Unit 3

Financial Independence
What is it? How much is needed? How can I achieve it?

The superannuation system, consolidating super and investment options

Making contributions, drawing income and making withdrawals from super

Super strategies
We will be covering …
What is financial independence? Investment options
How much is needed? Making contributions into super
How can I achieve it? Drawing an income from super
What are some common strategies? Withdrawing funds from super
The superannuation system Super strategies
Consolidating your super
You need to be able to …
1. Explain the concepts of financial independence and FIRE
2. Calculate long-term goal of funds required for financial independence
3. Model a saving plan required to achieve your long-term goal
4. Identify the common strategies for achieving financial independence
5. Explain the basic features of the superannuation system
6. Explain how to make contributions into super (and tax implications)
7. Explain how to draw an income from super (and tax implications)
8. Explain how to make withdrawals from super
9. Identify and explain some common super strategies
General Advice Warning
The content of this Unit is not personal financial advice for you
It covers general principles
… taught as part of university course based on the Australian system.

It does not take into account your situation, objectives or needs.

You are responsible to consider whether it is suitable
… for your personal circumstances.

You should consider obtaining financial and tax advice yourself.

General Advice Warning
The content of this Unit is not personal financial advice for you
It covers general principles
… taught as part of university course based on the Australian system.

It does not take into account your situation, objectives or needs.

You are responsible to consider whether it is suitable

Subtitles
… for your personal circumstances. Playback Speed
Closed Captions Slower Faster

You should consider obtaining financial and tax advice yourself.

CC
What is Financial Independence?
What is Financial Independence?
A situation in which the income you are drawing from your investments
is enough to cover your living expenses … indefinitely!

This means that you no longer need to do paid work

… freeing you up to do unpaid voluntary work
… or paid work that aligns with your values
… and spend a bit more time on leisure in relationship with others
It is not the same as ‘being rich’
What does ‘rich’ actually mean?

A flashy car, house and holidays?

… these things don’t generate cash flow
… and may be funded with large amounts of debt

Robert Kiyosaki jokes that a car and house is really a liability

… since they are a use of cash rather than a source of cash

Robert Kiyosaki and Sharon Lechter (1997), Rich Dad Poor Dad
The Pie and Financial Independence
pie is your
Your
1
total income Plan to be
each month
Generous
2 3
Plan for Plan to be
the Future Content
and what you do with it!

Investment income covers all three

The Snowball and Financial Independence
Income – Expenses = Profit = Savings
The Dam and Financial Independence

Assets
Investment − Liabilities
Income = Equity

Living
Expenses
Why not just use the term ‘retirement’?
RETIREMENT
RETIREMENT
Problems with the term ‘retirement’
1. Negative associations of ‘being old’ and ‘useless’
2. Feels like a long way off for people below the age of 45
3. … so you don’t need to think about it or plan for it until 50+
4. Sounds like you are not doing any ongoing paid work
5. Sounds like you are not doing any ongoing unpaid work
Benefits of the term ‘financial independence’
1. Positive associations of ‘freedom’ and ‘self-direction’
2. It is ‘age agnostic’ and could be achieved at any time
3. … so best to plan for it early so that you can achieve it early
4. Sounds like you are free to continue doing paid work
5. Sounds like you are free to continue doing unpaid work
FINANCIAL INDEPENDENCE RETIRE EARLY
Financial Independence Retire Early (FIRE)
Every expense should be compared to …
… time spent at work to earn the purchase

Keep living expenses very low

… and aim for ‘extreme saving’ of 70% of after-tax income

Once investments are 30 times living expenses (roughly $1 million)

… you can quit your day job and completely retire

Vicki Robin & Joe Dominguez (1992), Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence
Alexandra Kerr (2021), ‘Financial Independence, Retire Early (FIRE)’ on Investopedia (website)
Variations on FIRE
1. Fat FIRE
More traditional lifestyle who saves more than the average retirement investor

