The Money Mustache Community
General Discussion => Post-FIRE => Topic started by: deborah on June 20, 2015, 09:08:35 PM
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I have several questions that have been puzzling me about superannuation post FIRE.
1. Do you plan to continue contributing post FIRE?
My initial thought is - why would anyone do that? But as I am living on less than my budget, if I contribute, I could get a co-contribution from the government, and it might decrease any tax I need to pay. Also, maybe it is better to have as much as possible in super when you reach preservation age, so contributing each year reduces the amount that you would add in the last year . What thoughts do people have?
which leads to the next question...
2. Is it better to have as much as possible in super when you reach preservation age?
I think it still gets more favourable tax treatment than normal savings so maybe I should put everything I can there, but maybe not. What considerations should I take into account, or is this a no-brainer?
and the third...
3. So now it gets interesting. If I have everything in super at preservation age, I can divide my superannuation up into two parts - a pension part and an accumulation part. How would you divide this up? I could have exactly 10 x my budget in pension phase, and take out 10% as income (I can take out more as a lump sum if I need more). I could have 25 x my budget in pension phase, and take out 4% as income. Or some other random amount. Anything in pension phase has no tax, while everything in accumulation still has 15% tax.
and finally...
4. As I get older I have to take more out of my superannuation that is in pension phase - for instance, at 65 it is 5%. Does this alter what I should be doing earlier?
I can still have superannuation in accumulation phase (I went to an ATO seminar where there were people in their 90s with superannuation still in accumulation phase), but I think you can't change it back into accumulation phase after you are 65.
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Hi Deborah, I'm hoping there are some accounting/financial planning types who will weigh in on these questions since I'm getting closer.
I have a few comments but probably not much help
1. As far as I am aware, you could only contribute post FIRE if you pass the work test, which doesn't require too much work, but still it exists.
2. Currently still working and putting everything into super because I'm in a high tax environment. Once retired, one could keep enough outside super to generate income up to the tax free threshold i.e. pay 0% tax on the income - same as the pension phase. What I don't know is whether one would still pay capital gain on the shares if/when one sold them. If that is the case, then super has an advantage.
What concerns me is that no doubt the super rules will tighten….will us oldies stay grandfathered into favourable conditions or will they change? Intrinsically I feel uncomfortable with all my eggs in the governments basket, with limits on how I can access it.
3. I'm planning to put most of mine into the pension phase at 60 and take out 4 %. Initially there might well be a window where I'm still employed so I will put it back into the accumulation side.
4. If I end up having to withdraw more than I can spend, and unable to put more in because I have ceased working, I will invest outside super since I'm unlikely to be paying much tax. However due to my late start I'm not likely to end up with the problem of too much money.
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Hi Deborah, I'm hoping there are some accounting/financial planning types who will weigh in on these questions since I'm getting closer.
I have a few comments but probably not much help
1. As far as I am aware, you could only contribute post FIRE if you pass the work test, which doesn't require too much work, but still it exists.
No, that only applies past 65 (currently - will probably change to 67 or the pension age at some stage). For now, of you are not working at all you can still add to your superannuation until you are 65, as long as you have somewhere to put it (you have to put it into an accumulation phase fund).
2. Currently still working and putting everything into super because I'm in a high tax environment. Once retired, one could keep enough outside super to generate income up to the tax free threshold i.e. pay 0% tax on the income - same as the pension phase. What I don't know is whether one would still pay capital gain on the shares if/when one sold them. If that is the case, then super has an advantage.
There is no capital gains tax on assets in pension phase, so super does have the advantage.
What concerns me is that no doubt the super rules will tighten….will us oldies stay grandfathered into favourable conditions or will they change? Intrinsically I feel uncomfortable with all my eggs in the governments basket, with limits on how I can access it.
At the moment, they WANT you to access it. The sooner you take it out the more they tax you, and the less old age pension you can claim (until the new rules come in, and pass parliament) - and they make sure you take a lot out by upping the % you have to take out as you age.
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You can only get government co-contributions if at least 10% of you taxable income comes from employment.
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The split between pension or accumulation phase is interesting. Pension phase means 15% tax versus 0 but then you are forced to withdraw it. The optimal split will depend on how much you have and how much you need and the exact super laws at that time and in the future.
As it is, no matter what you do the tax laws are very generous so it's not too much of a worry.
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1. As far as I am aware, you could only contribute post FIRE if you pass the work test, which doesn't require too much work, but still it exists.
No, that only applies past 65 (currently - will probably change to 67 or the pension age at some stage). For now, of you are not working at all you can still add to your superannuation until you are 65, as long as you have somewhere to put it (you have to put it into an accumulation phase fund).
I think Happy is refering to this:
https://www.ato.gov.au/Individuals/Super/In-detail/Contributions/Super-co-contribution/?page=2
10% or more of your total income comes from eligible employment-related activities or carrying on a business, or a combination of both, otherwise you dont qualify for the co-contribution.
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You can only get government co-contributions if at least 10% of you taxable income comes from employment.
I didn't know that - thanks!
One reason for adding money after FIRE I missed out is that if you contribute after tax money, you dilute the ratio of pre-tax to post-tax contributions. This means that you will have to pay less tax on any money you receive from your superannuation accounts.
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1. As far as I am aware, you could only contribute post FIRE if you pass the work test, which doesn't require too much work, but still it exists.
No, that only applies past 65 (currently - will probably change to 67 or the pension age at some stage). For now, of you are not working at all you can still add to your superannuation until you are 65, as long as you have somewhere to put it (you have to put it into an accumulation phase fund).
I think Happy is refering to this:
https://www.ato.gov.au/Individuals/Super/In-detail/Contributions/Super-co-contribution/?page=2
10% or more of your total income comes from eligible employment-related activities or carrying on a business, or a combination of both, otherwise you dont qualify for the co-contribution.
