Author Topic: Young, High Earning Australian - Should I Salary Sacrifice Into My Super?  (Read 16069 times)

HappierAtHome

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This conversation started over on anatidaev's journal: http://forum.mrmoneymustache.com/journals/growing-a-moustache-in-booming-perth/300/ and as you can see, I was pretty firmly against salary sacrificing into my super in that debate.

However, I've now had time to think about it and would like opinions/feedback on my maths and my concerns.

The facts:
I am 26 years old, female.
My salary is $107,200 before tax. In the very near future it will rise to $110,148.
My employer makes the compulsory 9.5% contributions: so when I get my imminent pay rise, $10,464 (not included in my salary above).
I currently have a super balance of $39,324.
I am very likely to become a SAHP at about the age of 30, so in a bit over 3 years.

My maths:
The cap on concessional contributions is now $30,000 per annum.
So to meet the cap I would be contributing $19,536 (this amount would lower each year as the terms of my employment mean I will get 6 or 7% raises each year for the next three years, so my employer's contributions would rise in line with that).
Every dollar I earn above $80,000 is effectively taxed at 39% (37c in the dollar plus 2% medicare levy), so if I was salary sacrificing the $19,536, I think it would mean I would have $11,916 less in my take home pay each year.
Assuming that I salary-sacrificed up to the $30,000 cap, I would have roughly $130,000 in super at the time I started popping out babies (~$40k now + (3 years x $30k)). This is ignoring growth in the next three years, but I was too lazy to do that bit of the maths.
Let's assume that I never add another dollar in contributions after I turn 30.
My super fund allocation is meant to grow at a rate of CPI+3.5%, so I'll say 6.5%.
Does this mean that my $130,000 in 2017 would be worth $859,867 in 2047 when I turn 60?? i.e. a SWR of $34,394??

My emotional response:
I am having what I know to be a typical 'poor person' response to this: part of me believes that if I don't have money right where I can get at it NOW if I need to, it will somehow cease to exist before the point at which I need or want it. I'm afraid that the super rules will change and I'll miss out somehow.
I'm scared that if I put my money into super, it'll delay my FI date.
On the other hand, I know that one of the issues we face in Australia is that women (especially mothers) end up with far too little super to be able to live on. This seems like an option that would more or less guarantee that I would have enough super when I get to retirement age, so even if the shit hit the fan and I had to struggle financially, I would know that I had security at traditional retirement age.
(Yes, I'm very afraid of ending up poor, which seems irrational given my income and savings rate, but I grew up dirt poor and haven't managed to leave that fear behind entirely yet).

So: should I do it? Should I prioritise post-tax investment instead? Thoughts? Opinions? Flaws in my maths or logic?

NinetyFour

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Hi Happier--I'm in the US, as you know, so I'm not sure how your "super" works.  It is roughly equivalent to our 401K accounts, right?  But, for us, there are ways to access our 401K money well before age 59.5--without penalties or taxes.  Do those options exist for you, or is it that once you put this money away in your super, you can't access it again for decades (without significant penalties)?

I recently realized that I had more cash than I knew what to do with (nice problem!), and my tax preparer suggested that I defer more income into my 401K account.  For me, it's a win win win.  It will help protect another $18,000 per year from taxes, plus it is invested in an index fund.  Also, I chose to do this rather than to throw every extra penny at my mortgage (at 4.375%)--I can deduct the mortgage interest, plus I can probably see more than 4.375% growth in the index fund, over time.

Not sure if much of that is applicable in your situation.  I bet others here will have better advice for you.  Good luck!

HappierAtHome

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It is roughly equivalent to our 401K accounts, right?  But, for us, there are ways to access our 401K money well before age 59.5--without penalties or taxes.  Do those options exist for you, or is it that once you put this money away in your super, you can't access it again for decades (without significant penalties)?

It's similar to a 401K, but there are compulsory contributions that your employer must make (9.5% of your salary), and our aged pension is means-tested, so we don't have the situation where you're eligible for SS even though you've accumulated plenty of wealth. (Side note: I can't believe that SS isn't means-tested!!).

I don't think there are any ways to access super early, but others might know something I don't :-)

I recently realized that I had more cash than I knew what to do with (nice problem!), and my tax preparer suggested that I defer more income into my 401K account.  For me, it's a win win win.  It will help protect another $18,000 per year from taxes, plus it is invested in an index fund.  Also, I chose to do this rather than to throw every extra penny at my mortgage (at 4.375%)--I can deduct the mortgage interest, plus I can probably see more than 4.375% growth in the index fund, over time.