2. Lean FIRE
Minimalist living and extreme savings with a far more restricted lifestyle

3. Barista FIRE
Work casual job to cover some living expenses (so they don’t erode investments too much)

4. Coast FIRE
Work part-time job but have enough saved to fund their current living expenses

Steven Kurutz (2018), ‘How to Retire in Your 30s With $1 Million in the Bank’, The New York Times.
Alexandra Kerr (2021), ‘Financial Independence, Retire Early (FIRE)’ on Investopedia (website)
FIRE is interesting … but remember …
1. The nature of work can change as your career develops
2. Being actively employed in meaningful work is helpful for happiness
3. Saving 70% comes with significant sacrifices (relationships)
4. If you are in a relationship … they need to be ‘110% on-board’
5. … and isn’t planning on having any children any time soon!
6. Will people respect you if you don’t work?
7. Happiness is in the details … so what will you do once you FIRE?
8. ... and with whom?
Financial Independence
A situation in which the income you are drawing from your investments
is enough to cover your living expenses … indefinitely!

… and it is a much better term to use than ‘retirement’

How much is needed?
Important activity (recap)
Think back to your values and the principles of money and happiness
Now imagine that you are age 60 and financially independent. Describe …
1. Your closest relationship (romantic or otherwise)
2. Your relationships with your immediate family (children, parents, siblings)
3. Any paid or unpaid work to keep you engaged and serving others
4. Any hobbies or interests including with whom you practice them
5. Where you are living and with whom you are living
6. A typical holiday and with whom you are on holiday

Assuming you own your own dwelling and ignoring inflation …

… what is the minimum income would you need to fund that lifestyle?
ASFA Retirement Standard
Annual living expenses assuming you are healthy and own your own home
… so no rent or home loan repayments

Single Couple

Modest lifestyle $30,063 p.a. $43,250 p.a.

Comfortable lifestyle $47,383 p.a. $66,725 p.a.

The Association of Superannuation Funds (ASFA) (2022), ‘ASFA Retirement Standard’ at superannuation.asn.au (website)
FIRE Rule of Thumb
Multiply by 30 to get investment required for financial independence …

Single Couple

Modest lifestyle $901,890 $1,297,500

Comfortable lifestyle $1,421,490 $2,001,750

Steven Kurutz (2018), ‘How to Retire in Your 30s With $1 Million in the Bank’, The New York Times.
Alexandra Kerr (2022), ‘Financial Independence, Retire Early (FIRE)’ on Investopedia (website)
With math we can be more sophisticated!
Two mathematical approaches
Present Value of Perpetuity Present Value of Annuity
Investments Investments
1,600,000 1,600,000

1,400,000 1,400,000

1,200,000 1,200,000

1,000,000 1,000,000

800,000 800,000

600,000 600,000

400,000 400,000

200,000 200,000

0 0
60 70 80 90 100 60 70 80 90 100
Age Age
What is a perpetuity?
0 1 2 3 4 …
C1 C1(1+g)1 C1(1+g)2 C1(1+g)3 …
P
A perpetuity is an infinite stream of regular cash flows
… the first cash flow occurs at the end of the first period (C1)
… the cash flows can be level, growing or declining at a constant rate (g)

Useful for calculating the investment required

… to fund a perpetual stream of living expenses!
Present value of a growing perpetuity formula
0 1 2 3 4 …
C1 C1(1+g)1 C1(1+g)2 C1(1+g)3 …
P
𝑪𝑪𝟏𝟏
𝑷𝑷∞,𝒈𝒈 = 𝒈𝒈 < 𝒓𝒓
𝒓𝒓 − 𝒈𝒈
‘C1’ is the cash flow growing at a rate of ‘g’ per period
∞ means that they go on forever (with first cash flow at end of first period)
‘r’ is the effective rate of return per period (time value of money)
‘P’ is value of the infinite series of cash flows of ‘C’ at the start (left)
‘g’ is both growth in income and investments
Present Value of Perpetuity
Investments
1,600,000
g > 0 … but lower C1
1,400,000

1,200,000
P
1,000,000 g = 0 … but middle C1
800,000

600,000

400,000 g < 0 … but higher C1

200,000

0
60 70 80 90 100
Age
Present value of constant perpetuity example
How much would Susan need for financial independence if she would like
$50,000 per year indefinitely, keeping pace with inflation (g = 0)
if she can achieve real investment returns of 5% per annum?

𝑪𝑪𝟏𝟏
𝑷𝑷∞,𝒈𝒈 =
𝒓𝒓 − 𝒈𝒈
Present value of constant perpetuity example
How much would Susan need for financial independence if she would like
$50,000 per year indefinitely, keeping pace with inflation (g = 0)
if she can achieve real investment returns of 5% per annum?