Yes, it's all very confusing. There is the co-contribution (which I thought you could get whether you were working or not, but as you and Urbanista say you can't)
Then there is whether you can actually contribute at all. This currently cuts out at 65 if you are NOT working or at 75 is you are working 40 hours in one month of the year - see http://www.superguide.com.au/how-super-works/i%E2%80%99m-retired-can-i-make-super-contributions
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There is no capital gains tax on assets in pension phase, so super does have the advantage.
I didn't know this. So I should probably have a greater percentage in Super.
In stating that you need to have enough to get to 55. I'd also like a cash buffer outside of Super.
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The preservation age is gradually rising - you'll probably need enough to get to 60, (not 55), if they haven't raised it further by then.
In any case even if you are 55 now, you pay 15% tax on both accumulation and pension phase.
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The preservation age is gradually rising - you'll probably need enough to get to 60, (not 55), if they haven't raised it further by then.
In any case even if you are 55 now, you pay 15% tax on both accumulation and pension phase.
Inside superannuation you pay 0% tax on pension phase. When you get it out you pay a different amount of tax if you are under 60 to if you are over 60, but the capital gains tax is an inside super tax, because it is not what you are actually withdrawing.
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Ah, Ok I hadn't realised that. In any case my response on that part of the question wasn't great because you can pay even less if you have a lot of after-tax contributions.
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The preservation age is gradually rising - you'll probably need enough to get to 60, (not 55), if they haven't raised it further by then.
In any case even if you are 55 now, you pay 15% tax on both accumulation and pension phase.
Does this mean that on all withdrawals you pay 15% ?
That seems a lot to me.
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I think Happy is talking about tax paid on income earned by the superfund. So if your super earns 10,000 in the accumulation phase you pay 15% tax on the earnings and on your statement it will say you earned 8500 for the year. I guess you could consider it the marginal tax rate applicable to all Superfunds. When your super moves from accumulation to pension phase the tax on earnings drops from 15% to 0% which is generous.
There is the 15% contribution tax as well when the money gets paid in.
There is no tax on a withdrawal from super as long as you've reached perservation age.
https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/tax-and-super
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The preservation age is gradually rising - you'll probably need enough to get to 60, (not 55), if they haven't raised it further by then.
In any case even if you are 55 now, you pay 15% tax on both accumulation and pension phase.
Does this mean that on all withdrawals you pay 15% ?
That seems a lot to me.
Abbott banked on that being the understanding in the community in order to shout down Labor's proposed changes. Labor's proposal was to tax earnings above $75,000 within super at 15% (i.e. you can still earn $75,000 tax free).
Abbott's spin was to essentially say your entire super balance would be hit with 15%.
Happy is correct - tax free in pension phase after 60. If you are still in accumulation phase after 60 then you are still hit with 15% tax on earnings.
If you are taking a transition to retirement pension between 55 and 60 then you will pay tax on the taxable component and receive a rebate of 15% in your income tax return? Been a long time since I worked in the SMSF sector :)
These will become less and less in use as happy said - the preservation age is steadily rising to 60.
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To clarify ( or make it worse) - I investigated taking a TRIS between 55 and 60 pretty closely ( see my journal Happy Aussie Downshifter) and it seems the rules are different for TRIS versus retire between 55 and 60. I do apologise when I responded to Deborah, I think I did not fully recall/realise that rules between 55- and 60 for retirement are different to taking a TRIS.
If you take a TRIS between 55 and 60 - 15% contribution tax and 15% tax on earnings in the accumulation side. Pension phase 0%. Withdrawals are taxed at marginal tax rate minus 15% for withdrawals that are before tax contributions. No tax on withdrawing after tax contributions. Worked out pro - rata proportional to what you have put in i.e. if you have 50% after tax contribution, then on withdrawing you only pay tax on 50% (from the pretax contributions). Whether this helps depends on your personal numbers - in my case the money saved on earnings in pension phase was negated by increased tax on withdrawal, and the only advantage would be to increase aftertax contribution by putting the withdrawn amount back into accumulation. This is only of value until you turn 60, or for estate planning purposes.
The discussion does underline how complex the rules are…at each age/stage it changes…have to keep doing your own math.
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Being 13 years out from being able to access super at my preservation age of 60, and thinking the Government won't be able to resist either taxing it more, delaying access to it or forcing conversion of at least part of it to an annuity in the intervening time, I am not planning on adding any more to my super stash at this time. As it currently stands, excluding my Defence pension, I have about half my stash in super and half out and half of that super is unrestricted non-preserved, ie. I have reasonably ready access to three quarters of my total stash. As I get within the last 3 or so years of preservation age, I will review the super rules of the day and see whether it is then worth loading my super up to see me through the traditional retirement years.
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Thats what I'd do in your shoes too. If the govt is going to annuitize it, I'd only want enough in there to cover basic expenses e.g. something like 5-600k to annuities to about 20k a year for a single.
I'm less than 5 years from 60, so I really hope I'm going to make it to 60 without too many rule changes…but I'm watching the super arena closely.
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Just a quick thanks for the info.
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If the govt is going to annuitize it
It has begun! http://www.theage.com.au/business/banking-and-finance/annuities-and-private-pensions-to-replace-lump-sums-as-default-for-retirees-20151020-gkdm2y.html (http://www.theage.com.au/business/banking-and-finance/annuities-and-private-pensions-to-replace-lump-sums-as-default-for-retirees-20151020-gkdm2y.html)
It supposedly won't be compulsory but I reckon we're only a good recession or a GFC Mk2 away from it becoming so.
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Interesting. Not a lot of detail, but whilst I'm good with the move away from lump sum as a default option, an annuity is quite different to the current pension phase arrangement whereby you only with draw a nominated percentage within a mandated range, every year. I thought we would move towards pension phase, rather than jumping to annuities, which at the end of the day make money for private business. Of course so do super funds, but I think annuities are more "costly" than the current pension phase arrangements, unless of course you are pretty sure you are going to live a very long time.
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Yep annuities are more costly - the risk is transferred from you to the provider so you pay for that in spades.
