Further restrictions to superannuation regulations have made it increasingly difficult for Australians to rely on this compulsory federal scheme to support them through retirement.
As of I July 2017 the maximum deductible contribution for all Australians regardless of their age, drops to $25,000. After this contributions will be penalised depending on your age. Even with higher deductible contributions a large portion of the population were retiring in Australia with a strong reliance on state assistance. Reducing contribution incentives can only exacerbate this problem.
It is complex system that requires the advice of a superannuation expert. They can often help investors maximise the benefits of their super by making smart choices and planning accordingly.
However, many Australians are beginning to realise that superannuation, even with professional advice, is unlikely to create enough of an asset base to provide a decent living in retirement. This is particularly true as our life expectancy continues to rise (along with our cost of living).
The average Australian’s salary including benefits and bonuses is $80,000. The employer’s compulsory superannuation contribution is therefore around $7,500.
The average super balance at age 40 is $100,000. Sadly, the average for women is in fact around $55,000 at age 40, but the gap is closing and for the purpose of this exercise we will take the non-gendered average.
- If the fund performs at 8% per year and Sue contributes the national average of around $7,500 per year, she will have approximately $1.2m by the age of 65 (in 25 years).
Let’s assume that an investor (Sue) is in a position to contribute up to the concessional cap of $25,000 per year until retirement.
- If the fund performs at 8% per year and Sue contributes $25,000 per year, she will have approximately $2.5m by the age of 65 (in 25 years).
These figures might sound impressive, but we have not factored in the effect of inflation and subsequent purchasing power of Sue, our retiree.
- Scenario 1 would produce an average income for Sue $60,000 per year. However, with the effects of inflation, this would purchase the equivalent of $39,000 worth of goods and services today.
- Scenario 2 would produce an income of around $120,000 per annum which would purchase the equivalent of $80,000 per annum today.
Can you afford $25,000 per year for the next 25 years? If so, you may be able to retire on a relatively strong income and lifestyle. However, you are much more likely to contribute around the average of below $10,000 per annum. Indeed, most Australians are actually retiring on between $250,000 and $350,000 (or a yearly income of $12,500 to $17,500).
It hardly seems worth the trouble of saving 9% of your salary a year.
Most of us aspire to a little more than this. One way to boost any asset base is leverage. This is becoming more critical with the sluggish and challenging restrictions placed on super funds. So, let’s have a look at how leverage works:
You have an asset base of $100,000. There are various choices for how you invest, including:
- Passive: invest your $100,000 into cash or fixed interest
- Active: invest your $100,000 into the stock market or actively managed funds
- Alternative: use it as a deposit on a $500,000 direct residential property
Assume you select one of these asset classes, you invest your $100,000 into it and leave it for the next 25 years. You do not contribute any other funds towards it.
- If cash performed on average the way it has from 1990 to 2016, it would produce a return of 4.81% per annum. In 25 years this choice would equal approximately: $338,000
- If the Australian Stock market performed on average the way it has for the last 30 years to 2016, it would produce a return of 9.5% pa. In 25 years this choice would equal approximately: $966,000
- If the Australian residential property market performed on average the way it has for the last 20 years it would perform at around 9% pa. In 25 years this choice would equal approximately $4,300,000 (minus approx. 400,000 owed to the bank)
- If Australian residential property only performed at 6% for the next 25 years, this choice would equal $2,100,000 (minus approximately 400,000 owed to the bank).
Given the boost from leveraging into property, it is clear that this strategy may have a place in an investor’s portfolio. Particularly where there are no incentives – and in some cases even penalties – for contributing to an asset base like superannuation.
Leveraging into property may be the best way to contribute to your superfund without penalty, and it’s worth considering depending on your age or stage in life.