𝑪𝑪𝟏𝟏
𝑷𝑷∞,𝒈𝒈 =
𝒓𝒓 − 𝒈𝒈

𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 Calculator

= 𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓 ÷ 𝟎𝟎. 𝟎𝟎𝟎𝟎 =
𝟎𝟎. 𝟎𝟎𝟎𝟎 − 𝟎𝟎
Spreadsheet
= $𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎, 𝟎𝟎𝟎𝟎𝟎𝟎 = 𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓 / 𝟎𝟎. 𝟎𝟎𝟎𝟎
Present value of growing perpetuity example
How much would Susan need for financial independence if she would like
$50,000 per year indefinitely, growing at 1% above inflation (g = 1%)
if she can achieve real investment returns of 5% per annum?

𝑪𝑪𝟏𝟏
𝑷𝑷∞,𝒈𝒈 =
𝒓𝒓 − 𝒈𝒈
Present value of growing perpetuity example
How much would Susan need for financial independence if she would like
$50,000 per year indefinitely, growing at 1% above inflation (g = 1%)
if she can achieve real investment returns of 5% per annum?

𝑪𝑪𝟏𝟏
𝑷𝑷∞,𝒈𝒈 =
𝒓𝒓 − 𝒈𝒈

𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 Calculator

= 𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 ÷ 𝟎𝟎. 𝟎𝟎𝟎𝟎 − 𝟎𝟎. 𝟎𝟎𝟎𝟎 =
𝟎𝟎. 𝟎𝟎𝟎𝟎 − 𝟎𝟎. 𝟎𝟎𝟎𝟎
Spreadsheet
= $𝟏𝟏, 𝟐𝟐𝟐𝟐𝟐𝟐, 𝟎𝟎𝟎𝟎𝟎𝟎 = 𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 / 𝟎𝟎. 𝟎𝟎𝟎𝟎 − 𝟎𝟎. 𝟎𝟎𝟎𝟎
Present value of decreasing perpetuity example
How much would Susan need for financial independence if she would like
$50,000 per year indefinitely, growing at 1% below inflation (g = – 1%)
if she can achieve real investment returns of 5% per annum?

𝑪𝑪𝟏𝟏
𝑷𝑷∞,𝒈𝒈 =
𝒓𝒓 − 𝒈𝒈
Present value of decreasing perpetuity example
How much would Susan need for financial independence if she would like
$50,000 per year indefinitely, growing at 1% below inflation (g = – 1%)
if she can achieve real investment returns of 5% per annum?

𝑪𝑪𝟏𝟏
𝑷𝑷∞,𝒈𝒈 =
𝒓𝒓 − 𝒈𝒈

𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 Calculator

= 𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 ÷ 𝟎𝟎. 𝟎𝟎𝟎𝟎 + 𝟎𝟎. 𝟎𝟎𝟎𝟎 =
𝟎𝟎. 𝟎𝟎𝟎𝟎 − −𝟎𝟎. 𝟎𝟎𝟎𝟎
Spreadsheet
= $𝟖𝟖𝟖𝟖𝟖𝟖, 𝟑𝟑𝟑𝟑𝟑𝟑 = 𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 / 𝟎𝟎. 𝟎𝟎𝟎𝟎 − −𝟎𝟎. 𝟎𝟎𝟎𝟎
What about the second approach?
Present Value of Perpetuity Present Value of Annuity
Investments Investments
1,600,000 1,600,000

1,400,000 1,400,000

1,200,000 1,200,000

1,000,000 1,000,000

800,000 800,000

600,000 600,000

400,000 400,000

200,000 200,000

0 0
60 70 80 90 100 60 70 80 90 100
Age Age
Present value of an annuity
0 1 2 3 4 5
C C C C C
P
We are calculating the value of the cash flows (with first cash flow at end of first period)
… at the START of the regular series of payments

Here the regular cash flow is ‘C’

there are 5 cash flows and we are moving them to t = 0
to calculate the present value of the annuity ‘P’
Present value of an annuity formula
0 1 2 3 4 5
C C C C C
P
−𝒏𝒏
𝟏𝟏 − 𝟏𝟏 + 𝒓𝒓
𝑷𝑷𝒏𝒏 = 𝑪𝑪 ×
𝒓𝒓
‘C’ are the regular cash flows that are being moved to the left
‘n’ is the number of cash flows (with first cash flow at end of first period)
‘r’ is the effective rate of return per period (time value of money)
‘P’ is value of the regular series of ‘n’ cash flows of ‘C’ at the start (left)
Present value of annuity example
How much would Susan need for financial independence if she would like
$50,000 per year for 30 years, keeping pace with inflation,
if she can achieve real investment returns of 5% per annum?

