Not only could you save $3000 a year in tax by salary sacrificing, but there’s the potential to increase your super by hundreds of thousands of dollars by retirement age.
The difference between a 43-year-old on $85,000 per annum simply accepting his employer’s superannuation guarantee (SG) and him maximising his salary sacrifice contributions (currently $25,000 p.a. including SG) is just shy of $700,000 at age 60, assuming a 6 per cent return on his money. This figure is exclusive of any other of super benefits, such as transition to retirement, borrowing to buy property or borrowing to buy instalment warrants.
What is salary sacrifice?
Salary sacrifice is where you can contribute a portion of your normally taxed gross income to your super fund and pay just 15 per cent tax instead of your normal marginal tax rate, which may be 19 per cent or as high as 45 per cent excluding the Medicare levy surcharge. The simple principle is to save tax and boost your super so you can have a more substantial retirement fund. While many people salary sacrifice, few actually do the long-term calculations to determine the optimum amount they can afford.
Crunching the numbers
I know you’d rather chew off your left arm than do a family household budget, but humour me and give it a try (there’s a free one on the MoneySmart site). Once you know how much you need to meet your ongoing expenses, you can then work out the optimum level to bump your salary sacrifice up to without leaving you destitute.
It often makes more sense to increase your super than to pay off your mortgage because your mortgage is repaid with after-tax dollars (assuming your mortgage is not tax deductible). Super, on the other hand, can be increased with tax-effective before-tax dollars, thus having a greater effect on your total assets at retirement. The mortgage can then be reduced further at retirement by making a tax-free withdrawal or by utilising a transition to retirement to repay the mortgage.
While these strategies can appear simple, complexities may arise when comparing options and understanding what is right for you. That’s where a good financial advisor can help you to run the numbers.
Take control of your super now, reduce your tax and boost your retirement prospects. Your future depends upon it.