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Pro Studio Basics

11. Understanding Superannuaiton

The following advice is specific to Australia. Most Western countries have similar structures and the broad principles are similar. However, you should consult your own advisers for specific information. 

How much money will you need to retire with? One million dollars? Two million? Have you even thought?

Superannuation is probably the last thing you'll think about when you start a business, but is shouldn't be. During our working years we need to put aside money to support us in our retirement. Our parents support us for our first 20 years. We then work for the next 40 and retire for the final 20 years. Simplistically, we need to save enough during our working years for our retirement.

How Much Is Enough?

Many people pull round numbers out of the hat when working out a retirement plan - and this is fair enough because so many things can change between now and our retirement. Today we may be putting the kids through school or paying off a mortgage, but in theory this expenditure won't be required in retirement. We may also be subject to more generous taxation rates in retirement.

As a rule of thumb, you will need between $500,000 and $1,000,000, plus your own home. The money will provide investment income of $25,000 to $100,000 - and this will be your income in retirement. How much you need depends on your plans for retirement, a quiet retreat in the country or the high-life travelling around the world. And how much your nest egg will earn depends on the economy and your investments.

Although the details of our retirement years are full of uncertainties, one thing that's for sure is we will need a pool of money to live on. It would also appear that the government wishes to reduce what it pays in old-age pensions, so if your plan includes relying on CentreLink, the amount of income at your disposal may not be enough to provide you with the lifestyle you aspire to.

When To Start

If we had to put aside the income we needed in retirement, it would be very hard to save enough. How many of us could put aside $40,000 a year for 20 years so we had $40,000 a year to live on in retirement?

Fortunately, it doesn't work this way. A small amount put aside every year can grow (compound interest), and once you have retired, you can use part of your nest egg to live on (assuming you don't want to leave it all to your kids).

However, for this system to work, the earlier you start retirement saving the better. A person saving for 40 years might only have to put aside $4,000 a year to reach $500,000 million, while a person saving for just 10 years needs to put aside $40,000!

Few people at the age of 20 have the discipline or income to put aside $4000 a year, but with the government's compulsory 9% superannuation guarantee, they may be putting $3000 aside and so the objective of ensuring the majority of Australians are self-funded in retirement looks quite plausible. However, don't forget this requires you to contribute at this rate every year for 40 years. Many readers have fewer years than this left before retirement.

How To Do It

For most readers, superannuation is the best way to save for your retirement because of the tax concessions. When money is deposited into a superannuation fund, it is taxed at up to 15%, compared to the 31.5% to 46.5% that may otherwise be paid personally. Income earned by a superannuation fund is only taxed at 15%, compared to 30% in a company or up to 46.5% personally. The tax concessions are definitely worthwhile - but super contributions must be paid by 30 June each year to claim a deduction.

The downside of investing in super is once the money is in the fund, you can't touch it until you retire. For this reason, you may sink less into super while you still have a big mortgage or the kids are going through school. However, you can move your investment from one super fund to another - and this is something we should all consider doing if our funds are producing poor returns.

For employees, superannuation contributions are made by the employer and so any further contributions made by the employee directly into a fund are not tax deductible. However, if as an employee you want to contribute more than the 9%, ask your employer to ‘salary sacrifice'. For instance, if you earn $90,000 a year and you want to contribute $10000 to the fund, have your employer pay you a cash salary of $80,000 and invest $10000 directly to the super fund on your behalf. This is tax effective.

For self-employed photographers operating individually or in a partnership, there is a limit of $50,000 per annum for tax deductible contributions ($100,000 in some limited situations).

Many people invest their superannuation with one of the big superfunds, but as your super savings grow, an option is to set up your own ‘self-managed super fund'. This is usually only cost-effective if you are operating through a company or trust, and if you have at least $100,000 to $150,000 already invested.

However, the purpose of this article is not to explain the complexities, rather to prick your conscience into putting money into superannuation. NOW is the time to do something about it, no matter how old you are. Don't be in the nursing home on your rocking chair wishing you'd saved a bit more during your working life - JUST DO IT!

Super Savings Required

You need to save the following each year until you retire if you want to have $500,000 in the bank. Some assumptions have been made, but the figures give you the idea as to why it's best to start saving early!
If you have 10 years to save, you need $39,750 each year.
For 20 years to save, it's $15,100 each year.
For 30 years to save, it's $7,500 each year.
And for 40 years to save, just $4,150 each year is required.

The information in this article is general in nature and should not replace personal advice given by your own legal and financial advisers.

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