Last week, we looked at why super is, well, super, even for people just starting out in their careers. This week, we take a look at superannuation for people a little further advanced in their careers. Let’s say people aged 30-55.
Obviously, people in any age demographic will be a varied bunch. Male, female. Single, coupled, separated. Parents or not. High-earning, low-earning, not earning at all. Our thoughts below are meant to be food for thought. Please think about them and adjust what we say to your situation. And, of course, chat to us before you make any moves!
Choosing the right fund is important at every step of your super journey, including mid-career. Things to think about include the type of fund, the fees they charge, the way a fund will invest your money, whether and how the fund may include life insurances for their fund members, etc.
People who have been working for a few years often have more than one super account. Once again, as we wrote last week, it can be a great idea to consolidate your various funds into a few or just one fund. This can save fees which, given your super will be invested for many years to come, can really add up over time.
People are often surprised how much of a difference fees can make to the amount you have saved for your retirement. An example often helps. Let’s say there are two super funds which return an average of 6% per year before fees. Fund A charges a fee of 1% per year. Fund B charges 2%.
After 20 years, an initial contribution of $10,000 will have grown to be worth $26,530 in Fund A but only $21,910 in Fund B. The difference is $3,710, or 37.1% of the initial contribution. That small difference of 1% versus 2% in fees grows to become a 37% difference in returns over 20 years.
Of course, as we say above, fees are not the only consideration when choosing a fund. But numbers like these show how something that seems insignificant can become significant over time.
As we wrote last week, managed super funds usually let members choose how to invest their money. The choices range from ‘conservative’ options that try not to risk capital to ‘higher-growth’ options where capital is risked in the pursuit of higher returns.
Your choice of investment strategy has a lot to do with your appetite for risk. But the general principle that is often applied is that you can afford to take more risk if you have a longer-time horizon (obviously this is not the case for absolutely everyone). Superannuation is, for people in mid-career, usually still a longer-term investment because you cannot withdraw your money until you reach retirement age. So, for many people, the choice of investment strategy skews towards the growth end of the range.
People in mid-career often provide financial support to other people, such as a spouse or their children. This can make things such as life insurances (including protection in the event of death, permanent or temporary disability) vital for the family unit. Even if you do not support other people financially, your own standard of living is usually very much affected by your income. If you get sick or disabled, you need that income to continue.
Happily, super can often be used to access life insurances.
Because people in mid-career also often have many competing financial commitments, such as mortgages or the general costs of raising children, the opportunity to use super to pay for life insurances can lighten the demands on their accessible cash flow. Obviously, spending super benefits on life insurance premiums will reduce the benefits remaining, and the effects of time will compound the impact on your eventual retirement savings. But when there are several demands on your cash flow, choices need to be made.
For wage and salary earners, their employer is usually obliged to pay 10.5% of their ordinary earnings into a super fund on their account. For someone earning, say, $80,000, this equates to $8,400. These employer contributions are known as concessional contributions. This means that the person making the contribution can claim a tax deduction for them. In this case, the employer gets to claim the $8,400 as a deduction.
The annual limit per recipient for concessional contributions is $27,500. This means that tax deductions can be claimed for up to $27,500 in super contributions each year. Happily, people who make their own extra contributions can claim a tax deduction for it. If we continue with our example from the previous paragraph, where the employer claims a deduction of $8,400, that leaves an ‘extra’ $19,100 that an individual might claim. What’s more, the rules let people ‘catch-up’ for previous years in which the total deductions claimed were lower than $27,500.
As we write above, often people in mid-career simply do not have any ‘spare cash’ with which to make extra contributions. In those cases, people are often best advised to simply let their employer keep making contributions on their behalf. But in other cases, ‘spare’ cash might become available. This can include things like a person or a couple paying off their mortgage and thus finding that the money they were using to make repayments is no longer needed for that purpose. They might decide to use some or all of the ‘freed-up’ cash flow to contribute more into super.
On top of the $27,500 for concessional contributions, a person can also make ‘non-concessional contributions’ into super. Non-concessional contributions can be made using any money, but they are often considered when people acquire irregular, lump sums – the kind of thing that often happens when people reach mid-career. The lump sum is often an inheritance, or money received from selling an asset such as a house or a business.
The annual per-person limit for non-concessional contributions is $110,000. In this case, there are ‘bring-forward rules’ that essentially allow you to make up to three years’ worth of contributions into super at one point in time. A couple, then, could deposit up to $660,000 into super in one particular year.
Non-concessional contributions do not provide a tax deduction for the person making them. However, once the benefits are inside the super fund, any investment earnings are taxed at no more than 15% (with capital gains being taxed at as little as 10% or even 0% if the asset is held beyond the point at which you retire). If your personal tax rate is going to be higher than that, a superfund can be a great avenue through which to ramp up your investment portfolio.
As life goes on it also tends to get more complicated. In the midst of all that complexity, it can be really beneficial to sit down once a year and run a ruler over your long-term financial plan. Super should be essential part of any long-term plan, so why not get in touch and make a time for us to meet and discuss whether your super is doing what you need it to do.