With the introduction of MySuper screwing down fees, the industry has to come up with a new way to make money. This looks like the 1st shot across the bow.
They've even given it a funky name with an acronym... a CIPR - Comprehensive Income Product for Retirement.
Anything with the word product in it means you are going to be paying for it. Only in the world of finance can a banker come up with a product that takes your money up front, takes an annual cut and drips a little bit less back to you over the rest of your life.
(yes I understand annuities have a place in the world, but dumb cut-through logic like the above can stop a lot of stupid costly decisions being made)
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Only in the world of finance can a banker come up with a product that takes your money up front, takes an annual cut and drips a little bit less back to you over the rest of your life.
Yup, crazy funny :D
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When my mum retired, we bought her an annuity product ( she lives overseas...) with her superannuation....it gives her an income for life...
She loves the monthly income straight into her bank account..no fuss, no stress which at her age is all she cares about....of course the fact that she was determined to reach the age where she "breaks even" did not hurt at all !
In Australia, there will be people trying to take out all their superannuation in a lump sum, blow it all and then get on to the pension gravy train....
If this annuity resolves part of this "problem" i think it is a good positive step!
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In Australia, there will be people trying to take out all their superannuation in a lump sum, blow it all and then get on to the pension gravy train....
If annuities become compulsory, that's exactly what I'll be doing. Not to blow it all though, rather I want to manage it and perhaps pass some or all of it on in my estate. As far as I am aware, annuities die when you do.
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@Ozlady yes this is why I'm in favour of stopping carte blanche lump sums
@ Ozstache Correct, annuities cease when you die..although there might be a product that passes it onto your spouse (I've not looked into that since I'm single).
Some US folks recommend certain types of annuities (SPIAs I think)e.g. Nords, as a way of being certain of covering baseline expenses for life if you don't have a pension. In your case Ozstache your pension would cover this so no need for you. Personally I'm not sold on the idea, but I am thinking about it. When I looked up rates to purchase they are quite expensive, equivalent to about a 3% withdrawal rate. By this I mean if you have 1mill to spend on an annuity you'll get 31-2k indexed to CPI for life, starting at age 65. So if you believe in the 4% rule there is no need - why would you pay to decrease your withdrawal rate if you are certain you can safely withdraw 4% i.e. 40k on 1mm.
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When I looked up rates to purchase they are quite expensive, equivalent to about a 3% withdrawal rate. By this I mean if you have 1mill to spend on an annuity you'll get 31-2k indexed to CPI for life, starting at age 65. So if you believe in the 4% rule there is no need - why would you pay to decrease your withdrawal rate if you are certain you can safely withdraw 4% i.e. 40k on 1mm.
Also, if you are prepared to take a 3% SWR annuity, you may as well just cut out the middle man and self-impose a 3% SWR on your own stash and keep the extra 1% as self-insurance.
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Exactly.
Not only that, if that is the rate for 65 years up, if you live to 90, thats 25 years. That is, 25 x your withdrawal amount, so you only need to keep the stash growing at COL/CPI if you live to 90 ( i.e. stick it in a term deposit unless you live in US). If you make anything above that with compounding you should fairly easily get your stash to last to 100. So you don't have to be a great investor making 7%, to come out ahead. One is paying an awful lot for "certainty"….which is not really certainty because if the insurance company goes broke, then I'm not sure you're guaranteed get your money.
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Hmmm, think I just talked myself out of an annuity.
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Hmmm, think I just talked myself out of an annuity.
Lol. Glad to have helped you along!
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:D
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I was looking into the best options for my parents last year, and annuities appeared to be very good value. As you get older, annuities pay a greater percentage, so when you get to their ages, an annuity is a much better deal. Dad's was going to pay 9% per year, and go back to the estate if he died in less than 15 years.
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Oh, then I must investigate further. The one I priced was one where you get a CPI indexed return, from age 65, and it finishes when you die.
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I meant that the older you are when you take them out, the better the returns are, so if you are as old as my parents when you take them out, they are a reasonable alternative.
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Ok, whenever someone says "older" on this forum I assume they are talking about me!
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Belatedly posting to follow.
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I have been pondering the same issues, my mustachian thoughts are only measured in weeks so far, hope from some feedback.
I am 42, been living outside Australia is various places and in 3 years planning to move my family back to Perth, get a house and FIRE away. I worked in Australia for 5 years in my twenties and the value of the Super is about 70k. The Stache should be fine to support 40-50k AUD per year in largely franked investments (say 45k grossed up, 15k imputed credits), tax is minimal to refunded after 2012 change in brackets.
If tax is minimal, is there point adding to Super? Most Australian mustchacians would have a solid bunch of super, but from a FIRE point of view, is it relevant?
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I believe you can take some super at ages 55-60, so that gives some point to adding to it. But obviously if you're retiring before that, you need extra-super investments, and if that supports your lifestyle, then there doesn't seem much point in adding more to super.
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If tax is minimal, is there point adding to Super?
Maybe not. Some things are better in super. If you have an investment property in super, it CURRENTLY doesn't have any CGT when you sell it if it is in pension phase. In fact NONE of your investments attract CGT if they are sold in pension phase (of course, if you already own them outside super, they WILL attract CGT when you put them in because your superannuation is a separate tax entity). So if you might sell a lot of investments at once (for instance to pay for entry into an old peoples home), you would get taxed if the investments being sold were outside super, and incurred a lot of CGT.
Most Australian mustchacians would have a solid bunch of super, but from a FIRE point of view, is it relevant?
It is relevant when you think that Australians live to about 83, and if they are a couple, one of them will probably live into their 90s. That means super is probably relevant for at least the last 23 years of your retirement. If you retire tomorrow (rather than in 3 years), you will still have more time after super is available to you than before. And you might only need to budget for the first 17 years of retirement (because you have enough super), rather than go through all the calculations for the entire 41 years that you, on average, will be retired.
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If tax is minimal, is there point adding to Super?