GREAT problem to have! I'm in a great position, don't get me wrong, but I just feel like there are so many things I'll want my money for in the next few decades - buying a house, building up my FIRE portfolio, raising children etc. The tax advantages however are very tempting...

marty998

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Yes, you should do it. I've started salary sacrificing, just a little - $100 a week on top of the 9.25% (9.5% now). Save a modest $1,250 in tax, but it cuts my take home by $3,200 a year. Given I'm still able to clear almost $1,000 a week in savings to bash the mortgage with, I'm not really missing the $61 a week less cash in hand.

Hopefully you're aware you need to be really careful salary sacrificing up to the maximum. If you go over you will get slammed with tax and penalties. It's so easy to happen, because the timing of when your employer pays your Super contribution is different (and often later) than your salary. Always leave a buffer just in case.

Everyone who has ever asked me for advice I've always just said "dump as much as you can in Super". They ask me "what about shares" and I just say your Super fund buys the same shares cheaper and more tax effectively.

Have your partner do the same, and you'll both have close to $2m after compounding works its magic. It really is that simple. No tricks, no deception, no dipshit financial planners raping your nest egg. Just consistent regular saving and investing.


HappierAtHome

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Okay I just did some maths on my partner's income...

Assumptions:

His income grows at the rate of CPI (3%) - this is if anything a conservative estimate.
He doesn't make any contributions beyond the compulsory ones his employer makes on his behalf, calculated at 9.5%.
His super fund experiences its target growth.
He stops earning an income at all at 50 (his projected RE date - we should already be FI before that point).

...He will have $2.33M in his super by his 65th birthday.

a) I am honestly shocked, in a good way, by that figure, and b) does this mean he shouldn't bother making additional contributions? Or is it still worth it given that he would also stand to gain the tax concessions and he would be paying 39% on that money too if it wasn't going into super?

And yeah... just wow. Wow. Super is FUCKING AMAZING if you earn a decent income.

BubbaMc

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Your income is taxed at 39% over 80k, while your super is taxed at 15%.

Anything you don't salary sacrifice has to grow at least 24% to catch up to it :)

I'd salary sacrifice as much as I could while being comfortable with my take home pay..


marty998

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ok, wow. Well, you obviously won't be needing to put your hand out for that age pension then will you :)

Keep putting more in while you can. Because the rules as they stand mean that once your partner turns 60 and starts drawing a pension, the earnings will be tax free. So If the $2.33m earns 4% income, essentially thats almost $120k tax free income.

marty998

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correction to the bad maths, $93,200 tax free :)

HappierAtHome

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correction to the bad maths, $93,200 tax free :)

What the fuck would I even do with that much money. Guess we'll be transforming into big spenders in our old age! Gold plated zimmer frames.

I'd salary sacrifice as much as I could while being comfortable with my take home pay..

Yeah, as you can see I'm starting to come around to your point of view!

BubbaMc

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Yeah, as you can see I'm starting to come around to your point of view!

Good luck with it.

I wish I was as financially minded as you when I was 25 :)

HappierAtHome

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So far we've all been agreeing that I should totally do this.

Anyone want to share thoughts on why this could be a BAD idea?

I should calculate how much longer it'll take me to reach my FI number with the decreased take home income...

marty998

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Anyone want to share thoughts on why this could be a BAD idea?


Joe Hockey will be upset that you are increasing the budget deficit...

happy

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Quote
Anyone want to share thoughts on why this could be a BAD idea?

Ok, in the interests of self disclosure, I am 55 and I now max out concessional contributions to super.  But Super for me started back in the late 1980s at 2%, and has only fairly recently reached a substantial %. So I have a bit of catching up to do.

Saving 9.5% or 10% all your working life according to the shockingly simple math will give you 51 years to retire. i.e. from age 20-70. Amazing ,the" retirement" age ( or age you can get the OAP) is going up to 70.

The problem as I see it is that the govt is  gradually putting nips and tucks in super.  First the preservation age of 55, is now gradually rising. The OAP age is gradually rising. Retirement age is gradually rising.  "Rumours" include limiting lump sum payouts, limiting the amount that is tax sheltered, further raises of preservation age/ age which super can be accessed tax free, and even the concept that excess super left after you die is not able to be passed on to family but put back into the govts pot. How much you believe some of these ideas is up to you: some is undoubtedly exaggerated, but it seems to me the govt usually drops outrageous ideas  for a few years to gradually get the populace used to the idea then starts moving. And the govt really is trying to get super to replace OAP. In the long term I suspect the tax concessions will be good whilst you are replacing OAP ($5 at 20k for a single = 500k). And if lucky a bit more: a million is a rumoured figure i.e. 40k a year. And that fits with the current tax structure: if your income is <50k, your tax is pretty low.

