1. Adjust your income during your working life
If you have left saving for retirement until later in life, or have suffered financial losses due to bad investments, or still suffering since the Global Financial Crisis, then harsh as it may sound, some Australians will have to work longer hours or even delay retirement. For example, for many working baby boomers, the GFC meant making the decision to delay retirement, and for retirees, a return to the workforce (see Strategy 9). Your level of income can affect your wealth accumulation plans in at least four ways:
- Earning an income for longer means that you are not relying on your savings to live, preserving your capital for longer.
2. Manage your tax bill
The more tax you have to pay on your personal income, and other investments, the less money is available to invest for your financial future. Tax-friendly investments such as superannuation can help Australians reach their financial goals faster because, depending on your income, less money is snuffled up by the taxman. Although super’s reputation may be slightly tarnished due to the shenanigans of some of the service providers, super remains a concessionally taxed investment vehicle (see SuperGuide articles Australian income tax rates for 2018/2019 and 2017/2018 years (and earlier years) and Super for beginners, part 17: Four must-knows about super’s tax rules).
If you’re accustomed to using tax-minimisation strategies to reduce tax and boost savings, then super, or other tax-effective strategies such as negatively gearing an investment property are possible strategies. In terms of super, the higher your income, the more likely that you will choose to make before-tax (concessional) super contributions, rather than after-tax (non-concessional) contributions, because you can save thousands of dollars in tax this way. Note that higher-income earners pay more tax on super contributions (see SuperGuide article Double contributions tax for more high-income earners).
Remember, most retirees can expect to pay no tax in retirement if their savings are in the super system (see SuperGuide articles Tax-free super for over-60s, except for some and No tax in retirement because you SAPTO).
3. Review your level of super contributions — one-off or regular contributions
If you add more money to an existing pool of money, you will obviously have a bigger pool of money. Likewise, if you make additional super contributions, you can expect your superannuation balance to grow faster. You also have another element boosting your super savings — compound earnings (or losses in recent times, although long-term returns may trend back to 7% a year). Your superannuation account receives returns or earnings from your super fund’s investments, and then those earnings are re-invested with the balance of your super account, giving you even more returns (eventually!). Compound earnings, plus regular additional contributions, or even one-off contributions, can accelerate the growth of your super account over time.
4. Maximise years of contributions
The longer the timeframe in which you make regular contributions, the more money is invested over time for your retirement. More contributions from you (and your employer) means a larger pool of savings, and your super account reaps the benefits of compound earnings (assuming super fund returns revert to long-term averages) for a longer period of time, creating a larger final super balance.
See SuperGuide articles Doubling your wealth is a super compound: Rule of 72 and Investment returns after retirement: Understanding the 10/30/60 Rule.
5. Decide on desired rate of investment return
The return, or earnings, on your superannuation account or other non-super savings, is the key contributor to wealth accumulation. If you want higher returns, you generally have to take higher risks, which can mean investment losses in some years. For some individuals, losing money is too stressful and they would rather opt for an asset allocation that delivers a moderate long-term return, and invest for a longer period, or contribute more regularly, or even delay retirement to accumulate a larger super balance. (You may decide to review your super fund as well.) In case studies and examples published on this website, we generally use 7 per cent after fees and taxes as the assumed rate of return.
For information on how super investing work, including expected long-term returns, see the following SuperGuide articles:
6. Decide on years that you hold investments or hold your super account
Time is the key when accumulating wealth. You let compound earnings weave their magic and, if you choose, you can rev up your superannuation savings with additional super contributions. If you don’t have time on your side, however, then you may have no choice but to contribute more money, or take more risks when investing, or decide to accept a less costly lifestyle in retirement. Note that taking more risks also means that you have a higher chance of losing some of your savings (for related articles, refer to Strategies 3, 4 and 5).
7. Manage level of fees, and insurance premiums
Fees, like taxes, are the hidden enemies of investors, although fees are necessary if you’re planning to rely on someone else to invest your super money. Insurance premiums are an additional cost of having a super account, and based on some of the evidence heard at the Financial Services Royal Commission, it may be worthwhile to check that the cover you have is suitable for your circumstances (and that you don’t have multiple insurance policies).
Even when you choose to run your own super fund (a self-managed super fund) you will still encounter fees. The trick is to manage the amount of fees that you have to pay. The key to accumulating wealth, however, is the return on your investments — maximising the long-term return after fees and taxes.
For information on super fees, see the following SuperGuide articles:
8. Review your proposed retirement age
If you retire too early, you can miss out on important extra years for accumulating wealth for your retirement. A further disadvantage when you retire too early, is that you need to save more for your retirement because you will need to finance more years in retirement. Generally speaking, the earlier you retire, the smaller your super payout is, and the longer it has to last. In comparison, the later you retire, the larger your super account balance and you then also have fewer years in retirement to finance with your lump sum.
For information on the implications off retiring early, or later, see the following SuperGuide articles:
9. Working (and contributing to super) in retirement
If you’re willing to continue working when you retire, especially if you plan to retire before Age Pension age, the amount of money that you need on retirement is a lot less, because you’re providing a second income stream sourced from your work income. If this is an option you’re considering, then you need to be very particular about your plans, because most individuals choosing this option work only for the first few years of their retirement, and then rely solely on superannuation and non-super savings, and the Age Pension (if they are eligible). If you’re retired, then returning to return to full-time or part-time work can protect your capital and allow you to rebuild your savings.
10. Receiving an inheritance or other lump sum payment
You may receive an inheritance later in life, or other lump sum (such as the proceeds from a divorce settlement or sale of a property) that you can put towards your wealth accumulation plans. If you’re planning to contribute these funds into a super account, then consider the annual non-concessional contributions cap, and the bring-forward rule.
For information, see SuperGuide articles New normal: $100,000 non-concessional contributions cap and Bring-forward rule: A definitive super guide.