MONEY MATTERS MONDAY 23RD JULY 2018
Salary Sacrifice for a Comfortable Retirement
How much of our income should we spend now to enjoy today, and how much should we put aside so we can enjoy tomorrow? That is the perennial question we must all answer. If we put nothing aside we will be entirely dependent on the government pension in retirement. It won’t be a grand living.
Australia’s compulsory superannuation system will ensure most of us have at least some savings to provide income in retirement but it won’t give financial independence. For that we must take control and elect to put extra money aside for later.
The benefits of salary sacrifice
Salary sacrifice is the starting point. It means giving up a little of our income now to build savings for later. It will also reduce our tax bill, putting us well ahead. Yes, I know, younger people have children to raise, and mortgages, car loans and credit cards to pay. They can’t afford it.
Yet the benefits are there for those who do ‘sacrifice’. I have just arranged income plans for several people who retired in July. One lady whose salary was only a little above average has superannuation of just on one million dollars.
How did she accumulate $1 million of super? Mainly by salary sacrificing a little of her income for many years. She has plans and is looking forward to a very comfortable and enjoyable retirement.
You’ll reap the benefits later
Salary sacrifice means giving up part of your take home pay to go into super. It reduces the tax you pay because the tax on money entering super is usually less.
Tax on super contributions is only 15 per cent. People earning more than $37,000 per annum pay 34.5 per cent marginal tax rate. Suppose the pay office owes you $100 pre-tax pay. Take it in cash and you receive $65.50. If it goes into super your account will receive $85.
Which would you prefer – $65.50 in hand or $85 in super? Most 25 year-olds say “give me the cash”. But at 55 the super looks much the better option. The trick is to be forward thinking and start a low level of salary sacrifice at a younger age.
Start now, with the new financial year
You will have the benefit of compounding interest on your super savings for longer. Starting at age 40 means compounding for 25 years instead of 10. Giving up income each payday is only painful for a short time. Your spending will soon adjust to the reduced income and you won’t miss the foregone amount.
Higher income earners get a bigger tax saving – 39 or 47 per cent tax down to 15. The restriction is the $25,000 annual limit on concessional contributions. The total of salary sacrifice and employer contributions must not exceed $25,000.
A million in super is possible and the beginning of a new financial year is the ideal time to start saving.
This is general advice and should not be treated as personal advice. Russell Tym is an authorised representative of MoneyLink Financial Planning Pty Ltd ASFL No: 247360.
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