So since you are younger than I this is my advice, note I am not an accountant:
1.keep an on the super rules. 
2. work out what you need for old woman money and young woman money.
3. make concessional contributions to super, but make sure you don't hugely overdo it thinking you'll be filthy rich @60, or you may find you have a huge amount of old woman money that is harder to access than it is currently.
4. think about whether you'd prefer to sacrifice a lot now, whilst the tax concessions are good, then drop back to the compulsory contributions , or do what Marty is doing, sacrifice less for longer.

Personally I am seriously considering a TRIS, since I want to retire @60, and the ole mortgage won't be quite paid off then. I'm worried that a lump sum to pay off the remaining mortgage won't be available in another 4-5years.
« Last Edit: July 05, 2014, 08:02:13 PM by happy »

Ozstache

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Assuming that I salary-sacrificed up to the $30,000 cap, I would have roughly $130,000 in super at the time I started popping out babies (~$40k now + (3 years x $30k)). This is ignoring growth in the next three years, but I was too lazy to do that bit of the maths.
Let's assume that I never add another dollar in contributions after I turn 30.
My super fund allocation is meant to grow at a rate of CPI+3.5%, so I'll say 6.5%.
Does this mean that my $130,000 in 2017 would be worth $859,867 in 2047 when I turn 60?? i.e. a SWR of $34,394??

Yes and no.

Nominally, you would have this much, but to show it in real (today's) terms you need to remove the inflation component. ie. growth is 3.5% above inflation, so 30 years of $130K @ 3.5% is $364,883 or $14,595 pa @ 4% SWR. However, you must also factor in that if if your super fund achieves the stated 3.5% above inflation, then your SWR should really match this and be 3.5% not 4%, which further reduces that annual SWR amount to $12,771.

The same goes for your BF's $2.33m and $93,200 pa tax free. ie. you need to bring it back to today's figures which, assuming he too has a 30 year run to access his super and inflation of 3%, is a $959,929 super stash in today's dollars and $38,397 @ 4% SWR or $33,598 @ 3.5% SWR.

Combining your two stashes gives a worst case $46,369 @ 3.5% SWR in today's dollars. Not too shabby in any case, but not $100K+ like you were thinking.

Oh, and as others have said, super is currently a very tax effective investment stream however access is likely to become more restrictive and delayed in future, so if you want to ER you need to have enough money on the pre-preservation age side to fuel you through. How much to put onto each side is a bit of a crap shoot but FWIW, at 46,  I have about 2/3 of my stash in super (supposedly accessible @ 60, but we'll see) and 1/3 in non-super to fuel me through until then.
« Last Edit: July 05, 2014, 11:35:41 PM by Ozstache »

happy

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Re-reading your post - if you are going to become a SAHP @ 30, then it makes sense to max the contributions for 3 years now in my book. Check out https://www.moneysmart.gov.au, under calculators there are a variety of super calculators: which will help you check the math, including both super in the long term and the effect of making contributions on your take-home salary.

Meat Popsicle

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As happy stated earlier the real risk comes from Australia Superannuation being a tax structure rather then an investment class.

Ultimately for me the question: will the Australian government to act in their interest or mine when it comes to tweaking their tax structure?

The recent budget contained some interesting points highlighting this kind of question, such as the raising of the age for the state pension.
http://www.dss.gov.au/about-the-department/publications-articles/corporate-publications/budget-and-additional-estimates-statements/2014-15-budget/budget-fact-sheet-seniors-and-age-pension

Perhaps more interesting were the various other suggestions around how the government can acquire greater revenue (cutting existing tax breaks, adjusting means testing), mainly because it shows that a government motivated in that direction could easily find a rationalisation for a dramatic shift in the existing set of rules.

When arriving in Australia from the UK just over four years ago at the age of 29, I understood the Superannuation to be a good idea ...now I consider the odds to be that by the time I would be eligible, anything in my Superannuation account would be means tested, taxed and withdrawal restricted to such an extent that it'd be on par with the state pension.

In short: unless you're close to eligibility for claiming the Super, there's a great deal of risk around what exactly it will look like when you are eligible to claim.

deborah

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Actually, I disagree strongly with Meat Popsicle.

Firstly, the amount you can have in superannuation reduces substantially after standard retirement age. Currently, anyone over 75 cannot add any money to superannuation. Anyone not working over 65 cannot add any money to superannuation (this will hopefully change to 67 soon, and to 70 afterwards as the aged pension age increases). Anyone accessing superannuation has to withdraw a minimum amount each year - this increases from 4% if you are under 65 to 14% when you are 95. Note that in Australia SWR is 3.5%, so you always need to withdraw more than SWR from super. As a result, most people will gradually loose the tax benefits of superannuation. As they age, they will have less and less inside super, and more and more in a higher taxing environment. Thus, increasing taxes to super may happen, but I expect that it will continue to be a tax advantaged environment.

