Hi and welcome to this week's episode of Money with Alpha. Today I wanted to talk about uh, superannuation and retirement. That's why I'm wearing my, if you can see the video, I'm wearing my retirement earrings which is like a Palm beach kind of thing. Um, something that I see a lot when I work with business owners and to be honest people in general is not optimizing the superannuation system.
So this is specific to the Australian market. Uh, I'm not as familiar with the 401k system in the US or in other um, Western countries. So this one you would have, for that you would have to look at your specific rules. However, uh, the principles that I'm going to talk around will still be applicable to you.
So first of all I'm going to talk about what superannuation is and then I'll start to talk about the principles behind um, contributing to it and how to maximize or optimize your cash flow in that way. So firstly we've got. Superannuation is a structure that was set up by our government a good 20 years ago, if not longer.
Now I'm trying to, it would have been longer than that. Um, but it was designed to create a holding place for um, retirement savings. So rather than relying on individuals to put money aside for their retirement, they created a mandatory system where employers had to contribute a certain percentage of wages for the individual that they employed.
Um, and then that has expanded into contractors as well in Australia to a retirement fund. Superannuation is sort of the name given to that whole system. Um, the funds sit in a trust structure. So regardless of which fund you're actually in, unless you have a self managed super fund, um, which operates slightly differently, um, because you create your own structure but there's still um, rules around how to access it that come from when you get, because it's designed to be there in your retirement so for when you're older.
So quite often we don't really think about it much until we get into our 40s, sometimes 50s and go, oh crap. I can now see retirement on the horizon and I haven't really been doing enough to increase or optimize my savings in that regard. So um, what it's designed to do is they have what they call a superannuation guarantee, which is there is a guaranteed amount of your income that gets paid on your behalf by an employer.
However that changes things. If you're self employed or you are your business, even if you employ staff, you're going to have to be aware of how to pay your staff. So at the moment for FY25 were at 12%, it was 11 and a half percent. And it's been gradually increasing.
So it does increase the cost to two companies but or to businesses. Um, however there's the cost of living has increased. So it's sort of only makes sense that the amount that goes into superannuation increases too. But what that's meant to do is allow us to save for our retirement.
Business owners again like I said, generally don't tend to prioritize that especially in the early years. I remember when I first started um, to be. I started out as self employed employed and I didn't pay myself super for at least a year. And I remember now I look back on it and go oh, what am I thinking?
But now I'm, I've been there, I know what it feels like. So I can relate. When I, when I work with businesses, um, and I we encounter this same issue which is why, why it's not happening because I get it, you want, you know cash flow in the beginning is a little bit yeah sketchy.
So you're, you're trying to reinvest as much as you can back in your business. So you often don't pay yourself a proper salary which then also means that you're not prioritizing super any. However, it is really important to at least put some focus on this. Um, preferably now or at least as soon as you possibly can.
Now every year we're given tax concessional caps. So the superannuation system reduces the amount of tax that we pay on that income we're earning. So instead of paying whatever your marginal tax rate is or a small business tax rate which is 25%, it's capped at 15% tax. So it's actually quite a tax effective investment strategy because everything that sits in a superannuation fund is invested.
So even if you don't have investments outside of superannuation, you are an investor because you have investments in your name or are invested on your behalf within your superannuation fund of choice. Um, I'll get into the choosing the superannuation fund part in a moment but. And the capped for that.
So because there's a tax benefit the government's like oh, we don't want people to just like chuck as much as possible in there and they get the benefit of that, of that tax break. Um, so we're going to cap it. So the concessional rate cap is $30,000 a year to maintain that 15%.
But then there's also what we call non concessional contributions, where you can still contribute up to then $120,000 at the moment into your super fund, but you don't necessarily get the concessional, um, 15% tax rate on that. But they still acknowledge that, especially if business owners want to start to play catch up and put more in their super, they can still do that.
However, I still am of the personal opinion that we should be investing inside and outside of super, because then outside of super, we get a little bit more flexibility, a bit more control about A, what we invest in, B, how we invest and see when we extract it and how we extract those investments.
So it just gives us a bit more choice and it gives you optionality, have them in both, you know, take advantage of the superannuation system, optimize that as much as you can, but then also try and, uh, structure your cash flow in a way that you can also invest out outside of Super.
So talking about the investment choices inside super, the different superannuation funds will often have different choices. There is now what they call my Super. So because it was really hard to compare super funds, the Australian government decided to put in a certain type of fund that could be comparable.
And that's what they call my Super. And so every fund needs to have a my super fund so that they can compare it and go, well, how, uh, how are the different super funds performing in comparison to one another? So it's actually a really good initiat. Outside of that though, you can invest in other things and the choices have really opened up over the last sort of five to 10 years.
You can invest in direct shares, so you can actually choose which particular companies that you want to invest in. You can invest in index funds, ETFs, inside your super funds if you want to, or you can go with the portfolio that's more balanced. You can go for one that's a bit more aggressive if you're a bit younger.
Um, then there's also transitional retirement funds now. So Vanguard have brought out a super fund where it actually transitions with you. So the portfolio adjusts. And by that I mean when you're younger, you can afford to take on a bit more risk because you've got more working life to be able to ride out any market crashes, for example.
So your portfolio might be made up of like 70% sort of higher risk investments, which are usually shares, especially international shares. And then 30% will be a little bit less risky. So they could be in fixed interest, um, debentures, bonds, other fixed interest Some might just be in pure cash, term deposits, for example.
Um, and you can actually choose. Some funds now will actually allow you to invest in term deposits. That, however, is provided the fact that the return on term deposits is decent enough at the moment. You can get one for around five, five and a half percent, but who knows how long that will last.
