For the purpose of wealth accumulation, saving for and funding retirement, there are few - if any - investment vehicles better than superannuation in Australia.
Below we look at the reasons why.
TAX
As individuals, we pay personal tax on any income or investment returns that we generate. In the lowest tax bracket, we pay 19 cents tax for every additional dollar we earn, and in the highest bracket, 45 cents for every extra dollar earned.
Returns in our superannuation are taxed a little more favourably. While we are working, our super funds pay a maximum of 15 cents for every dollar of investment earnings, however once we retire our superfunds pay no tax at all. To sweeten the deal even further, the income that we draw from super once we retire and reach a certain age is not taxed personally.
TIME
The amount of return generated by an investment, whether it is in superannuation or not, grows exponentially over time in dollar terms.
In our blog 'What’s all this about ‘time being money’?' we look at some examples that demonstrate why this is the case. But in summary, when an investment is held for the long term, you start generating profits on top of profits resulting in a snowball effect.
It can be calculated that an investment returning about 7% p.a. will double in value every 10 years. The following table shows the implication of this, using $10,000 as a starting investment.
YEARS | VALUE | INCREASE |
0 | $10,000 | - |
10 | $20,000 | $10,000 |
20 | $40,000 | $20,000 |
30 | $80,000 | $40,000 |
40 | $160,000 | $80,000 |
Although this is an extremely simplified example it clearly shows that the increase in dollar value of the portfolio gets significantly larger each consecutive 10-year period. For those who enjoy numbers, the exponential equation for the above table is:
More generally, the growth of a portfolio value is represented by:
Superannuation takes advantage of this because it is mandatory for employers to make contributions to our super funds. Therefore, most Australians will have an investment portfolio generating returns for about 45 years before they start accessing it - long enough to take advantage of these increasing returns.
All investment returns mentioned are on a scenario basis only. Past performances are not indicative of future returns
PROFESSIONAL MANAGEMENT
For most of us, our superannuation investments are managed by professionals who have the experience, expertise and resources to find appropriate investment opportunities.
Although every investment may not perform well, here at Hub we have noticed a tendency for reputable fund managers to consistently outperform their peers. Tapping into high-performing and reliable providers means that good long-term returns can be achieved, which therefore has a significant impact on the value of your superannuation.
Super does have some drawbacks, for example not being able to fully access it until retirement or reaching a certain age, meaning it isn’t a suitable tool for every scenario.
However, it does have significant benefits in the accumulation of assets for, and then to fund, your retirement.
If you’re looking for professional advice to ensure your superannuation is working for you now, and towards your retirement, give the team at Hub Advisory Group a call on 02 4926 8000.
Disclaimer: The information provided in this presentation is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions.
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