For many of us the thought of retirement and accessing our superannuation is so far off that we all too often put it into the basket marked ‘I’ll think about it next year’. In putting super down your list of priorities you could be doing yourself a great disservice.
Superannuation was essentially set up by the Government to provide a concessionally taxed investment environment so we – the taxpayer – would save. The tax concessions associated with superannuation aim to decrease reliance on welfare and increase economic independence in retirement.
There are three key concessions:
- Deductions for contributions;
- Low tax on income and capital gains in the accumulation phase; and
- No tax on income and capital gains in the pension phase for member balances under $1.6m.
This seems simple enough. And for most people they are a generous set of rules that, if acted on early in a working life, almost guarantee a comfortable retirement and perhaps a significant legacy to the next generation.
When these rules are combined with the height, stability and longevity of a doctor’s income, and the fact that most doctors are self -employed, they become an irresistibly powerful wealth creation strategy well beyond what can be achieved by most people. This is because:
- doctors have stable incomes, and strong borrowing ability, so locking money up in super to age 60 is not a significant risk;
- doctors have high incomes and can usually afford to pay the maximum contribution every year, from a young age on;
- doctors’ spouses can usually afford to pay the maximum contribution every year too;
- doctors work much longer than most people, and hence pay the maximum contributions over a longer period;
- doctors are more likely to pay large non-concessional contributions, to build up the super benefits even faster;
- doctors are more likely to take advantage of the rules for gearing SMSFs, which are a powerful investment strategy;
- doctors are often self-employed via practice entities, and this means they can borrow to pay deductible contributions, and the interest is tax deductible to the employer; and
- doctors are more able to integrate a sensible super strategy into their broader and more comprehensive financial plan.
Just pay those super contributions every year
Superannuation, therefore, should be an integral part of your wealth building plan and getting started early is the key. Albert Einstein once said “compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” As the chart below shows the earlier you start your super journey the larger the impact on your super savings.
The following graph (using some simplified assumptions on investment return, tax and maximum contribution limits, and shown in today’s dollars) provides a good illustration of the power of starting early.
As the table illustrates, a 35 year old making maximum contributions to age 65 will only tip in $125,000 more than the doctor who starts at 40 – however, they will expect to have $889,585 more in today’s dollars by age 65. When compared to a doctor starting at age 45 the effect is even more pronounced. The 35 year old will contribute an extra $250,000 to super over their working life but will accumulate a staggering $1,498,890 more by age 65 than their laggard 45 year old contemporary.
It is for these reasons that we encourage our clients to consider making the maximum concessional contributions possible each year to their superannuation fund ($25,000 for the 2019 financial year). Even if the maximum is not possible then just getting something into superannuation will make a difference.
For those a little more advanced in age from 35 then the next best time to contribute is now. Given the tax concessions associated with superannuation it is still likely that this is the best place to invest.
Obviously personal cash flow needs to be taken into consideration as once that money enters super it is a long time before you can get it back. To discuss your superannuation goals further please contact our one of financial advisors.
General Advice Warning
This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided in this article are general advice only. Please arrange an appointment to seek personal financial and taxation advice prior to acting on this information.