Following recent Federal Budget announcements regarding discretionary trusts, Superannuation and Self-Managed Super Funds (SMSFs) are becoming increasingly vital channels for wealth creation.
Because accessing superannuation can be many years away for younger people, it often suffers from a high level of neglect, frequently leading to lost or multiple accounts.
Without taking exorbitant risks, superannuation is a slow and steady journey that can feel frustratingly slow at times. You may not see dramatic gains in the first 10-20 years.
Much like a home loan, where you initially feel as though you aren’t making a dent in the principal balance, the real progression and compounding momentum become visible toward the back end of the journey.
The Long-Term Value of Superannuation
The illustration above demonstrates that if you start working at age 20 and contribute $5,000 annually over a 40-year period (based on an average income of $42,000), a 7.50% return after fees will result in a retirement balance of approximately $1.1 million. (For context, the ASX historically averages returns between 7.50% and 9.50%).
When you retire, the inevitable question arises: “Is this enough to retire on?”
The answer to that ultimately depends on your desired retirement lifestyle, personal asset base and outside investments. Some retirees want lavish annual international trips, while others simply want financial peace of mind.
The best approach is to sit down and plan early. For the younger generation, it is wise to keep one eye on superannuation to ensure it is moving in the right direction.
The ultimate objective is to build your superannuation balance as large as possible. Upon retirement, either when you reach age 60 and completely retire, or when you reach age 65 – transitioning your account into the “pension phase” means all future withdrawals and investment earnings become entirely tax-free.
This remains the only completely tax-free investment product in the country. Given the recent legislative changes to negative gearing, capital gains and trust distributions, superannuation is more critical to your wealth building than ever before.
Strategies to Help Maximise Superannuation
To give yourself the best possible opportunity to maximise your superannuation, consider the following strategies:
- Non-Concessional Contributions (After-Tax): Have you fully utilised the $120,000 annual contribution cap or considered using the “bring-forward” rule to contribute up to $360,000 over 3 years?
- Downsizer Contributions: If you have lived in your primary residence for more than 10 years and are looking to downsize, you may be eligible to make a one-off downsizer contribution of up to $300,000.
- Carry-Forward Concessional Contributions: If your super balance is below $500,000 and you have unused concessional contribution caps from previous years, you can “catch up” on those missed contributions dating back five years. This represents a potential opportunity to contribute up to $115,250 (accumulated across FY21 to FY26), where the funds are taxed at just 15% rather than your marginal individual tax rate, potentially saving you up to 32% in tax.
How Can We Help?
Taking action early can place you in a significantly stronger position over time, particularly as compounding begins to accelerate in later years.
In light of the structural changes introduced in the recent budget, we highly recommend speaking to one of our advisers to assess the cost-benefit of restructuring your finances and initiating these strategic contributions.
Disclaimer: This information is general in nature and does not take into account your personal objectives, financial situation or needs.