Maybe not. Some things are better in super. If you have an investment property in super, it CURRENTLY doesn't have any CGT when you sell it if it is in pension phase. In fact NONE of your investments attract CGT if they are sold in pension phase (of course, if you already own them outside super, they WILL attract CGT when you put them in because your superannuation is a separate tax entity). So if you might sell a lot of investments at once (for instance to pay for entry into an old peoples home), you would get taxed if the investments being sold were outside super, and incurred a lot of CGT.
Most Australian mustchacians would have a solid bunch of super, but from a FIRE point of view, is it relevant?
It is relevant when you think that Australians live to about 83, and if they are a couple, one of them will probably live into their 90s. That means super is probably relevant for at least the last 23 years of your retirement. If you retire tomorrow (rather than in 3 years), you will still have more time after super is available to you than before. And you might only need to budget for the first 17 years of retirement (because you have enough super), rather than go through all the calculations for the entire 41 years that you, on average, will be retired.
+1 for what Deborah says. Lots of guys I work with don't pay any attention to their super, don't add anything to it outside the 9.5% because "the government will take it all". I think this is the wrong attitude. I certainly hope to live more years after I can access my super than between now and then.
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I have both super and non-super investments, and in my "well what if I quit work tomorrow plan", the non-super investments act as a bridge, that gradually get used up, to be practically zero, until I can start using my super investments.
Even in my intended work until 2022 plan - that's when I hit the mark that my super, and non-super investments together will hit 25x expenditure, so there will still be a slight rundown of my non-super investments - it just won't be total.
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Super/non-super investment ratio...
...what we need is a solid (Australian relevant) FIRE calculator to work out the best way to have super and non-super distributed. The different taxation on the super stash, plus the option of doing pretax super contributions, etc, makes it tricky with current calculators to determine the ideal ratio for each person.
I'm 31, aiming FIRE about 46-47 (yeah, long way off). I'm about to fill out the form at work to do pre-tax contributions, but its pretty hard to work out how much to put in, obviously not more than the maximum (not much point). I was originally thinking about 20% (of gross salary, this is on top of employers 9.5%), but now I'm thinking at the moment I should only put in about 10%, and wait and see how things go for a few years with both my super and non super stash, and PPOR situation. In a few years I should definitely be up into the next tax bracket (37%), so its more worthwhile for me to do pre-tax contributions then.
One of my supervisors, who is 63 (and still working), she has three different super accounts, all with quite different rules. Hard to understand them, but Super rules have changed in her lifetime. The earlier rules from what I gather are more favourable than the current ones. But, they are grandfathered. I won't be surprised if before I reach preservation age (which will probably get jacked up to something like 67 by the time I get there...) rules change, but I suspect that any super held under old schemes will be kept at the rules it was invested under. More likely any new contributions would fall under new rules from that point onwards. SO, I'm not too stressed about rules changing.
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One of my supervisors, who is 63 (and still working), she has three different super accounts, all with quite different rules. Hard to understand them, but Super rules have changed in her lifetime. The earlier rules from what I gather are more favourable than the current ones. But, they are grandfathered. I won't be surprised if before I reach preservation age (which will probably get jacked up to something like 67 by the time I get there...) rules change, but I suspect that any super held under old schemes will be kept at the rules it was invested under. More likely any new contributions would fall under new rules from that point onwards. SO, I'm not too stressed about rules changing.
You'll find that they had both good and bad points, but our current one is about the best (apart from the earlier ones allowing you to take it out whenever you wanted to).
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Super/non-super investment ratio...
...what we need is a solid (Australian relevant) FIRE calculator to work out the best way to have super and non-super distributed. The different taxation on the super stash, plus the option of doing pretax super contributions, etc, makes it tricky with current calculators to determine the ideal ratio for each person.
I'm 31, aiming FIRE about 46-47 (yeah, long way off). I'm about to fill out the form at work to do pre-tax contributions, but its pretty hard to work out how much to put in, obviously not more than the maximum (not much point). I was originally thinking about 20% (of gross salary, this is on top of employers 9.5%), but now I'm thinking at the moment I should only put in about 10%, and wait and see how things go for a few years with both my super and non super stash, and PPOR situation. In a few years I should definitely be up into the next tax bracket (37%), so its more worthwhile for me to do pre-tax contributions then.
Yep, good calculator would be sensational. No way the superfunds will introduce one - they just want you to contribute max to their fund. At the moment I'd just go with the ratio of planned years in "pre-retirement age retirement" to "life after 65" then deduct say 10-15% from the super allocation to give yourself some flexibility as per the earlier posts.
My view of the stash is probably more conservative than some here - I think you need a paid off PPOR and 25x your nut. So I'd be putting some thought into your PPOR situation. I wouldn't personally rent in my old age - can you imagine having to move house every few years in your 80s because the landlord was selling? This is unless you're going to move overseas or perpetually travel ...... but I'd still have the PPOR in Oz in case I wanted to come home for aged care, medical reasons. Ours is the sort of market you could get priced out of if you sold up and then had to buy back into. But like I said, I'm probably more conservative - I don't want to be poor when I'm old and the stories of pensioners not being able to afford to turn on the heating or cooling frighten the bejezus out of me!
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the stories of pensioners not being able to afford to turn on the heating or cooling frighten the bejezus out of me!
They used to scare me too, until I realised a mustachian can live very well , and certainly afford basic comforts, on the OAP. Provided, as you say, they have a paid off house. This was an incredibly freeing realisation.
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the stories of pensioners not being able to afford to turn on the heating or cooling frighten the bejezus out of me!
They used to scare me too, until I realised a mustachian can live very well , and certainly afford basic comforts, on the OAP. Provided, as you say, they have a paid off house. This was an incredibly freeing realisation.
We just paid off our house and now I think I could live really well just off social security for the rest of my life. We won't do this and I doubt we will even take the pension when we get older however it does feel good to realize because our nut is low we should be fine.
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Yep, good calculator would be sensational. No way the superfunds will introduce one - they just want you to contribute max to their fund. At the moment I'd just go with the ratio of planned years in "pre-retirement age retirement" to "life after 65" then deduct say 10-15% from the super allocation to give yourself some flexibility as per the earlier posts.
