A tax insider has lifted the lid on how Aussies can quickly save their money and retire a decade sooner than most people – even during a cost-of-living crisis.
Kuan Tian, who has spent a decade working in tax and superannuation policy, fears Australians will be poor in old age if they don’t plan for their future now.
But the senior Australian public servant argued that with careful planning, it was possible to join the FIRE movement – Financial Independence Retire Early – and also own a house.
Someone now in their early 40s could potentially have $750,000 in retirement savings in just two decades, with enough for a regular overseas holiday and new car every few years if they contribute $27,500 a year to their super instead of investing the money in other ways.
First home buyers can also withdraw $15,000 in super to buy a first home – with a comfortable retirement only possible if someone has paid off their mortgage.
While Australians can access their super at 60, those born after 1957 have to wait until they are 67 to get the age pension.
The senior Australian public servant argued that with careful planning, it was possible for someone in their early forties to have $750,000 in retirement savings in just two decades, with enough for a regular overseas holiday and new car every few years
The pension is also subject to an income and assets test, excluding the family home.
This means retiring early is a challenge without access to the pension.
Even with the age pension, the Association of Superannuation Funds of Australia recommends $595,000 for a comfortable retirement for an individual.
But Mr Tian, who has a YouTube following, is much more ambitious, arguing it was possible to save up $750,000 under existing super rules.
He recommended topping up super beyond their employer’s compulsory contribution of 11 per cent, through salary sacrifice where pay is diverted straight into retirement saving.
This means less in the bank account now during a time of surging prices, but it means much more money later as the savings are accrued through the tax benefits of contributing extra into super.
‘If you try to accumulate $750,000 of superannuation through salary sacrifice…that would take you about 17 years,’ Mr Tian told Daily Mail.
He argued it would take 24 years to reach $750,000 outside of super, based on the same rate of return.
‘If you want to get the same amount of money by taking your income, paying income tax and then taking what’s left and putting that into…any type of investment outside of super, it would take you 24 years to get to the $750,000 target,’ he said.
Mr Tian said salary sacrificing super contributions was like a ‘supercharged bank account’.
‘It gives you a similar type of tax benefit,’ he said.
Those who retired early would need ‘significantly more assets’, especially during a cost of living crisis, with Mr Tian recommending these assets would be needed to fund living expenses if retirees were to ‘quit their job’.
Super provides a better way of saving up for an earlier retirement as it provides tax benefits to help people achieve their retirement goals faster.
Super Consumers Australia says $258,000 is sufficient for a modest retirement for someone who has paid off their home, even during an era of high inflation.
Director Xavier O’Halloran told Daily Mail Australia $750,000 could help retirees fund a lavish retirement.
‘A lot of people have a lot of money that they could be using to retire much earlier,’ he said.
‘If you do retire earlier you would be living off your retirement for quite some time.’
The reality is however very different, with men aged 60 to 64 having a median super balance of $212,000 in 2020-21, compared with $158,800 for women, Australian Taxation Office data showed.
The advantage of super contributions are that these funds are taxed at a concessional rate of 15 per cent, which is lower than the 19 per cent marginal tax rate for those earning $18,200 to $45,000.
But Mr Tian, who has a YouTube following, is much more ambitious, arguing it was possible to save up $750,000 under existing super rules
Buying a first home
Salary sacrificing can also be used to save up for a new home through the First Home Super Saver Scheme, introduced in 2017 by the previous Coalition government.
Australians who make voluntary super contributions can withdraw up to $15,000 a year to fund a deposit for their first home, which is challenging considering the median house price of $800,000 is unaffordable for an average, income earner on $95,581.
Mr Tian said Australians could benefit from their voluntary super contributions before they turned 60.
‘A lot of people are seeking to early retire with owning their home,’ he said.
Withdrawing super from voluntary contributions is different to being able to just withdraw money from super to fund a home deposit, which sections of the Liberal Party support.
