Author Topic: Young, High Earning Australian - Should I Salary Sacrifice Into My Super?  (Read 18258 times)

This_Is_My_Username

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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.


Notch, this is amazing, I just had a huge epiphany.  And such a simple spreadsheet! 

Let me use an example from the attached spreadsheet. 

at line 18, A 40 year-old with $32,094 annual spending needs x25 = $802,353 to retire.   (4% rule).

The 40-year old could do this by having $802,353 in regular investments (outside super).

But we can use an easier method than saving up $802k outside super. 

We can have $457,819 outside super and $374,485 inside super. (This adds to 832,304)

$457,819 is the minumum needed to live from 40 to 60 without any other income.

$374,485 is the maximum we should have in super.  any extra is not needed.

:

But, saving $457k outside super and $374k inside super is much easier than saving $802k outside super!

Am I on the right track here?

MsRichLife

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I was in a similar situation to you at your age. The main reason I decided not to invest extra into Super was that I knew I wanted to retire early and therefore I wanted access to my money earlier than 'retirement age'. My concern was that the Government would continue to increase 'retirement age' to a point that I'd die before I ever saw my Super!

Now the Government has already starting to discuss the idea. http://www.news.com.au/finance/superannuation/plan-to-raise-retirement-age-to-70/story-e6frfmdi-1226765584588

Anyway, I'm now 37 and plan FIRE in a few years time. I have A LOT in super, even without making any extra contributions. I am very glad I didn't lock more away. I can use the money I've saved personally how I want to, right now...rather than waiting until 60...65...70?

MRL

Notch

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Notch, this is amazing, I just had a huge epiphany.  And such a simple spreadsheet! 

Let me use an example from the attached spreadsheet. 

at line 18, A 40 year-old with $32,094 annual spending needs x25 = $802,353 to retire.   (4% rule).

The 40-year old could do this by having $802,353 in regular investments (outside super).

But we can use an easier method than saving up $802k outside super. 

We can have $457,819 outside super and $374,485 inside super. (This adds to 832,304)

$457,819 is the minumum needed to live from 40 to 60 without any other income.

$374,485 is the maximum we should have in super.  any extra is not needed.

:

But, saving $457k outside super and $374k inside super is much easier than saving $802k outside super!

Am I on the right track here?

Yep, that's right :)

AdrianM

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The decision to invest in an any scheme should be based on the merits of the scheme not on the potential tax benefits.

marty998

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The decision to invest in an any scheme should be based on the merits of the scheme not on the potential tax benefits.

Yes but super is not a scheme. By nature it is a tax sheltered structure.

Super funds invest in the same assets as everyone else - bank shares, resource cos, fixed interest etc. It's just taxed a bucketload less than holding investments through any other means.

AdrianM

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While i don't want to derail the OP thread and go off tangent. I will simply say that if you are interested in FIRE then super is not the vehicle to achieve it.

However if you want to work until you are 60+ then retire, Super is the way to go.

Personally I am not putting any extra into my super I am using it to build my stache debt free.
Yes it is slower than loading up on debt but that is a personal life choice that my Wife and I have chosen.

I also don't trust our government not to raid the piggy bank when they run out of money.
As they have proven they already will.
Foreign works super
Unclaimed super
Inactive bank accounts

All have been collected and added to "consolidated revenue" AKA spending money.
So they have form.



This_Is_My_Username

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« Reply #56 on: July 19, 2014, 02:46:22 AM »
I also don't trust our government not to raid the piggy bank when they run out of money.
As they have proven they already will.
Foreign works super
Unclaimed super
Inactive bank accounts

All have been collected and added to "consolidated revenue" AKA spending money.
So they have form.

The govt can be a lot more subtle than simply confiscating money that arguably belongs to someone else, as with the above examples. 

(1) reducing age pension indexing to CPI only costs pensioners ~50c per week in 2014, but will save the govt a shit load in 2024. 

(2) Changing super's flat 15% tax to (your marginal rate minus 15 %). 

(3) Changing super's flat 15% tax to a flat 16% tax.

(4) inheritance tax!

(5) stamp duty on insurance premiums within super

(6) etc. 

all kinds of shit like this will save the govt many billions.   And they can do it at any time


Mark31

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Even at my age – 40 – I’ve come around to the view that there is too much risk adding extra to super at this point.

Something else to consider though – as the stay at home parent, you can have a taxable income of up to $5,180 without losing any of your FTA or FTB benefit. (I’m assuming your partner’s income will be low enough that you’ll be eligible in the first place).

For every dollar over that, you’ll lose 66.7 cents in benefit. That’s one hell of a marginal “tax” rate. You should arrange your finances to avoid this, and extra money into super may be one way to do this.

What I would definitely recommend is earning enough each financial year as a SAHM to satisfy eligibility requirements for the super co-contribution. The bar is actually really low for this. Then add $1,000 to your super account and get the $500 co-payment. Even if you didn’t earn as much as $1,000 you can still do this.

(I use the calculators at http://www.rdlaccountants.com.au/calculators.php to model different income scenarios)

happy

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As far as FTA/B goes I think its no longer based on net taxable income only. You have to take your taxable income and add personal super contributions and  any other salary sacrificing/packaging .  Just another nip and tuck from the gubbmint…the total threshold of 150k remains the same but you can't reduce your income in a tax advantaged way to qualify.

Mark31

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I'm sure everyone here's smart enough to crunch their own numbers, but that 66.7 cents per dollar may only apply in our two child, particular income situation.

Salary sacrifice contributions are counted for FTA/B eligibility.

The good thing is the amount you get is based purely on income, not wealth, so you don't need to hide your money, just defer income or aim for capital growth.