Thanks, yeah I think this is good advice. I'll just play it by ear I think. I think I'll err right on the side of keeping funds out of Super for a bit until I've sorted a PPOR or made a decision on that, and just do an extra 10% pre-tax contribution for now while I'm in the 32% tax bracket.
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Yep, good calculator would be sensational. No way the superfunds will introduce one - they just want you to contribute max to their fund. At the moment I'd just go with the ratio of planned years in "pre-retirement age retirement" to "life after 65" then deduct say 10-15% from the super allocation to give yourself some flexibility as per the earlier posts.
I've toyed with the idea of putting together a detailed generic super/non-super balance calculator in the past, but have been put off by seeing enough variety of inputs in existing non-super calculators that cause great variability in output to think that adding more complex variables may simply render the model useless. This variability is further exacerbated by the (IMO) high potential for super rules to change in future, regardless of whether grandfathered or not.
Nonetheless, I like the idea of splitting the stash into pre and post super portions, however the maths of SWR shows that as the pre-super timespan exceeds 20 years, you end up needing to have most of your stash in non-super regardless of how long you think you will live post-super ie. it is not a direct ratio of the two time spans. eg. say your pre and post super time span estimates are 20 and 20 years respectively and you plan to draw down at the standard 4% SWR.
(http://ei.marketwatch.com//Multimedia/2013/01/07/Photos/ME/MW-AX900_safema_20130107210919_ME.jpg?uuid=6c9f65dc-5938-11e2-8515-002128040cf6)
From a chart like the one above, the information from which aligns with my experience playing with cfiresim, a stash with a 20 year time span can endure a 5% SWR, the corollary of which is that you only need 80% of that stash to achieve the aforementioned 4% SWR. As such, for a 50/50 time span split like this, it turns out you really need an 80/20 non-super/super stash split. This is before even considering super's favourable tax treatment in both accumulation and access phases which further reduces the amount needed to progressively put into super because it grows faster and provides more tax efficient income when you get access to it.
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This conclusion that I was leading to also, much more clearly expressed! Those in 30 and 40s may be better off focusing on Stash outside super...
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As such, for a 50/50 time span split like this, it turns out you really need an 80/20 non-super/super stash split. This is before even considering super's favourable tax treatment in both accumulation and access phases which further reduces the amount needed to progressively put into super because it grows faster and provides more tax efficient income when you get access to it.
I agree. It's tempting to state make your split 50/50 but the problem is you can only access that later in life and it has a lot longer time period to grow. I won't have an 80/20 split though. It will be more like 60/40. It sort of makes super the back-up option for FIRE. Ideally we could access it earlier but I reckon so many people would just spend it all and then go on the pension.
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Ideally we could access it earlier but I reckon so many people would just spend it all and then go on the pension.
Well, ALL the studies that have been done say that almost no-one does this. If they spend it all, it is generally a small amount, so they would end up on the pension anyway. But anyone who has enough superannuation that they are not going to end on the pension, just don't. I guess the people who are currently retired would all remember relatives on the pension who really struggled (before it was indexed, and pensioners really were a fair bit below the poverty line).
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Ideally we could access it earlier but I reckon so many people would just spend it all and then go on the pension.
Well, ALL the studies that have been done say that almost no-one does this. If they spend it all, it is generally a small amount, so they would end up on the pension anyway. But anyone who has enough superannuation that they are not going to end on the pension, just don't. I guess the people who are currently retired would all remember relatives on the pension who really struggled (before it was indexed, and pensioners really were a fair bit below the poverty line).
Interesting. If that is the case then the age limit should be lowered. I can't see tha happening though due to my comment previously.
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No need to invest extra money into your existing super fund, Deborah; invest the extra in an Australian imputation fund, so you receive tax free dividend income, assuming your marginal income tax rate is 30%. You have more control over the investment, but the disadvantage is that you invest with after tax income.
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What everybody thinks about maximizing super contributions and using one's house to get through till the super is available?
Say, you retire at 45 and run out of outside-super-money at 55. Get $250,000 redraw from the (almost paid off) mortgage and use it to get to the age of 60? Then pay any accumulated mortgage balance with super.
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No need to invest extra money into your existing super fund, Deborah; invest the extra in an Australian imputation fund, so you receive tax free dividend income, assuming your marginal income tax rate is 30%. You have more control over the investment, but the disadvantage is that you invest with after tax income.
Why? Let's assume that you can have an ETF in Super, so you would get more advantage than externally, and you have the same level of control.
What everybody thinks about maximizing super contributions and using one's house to get through till the super is available?
Say, you retire at 45 and run out of outside-super-money at 55. Get $250,000 redraw from the (almost paid off) mortgage and use it to get to the age of 60? Then pay any accumulated mortgage balance with super.
It would be a good contingency fund if you ran out of money in your investments to gradually redraw from your offset account as you needed the money. That way you wouldn't have minimum limits on the size of the redraw, and it would not have fees. You could also have the entire mortgage paid off (but not closed) before you started to draw down on the offset. And you wouldn't need to worry about satisfying income etc. tests.
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What everybody thinks about maximizing super contributions and using one's house to get through till the super is available?
Say, you retire at 45 and run out of outside-super-money at 55. Get $250,000 redraw from the (almost paid off) mortgage and use it to get to the age of 60? Then pay any accumulated mortgage balance with super.
I don't like the idea but in situations like you are talking about you could use it like you state. I intend to have more outside of Super than in Super.
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What everybody thinks about maximizing super contributions and using one's house to get through till the super is available?
Say, you retire at 45 and run out of outside-super-money at 55. Get $250,000 redraw from the (almost paid off) mortgage and use it to get to the age of 60? Then pay any accumulated mortgage balance with super.