−𝒏𝒏
𝟏𝟏 − 𝟏𝟏 + 𝒓𝒓
𝑷𝑷𝒏𝒏 = 𝑪𝑪 ×
𝒓𝒓
Present value of annuity example
How much would Susan need for financial independence if she would like
$50,000 per year for 30 years, keeping pace with inflation,
if she can achieve real investment returns of 5% per annum?

−𝒏𝒏
𝟏𝟏 − 𝟏𝟏 + 𝒓𝒓
𝑷𝑷𝒏𝒏 = 𝑪𝑪 ×
𝒓𝒓 Calculator

𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓 × 𝟏𝟏 − 𝟏𝟏. 𝟎𝟎𝟎𝟎 𝒙𝒙∎ − 𝟑𝟑𝟑𝟑 → ÷ 𝟎𝟎. 𝟎𝟎𝟎𝟎 =

𝟏𝟏 − 𝟏𝟏. 𝟎𝟎𝟎𝟎−𝟑𝟑𝟑𝟑 Spreadsheet
= 𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 ×
𝟎𝟎. 𝟎𝟎𝟎𝟎 = 𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓𝟓 ∗ ( 𝟏𝟏 − 𝟏𝟏. 𝟎𝟎𝟎𝟎 ^ − 𝟑𝟑𝟑𝟑 )/ 𝟎𝟎. 𝟎𝟎𝟎𝟎

= $𝟕𝟕𝟕𝟕𝟕𝟕, 𝟔𝟔𝟔𝟔𝟔𝟔 compared to $1,000,000 for a constant perpetuity (indefinitely)

Asset categories real and nominal returns
Asset category Real return Inflation Nominal return
1. Cash 0.5% + 2.5% = 3.0%

2. Fixed Interest 1.5% + 2.5% = 4.0%

3. Residential Property 5.0% + 2.5% = 7.5%

4. Commercial Property 6.0% + 2.5% = 8.5%

5. Australian Shares 6.0% + 2.5% = 8.5%

6. International Shares 6.0% + 2.5% = 8.5%

These are assumed long-term future expected rates of return for this course. The derivation will be discussed further in Units 9 and 10.
Asset categories price gains and income
Asset category Price gains Income Nominal return
1. Cash 0.0% + 3.0% = 3.0%

2. Fixed Interest 0.0% + 4.0% = 4.0%

3. Residential Property 5.0% + 2.5% = 7.5%

4. Commercial Property 5.0% + 3.5% = 8.5%

5. Australian Shares 5.0% + 3.5% = 8.5%

6. International Shares 6.5% + 2.0% = 8.5%

These are assumed long-term future expected rates of return for this course. The derivation will be discussed further in Units 9 and 10.
How can I achieve it?

Modelling
a path to financial

independence
To achieve Financial Independence …
1. Calculate financial independence goal
$PV of future living expenses at the financial independence target age

2. Calculate future value of existing savings

FV of single cash flow at target date

3. Calculate financial independence gap*

Financial independence goal from step 1 minus FV of existing savings from step 2

4. Calculate regular savings required

Future value of annuity formula solving for ‘payment’ C with gap from step 3 as the target

… then implement a plan to achieve this!

* Receiving an inheritance might help to close this gap but we’ll assume zero inheritance in this example
Financial Independence Example
Current Age: 30
Independence Age: 60
Future Expenses: $100,000 growing at 1% p.a. in real terms
Current Savings: $150,000 invested at 6% p.a. in real terms

How much to save each year to achieve financial independence?

