Opinion | An early plan key to super riches | David Henriksen

With recent changes to superannuation and contribution limits it is again important to plan for your retirement sooner rather than later.

Consider this case study:  John is 30 and is on a salary of $105,000 + Super guarantee contributions of $10,000. He holds life insurance cover in his superannuation fund at a cost of $2500 pa. His superannuation balance is currently $50,000 and his superannuation fund is expected to return an average of 5% p.a. (after allowing for tax and inflation) until he reaches 65. By 65, John would expect to have accumulated $818,000 to retire on which is not very much to fund his retirement.

If John salary sacrificed an extra $10,000 to his superannuation fund (bringing his annual contributions to $20,000 pa to super) his superannuation entitlements could reach $1,585,000 by the time he reaches 65. This may seem tough in many circumstances but if this additional contribution is in place for John he will save $2400 in tax each year (assuming his taxable income is $105,000) by sacrificing this money into his superannuation fund instead of taking it as a wage. This is $84,000 in tax savings over 35 years.

This additional salary (after tax) may instead go towards John paying down his home mortgage or investing in other investments outside of his super fund. If the wage was instead taken and put towards a mortgage, due to current low interest rates, this may save some interest and repay the loan sooner, but the interest  saved in this case would be significantly less than the uplift in John’s retirement wealth. If he diverted this wage to other investments not held in super he would be able to access this wealth again before retirement but, in the long run, he would most likely pay more tax on income and capital gains he makes when compared to the tax on his wealth held in super.

As illustrated here, based on modest returns, a person can nearly double their wealth for retirement in a tax effective structure if they plan well in advance. Had John waited until he was 50 to consider increasing his super contributions he would be lucky to accumulate an extra $250,000 which would bring his retirement wealth to just under $1 million.

There are many factors that should be managed and considered to ensure contribution caps are not exceeded. This article is not intended to be advice that should be solely relied upon as it in no way considers individual circumstances.

David Henriksen, Superannuation Principal at PKF