Urbanista - are you sure that you're going to be able to take a lump sum payment from your super when you're 60? I'm assuming that you're 45 or less from the tone of the question - theres a lot of water to go under the bridge (and governments to come and go) between now and when you can access your super. There will be a push in the future both to raise the preservation age in line with the pension and also to mandate pensions / annuity streams. What would be the end result if one or both of those situations came about?
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Thing is, super is extremely attractive for me right now. Every year it's like free $9000 plus only 15% tax on dividends.
If the lump sum super is banned and I have to take an annuity, even that should be enough to keep up with the $250,000 mortgage? Our estimated super at 60 is 1.5M. In the worst case scenario I can sell the house.
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What I don't like about this plan is that you are then paying the bank interest on the re-draw. Sure at the moment interest rates are only 4%ish, but you don't know what they will be in advance. How would you feel about 10-15%? Have you done the math on that? It might make your tax savings now less impressive. In 1990 rates were17% and it only took just over 2 years for them to drop to 10%. I can remember people saying things like "we'll never see interest rates in the single digits again". And then we did. Sure no-ones predicting even much of a rate rise anytime soon, but things can change and can change quickly.
In short:
1. paying interest on debt again is inefficient.
2. you don't know what the interest rate might be.
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Thing is, super is extremely attractive for me right now. Every year it's like free $9000 plus only 15% tax on dividends.
If the lump sum super is banned and I have to take an annuity, even that should be enough to keep up with the $250,000 mortgage? Our estimated super at 60 is 1.5M. In the worst case scenario I can sell the house.
Is the $1.5m in todays dollars, or just the amount that one of the retirement calculators spits out (which will be future dollars). I'd be tempted to model the cashflows in todays dollars (using a min of a 3% inflation rate and an average interest rate of 7.5%) just to make sure you're completely happy with the results.
Its not a strategy that I'd be comfortable with. However, if you are forced to sell, after repaying the loan you think you could still buy a smaller house with the money left over, and you'd be comfortable in that smaller house, then maybe its OK. I'd probably just sell the house upfront and downsize though, to avoid the interest.
The other thing to consider is whether super will still get the tax breaks in the future as it does now, which I think is very unlikely. You're obviously in the top tax bracket, so you're squarely within the sites of those who would like to see high income earners access to tax concession in super taken away.
As an aside, if you have a partner who earns less than you and has a lower super balance, are you super splitting? Be worth trying to ensure that the $1.5m is no all in one account at the end of the day.
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Thanks everyone for the responses.
Actually, we are not super high earners. Our marginal tax rate is 39%. So I don't think we are going to be specifically targeted for extra tax on super.
As I've said, if we do t max out our super, we are leaving free $9000 each year on the table. Assuming 4% growth rate in super, that's after inflation and taxes, after 7 years that grows to $72,000 and then 15 years to compound brings that to $132,000. That's a lot of money to leave on the table.
Our expenses are $40,000, and even with the mortgage interest rates 10%, the interest we would pay after 5 years is going to be only $22,000 in total.
If the interest rates go crazy like 17%, we can just downsize.
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The whole reason I am thing about it all is that we want to tie a lot of our wealth into a house. Probably 1.3-1.5M. So we are going to pour a lot of money into the house and have only 4-5 years to save for early retirement after the house is paid off. So I thinking there must be ways to utilise all that wealth tied up in the house somehow in the future!
I know it's crazy but I am so tired of 2.5 hours daily commute for the both of us. It sucks us dry. We have no energy left at the end of the day. Also, DS is going to start school next year, that will turn my commute to full 3 hours daily. The area we are now is nice but not walkable so need two cars. Yet, morning traffic is a nightmare. Guess I could retire right now but DH is not emotionally ready, and I will be very lonely at home by myself. I also love what I do and get paid well.
The area we are looking at now is super walkable, not to work but to the train station, shopping, schools, and family nearby, so saving on child care too. We can ditch one car and cancel my city gym, since I will have time to exercise in the morning. Sadly it comes with a huge price tag on houses. DH refuses to rent or live in an apartment even temporarily. He is fine with working longer but at the moment he has virtually no life Monday to Friday, and half of the week end goes to unwind from work. I really hope that throwing money at the problem (at the house) will help in our situation.
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The whole reason I am thing about it all is that we want to tie a lot of our wealth into a house. Probably 1.3-1.5M. So we are going to pour a lot of money into the house and have only 4-5 years to save for early retirement after the house is paid off. So I thinking there must be ways to utilise all that wealth tied up in the house somehow in the future!
Why not move and downsize.
I know it's crazy but I am so tired of 2.5 hours daily commute for the both of us. It sucks us dry. We have no energy left at the end of the day. Also, DS is going to start school next year, that will turn my commute to full 3 hours daily. The area we are now is nice but not walkable so need two cars. Yet, morning traffic is a nightmare. Guess I could retire right now but DH is not emotionally ready, and I will be very lonely at home by myself. I also love what I do and get paid well.
The area we are looking at now is super walkable, not to work but to the train station, shopping, schools, and family nearby, so saving on child care too. We can ditch one car and cancel my city gym, since I will have time to exercise in the morning. Sadly it comes with a huge price tag on houses. DH refuses to rent or live in an apartment even temporarily. He is fine with working longer but at the moment he has virtually no life Monday to Friday, and half of the week end goes to unwind from work. I really hope that throwing money at the problem (at the house) will help in our situation.
I read this and think you need to reassess your plan. It sounds like the move mightn't really work out that well. Why not think about other options - retiring earlier, moving to a smaller house or apartment or even renting.
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The whole reason I am thing about it all is that we want to tie a lot of our wealth into a house. Probably 1.3-1.5M. So we are going to pour a lot of money into the house and have only 4-5 years to save for early retirement after the house is paid off. So I thinking there must be ways to utilise all that wealth tied up in the house somehow in the future!
I know it's crazy but I am so tired of 2.5 hours daily commute for the both of us. It sucks us dry. We have no energy left at the end of the day. Also, DS is going to start school next year, that will turn my commute to full 3 hours daily. The area we are now is nice but not walkable so need two cars. Yet, morning traffic is a nightmare. Guess I could retire right now but DH is not emotionally ready, and I will be very lonely at home by myself. I also love what I do and get paid well.
