Wealth creation strategies commence from the moment we begin our working lives. It can be as simple as commencing a regular savings plan with a view to building a deposit for a first home. This gives rise to the single biggest financial hurdle that most people face when endeavouring to accumulate assets for retirement, their mortgage.
The planning process allows us to quantify the impact of borrowing to purchase your family home on your long term position, providing you with the opportunity to make an informed decision on how much you should look to borrow and what your repayments should be.
A long term wealth creation strategy may then look at opportunities to utilise the equity in your family home to invest in growth assets such as shares or investment properties, and also consider the long term benefits of additional superannuation contributions.
Contribute to Superannuation
Contributing to superannuation is often the most effective way to accumulate assets for your retirement. Superannuation is a concessionally taxed environment that also offers an element of asset protection.
The retirement planning process may identify it is appropriate to make additional contributions to superannuation. Your Southern Financial Solutions Financial Planner can determine how much should be contributed and whether the contributions should be made as concessional or non concessional contributions.
Concessional contributions are “pre-tax” contributions and are made up of compulsory employer contributions, salary sacrificed contributions, and personal tax deductible contributions. These contributions have an annual limit which depends on your age. Concessional contributions can be used to reduce your overall level of tax payable as they are taxed at the rate of 15% in your superannuation fund, which may prove to be favourable when compared to your personal marginal tax rate.
Non concessional contributions are made from “post-tax” money, normally from a personal bank account. These contributions are not tax deductible and are not taxed at 15%.
As there are limits on each type of contribution, careful planning is required to maximise your superannuation balance at retirement. The greater your balance in superannuation, the more benefit you will receive from the low rate or nil rate of tax the structure provides.
Gearing refers to the process of borrowing money to invest. This is a strategy that can be effective over the long term, but the risks involved in such a strategy must be fully understood before entering into any gearing arrangement.
Gearing magnifies the gains and losses produced by growth investments such as shares and property. Any form of gearing strategy should take into account your entire financial position, needs and objectives.
Often individuals who commence gearing strategies either do not need to take on the additional risk to achieve their long term financial objectives, or cannot afford to take on the risk whether it be because of cash flow constraints or insufficient equity.
A well considered and thought out gearing strategy can be effective in creating wealth over the long term as part of a broader financial plan.
Non Superannuation Asset Accumulation
Although superannuation is the optimum vehicle for the long term accumulation of retirement assets, care needs to be taken that only an appropriate amount of funds are contributed to superannuation. This is particularly important for individuals who are hoping to retire before their preservation age, which is the age at which you are able to access your superannuation balance.
It is important that a sufficient level of non superannuation asset base is accumulated to ensure that not only are income needs met between the goal retirement date, and the time at which superannuation becomes accessible, but to ensure that you have access to sufficient capital should unexpected expenses arise or a reduction in income be experienced.
When correctly structured, tax can be minimised on non superannuation investments. Consideration needs to be given to which member of a couple should own the asset, or if a trust or company structure is an appropriate non superannuation investment vehicle.
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication. You should also obtain and read a copy of the Product Disclosure Statement before making any decision to acquire a financial product. Jason Ellis of Southern Finance Solutions Pty Ltd, Authorised Representative of Politis Investment Strategies Pty Ltd, ABN 71 106 823 241, AFSL 253125.