For many Australians, their wealth journey consists of owning a family home and accumulating superannuation. But many would be interested to know there are other wealth generating strategies available.
Investing money outside of superannuation
Investing money outside of superannuation has merit because monies are not locked away and can offer tax effective benefits from compound returns. In addition, the rules may be easier to follow than super with less government tinkering.
It is a fact that many self-employed Australians and contractors (such as real estate agents, builders, tradesmen and consultants) do not pay themselves superannuation. Instead they spend it elsewhere. However there are ordinary investment plans that can be easily accessed to ensure funds are retained for a later date and accessed along the way if needed.
Retirement age
One of the main drawbacks of super is a person cannot access their super until preservation age (on a restricted basis), age 65 or retirement. You can however develop a pre-retirement strategy such as a reduced working rate using non-super money to supplement lower wages and achieve more free time. Or you can choose to retire early and access non-super investments for drawings and then access super at a later date. This option benefits from increased compound returns over a longer time period.
Some people are opting for other investment methods and are avoiding superannuation altogether.
Here is a simple plan for establishing non-superannuation investment:
Place $2,000 into an investment account every year for 20 years. Using a 6% net rate of return, you could expect $78,000 to support a pre-retirement strategy. This is a realistic and achievable plan. To achieve this result, would "cost" you $38.46 per week, $76.92 per fortnight or $166.67 per month.
Diversification
Most investors understand that diversification can reduce the risk of reliance upon the performance of a single asset class, or single security, or even single fund manager investment philosophy. But they fail to see that diversification of strategies such as investing outside of super can also guard against a range of risks, such as regulatory and legislative risk, unexpected loss of employment and the effects of a serious health matter. By diversifying away from the home and super, investors can improve their prospects of wealth over the long term.
Structuring
Investors can select tax effective structures outside of superannuation based on their current position, needs and objectives. Access to money is an important consideration, but additional benefits of managing or minimising taxation, family and asset protection and cash flow can give an investor greater confidence about their future. Particarly when investment is not soley linked to the family home or superannuation that is locked away.
Good financial advisers can propose valuable investment plans to address these considerations whilst keeping a handle on risks.
Investors in the 40s
Chances are that people in their 40s are likely to find that the rules and regulation around superannuation savings are very different when they reach preservation age (approximately age 60). It may be that payments that are currently tax free have lost this status or that withdrawals need to be partly or fully annuitised in the form of a mandated income stream, losing the ability to draw a lump sum.
Also, the current retirement age of 65 may be extended to age 67 meaning that investors cannot access their super until much later. I for one don’t want to be withheld against my wishes at that age to make ends meet.
The point is there is no certainty and things happen. Relying solely on one funding strategy (eg. super) is more risky when it comes to future financial wellbeing.
More information
For more information regarding investing outside of superannuation, or developing a financial plan for you and your family, please contact James Cavanough on jamesc@lanternadvisory.com.au or (07) 3002 2690.
