Many Australians think that early retirement is just a pipe dream that is for the billionaires of this world – but here's why superannuation is a simple and powerful tool that you can use to retire early.
How does superannuation work and how can I use it?
Australia's superannuation system is one of the best in the world, and I believe it is one of the easiest and best ways to invest your hard-earned cash.
Super contributions are generally taxed at 15%, which is below the 18% threshold for earnings above $18,200 in the Australian taxation system.
Super returns are a simple example of the magic of compounding returns, with the principal invested now worth exponentially more by the time you reach preservation or retirement age (i.e. at 67).
As a simple example, if you assume a 5% per annum real (inflation-adjusted) rate of return on your investments, a $10,000 investment would be worth the following by the age of 67:
- 20 years of age: $99,059.71
- 25 years of age: $77,615.86
- 30 years of age: $60,814.07
- 40 years of age: $37,334.56
- 50 years of age: $22,920.18
- 60 years of age: $14,071.00
- 67 years of age: $10,000.00
When is salary sacrificing right for me?
Salary sacrifice is a part of salary packaging here in Australia, in which employees (i.e. you) can sacrifice a portion of your pre-tax income and divert that money towards other causes such as rent, car payments or superannuation.
While not for everyone, it's worth considering salary sacrificing a portion of your pre-tax income into super to build that retirement nest-egg and put your investments in a tax-sheltered investment vehicle – after all, lower tax means higher real returns.
As a general rule, if you are earning in the higher tax brackets or are beginning to look towards retirement or preservation age then super is right for you.
With a lower tax rate, the effective rate of return required on your super is higher than that from your investments outside of the tax-sheltered vehicle, which means it's worth building up that nest egg.
For younger Australians, superannuation can be a powerful savings tool, particularly if you struggle with stashing that money away, with the obvious drawback of that money being locked away for a long time and the inevitable regulatory risk.
I'm a big proponent of superannuation but you should be financially secure on your living wage before considering ploughing extra cash into your retirement fund, or risk being caught short when trying to pay for that emergency expense.
For those looking for a more high-risk, high-reward growth play in their investment portfolio, this top-rated stock in a $22 billion new-age industry could be the perfect portfolio fit.
