Retiring well: Planning to salary sacrifice early on can make your later years much more comfortable. Photo: Glenn Hunt
Much is made of the generous caps or limits that people can salary sacrifice into their super. However, the reality is that most salary earners have no hope of getting any near the limits. However, even being able to salary sacrifice $20 or $30 a week will make a difference to how much there is to retire on. As long as the savings plan is started early enough, compounding investment returns can weave their magic
Salary sacrificing is a powerful way to grow super because the income tax that would have gone to the Tax Man is redirected to your superannuation account. It is a way to swap your marginal income rate for the 15 per cent contributions tax.
The annual salary sacrifice caps or limit for the 2014-15 year is $30,000, or $35,000 for those over 50 or those who turn 50 during the current financial year. That is, they turn 50 no later than June 30, 2015.
The cap includes the 9.5 per cent superannuation contribution but, even so, someone on $60,000 who is under 50 has an effective cap of $24,300. The higher cap for over 50s reflects the reality that for most people, it is not until the kids are off their hands and the mortgage is paid off or substantially paid down that they can afford to top-up their super.
To illustrate just how powerful even making small contributions to super can be, let’s put some numbers into my favourite superannuation calculator, the one at the MoneySmart website run by the Australian Securities and Investments Commission.
Assume a 30-year-old earns $60,000 with a super balance of $40,000 and does not salary sacrifice. After assuming super fees of 1 per cent, the 30-year-old could expect to retire at age 65 with $478,000.
If the 30-year-old sacrifices $3000 of his salary a year, or about $58 a week, the balance at retirement is projected to be $636,000 - or 33 per cent higher.
Lower earners are better off taking advantage of the government’s co-contribution scheme than sacrificing salary. One reason for that is lower earners pay an average rate of income tax on their wages of less than 15 per cent, yet any salary sacrificed into super is taxed at 15 per cent. The way the co-contribution scheme works is that for those with “adjusted” income of less than $34,488, for each dollar of after-tax contributions made to your super fund the government puts 50c into your fund.
The government's contribution reduces with income above the $34,488 threshold and cuts out altogether at an income of $49,488. It beats salary sacrificing but the maximum contribution is $1000 each year with a matching $500 from the government. In all likelihood, anyone on that income would not be able to put aside more than that anyway, unless a higher-earning partner chips in.
The bottom line is that everyone should be picking up as much of the tax concessions or the government co-contribution as they can reasonably afford.