The area we are looking at now is super walkable, not to work but to the train station, shopping, schools, and family nearby, so saving on child care too. We can ditch one car and cancel my city gym, since I will have time to exercise in the morning. Sadly it comes with a huge price tag on houses. DH refuses to rent or live in an apartment even temporarily. He is fine with working longer but at the moment he has virtually no life Monday to Friday, and half of the week end goes to unwind from work. I really hope that throwing money at the problem (at the house) will help in our situation.
I can understand the "sucking you dry" comment. I work long hours and at times it does feel like you have no life. However, the way I look at it is that I want to work for the minimum number of years to give myself the ultimate freedom. Buying a $1.3-1.5m house is a lot of extra years of working....... DH clearly has thought about the trade off he's making, he'd rather the commute than rent or live in an apartment. Personally, I'd rather rent or live in an apartment! Has he done the "your money or your life" exercise of working out his hourly rate once he takes into consideration all the extra time needed to get ready for work, commute, unwind etc? Its worth doing - puts into perspective not only the additional time value but also that you could earn a lot less and still have a richer life.
I don't include the value of our PPOR in our retirement planning. Its in our net worth, but I don't ever want to be in a position where our PPOR would need to be used or compromised - but I'm ultra conservative like that.
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What everybody thinks about maximizing super contributions and using one's house to get through till the super is available?
Say, you retire at 45 and run out of outside-super-money at 55. Get $250,000 redraw from the (almost paid off) mortgage and use it to get to the age of 60? Then pay any accumulated mortgage balance with super.
It would be a good contingency fund if you ran out of money in your investments to gradually redraw from your offset account as you needed the money. That way you wouldn't have minimum limits on the size of the redraw, and it would not have fees. You could also have the entire mortgage paid off (but not closed) before you started to draw down on the offset. And you wouldn't need to worry about satisfying income etc. tests.
Thanks, Debora. Would that mean that the mortgage would have to be still current? If we refinance just before retiring at the age of 45 and get a 25 years mortgage, but put all the money into the offset account, there will be no repayments until we start drawing the offset account. Which is sometimes between 55-60 till the super becomes available. Because the house value is well above 1M, I will be comfortable to draw at least 25% of the value, but not more than 40%. Then either super becomes available or just sell and buy a smaller home.
I know that there could be a depression with the slow housing market, etc. That is the risk I am willing to take.
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I can understand the "sucking you dry" comment. I work long hours and at times it does feel like you have no life. However, the way I look at it is that I want to work for the minimum number of years to give myself the ultimate freedom. Buying a $1.3-1.5m house is a lot of extra years of working....... DH clearly has thought about the trade off he's making, he'd rather the commute than rent or live in an apartment. Personally, I'd rather rent or live in an apartment! Has he done the "your money or your life" exercise of working out his hourly rate once he takes into consideration all the extra time needed to get ready for work, commute, unwind etc? Its worth doing - puts into perspective not only the additional time value but also that you could earn a lot less and still have a richer life.
Thanks, Aussiegirl. The thing is, we already been doing this for the last 6 years. Add a child and graduate school for me on top of full time job. I just can't do it anymore. I will not last another year. Must move now or risk a major breakdown.
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Urbanista - if things are at that point, perhaps another conversation with your partner is in order. Surely he would compromise on the renting / apartment stance if it would mean so much to you?
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Urbanista - if things are at that point, perhaps another conversation with your partner is in order. Surely he would compromise on the renting / apartment stance if it would mean so much to you?
Not a single chance :(
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Posting to follow.
I am 28 and put almost $600 extra into super from my pretax income (which is about 10% of my take home pay) I am trying to work out if this is a good strategy for now or if I should be just investing out of super.
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Hmmmm.... dusting off an old thread in my deliberations on super strategy post fire.
However, what caught my eye here was Urbanista's contemplations.
I don't know what Urbanisata finally decided, but I can offer some perspective as 7 years ago we were in the same position, struggling with a long commute which was impacting heavily on our health and our marriage.
After much deliberation We took the plunge and forked out for a $1.4M house, taking on a $1.0M mortgage at the time. Eek.
Mind you, this was before my thoughts of FIRE..... I doubt I'd make the same decision again, but let me share how it panned out....
Ultimately we got lucky and the decision was a big winner
- the house is now worth around $2.1M, so we won the financial gamble, but I wouldn't expect any real cap gains for the next 7 years so this is an aberration for anyone thinking of doing what we did.
- having an extra few hours at home every day had a very positive impact on my health, our marriage and our social lives. For me this has been a far more important outcome than the financial outcome. It made a HUGE positive difference to our lives.
If I had my time again I would still have relocated but to a cheaper house or apartment.
Having the monster mortgage hanging over me has weighed heavily at times. I am the primary earner, and if I lost my job we wouldn't have been able to service the loan in any way. At the time we purchased, i rationalised this saying it doesn't matter because if I lose my job we won't need to live close to the city and we can sell quickly due to the desireability of the property we purchased. So we will just sell and move back to the burbs. Whilst this is true, it is also true that the day you lose your job the last thing you would want to deal with is losing your home as well. We could also have rented it out to service the loan and lived cheaply somewhere on DWs income until I got a new job. I had all the answers, but the debt still weighed on me. I really didn't like it being there at all!
As it turned out, I didn't lose my job but instead my earnings continued to surge upwards and the mortgage is no longer a financial concern. We hit that sucker hard, and we became moustachian.
Today's concern is that we have done so well with our saving in the past 7 years that selling the house is now a quick path to FIRE.
We don't need a $2M home when a $700K home anywhere else in Australia would be more than fine. The only problem is that the ridiculously expensive house has become our home, and we love it there. We are at the heart of everything. Our friends are mostly in walking distance and our lives don't require us to travel more than about 5kms away very often. We are involved in a local sports club and don't want to break that tie. We are living temporarily OS but can't wait to get back to our life in Sydney.