Super savings recommendations for home owners
SUPER CONSUMERS AUSTRALIA: $258,000 savings for an individual living off $38,000 a year for a ‘medium’ lifestyle
They recommended $73,000 in savings for a ‘low’ $29,000 a year lifestyle
The ‘high’ lavish lifestyle requires $743,000 savings, costing $51,000 a year
For couples, the ‘medium’ recommendation was $352,000 to live off $56,000 a year
The ‘low’ savings goal was $95,000 to live off $42,000 a year
The ‘high category’ is $1.021million to live off $75,000 a year
Australians haven’t been able to withdraw from their super unconditionally since the pandemic in 2020 when those who lost their job could take out $20,000 in two $10,000 instalments.
That was the only time super could be withdrawn, without a specific purpose, since the compulsory system debuted in 1992.
Although Australians can’t access their super until they turn 60 Mr Tian, says there are ways to have enough for retirement by investing wisely.
‘There’s a common misconception that is spread around the internet that superannuation is not a good vehicle for early retirement,’ Mr Tian said.
‘You don’t retire and then take out all of your money and then spend immediately on whatever it is you want to spend on.’
‘The money needs to sit there and continue to be invested and provide you with an income stream so that you can spend your retirement or early retirement in comfort.’
So while Australians can’t withdraw their super early under normal circumstances, Mr Tian said they needed to focus on their retirement savings and the share market to have enough by the time they turned 60.
He also suggested exchange traded funds, where investments are tied to a share market index or a basket of commodity prices.
‘I guess the trick is you have some investments outside of the superannuation system…that will last you from when you early retire and when you reach 60,’ he said.
‘Ignoring super only makes sense if you never have an intention of turning 60 after you retire.’
‘There will be a point in time when that money that will be accumulated within super you will be able to access’.
Salary sacrificing can also be used to save up for a new home through the First Home Super Saver Scheme, introduced in 2017 by the previous Coalition government (pictured is a Sydney auction)
Keep an eye on your super
Mr Tian recommended keeping a close eye on super balances.
‘A lot of people, their initial impressions of it, is…super, I can’t touch until I turn 60, I want to retire early, super is useless for me,’ he said.
‘If you have enough investments outside of super…that will last you 15 to 20 years, that is a better way of doing early retirement.’
International conflict between Russia and Ukraine and Israel and Hamas is creating share market uncertainty with super balances, with growth-orientated assets, shrinking in September for the second straight month.
SuperRatings executive director Kirby Rappell said investors needed to be focused on long-term investing as high inflation and global uncertainty spooked markets.
‘The trajectory for interest rates and geopolitical tensions are likely to remain as the dominant drivers for superannuation returns over the coming months,’ he said.
‘Super funds continue to display strong capabilities in navigating uncertain market environments and members have been experiencing increased levels of ups and downs for some time now.
‘Our message to members remains one of focusing on the long term and sticking with their long-term investment strategy.’
Mr Tian says super is a better way of maximising the return on an investment as it provides better after-tax savings.
‘Superannuation is not a type of investment, it’s an investment environment.
‘Anything that you want to invest in outside of super you can invest within super.’
‘If we assume that whatever you want to invest in outside of super you’re going to invest in the exact same thing inside super so that the rate of return is going to be exactly the same, the fact that you’re paying less tax makes up that massive difference.’
The number Australians retiring at 45, or over, steadily increased however the average age retirement in Australia is still 65.
Guidelines to salary sacrifice and the First home super save scheme
A salary sacrifice is an arrangement between an employee and an employer to make additional superannuation contributions.
This arrangement allows employees to contribute more money towards their retirement.
Taxpayers can choose this option however they should check if their workplace offers such an arrangement.
They are concessionally taxed and and can be claimed as a tax deduction.
These contributions are taxed a rate of 15 per cent and are capped at a rate of $27,000 (anything extra is subject to extra tax).
Super (including any additional amounts) can only be accessed once a person turns 60.
Salary sacrifice arrangements need to be complemented with income from other investments to support early retirement plans.
The First home Super Savers Scheme only allows first home buyers to withdraw $15,000 per financial year and a maximum of $50,000 across all years through the scheme to fund a deposit for their first home
Superannuation cannot be accessed to fund the purchase of a property under the scheme
People are urged to consider their own financial circumstances and commitments before opting for a salary sacrifice arrangement and/or making personal superannuation contributions