Secondly, the government has always tinkered with the amount you can salary sacrifice into super. This has progressively fallen since John Howard allowed people to put in any amount. It also costs the government a lot in foregone taxes. I expect that this will last a maximum of another 7 years. Why? By that time people will have been putting in 8% or more for 20 years, and we will start to see people being able to retire without a pension. Anyone would be advised to take advantage of salary sacrifice while it is still available. You can stop putting in once you have reached an amount you think of as a maximum.

Thirdly, in the past, when things were changed "radically" (meaning, for the worse, and to something totally different), the part of your superannuation that was pre-the-date was left as it was. If superannuation is changed radically, we would have pre-2015 super and post-2015 super (for example). I don't think this will happen, as Abbott loves the big banks and the big banks love super as it is. There is also reasonable bipartisan agreement about the current system, and we are also seen as having one of the best systems in the world, so there is little impetus to radically change it.

Fourthly, superannuation is your own money. It will not be means tested. There is no way Australians would ever allow this - particularly when you factor in the huge old age demographic. It would be political suicide.

Fifthly, you will note from my first point that withdrawal rates are controlled - but you have to take a minimum amount. The more you are forced to take out, the more it can be taxed if you don't use it all up. From what I have read, there is effectively no maximum limit (if you are under aged pension age the maximum is 10% but you can also take a lump sum). This has been remarkably consistent over time, and I can't see it changing, as it increases the government tax base.

The Hamster

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My "advice" would be to salary sacrifice half of what you can save from after tax money into your super, and save the other half outside of super due to the tax effectiveness of super and the magic of compounding interest.  You are lucky to be earning a great wage so early in life, and have a half decent employer contribution amount (when I was 26 I was earning <$30,000 and I think super was only 4%).  I really wish I had put a lot more into super back when I was younger.  Plus I think with a sal sac of $200 each week you will be up to the limit anyway so it really is very affordable and you probably won't miss it.

I have read often that the earlier you contribute to super, the more you will have compared to someone who starts later and has to contribute much much more.  If I had kept contributing $100 a week from when I started working, I wouldn't need to contribute $1000 a month now to get to my ideal retirement number.  I would have been able to stop all contributions now and just save outside of super and still be better off.  You have time on your side, don't waste it like I did.

Another benefit of super is that you can't touch it, so there is no chance you would be tempted to "spend" it on something that could jeopardise your retirement. 

happy

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Quote
Secondly, the government has always tinkered with the amount you can salary sacrifice into super. This has progressively fallen since John Howard allowed people to put in any amount. It also costs the government a lot in foregone taxes. I expect that this will last a maximum of another 7 years. Why? By that time people will have been putting in 8% or more for 20 years, and we will start to see people being able to retire without a pension.

This.
I'm not sure I'd put such an exact  figure of 7 years on it, but as the level of super increases in the community, once people pay in enough to reasonably cover the OAP then the tax concessions will highly likely reduce.

stripey

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Hopefully you're aware you need to be really careful salary sacrificing up to the maximum. If you go over you will get slammed with tax and penalties. It's so easy to happen, because the timing of when your employer pays your Super contribution is different (and often later) than your salary. Always leave a buffer just in case.

My super fund provides free over-the-phone advice which I know some of my colleagues have used to 'double-check' they won't go over the contributions cap. This is pretty easy to do with employer contributions of 14 or 17%.

deborah

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My super fund provides free over-the-phone advice which I know some of my colleagues have used to 'double-check' they won't go over the contributions cap. This is pretty easy to do with employer contributions of 14 or 17%.
Gosh - there are other people who do it where you work! I didn't work with other people who maxed out their contributions cap. I was considered very unusual by my HR department - they really couldn't understand where I was coming from when I needed calculations, so I can guarantee that no-one else in my entire company was doing it.

stripey

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Yeah, I suppose I do work with an odd group of people in some ways- everyone in my section brings lunch to work, and a large proportion go op shopping and scour the streets when kerb-side collection comes along. Lots of positive peer pressure for Stripey! ;)

FrugalUndercover

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Im maximising my contributions each year on the basis of the tax advantage, and planning not to dip into that money even with FI (building up accessible assets in a separate trust).  In a worst case scenario, you could access super funds on compassionate grounds, but hopefully it never comes to that.

