We reached a 100 day milestone today!!! We are 100 days down and only 2900 days to go on our 3000 day journey to financial independence.
As promised, today we discuss our views on salary sacrificing in to superannuation.
When you have the goal of financial independence and retiring early , does it make sense financially, strategically and from a risk/reward point of view?
The tax benefits - contributions:
A very attractive benefit when looked at simply. The average Australian salary is roughly $83,000 before tax therefore the portion of income above $37,000 is getting taxed at a whopping 34.5% including medicare levy, whereas your super is taxed at 15%. If you are receiving an $83,000 salary, your employer would be paying $7,885 to your super fund, this would leave potentially $17,115 for you to salary sacrifice, due to the $25,000 concessional cap. If you decided to do this, your tax savings would be $17,115 x 19.5% (34.5% - 15%) = $3,337.43 per year tax saving.....not bad hey.
Funds locked away - a benefit or risk?
Currently your funds are locked away (except for some very limited hardship reasons) until you are 60 and retired or any time after 65 years old.
On one hand, it is great that you can not touch these funds, as it forces you to save! On the flip side, for those working towards early retirement, the goal is typically to achieve this between the 30's - 50's age brackets. Our view is the longer the wait to receive these funds, the greater the risk.
The tax benefits - after age 60:
Currently those over 60 years of age have the benefit of receiving tax free income and gains from super tax free. This is a great benefit, however keep in mind that you can also earn tax free income outside of super when you have reached Age Pension age.
Seniors & Pensioners Tax Offset (SAPTO) means that a couple who has reached Age Pension age, can earn a ‘rebate income’ of up to $28,974 each ($57,948 combined) for the 2017/2018 year without paying income tax, subject to certain conditions. This ‘rebate income’ is in addition to any super benefits from a taxed source. So you could work or have investment/business income and get the same tax treatment as super, up to the above levels.
The risk of government intervention:
The main concern for Mrs 3000 and I, is the potential for government to change the rules or increasing the age you can access your super. Say this was increased to 70 years old, we don't necessarily want our funds locked away that long. Unfortunately the government keep meddling with the super rules and this makes super a little less appealing for us at this stage of our journey.
Salary sacrificing to super is part of our plan, however just not yet. We are in our mid/late 30s and therefore we feel the risk of government intervention is too great. Plus we have 25+ years to reach the preservation age and no ambitions to leave the workforce in the medium term. Our goal currently is reaching financial independence within the next 8 years. Therefore we will have 17+ years to look at increasing our super contributions via salary sacrifice once we hit that goal.
However, if you are reading this and you are over 40- 45 years old + and have earnings getting taxed 34.5% or higher, the reward may be a lot greater than the risk in this instance.
The decision to salary sacrifice to super isn't as clear cut as the simple tax savings, a lot of factors come in to play, the biggest in our mind is age....the longer you have to wait, the greater the risk of government rule changes. It may not for us at this stage, however the tax savings are enticing....perhaps we will revisit this in a few years.
Take care and best wishes all,
Mr & Mrs 3000
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Note, in no way is this financial advice – personal or otherwise. We are not financial advisors, this is purely our opinion. You should always seek professional advice regarding your personal circumstances.