The superannuation landscape and the rules that govern superannuation in Australia are constantly changing. These changes impact each member’s ability to achieve financial security in retirement.
The following case study explores the ability to maximise super using concessional (before-tax) superannuation contributions and to invest in property in self-managed superannuation funds (SMSF).
Strategies explored:
- Concessional contributions
- Direct investment in property using SMSF
PICTURE THIS
Logan, aged 45 (today), currently earns $120,000 a year and has an accumulated super balance of $250,000. He wishes to retire at the age of 60 with an annual pension of $70,000 per year to fund his desired lifestyle in retirement. This equates to a retirement savings goal of $1,115,1471 by retirement age.
Logan understands a significant gap exists between his current super balance of $250,000 today and his savings goal of $1,115,147 by age 60.
He is aware changes to super legislation has taken place recently but is unsure how they impact his current situation. Further to this, he is interested in understanding how direct investments in property work with a self-managed superannuation fund (SMSF) and how this could help him achieve his retirement savings goal.
Logan seeks professional financial advice to explore the available options.
| Age | 45 years old |
| Annual salary | $120,000 p.a. |
| Superannuation balance | $250,000 |
| Desired retirement age | 60 years old |
| Desired annual pension | $70,000 p.a. |
| Projected retirement savings goal (age 60) | $1,115,127 |
Scenario summary
SCENARIO 1 – DO NOTHING
Logan continues to only receive super contributions made by his employer. He currently receives the standard superannuation guarantee, at 9.5% p.a. of his salary. Logan finds that he falls short of his retirement savings goal by $502,512.
| Do nothing – Receive compulsory contributions | ||
| Employer contributions | $11,400 p.a. | THE GAP:($502,512) |
| Total concessional contributions | $11,400 p.a. | |
| Projected retirement savings (age 60) | $612,635 | |
| Projected annual pension (age 61 – 84) | $38,456 p.a. | |
SCENARIO 2 – DO SOMETHING
In addition to receiving his employer super contributions, Logan decides to salary sacrifice $13,600 p.a. By doing so, he reaches the maximum concessional (before-tax) contribution cap of $25,000 p.a. Logan is still short of his goal by $245,110.
Note, prior to the super changes that came into effect on 1 July 2017, he would have been able to contribute up to $30,000 p.a. until age 50, and $35,000 p.a. thereafter. This highlights the importance of understanding superannuation legislation and when new rules come into effect as this can significantly impact the end result.
| Do something – Salary sacrifice | ||
| Employer contributions | $11,400 p.a. | THE GAP:($245,110) |
| Salary sacrifice | $13,600 p.a. | |
| Total concessional contributions | $25,000 p.a. | |
| Projected retirement savings (age 60) | $670,037 | |
| Projected annual pension (age 61 – 84) | $54,614 p.a. | |
SCENARIO 3 – DO MORE
In addition to receiving his employer super contributions and salary sacrificing $13,600 of his before-tax income, Logan establishes an SMSF and decides to invest in direct property.
With consideration of property growth rates and rental yields, Logan is able to close the retirement savings gap and achieve his retirement savings goal prior to retirement at age 60.
He achieves a surplus of $23,638 by using leverage as a tax-effective alternative to contributing to super beyond the $25,000 concessional contributions cap.
| Do something – Salary sacrifice | ||
| Property purchase price (4% growth) | $500,000 | GOAL REACHED$23,638 |
| Investment debt | $350,000 | |
| Rental income (4% growth) | $20,800 p.a. | |
| Projected retirement savings (age 60) | $1,138,785 | |
| Projected annual pension (age 61 – 84) | $71,484 p.a. | |
Speak to your Superannuation adviser regarding strategies to maximise super growth or contact us to find out more.
This is a case study provided for illustrative and educational purposes only. The case study is based on a model, not a prediction. Any information, rates and calculations used are based on what laws and regulations were current or proposed at the time of preparation. This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances