Super Squeeze

What’s that sound I hear you ask?

Yes, it’s the government tightening the screws on one of the widely used and lucrative legal loopholes available to reduce your tax bill and boost your super. In the recent May budget Wayne Swan announced that, despite widespread expectation that the concessional contribution cap for those over 50 with balances under $500,000 would remain at $50,000, it was halved to $25,000. Sorry, delayed. For 2 years. Hmmm. We’ll see.

Further, for those of us you lucky enough to be earning over $300,000 you will pay 31.5% on your contributions rather than 16.5%.

There’s been a fair bit of huffing and puffing from those in the superannuation sector who say that these changes make building an adequate superannuation nest egg more difficult. They emphasise that those over 50 who have hopefully paid off their mortgage and raised their children require this potential tax break to provide impetus to make the best of the superannuation system.

Some commentators (like Ross Gittins from the Sydney Morning Herald) pooh pooh this argument saying half your luck if you can avail yourself of a $50,000 salary sacrifice arrangement to boost your super. Those on moderate incomes have a snowball’s chance in hell of growing their super as quickly as those on higher incomes and hence the gap between rich and poor expands. Moreover the government is also ramping up super contributions to 12% over the next 8 years which is a pro-super initiative.

In this debate, I might have to be that most irritating of observers  - a fence sitter. It’s tough when something that you take for granted (beneficial salary sacrificing arrangements) is “snatched” away from you. A few years ago you could salary sacrifice up to $100,000 per year and pay only 15 cents in the dollar. Now it’s $25,000. It does feel like the earth is shifting under your feet when the rules keep changing on you.

On the other hand, the superannuation system was introduced as a mechanism for those on low to moderate incomes to find a way to at least partially fund their retirement and ease the burden on the pension system. The generous concessional caps were (and still are) a fabulous tax planning strategy. But could a teacher on $60,000 a year take advantage of it?  Even if they didn’t have a mortgage and children your take home pay gets eaten up pretty damn quickly just living your life.

What IS patently clear to me is that building an adequate superannuation balance is a bloody tough thing to do. To give you some simple numbers, to earn $50,000 per annum tax-free in your retirement you need $1 million dollars earning 5%. This is assuming you don’t blow your budget and live on $4k per month and keep your capital intact. Assuming you can earn 5%. That’s a lot of assuming in there.

Yet I look around – at clients, at friends – and see many people a long way from that. A lot of them have earned decent money too. Quite frankly a lot of the time we are frittering it away on stuff that we don’t even remember – too many dinners out, too many clothes, bigger houses, new cars, stuff. There is capacity to save in there but somewhere along the way life and us get in the way. Damn human nature for making us want “more” all the time.

We need to educate our children to start young. First paycheck - get them to put 10% away. Don’t care where – super, bank account, managed fund. That’s detail. They’ll never notice it and it is the seed of a lifelong habit that might just make the difference. Challenge them to live on 90% and that small meagre amount WILL grow. I could show you lots of fancy graphs showing you how much $100 per month will grow in 30 years time but that’s a waste of time. We know this is a good thing.

I like simple messages. Like “Eat Less Move More” when it comes to losing weight let’s apply the same principle to our money:  Spend Less Save More! Obvious – yes. Boring – mmm a little. Useful and helpful and going to achieve results – Hell yeah!