Recent arrivals are keen to build savings
Istarted reading Money magazine a few months ago and ever since then I’ve been excited to read your section, as I find it very insightful and handy, especially for people like us who are striving hard to build ourselves in this country.
My partner and I, aged 42 and 37, migrated to Sydney five years ago with zero savings; currently, we only have $90,000 sitting in our bank account and our super is $90,000 combined. We earn $220,000 combined before tax while our annual expenses are $60,000. We want to prepare for our retirement in the next 10 to 15 years.
What strategy do you recommend for us to be able to build our retirement plan? We really wanted to seek your advice on how we can establish ourselves in Australia considering our age and the only savings we have right now. Earl (and Emz)
Iwas delighted to get your email, Earl and Emz. So many of us came to this terrific country from somewhere else. In my case it was from the UK, a very long time ago. My dad, mum, sister and I arrived in 1963 when I was eight.
My parents felt that our family would have a better life in Australia. My dad was a doctor and quite a number of his English friends were practising in Griffith, in NSW. I really enjoyed growing up there, doing things that were not so easy to do where we lived in England, such as golf, sailing and water skiing. The ability to ride my bike to school and mucking around on friends’ farms made it a really good childhood.
Australia has been wonderful for me and my family. I really hope it is the same experience for you.
We’d better get onto your money. First, a big congratulations for having achieved so much in just five years. Accumulating $180,000 in super and savings is a great effort, given you arrived with no savings and had the costs of getting settled. Second, you have an excellent combined income and, finally, you have your expenses well under control.
It depends on each individual salary, but for this exercise, I’ll assume they are roughly equal, and you are paying about $50,000 in tax, leaving you with $170,000. Of this, you are spending $60,000, so saving $110,000 a year. This really is the key number. When it comes to creating wealth, it is not what you spend, it is what you earn.
As you are paying about 34.5% tax on your income above $45,000, super makes a huge amount of sense. Here you only pay 15% tax on money that is salary sacrificed into super, up to the maximum contribution of $27,500pa each.
However, before we look at the impact of
making maximum super contributions, the biggest issue is that you really do need to fully own a property to live in before you retire. This can be a house or an apartment; I am relaxed about either choice. That is totally up to you and the lifestyle you prefer. An apartment has many advantages in terms of a lower purchase price and may well give you better proximity to the facilities you like, public transport, restaurants, entertainment and so on. Or you may prefer a house. But either way, I believe owning a fully paid-off property at retirement is a key goal.
So, you may want to maximise your home deposit for a short time. With our strange tax system, which penalises homeowners over investors by making your investment property mortgage interest and running costs tax deductible, I have no problem if you buy a place as an investment and rent it out until you want to live there. Or you may prefer to just buy a property as a home today. But I would like you to look at both these options and at the numbers. Your accountants can certainly help here
So, step one is a plan to buy a property that will be your home now or at a point in the future.
Step two is maximising super. Let’s look at the position this would put you in down the track. You already have 10% going into super in compulsory contributions. Let’s top that up to the maximum $27,500 each. In 15 years, based on a conservative estimate of 6%pa, you would have some $460,000 in super.
If you worked for 20 years this could be
$674,000. But with your savings capacity of $110,000, the $55,000 that would be going into super is only about half of your surplus income. The balance of your savings could be used to pay of a mortgage or to build other investment assets outside super. Your money journey over the next 15 years or so will evolve. But with your savings capacity, you could build substantial wealth before you are both 60. My broad view is that you should:
• Build a deposit and secure a property that will either be your home now or in the future
• Once you have secured a property, top up super to the maximum allowable, while ensuring you are in a low-fee, large, well-diversified, topperforming super fund.
• At this stage, you review your position, look at your surplus income and decide whether to reduce your mortgage, invest in assets such as shares or consider a second investment property. Thanks again for getting in touch and I am delighted you are enjoying Money magazine. Along with all the team, I would like to wish you all the best for your future in this great country.
Paul’s verdict: Aim to have a paid-off home by retirement With surplus income, top up super and start investing in shares