I had the same initial reservations about time delay, but as you get more passive income it will be more important to have tax advantaged structures.  Trust most of all to direct earnings to lowest earning family member

former player

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If you max out your super contributions for the next three years, you will pretty much spend the following thirty years not having to worry about your pension and not having to make more contributions to it - which is a great position in which to then take time out to have babies.  Your government is effectively giving you nearly $8,000 per annum to do this, and there is no good reason to turn down free money from government if you are still in stash-building mode.

Notch

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I'm 24, earning $92,000. Work contributes $12,300 into super and I sacrifice another 19% ($17,500) to max out the $30,000 cap.  I don't miss the take-home pay at all, as my savings rate is already 60-70%, so it's just more money I would have invested outside of super anyway.  I think future-me will be grateful for it too :)
« Last Edit: July 07, 2014, 05:04:18 AM by Notch »

Anatidae V

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For high income earners, I think if you are otherwise reaching FI at the speed you desire, it makes sense. As a 25 year old making a nice medium $62k per year (as opposed to a high >$90k or a low <$30k) I don't plan on putting any extra into my super this year, or next year... Maybe not even the year after that. 

deborah

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For high income earners, I think if you are otherwise reaching FI at the speed you desire, it makes sense. As a 25 year old making a nice medium $62k per year (as opposed to a high >$90k or a low <$30k) I don't plan on putting any extra into my super this year, or next year... Maybe not even the year after that.
Yes, it's difficult to advise people who will have super for their entire working lives. People my age have so little in super that it's a no brainer. That said, it is difficult to imagine how much salaries change over your life, and so, just how much you will need in retirement. Twenty years ago, the average weekly earnings were $629, now they are $1437.70 - and that doesn't include the horrendous inflation in the late 1980's (average weekly earnings 30 years ago were just $375.30). As others have said, even a very small amount now can increase a lot over your life, so I would be advising a small amount - say $10 - $20 per pay.

BubbaMc

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For high income earners, I think if you are otherwise reaching FI at the speed you desire, it makes sense. As a 25 year old making a nice medium $62k per year (as opposed to a high >$90k or a low <$30k) I don't plan on putting any extra into my super this year, or next year... Maybe not even the year after that.

Good idea. Salary sacrificing into super only really makes sense for high income earners.

bigchrisb

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If:
- you earn more than 37k a year (which means an effective tax rate of 34% i.e. including medicare/NDIS levy)
And
- You are investing old man money (don't need to spend it in the foreseeable)
Then
- Super is the  best tax haven you will ever get.

For example, if you were on $38k a year, and salary sacrificed $1k, you would get an instant 29% return (you would get $850 in super vs $660 in your own pocket, and you would get a 29% boost in after tax earnings every year from now until retirement age.

Yes, the rules will change between now and when I retire (I'm 32).  Yes, this will probably be to my detriment.  However, ignoring any benefit in future earnigns rate, the government could confiscate that 29% tomorrow, and I would still be equally well off to ivnesting outside super.

To me its a complete no brainer.  But as I don't want to retire at preservation age, I also invest outside super to cover that time period.

terrier56

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If:
- you earn more than 37k a year (which means an effective tax rate of 34% i.e. including medicare/NDIS levy)
And
- You are investing old man money (don't need to spend it in the foreseeable)
Then
- Super is the  best tax haven you will ever get.

For example, if you were on $38k a year, and salary sacrificed $1k, you would get an instant 29% return (you would get $850 in super vs $660 in your own pocket, and you would get a 29% boost in after tax earnings every year from now until retirement age.

Yes, the rules will change between now and when I retire (I'm 32).  Yes, this will probably be to my detriment.  However, ignoring any benefit in future earnigns rate, the government could confiscate that 29% tomorrow, and I would still be equally well off to ivnesting outside super.

To me its a complete no brainer.  But as I don't want to retire at preservation age, I also invest outside super to cover that time period.


I have run the numbers on someone earning $62000 AUD maxing out the salary sacrifice and someone not doing a personal contribution.
This person has an annual expenditure of $25000 AUD in both scenarios still very conservative by australian standards.
This person starts work at 25.

The person making the salary sacrifice is FI after 26 years at age 50 with 1.46m in super which they can not access for 15 years.
The person without is FI after 19 years at age 43 with 235k in super.

The question is how much are those 7 years worth to you and being FI do you care about having more money way later on down the track.

As bubbamc has mentioned you can come up with a draw down from principle strategy which would required a significant amount of calculation.

Personally i think FI=FI=FI and don't care for a large payout 22 years past the retirement date. just an opinion though

englyn

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Throwing other ideas into the pot:

CPI+3.5% is a lousy return. Even my super fund's balanced option aims for CPI+4%, and you should seriously consider something more aggressive. Also, the balanced option returned 9.5% average over its 29 years since inception, so CPI+6% odd in the longer term is not unlikely.

