Time to panic: It’s quite a ride

Bruce Brammall, The Australian, 10 July, 2022

Annoyingly, the current social lifecycle norm doesn’t work particularly well for a happy, prosperous, retirement.

Marriage, mortgage and kids, and associated variations, are expensive. Damned expensive. And while they are partly about building wealth (home) and having fun (kids), they soak up a lot of what we would otherwise like to deem “investment funds” or “free cash flow”.

But, within a few years of 50, the expense of kids drops off and the mortgage is not the constant stretch it once was.

For the first time in a long time, you have time to think just about yourself and/or your partner. And what retirement might look like for you.

That moment … when you realise you’re approaching retirement … can be a little scary. Hearts can skip a beat. And the stomach might churn a little. Then …

“Bugger. Where’s my super? What’s it doing? Doesn’t look too healthy. Or is it okay? I don’t know! Is it too late to fix things?”

The correct reaction at this point is to panic. Yes, panic. Or at least put on a face that suggests that you’re deeply concerned. And mumble to yourself a bit, about how the hell you got here so fast (when it clearly wasn’t fast at all. It’s been 50 years.)

While some people plan for retirement their whole life, most don’t. If you’re the latter and you’ve recently hit that point, it’s generally not too late to make a serious difference to your retirement.

But it’s your thing. It’s you who needs to identify the issue and make the decision to deal with it. The more you panic, the more likely you are to take action.

No-one is holding a gun to your head. If you want to survive on the Centrelink age pension, that’s your call.

I’m tipping you don’t.

Ready, set …

To begin with, let’s think about it as the “runup to retirement”. It starts about a decade, give or take, before you think you will punch the clock for the final time.

It is a critical period to take action.

It’s never too late. Sure, it would have been way better if you’d started properly planning for this 10 or 20 years before the “runup” starts. But, kids, mortgage, etc.

What do you need to do?

Super’s tax break

First thing is to understand super. Then how to make it work for you.

Super is a government-sanctioned tax haven. It’s the government saying: “We want you to save for your own retirement. If you do, we’ll barely tax you.”

Anything that goes into super, or is earned in super, is taxed at a maximum of 15 per cent. That is, if you earn $10,000 in super, your super fund gets to keep $8500. If you personally earn an extra $10,000, you are likely to only get to keep between $6550 and $5300 (depending on your marginal tax rate).

Those thousands of extra dollars saved are powerful, year in and year out. And as balances grow and the numbers are higher, the compounding increases.

Extra contributions

Employers have to make compulsory contributions for their team. As of 1 July, this is now 10.5 per cent of salary.

You don’t have any control over this.

What you do have control over is how much extra you contribute to super now you’ve kicked the kids out and don’t feel like the bank owns you anymore.

There are two ways to do this tax effectively – salary sacrifice and personal deductible contributions. They both wash out the same from a tax perspective, just a slightly different path.

Salary sacrifice is an arrangement where you forgo income to put away for retirement. There, the money is only taxed at 15 per cent on the way into super.

Personal deductible contributions come from savings (or money that has already been taxed). But you get a tax deduction for it.

Let’s use someone earning an average salary, with a marginal tax rate of 34.5 per cent (including Medicare).

Kids have taken the parachute and exited the plane and the mortgage is under control. So, there is capacity to put an extra $12,000 a year into super, or $1000 a month.

If they salary sacrifice that amount into super, it will be taxed at 15 per cent. A net $10,200 will end up in your super fund. Outside of super, you have earned $12,000 less, so you have paid $4140 less in tax for that year.

Holistically, both inside and outside of super, you have paid $2340 less tax, which is now invested for you inside super.

DIY contributions

With personal deductible super contributions, you are putting the money in yourself.

You put in $12,000. The fund taxes that at 15 per cent, leaving $10,200 in the fund.

But you then get to claim a tax deduction on the $12,000, meaning you will get a tax return of $4140.

In both cases, after tax deductions, you have given up a net $7860 of money in your bank account to get $10,200 into super.

There are limits

But the amount of money you can get into super this way has limits. The three contribution types above are known as “concessional contributions”, which means someone is claiming a tax deduction for the contributions (either you or your employer) and it is only taxed at 15 per cent on the way into super.

The total amount you can put into super this way, each year, is $27,500. If you’re earning $100,000, your employer will put in $10,500 (10.5 per cent) into your super fund. So that means you can put in a maximum of $17,000 via salary sacrifice or personal deductible contributions.

Catch-up rules

However … if you are in a position to put in more and you haven’t done it previously, you might qualify to go above those limits, under what’s known as the “five-year catch-up” rules.

These rules allow you to access unused contribution caps, from up to four previous years, but only if your super balance is below $500,000 on the 1 July of the year the contribution is being made.

How do you know how much has been contributed to your super fund? For the current year (or last financial year as it’s only just ended), you’ll need to call your super fund. For previous years, the information is best accessed via logging in to MyGov.

So, if your cash flow has considerably freed up, you might be able to put even more into super and reap some bigger tax advantages.

This area can get complex. If you’re not sure, don’t guess. Get advice.

Game for two

If there are two of you working, you can potentially double all of the benefits above, by both of you topping up super.

There are actually a number of super rules where couples can play super better than two individuals can. For a future column, or get advice.

Mortgage or super?

A common question is: “Should you dump the money into super, or pay down the mortgage?”

Again, that will depend on individual circumstances, but here’s something to consider.

Using the same example as above, if you took that $12,000 of earnings from regular work, you’ll receive $7860 in the hand to pay down the mortgage.

If you put it into super, your super fund gets $10,200. That’s $2340 that hasn’t been paid in tax.

If you do that every year for the last 10 years of work, there’s an extra $23,400 saved in tax you could now use to pay down the home loan.

At the top

It’s a long runup, like Dennis Lillee turning to begin his runup to bowl short and fast at the Poms.

But that 10-15 years, roughly, between the major expenses going and retirement starting, is not too late to do something big for your retirement.

As I said earlier, if that’s you, now’s the time to panic. Only because panic is more likely to lead to action and a better result.

Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: bruce@brucebrammallfinancial.com.au.

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