We often discuss owning the great companies of Australia and the world and how it benefits you in retirement. Today, we look at some things you can do while you are still working.
There is no magic bullet when it comes to reaching your financial goals – it comes down to many components. Buying quality companies and holding onto them is one of the strategies we recommend to our clients. And if you’re 55, accumulating and owning shares in the top companies can certainly serve you well in the last decade of your working life.
At age 55, many people are earning the highest income of their careers – that’s why, at this point, it’s critical to maximise the input of concessional super contributions in order to receive a tax saving. We want our clients to have the least amount going to the ATO and the most amount possible going into their super.
Funds going into super are taxed at 15%; a much lower rate than income tax which is around 34.5% for most people depending on their level of income. A couple earning $90,000 each would have an employer contribution of $17,100 together, which means they could put $32,900 into their super as a voluntary contribution (the limit being $50,000 per couple per year for FY2020-21). That amount would be taxed at 15% rather than 34.5%. Over 10 years, that’s a significant saving.
We recommend our clients do this each year. Small savings such as these equal huge savings over time. And if you looked at the amount over 10 years, you certainly wouldn’t take it for granted!
There are other government benefits people can take advantage of while they are still working. For example, if one member of a couple is a high-income earner and one is not, they can take advantage of something called a spouse contribution. If one person earns under $40,000 and the other earns over $150,000, the higher earner can put $3,000 into their partner’s super. There is a tax offset of up to $540 (reduces between income of $37,000-$40,000) – which, again, over 10 years would be $5,400. Not a bad amount to be sitting and accumulating in your super fund. The high-income earner can also take advantage of the concessional contribution’s “CC” (as mentioned in the first example) and carry forward amounts left over in their CC Cap from previous years.
You don’t need to be a couple to take advantage of tax benefits, though. Concessional contributions can be done individually. On top of that, when a low-income earner (who earns approximately $40,000 or less) puts $1,000 into their super, the government will add an extra $500 to it.
These are just some of the strategies we can utilise to make the most of your income while you’re still working. Towards the end of each financial year, we look closely at each of our client’s financial circumstances and income to determine which tax strategies would work best for them.
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Dallas Davison, Michael Hogue and Ali Hogue.