Superannuation Myths

Superannuation is still undoubtedly the best vehicle to save for your retirement.  As I have written in previous newsletters, superannuation has both tax and Centrelink benefits which can add greatly to the wealth of clients.

When speaking with clients there are 2 main objections to using superannuation as a savings vehicle.  The first objection is that superannuation is always losing money.  What is not clear to many people is that superannuation is only a tax structure.  Superannuation does not dictate that you must have shares or property.  Therefore provided the superannuation investment strategy allows for it, 100% of your superannuation money could be invested in cash or fixed interest based investments.  Therefore it is possible that your superannuation is no more risky then money in the bank.  It is a myth that superannuation is risky as it purely comes down to the member’s investment choice.

The second main objection to superannuation is that the Government is always changing the rules and making it less attractive.  While it is true that the rules around superannuation have always and will always change, the tax effectiveness of money, once it’s inside superannuation is as great as it has ever been.  There have been measures taken to reduce the amount of money that people can contribute to superannuation, however a superannuation tax rate of 0% on pension investment earnings and 0% tax on pension payments for superannuation members over the age of 60 is still as good as you can get. In fact recent announcements by the government in relation to capital gains tax when a member passes away have increased the tax effectiveness of superannuation.

The main advice I have for clients is to be aware of the rules of superannuation and how they affect their own personal circumstances.  Do not make blanket assumptions that superannuation can’t be of benefit to you.

Wealth creation for the next generation

 

Over the last few months I have had the pleasure of a number of clients bringing in their young adult children who have recently commenced  employment for the first time.  The idea was to discuss with them how to create long term wealth.

While each client’s circumstances are slightly different there are a number of key themes that continually recur in each meeting which I have summarised below.

1)      Continue to improve your knowledge in the career you have chosen.  The main asset of a young adult is their ability to earn an income.  By increasing knowledge of your job you are increasing your ability to earn a high income from that job and you are increasing your job security as you become more integral to your employer.  Many young people see a job as the end to their education process, but it should just be a continuation of that process.

2)      Don’t try and emulate your parent’s lifestyle too early.  Many young adults are seduced into far too much debt as soon as they earn an income because they want a house and a car like their parents.  It is far better to start off with a modest house and car and pay them off quickly, then to be burden under the weight of large debt repayments.  Some parents have taken decades to accumulate their assets and their children should understand there are no short cuts in achieving wealth.

3)      Pay off your non-deductible debt first.  The allure of a hot share tip or a get rich quick scheme is often too tempting for many.  However, there is no investment that offers a better risk adjusted return then that off paying off non-deductible debt first.  Non-deducible debt maybe such things as a home loan, car loan or credit card debt.

4)      Be prepared to take some risk with superannuation.  The default superannuation fund option that many people are automatically invested into is often the wrong investment option.  People in their 20’s have a 40 year investment timeframe in front of them before they can access their superannuation and therefore this should lead them to weight their superannuation in favour of growth assets such as shares & property.

5)      Never spend more than you earn.  Credit cards are a convenient way to pay for many items, however they can be the worst financial trap for many people.  It is very easy to spend on a credit card without any thought as to how it will be repaid.  The 20% plus interest rates can then make it virtually impossible to climb out from under this debt burden.  Ultimately everyone needs to ensure that live within their means and if debt is becoming a problem there are only 2 solutions.  Increase your income (eg second job) or decrease your spending.

The above items are by no means an exhaustive list of what young people should be considering when first starting to earn an income, however they would be well on the way to financial success by taking note of these 5 principles.