‘The best time to start thinking about your retirement is before the boss does.’ Anonymous
But what if you are thinking about your retirement and have managed to put together a few dollars, or better still a surplus cash flow, where do you invest?
When looking for somewhere to put money away for retirement we find too much focus is given to investment choice, with mixed results, and too little thought is given to the investment structure. If you are putting money away for retirement then you want a low tax environment to manage income and little or no capital gains when you cash in.
In nearly all cases the vehicle that will offer the biggest tax concessions is superannuation. We understand the word “superannuation” might have you heading for an exit. But before you stop reading, I would strongly urge you to read (at least) the next paragraph as understanding this, will put you in front of most when it comes to understanding super.
Hang on, doesn’t super just lose money!
Superannuation does not lose or make money – it’s just an environment – the assets you choose to own in super such as shares and property are what will lose, or make, the money. Good investment decisions are important no matter what the structure but consider the following scenario to see the benefits of using super.
In 2007 we had four investors each had $500,000, and each had invested in a 5 year term deposit at 6.5% – the going rate in 2007. Because they had by chance invested in cash, none had incurred a loss during the financial crisis. The deposits have recently matured and all now have investments worth $685,043 today, before tax. And this is where the similarities end.
|Personal situation||Amount Invested||Amount earned||Tax paid||Net earnings|
|$180,000 income p.a||$500,000||$185,043||$86,045||$98,998|
|$80,000 income p.a||$500,000||$185,043||$71,242||$113,901|
|Super – Accumulation||$500,000||$185,043||$27,750||$157,287|
|Super – Pension||$500,000||$185,043||$0||$185,043|
Superannuation has two stages; accumulation i.e. before retirement and pension i.e. past retirement age.
Remember, these returns assume exactly the same investment only the investment environment is different. This simple structural approach has highlighted a potential difference of $86,045. And that’s only over 5 years. Imagine what it could be over 10 or 20 years!
We are not advocating cash or any particular asset; we are advocating the use of a tax effective structure. When it comes to investment choice you should use what is suitable for the current economic conditions and your circumstances.
In fact one of the best things about living in Australia is the high level of choice we have when it comes to investments inside superannuation funds.
You can choose how you want to use the superannuation environment so that it suits you. You can choose how the money is invested. If you want to put all your money into a term deposit … you can! If you want to have all your money in equities … you can! Superannuation has many rules but dictating where your money may be invested is not one of them.
The next step is to understand what all this could mean for you? No doubt you will know quite a bit about beef production but do you understand the different structures you can use to invest? Do you understand the investment options that are available?
Superannuation has significant benefits for the long term investor. Seeking advice from a suitably qualified professional in this field, even if you only do it once, will give you a serious head start towards building a level of funds that will allow you to get past the front gate and into your retirement.
Graham Financial is a privately owned boutique financial planning practice which has been in operation since 1985. AFSL 327520. The advice in this article is general in nature; advice specific to your circumstances should be sought before acting on this advice. The author of this article can be contacted on (07) 4613 0514, by email at firstname.lastname@example.org or online at www.grahamfin.com.au
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