Hi, I'm a 28-year-old self-employed male wondering whether I should invest my surplus cash flow via super (deductible contributions) or in my own name personally? I'm worried about tying up my money for such a long time but am aware of the tax benefits if I'm in the 37-cent tax bracket.
Sam in Curtin, WA
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Hi Sam and thank you for the question. It sounds like you're in a fantastic position to be thinking about extra contributions at your age with an established business.
There are certainly tax benefits to contributing to superannuation, but I'd urge caution against making investment decisions based on taxation alone. You may want to consider the different uses that you have for the money. At your age it's unlikely that you would want to bolster your superannuation aggressively and you may have things over the next 30 years that you would like to achieve. Generally speaking, these may be:
- Being debt-free
- Saving for property/holidays
- Upgrading lifestyle assets (Car etc)
- Developing a passive income stream
If the above is the case, I'd suggest that you consider splitting your surplus cashflow to achieve the relevant goals alongside each other. Often people focus on a specific aim and focus fire it, which is fine if you are operating on a limited timeframe to get a result. With the years ahead of you, you may want to look into investment strategies that have taxation consequences whilst retaining liquidity for you. Depending on the level of surplus cashflow and timeframe to achieve goals, looking at gearing, trust structures or insurance bonds may benefit you. However, tax-effective investing can be fraught with danger due to added risks that are introduced, so it's vital that you seek personal advice to assist.
Finally, on superannuation contributions remember that a little goes a long way as you will benefit from compounding interest. At your age and assuming retirement at 67, by contributing $1,000 per annum, your potential balance will increase by $63,118 in today's dollars. I'd encourage anybody looking to consider the impact of contributions on their super balance to use the MoneySmart website calculator (I worked this out using their default settings). Another important consideration for you to make is when making additional contributions, how will you spread it over the year. Regular contributions result in averaging out your purchasing price, rather than putting your surplus cashflow into the market all in one hit (You may end up buying at a high point). https://moneysmart.gov.au/how-super-works/superannuation-calculator
Congratulations on being in a position to be thinking about your superannuation. As already stated, it's important that you do seek advice to ensure that your actions are appropriate – it may also assist in making you aware of other opportunities!
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