Making the decision to sell up for FIRE is not proving easy, and saving an extra $1.4M to stay living in our house is a ridiculous notion. No way!!!
So, the moral of the story is be careful. You could lose big if the financial side bites, and even if you win (like we did) it could still end up that you will need to sacrifice something down the line.
In our case the decision is to either sacrifice our present (preferred) way of life that we love to FIRE, or to keep working for maybe 8 more years.
We would have achieved FIRE quicker by not relocating, but we may not have still been married to enjoy it together.
We are contemplating a 3rd option, which is to FIRE but target to earn a part time income equivalent to the additional rent of living in our expensive home ie: ($2.1M - $0.7m) x3.5% = $49K. The problem is that this rent charge alone is a lot. Not exactly easy and free part time work.
Today we can't decide. The decision becomes a real one from next June when we hit our " sell up and leave Sydney immediately FIRE number". We have no idea what to do.
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Thanks, Itchyfeet. I found it helpful to hear the post-decision thoughts and the "side effects" to weigh up. Really pleased you enjoy your new home! Good luck deciding.
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Happy new financial year all.
With the super cap being lowered to 25k, the debate between whether to add more to super might be less of an issue now, because there's less we can add!
I've been maxing my super concessional caps for the last couple of years. Preservation age is a longggg way away from me but for me the decision was pretty simple. I was still saving significantly more outside super each year while maxing out the concessional contribution.
With a 5k reduction in the cap, I'm losing some tax benefits there but not unhappy about getting a bit extra in the take home pay.
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Nice one Itchyfeet.
Whow knows... in a few years time you could have another million equity in the home and the decision will be even harder... after all, why kill the golden goose? >_<
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Nice one Itchyfeet.
Whow knows... in a few years time you could have another million equity in the home and the decision will be even harder... after all, why kill the golden goose? >_<
The problem is that for as long as we consider it a home the capital gains mean squat. It could decrease in value by a million or increase by a million and it would make no difference.
It is only a golden goose if we sell and take the cash as fuel for our FIRE.
Otherwise it is just a $1.4m cost, which is a massive chunk of my total career earnings.
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Ichyfeet, I assume that for the next year (until sell up and leave Sydney immediately FIRE number) you will be living OS. Perhaps, before you come back you could work out together what other places you may be interested in, and when you come back, you could spend some time (several weeks?) in each of the resulting short list to get to know the place and work out whether you could happily transfer there. We moved a lot when I was a kid, and I know I could find a home in a lot of places - even though I am a homebody. I think every Australian city is very high on the global livability index, when it is broadened to include the smaller cities. So there is a lot of world class cheaper central city living available.
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Itchyfeet - that is a great post that I honestly think a lot of Australians on this board will be able to relate too. Our situation is not as extreme as yours. Our house is probably worth about $1.3 million. We've paid it off as well and if we downsized/relocated we would probably be able to retire.
We also have 3 kids - 6, 13 and 15 and we love the area that we live in. We are basically sitting on an asset that can enable us to retire if we change our lifestyle but at this point we don't want to do that.
I've changed my outlook now to be willing to work another 3 years in order to get to a 5% or lower WR. This has been tough to get to this outlook and even posting this makes me realise that work is probably not essential right now which makes me want to consider selling and retiring. My wife really doesn't want to take the easy sell and relocate option. My positive frame in relation to working for another 3 years (it could go up if the markets crash or we really feel like pushing to 4%) is partially based though on the house being a great option in relation to flexibility within my retirement phase. So if we start to struggle financially we can just sell the house and then we would be I think easily 100% financially secure.
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Ichyfeet, I assume that for the next year (until sell up and leave Sydney immediately FIRE number) you will be living OS. Perhaps, before you come back you could work out together what other places you may be interested in, and when you come back, you could spend some time (several weeks?) in each of the resulting short list to get to know the place and work out whether you could happily transfer there. We moved a lot when I was a kid, and I know I could find a home in a lot of places - even though I am a homebody. I think every Australian city is very high on the global livability index, when it is broadened to include the smaller cities. So there is a lot of world class cheaper central city living available.
Thanks Deborah. FIREing and coming home next year is an option for us. We would still have 2.5 years to move back to our house to still advantage from the 6 year rule.
Several years ago (around 2013 I guess) we bought a house in Brissy with a view to FIRE there (before I even knew the term FIRE and before I came across MMM). We may still move to that place, which is worth < $600K so far more logical.
We are still debating.....
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I am about to hit the aged pension age, and will be required to draw 5% from my super. I've been to the FIS who told me it is possible to take a portion of my super and convert it to a pension, leaving the rest in accumulation phase?
I'm not sure what the benefit of this strategy is, and I was also recommended to see a FA (to perhaps explain this).
I can make an appointment to see a FA at my super fund, but I would like to understand beforehand. I don't have much confidence in FA as the buck stops here, and from previous experience they don't seem to give you the whole picture explaining various strategies.
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You actually don't have to take a pension at all do you? I thought you can leave the whole lot in accumulation mode forever if you choose (and eat the 15% tax on earnings). And take lump sums as necessary if you satisfy a condition of release.
The point about leaving a bit in accumulation is that you can choose only to convert what you need to a pension stream. This allows more of your money to stay in the low tax super environment for longer (at 15% tax on earnings).
Now here is where strategy comes in. If you convert the whole lot to pension phase and the mandatory pension payments end up being higher than your living costs, you can invest that difference outside of super, and take advantage of the tax free threshold (~$20,500 including LITO). This outcome could be better than leaving some of your super in accumulation mode.
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Thanks Marty998 ... interesting ... it might be a tax and Centrelink strategy.
The tax savings in the pension phase are appealing, although outside super we've been under the tax free thresh hold since OH retired. At present I don't need as much as the super pension would supply. A complication might be an inheritance in the future, which I wouldn't be able to put into super and might put us over the tax free limit.
Need to think more about this, and get a FA take on it ...