussion superannuation freak agreed with you but he was talking about the scenario where someone retires on low income. Super is taxed at 15% no matter what level of income before preservation age. For someone on low income, they may have a 0% tax rate and in that case the higher yielding shares should be outside super.

Living off of dividends is easier to administer practically but it is more tax efficient if you have a high tax rate to have no dividends and rely on selling shares instead for cash to spend.

FFA

  • Pencil Stache
  • ****
  • Posts: 525
    • Financially Free Australia
Re: Superannuation and FIRE
« Reply #21 on: May 12, 2015, 05:30:38 AM »
thanks both, i will rethink as about to start investing a lump sum across personal/super and primarily into aus/global shares, so very timely for me!

As i mentioned in other thread, i still feel its not a huge factor though and am inclined to keep roughly same AA in both buckets. But if i do tilt it will be nice to move in the right direction :)

qwerty8675309

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Superannuation and FIRE
« Reply #22 on: May 13, 2015, 06:50:37 AM »
Just curious as to what people think a reasonable portion in/out of super is. eg, 30% in super, 70% outside of super? More/Less?

FFA

  • Pencil Stache
  • ****
  • Posts: 525
    • Financially Free Australia
Re: Superannuation and FIRE
« Reply #23 on: May 13, 2015, 07:17:06 AM »
IMO it's very age dependent. off the top of my head i'd say -

<40 years, perhaps 20% or less.
40-50 years, more than 20%
50+ , much more than 20%

Really depends a lot on individual circumstances and plans (e.g. retirement age, size of stash, relying heavily on super or treating super as icing on the cake, etc). So difficult one to answer and frankly, I'm not sure if it's a useful ratio to benchmark.

FWIW, i'm retiring early at 38 and with approx. 10% of Net worth in super. I concede this is probably too low, and is a consequence of being abroad for over a decade and thus less employer contributions.