What budget do you need in retirement? Let's say $30k, which is somewhere between 'modest' and 'comfortable' for a single (assuming for the sake of the argument you keep separate finances to SO) ($30k is also a bit over half the 'comfortable' for a couple) according to Aus retirement standards. SWR of 4% means you need 750k in super at age 60, say, and have 30 years of compounding between when you stop work and age 60. We'll keep all this in today's dollars, and so use a return of 6% after inflation. So what you would need in super at age 30 would be 750000/(1.06^30) which is, surprisingly enough, 130k.

If you had that, your old lady money is covered. You can then use a withdrawal rate for your ER period a lot more ambitious than 4% because: you don't care if it runs out at age 60; you can always adjust spending according to market performance; or go back to work if worst comes to worst; etc.

Given that, if you have an ER net worth target, you could do some complicated maths to work out what % contribution to super minimises the number of years you need to work to meet both targets. But really, this is going to be driven more by personal and family plans than algebra, isn't it.

There's no doubt that salary sacrificing to super is a very tax effective strategy. For most of us, the question is: is the compulsory employer contribution over our projected remaining working time already going to provide enough old lady / man money? If so, it's better to divert the funds we get a choice on into ER money instead.

Personally, my compulsory contributions are going to provide enough old lady money by themselves in the next 6 to 7 years, and I'm further than that period away from having enough ER money, so I'm not salary sacrificing.

Primm

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If you had that, your old lady money is covered. You can then use a withdrawal rate for your ER period a lot more ambitious than 4% because: you don't care if it runs out at age 60; you can always adjust spending according to market performance; or go back to work if worst comes to worst; etc.


Disclaimer: I'm salary sacrificing into my super because I benefit from it by company match. For every 1% we SS into super, our employer puts in another 0.5%, up to our limit of 5%. So I'm putting in 5% because that way my employer pays 12.75% (which increases as the SG increases) rather than 9.5%.

But after that I'm not putting any more in, and my reason is for the highlighted quote above. What happens if this age changes? I'm pretty confident it will go up before I get to 60, and I'm 45 now, so if you're 26 the chances are almost certain. I *do* care if it runs out at 60, because I don't think I'll be able to access my super until 65 at least, probably 70. I don't want to be caught with nothing for 5 or more years. So everything extra to what I mentioned previously, even though it doesn't hit the contributions cap, is going into investments I can access whenever I need to.

Nudelkopf

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For high income earners, I think if you are otherwise reaching FI at the speed you desire, it makes sense. As a 25 year old making a nice medium $62k per year (as opposed to a high >$90k or a low <$30k) I don't plan on putting any extra into my super this year, or next year... Maybe not even the year after that.
You should at least sacrifice enough to match your take home pay. For example, on $62k/yr, my calculator says that you can sacrifice $64/fortnight without it impacting your take home pay.

(I use my super's calculator http://qsuper.qld.gov.au/members/calculators/salarysacrifice.aspx, but you could use your own, I'm not sure of the calculations that go on behind the scenes).

I apologise if you're already doing this and I've misread your post :)

Anatidae V

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For high income earners, I think if you are otherwise reaching FI at the speed you desire, it makes sense. As a 25 year old making a nice medium $62k per year (as opposed to a high >$90k or a low <$30k) I don't plan on putting any extra into my super this year, or next year... Maybe not even the year after that.
You should at least sacrifice enough to match your take home pay. For example, on $62k/yr, my calculator says that you can sacrifice $64/fortnight without it impacting your take home pay.

(I use my super's calculator http://qsuper.qld.gov.au/members/calculators/salarysacrifice.aspx, but you could use your own, I'm not sure of the calculations that go on behind the scenes).

I apologise if you're already doing this and I've misread your post :)

I'm not, it hadn't even occurred to me that the maths would work for that! I'll definitely work it out and salary sacrifice whatever my amount works out to, in that case.

gorey

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I currently have the same dilemma. I am 33 and have a mortgage of 375k. Until now I have just been putting any extra cash into my mortgage which has helps reduce it considerably. I have started putting my extra savings into shares (etfs) as per the MMM way.

I probably should start putting more money into super given the tax breaks however given you can't take it out until your 65, it's not going to help me retire at 45. I guess I just need to find a happy medium for how much goes directly into index funds (VAS etc) and what extra I put into super.




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englyn

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For example, on $62k/yr, my calculator says that you can sacrifice $64/fortnight without it impacting your take home pay.


I couldn't get that result - any salary sacrifice I plugged into that calculator reduced take home pay.