So the whole idea of this is if you're going to take on a bit of risk, possibly super funds could be a place to do it. Or you might prefer to do that outside of super. It depends on your risk profile. So that's 70, 30, and then that starts to shift as you get older.
So it might end up at 50, 50 at one point and then as you get older, like my parents are like 80, 20, so they have a little bit of money in the share market, but 80% of it is sitting in like pure cash because they're in their 80s now.
So they, you know, they don't have the time to ride out any sort of markets. They need the money to be able to survive because they haven't been working for 10, 15 years. So that's how the investment side works. And you can choose the investments you want to be in inside super.
Nobody's saying to you, oh, you're this age, you have to do that. They're guidelines, um, but you need to be informed so that you make sure you're making the right choice for you. So that's the superannuation sort of fund system. Um, and like I said, the percentage guarantee at the moment is 12%.
Um, the tax advantage side of it. And you can choose your investment choices. The other thing to look out for are fees. That differs quite a lot amongst different superannuation funds. Some you can pay $300 a year, some you can pay $600 a year. And the actual investment that you're chose that you've chosen as well, that also makes, makes a difference what the percentage of that is.
If it's more than 1%, in my opinion, too high. Because if you, you can actually there are calculators where you can see the impact it has on your balance. So if we're talking, if you're talking like $600 over two, three years, not as the compounding impact of the fee as well as the, uh, percentage, like the percentage fee and the dollar fee, if you multiply that or compound it over like 20 years, you could be looking at 40 to 60 thousand dollars difference.
Like it starts to become really significant. And I don't know about you, but I prefer to have that 40 to 60 thousand dollars in my pocket to use. That could, that could be an entire year or two's retirement funding. So you would forego that just because you hadn't looked at your fees.
So if you've had your annual return that they have to send you at the end of every financial year, have a look at it and just check it out and see what um, fees you're paying. Also have a look at what um, your insurances are. If you have some, or if you don't.
Make sure you're insured for the right amount. Make um, sure that you don't have multiple insurances. If you've got multiple super funds and you're paying multiple fees because that also comes off your balance as well, the insurance, um, premiums. And you can have some outside of super if you want.
But one that um, I see business owners often have is income protection. The one thing you've got to remember though is this is a super fund, which is a retirement fund vehicle. So if you need to make a claim on it, not only do you have to satisfy the requirements of the income protection insurance policy, you've also got to satisfy the requirements of the super fund to actually get the money out of it.
So you've got like two layers of oversight there. So just keep that in mind as well. And just in general in terms of optimizing your cash flow for it, if you're tracking your revenue every month and your expenses and you see what you've got left and you make sure that you put money aside to pay your tax, that you've got money to cover all your operating expenses, that you've got some extra operating expenses set aside in case there's some fluctuations up and down in your revenue or something breaks and you need to be able to replace it.
Um, that you made sure you're paying all your wages, the payg. So your tax that you pay on your um, the employees wages as well as the super on your employee wages, if you've got any, and you're paying your own super as well, and you're also paying yourself a decent wage.
If you've got anything left over, you could hang onto it as retained earnings as profit or you could at the end of the financial year go, you know what I'm going to, I've only put like 15 grand away for my super this year. I'm going to chuck an extra five on.
It's not quite up to the 30, but I've got a little bit extra. I'm going to Prioritize putting that into my superannuation. Because what you'll then find is when you've got your personal finances and this is contingent to make sure you're paying yourself the right salary, you can then.
And you're paying super on that salary as well. You can then see if you can invest with, if you've got, if you structured your, your um, your personal finances in a way and you can see you've got all your bases covered there including money for fun and emergencies and anything else that you need to account for like a new car or kids school fees.
It happens to be make sure you're putting some money aside so you can invest so the investing money actually happens in your personal finances. But your extra super will generally happen in your business finances. And you can pay yourself extra super and it's before tax so you get sort of the benefit of that.
And then your accountant can help sort the rest of that out. But have a look at your money and your cash flow and if you're not sure, you can book in a free Clarity chat with myself. You can follow me on socials, um, follow me, um, Alpha Shorter on, on um, Facebook and Alpha Money Made simple on Instagram and ask questions, ask your accountant questions, ask me questions.
Make sure you understand it because if you don't, you could be missing out on thousands, if not tens of thousands of dollars in retirement and also investments. And you could also miss out on being able to go on holidays if you're not budgeting for them as well. That wasn't the point of today's episode.
Today was more focusing on ret in superannuation. But I really want to make sure that you understand the superannuation system, understand how much you put in, uh, you can put up to $30,000 in and still maintain the tax benefit. Um, make sure that you see if there's any extra you can put in to get closer to that $30,000.
Look at your um, investment choices in your super fund. Look at the fees that you're paying and then when you've paid yourself your personal salary, see if you can optimize that and actually invest outside of super as well because that will also help support you in your retirement and your lifestyle.
So our insurance, your income protection insurance, if you wanted to go down that path as well, inside or outside super. And look at the benefits and the differences, um, based on your circumstances. So for that you can talk to a risk specialist but prodding you so that you know what questions to ask.
So with that I will leave you to start dreaming about your ideal retirement and then to start looking at how you can fund it. Because once you know that, it makes it a bit easier to start putting dollar figures around it. And I do have a money planner which helps you understand what your net worth future will look like if you wanted to check that out as well.
But for now, start to absorb that and just think of some questions that you might want to ask your professionals. And feel free to ask me too. All right, Enjoy the rest of your week. As we start to approach the Christmas season, um, and I might be doing one more episode before we take a little break over the Christmas New Year period.
So enjoy the rest of your week.
