Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.

Investing for retirement outside of superannuation

IF YOU'RE aged 40 or under, there are serious choices to make. Unless you're prepared to work until age 70, you face the challenge of investing enough money outside superannuation to live on until you can access your superannuation, or the age pension, or a combination of both.

Superannuation is the only investment you can make with pre tax dollars, but contributions are capped and the money in inaccessible until you reach your preservation age.  It also enables you to hold money in a low tax environment which means it will grow faster.

If you invest outside the system there are no caps, and no loss of access.  The price is a lower after tax return.

Think about Robin and Kim.  They are both aged 40, have a substantial equity in their houses, and wish to build wealth with the aim of retiring earlier rather than later.  They both decide they can afford $25,000 a year out of their pay package to boost their retirement savings.

Robin is nervous about borrowing, and makes an arrangement with her employer to structure her package so that $25,000 is contributed each year into super via salary sacrifice.  After deduction of the entry tax of $3750, she will have $21,250 working for her in a 15% tax environment.  If her funds can produce 8% per annum long term, she should have $1.7 million at age 65.  The problem is, she may not be able to access it then unless transition to retirement pensions are still available.

Kim is not fussed on super because he's worried about rule changes, and decides to take out a home equity loan of $350,000 to invest in a portfolio of managed share trusts.  He likes the idea of share trusts because of diversification, and by securing the mortgage over his home he's unlikely to be caught with a margin call.  The interest will be a tax deductible $25,000 a year.

Notice that in the first year, Robin has just $21,250 working for her while Kim has $350,000.  The name of the game is to maximise the amount of assets working for you at an early an age as possible, so at this stage Kim is the winner.

But, compounding is going to play a part.  If we assume that both have an identical portfolio, and that Kim's produces 7% per annum, because the earnings will be taxed at his marginal rate, he will have just over $2 million at age 65 but will still have a mortgage of $350,000.  Just that 1% difference in earnings has made a big difference. However, he has the advantage of access to his funds at any stage in the investment program.

What I've talked about today is not a recommendation- the sole purpose is to help you know about the options available and seek advice about strategies that may speed you on the way to wealth. The more options you have, the better informed you will be.


 



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