BubbaMc

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The person making the salary sacrifice is FI after 26 years at age 50 with 1.46m in super which they can not access for 15 years.
The person without is FI after 19 years at age 43 with 235k in super.

When I did this calculation, maxing super I could retire before 50, neglecting super I could only retire at around 55. What withdrawal rate are you using for the first case?

I put a spreadsheet together that allows you to easily calculate how much outside super you need to save at a given rate of return in order to retire early, while at the same time taking super into account. If anyone wants to play with it PM me for a copy.

BubbaMc

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I probably should start putting more money into super given the tax breaks however given you can't take it out until your 65,

60.

Also guys lets not forget that anything withdrawn from super over the age of 60 is 100% tax free. Try doing that with your outside-super investments :)

Ozstache

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I probably should start putting more money into super given the tax breaks however given you can't take it out until your 65,

60.

Also guys lets not forget that anything withdrawn from super over the age of 60 is 100% tax free. Try doing that with your outside-super investments :)

Fully franked dividends will be close enough for me.

marty998

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I probably should start putting more money into super given the tax breaks however given you can't take it out until your 65,

60.

Also guys lets not forget that anything withdrawn from super over the age of 60 is 100% tax free. Try doing that with your outside-super investments :)

55 with a transition to retirement pension (but not 100% tax free)

agent_clone

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I probably should start putting more money into super given the tax breaks however given you can't take it out until your 65,

60.

Also guys lets not forget that anything withdrawn from super over the age of 60 is 100% tax free. Try doing that with your outside-super investments :)

Fully franked dividends will be close enough for me.
I agree with you Ozstache. 

Also BubbaMc note that it is currently 60.  The federal government has been giving hints that they will raise the preservation age.  It is also currently 100% tax free, whether it is in another 34+ years is another matter.  This is why people have commented that it doesn't necessarily make sense to add a lot extra until closer to preservation age.

HappierAtHome, when I do calculations of savings, I do the interest without the CPI indexation (so in this case i think you are looking at 3.5%?).  This means that you can understand the number better in todays dollars, rather than tomorrows dollars.  Plugging the numbers into: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/savings-goals-calculator with a 3.5% interest rate (You should probably look into a better performing super) you would end up with $377000 in todays dollars which I don't think is particularly livable.  If you can get CPI+5% then it raises to 590k which with a SWR of 3.5% is around 20k, which is currently livable if you own your own home.  It may be worth it to put the extra into super.

To be grim, in the event of your husbands death I believe his super goes to you and he should also have life insurance through his super, in the event of divorce your supers may be divvied up however the courts decide.  The main events to avoid would be serious illness or disabilities, then earnings just need to be enough to pay to get to preservation age.

As a personal thing, by my calculations if I were to contribute $250 a fortnight to super for the next 10 years I should have something livable but not ideal by the time I turn 60.  Given that a) My current contributions are higher than this as the minimum I need to pay and what my work contributes and b) I expect that I will be working for at least another 20-25 years I see there being no point in contributing more than work will let me get away with, as it will delay my FI point.  Individual results will vary however.

HappierAtHome

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Quote
To be grim, in the event of your husbands death I believe his super goes to you and he should also have life insurance through his super, in the event of divorce your supers may be divvied up however the courts decide.  The main events to avoid would be serious illness or disabilities, then earnings just need to be enough to pay to get to preservation age.

Super goes to the named beneficiary - which yes, would be me. Divorce doesn't worry me too much as we'll have a pre-nup (no way I would be a SAHP without a legal agreement about what would happen with assets in the event of divorce).

We're also not having kids until we get to what I would term 'halfway to FI' (net worth of $1M or more) as this means that there's a short time frame between my leaving the workforce and us reaching FI. If anything goes wrong in those early years, I'll still be considered a desirable employee in my field because I'll have had a relatively short break from employment. For that matter, my employment is such that I can take up to two years off entirely after the birth of a child and walk straight back in, so we've got some risk mitigation built in there. Basically, if shit hit the fan soon after kids, I could get a job again, and if shit hit the fan 5+ years after having kids, 50% of our combined assets (holla we want pre-nup!) would be very likely to be FI for me + kids, or soclose to FI that I would be well and truly able to get back into the workforce in a timeframe and manner of my choosing. And of course, if he died I would get everything and be fine financially, though emotionally not so much.
_______________________________________________________

Lots of good advice from many posters on the returns I should be getting with my super. I think the issue here is that I have it in a relatively conservative asset allocation. My fund also offers much more aggressive allocations, which I will look into some more. I chose my asset allocation five years ago when I knew a lot less about personal finance, and I've maintained it as I had vague thoughts of wanting my super to be 'safe'. Of course I know better now, and should address this.

