Everything we’re told is to begin adding to our super at a young age while time is on our side.
Well blow that.
I’m not talking about employer contributions. They can keep coming. I’m just saying that I don’t think people our age should be making extra contributions to super.
Being in your late twenties, thirties, or even early forties is an exciting time. There’s so much going on and it feels as though there’s not enough hours in the day to fit it all in.
Between work, time with the kids, time with your partner (occasionally getting frisky), maintaining the home, and catching up with friends – there’s not much spare to take a deep breath to unwind. You probably even count yourself lucky if you get to go on a holiday somewhere throughout the year.
You think to yourself, ‘Is this it? Am I a slave to my lifestyle for the next 30-odd years?’.
We all love our kids, our partners, and our friends and we do what we need to do to spend time with them. But we know there must be a better way. We shouldn’t be flogging ourselves silly week-in-week-out just for a few precious moments, should we?
So, what do we start thinking of next?
Well, we begin looking at ways to earn a bit more money, or to just simply ‘get rich’!
This way we wouldn’t have to work as hard, definitely wouldn’t have to work as long and, ultimately, we could spend more time doing the things we love – with the people we love.
So…. what’s that got to do with investing in super?
(yep, that’s right, we’re meant to be talking about super)
Super is a magical land where we put money aside to thrive (hopefully) until we’re much, much, much older.
Most of us would just have the mandatory employer contributions being made into our super accounts, which is fine. Don’t dare stop them!
But what about voluntary savings and contributions, like salary sacrifice?
Or what if you’re self-employed?
Should you be adding to your super?
The incentive of super is that you can claim a tax deduction on certain contributions made into your account – reducing your personal income tax (in Australia anyway). Also, the earnings within your super account are concessionally taxed.
But, in order to create a ‘better’ life for ourselves, now or in the near future, we need two things: time and money.
Time allows us to focus on starting a side venture to make a business idea become a reality. Time lets us set a foundation for our own business – if we choose to move away from being an employee; or it may simply give us half-a-day per week to reflect on our current business to brainstorm ways of improving processes, or increasing customers.
Then there’s money.
Money might help fund the initial stages of a new business; it might allow us to market our existing business; it could cover education expenses to further our career, or it may well just give us the half-a-day per week we need to not be physically working, but rather planning a way towards a more fulfilling life.
So, where the hell am I going with this?
Well, in a largely roundabout way, I’m trying to highlight the ‘risks’ of investing in super while you’re still young. I’m trying to provide a macro perspective and rid you of short-term incentives associated with contributing to super.
Here’s my belief.
Essentially, by contributing to super, what you are saying is: ‘I cannot think of a more creative way to utilise this portion of money right now, when considering the tax benefits associated with contributing to super. Furthermore, I don’t believe I will have any ideas on how this money could help fund my career/business dreams between now and when I’m in my 60s. And, because of this, I am willing to lock away these funds for the next 30 years.’
Now, if that’s your un-inspiring attitude, then fine. I’m not here to judge.
Let’s look at it from a mathematical view.
(don’t leave because I used the ‘M’ word) – don’t worry, all calculations will be very simple.
Say you were considering salary sacrificing $10,000 this year, or making a self-employed contribution of $10,000 into your super account. Upon being contributed, this amount will incur ‘contributions tax’ of 15%. Therefore, the net amount invested into your account would be $8,500. This $8,500 would be worth approximately $38,000^ in 30 years’ time (just over $15,000 in today’s dollars – taking into account inflation).
Alternatively, had you not contributed it to super and instead put it on your mortgage, you would have paid tax at 32.5% (incl Medicare), which is a fairly average rate; meaning the net amount of $6,750 would have been allocated to your mortgage. Over the course of 30 years, the benefit would be approximately $29,000*.
Now, let’s consider your other choices.
Firstly, in order to have immediate access to this $10,000, you will need to pay income tax – like our example above – at a rate of 32.5% (or whatever your marginal tax rate is). Therefore, you have $6,750.
Are you telling me you can’t think of a more productive way to put these funds to use?
- If you are an employee, you could use this $6,750 to further your qualifications. You would only need a once-off pay-rise equivalent to $5,000 to equate to a benefit of more than $100,000 (after tax) over 30 years – much greater than contributing to super; or
- You may use this $6,750 to quit your job (or leave without pay) and have enough to cover your living expenses for a month while you look for a more fulfilling role and/or one that pays higher.
- If you run your own business, you might only be paying tax at 30%, giving you $7,000 of the initial $10,000 to build your customer base, target a new market, or refine your business efficiencies.
Tell me that one of these options wouldn’t net you more than $38,000 over 30 years…….
Contributing to super under age 40? Ha, no thanks… I’d prefer to bet on myself!