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« Reply #42 on: July 14, 2014, 09:54:01 PM »
A lot of australians here - it is good to see!

HappierAtHome, I am in a very similar situation to you - I am 30yo, 100k salary, 65% savings rate, FIRE at 40.  I am currently putting the minimum possible in to super (15%)

And I have the same dilemma you do - should I put my monthly savings in super or regular investments?

My goal is FIRE as soon as possible.  Here are my deliberations:


(2) super becomes slightly shittier at every federal budget.  That is a lot of accumulated shit by 2045. 

(1) extra money in super means a lower FIRE lump sum amount at age 40.  But it means I can draw down on the principal more agressively, with the promise of access to larger super at 60(?).  Will this mean an earlier or a later FIRE? No idea.  I'm keen to hear your advice. 

Does salary sacrifice in to super give a person an earlier or a later FIRE?

Notch

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(1) extra money in super means a lower FIRE lump sum amount at age 40.  But it means I can draw down on the principal more agressively, with the promise of access to larger super at 60(?).  Will this mean an earlier or a later FIRE? No idea.  I'm keen to hear your advice. 

Does salary sacrifice in to super give a person an earlier or a later FIRE?


Most likely an earlier FIRE. The math requires Excel and some assumptions about future investment return, inflation and taxation.

You need to get the proportions in and outside of super right, so you don't run out of money before you can access super - and you need a little more money in total (like ~5% extra in total), as you will be drawing more than your SWR off your investments outside of super.

But depending on your tax situation, you should be able to FIRE earlier even saving to 105% because you have more cash to invest because you lose less to tax.  As has been said already, the higher your salary, the more effective this is.

edit: I attached the basic spreadsheet I used to work this out.
« Last Edit: July 15, 2014, 12:08:00 AM by Notch »

deborah

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Because salary sacrifice gets shittier every budget, taking advantage of it earlier makes more sense. You can always forget about it later.

Lukim

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The problem I see for you with super is that your money is tied up for a long, long time.  In your case, at least until 60 and with a good chance that could increase to 65 in the future.

If the rules stay the same (and certainly no guarantee they will), you could invest money outside super using some tax effective strategies and then when you get to 50 throw $150,000 a year plus $35,000 from employer into your SMSF.  If you did that for 10 years from age 50, you should end up with almost $2,000,000 when you are 60.  You then access tax free.

That assumes no changes in the rules - big assumption.

Ozstache

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If you do want to contribute extra to super and capitalise on the tax benefits, don't confuse salary sacrificing to be the same as making what you think is a tax deductible contribution from your after tax pay. The former is considered a legit employer contribution whereas the latter is considered a personal contribution which can only be claimed as a tax deduction if less than 10% of your taxable income came from an employer. Ask me how I know!! :(

FWIW, I run two staches in my ER spreadsheet, namely non-super and super, the latter with a higher estimated rate of return due to more favourable tax treatment. Pre-preservation age, the non-super stach is drawn down and I have a five year buffer added on as contingency for an anticipated government jack act of moving preservation age to 65. Obviously super takes over from there. If I was in my 30's or younger, I'd be fearful that the government would move the preservation age even further by the time I get there ie. 70, so I'd be banking even more in the non-super stache side.

In short, I'd rather have a sustainable ER at a lower spend rate than one at a higher rate that could be interrupted with a 5 to 10 year return to work because of a fairly likely (IMO) policy change.

marty998

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I take it you got smacked by the ATO Ozstache? Youch, that must have been painful.

Because salary sacrifice gets shittier every budget, taking advantage of it earlier makes more sense. You can always forget about it later.

It got better this time? I thought the concessional cap was increased by $5k to $30k (Under 50) and $35k (over 50)?

Ozstache

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I take it you got smacked by the ATO Ozstache? Youch, that must have been painful.

I could have been, but thankfully discovered the issue when completing my tax return and hence didn't end up claiming it. I am a bit miffed because when I put extra into my super and earmarked it as tax deductible, neither of the ATO and super fund forms explicitly mentioned the less than 10% income from employer requirement. Subsequent reading of the ATO form shows a small print reference to the ATO's website for 'other' eligibility requirements, where the 10% threshold can eventually be found. I don't normally fall into such traps and am a bit embarrassed about it, but I am just going to notch it up to experience and to make sure I read ALL the fine print for such actions in future.

deborah

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Because salary sacrifice gets shittier every budget, taking advantage of it earlier makes more sense. You can always forget about it later.

It got better this time? I thought the concessional cap was increased by $5k to $30k (Under 50) and $35k (over 50)?
That increase was automatic, due to the rise in cost of living (or something), and governments have postponed that automatic increase before, they just didn't this time.