30 31 … 59 60 61 62 …
150,000 C C C C 100,000 100,000×(1.01)
F P
1. Calculate Financial Independence Goal
30 31 … 59 60 61 62 …
150,000 C C C C 100,000 100,000×(1.01)
F P

We are calculating the amount required at age 60 (P60)

To fund expenses starting at age 61* (C61 = $100,000) growing at 1% p.a.
assuming our investments achieve a real return of 6% p.a.

𝑪𝑪𝟔𝟔𝟔𝟔 𝟏𝟏𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎

𝑷𝑷𝟔𝟔𝟔𝟔,∞,𝒈𝒈 = = = $𝟐𝟐, 𝟎𝟎𝟎𝟎𝟎𝟎, 𝟎𝟎𝟎𝟎𝟎𝟎
𝒓𝒓 − 𝒈𝒈 𝟎𝟎. 𝟎𝟎𝟎𝟎 − 𝟎𝟎. 𝟎𝟎𝟎𝟎
* You can model this question using monthly cash flows but to make it more realistic but it doesn’t make a big difference
2. Calculate Future Value of Existing Savings
30 31 … 59 60 61 62 …
150,000 C C C C 100,000 100,000×(1.01)
F P

We are calculating the amount we expect to have at age 60 (F60)

based on only our existing savings of $150,000
assuming our investments achieve a real return of 6% p.a.

𝒏𝒏
𝑭𝑭𝟔𝟔𝟔𝟔 = 𝑷𝑷 × 𝟏𝟏 + 𝒓𝒓 = 𝟏𝟏𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎 × 𝟏𝟏. 𝟎𝟎𝟎𝟎𝟑𝟑𝟑𝟑 = $𝟖𝟖𝟖𝟖𝟖𝟖, 𝟓𝟓𝟓𝟓𝟓𝟓
3. Calculate Financial Independence Gap*
30 31 … 59 60 61 62 …
150,000 C C C C 100,000 100,000×(1.01)
F P

We are calculating gap (G60) between how much we need (P60)

… and how much we expect to have (F60) based on existing savings

𝑮𝑮𝟔𝟔𝟔𝟔 = 𝑷𝑷𝟔𝟔𝟔𝟔 − 𝑭𝑭𝟔𝟔𝟔𝟔

= 𝟐𝟐, 𝟎𝟎𝟎𝟎𝟎𝟎, 𝟎𝟎𝟎𝟎𝟎𝟎 − 𝟖𝟖𝟖𝟖𝟖𝟖, 𝟓𝟓𝟓𝟓𝟓𝟓
= $𝟏𝟏, 𝟏𝟏𝟏𝟏𝟏𝟏, 𝟒𝟒𝟒𝟒𝟒𝟒
* Receiving an inheritance might help to close this gap but we’ll assume zero inheritance in this example
4. Calculate Regular Savings Required
30 31 … 59 60 61 62 …
150,000 C C C C 100,000 100,000×(1.01)
F P

We regular savings required (C) to close the gap at age 60 of $1,138,476

assuming our investments achieve a real return of 6% p.a.

𝟏𝟏 + 𝒓𝒓 𝒏𝒏 − 𝟏𝟏 𝟏𝟏. 𝟎𝟎𝟎𝟎𝟑𝟑𝟑𝟑 − 𝟏𝟏
𝑪𝑪 = 𝑭𝑭𝒏𝒏 ÷ = 𝟏𝟏, 𝟏𝟏𝟏𝟏𝟏𝟏, 𝟒𝟒𝟒𝟒𝟒𝟒 ÷
𝒓𝒓 𝟎𝟎. 𝟎𝟎𝟎𝟎

= $𝟏𝟏𝟏𝟏, 𝟒𝟒𝟒𝟒𝟒𝟒 per annum

To achieve Financial Independence …
1. Calculate financial independence goal
$PV of future living expenses at the financial independence target age

2. Calculate future value of existing savings

FV of single cash flow at target date

3. Calculate financial independence gap*

Financial independence goal from step 1 minus FV of existing savings from step 2

4. Calculate regular savings required

Future value of annuity formula solving for ‘payment’ C with gap from step 3 as the target

… then implement a plan to achieve this!

* Receiving an inheritance might help to close this gap but we’ll assume zero inheritance in this example
What are the common strategies?
3 Key Principles
1. Consistently ‘save to invest’ at least 20% of your income (before-tax)
2. Avoid dumb investment decisions
3. Diversify across multiple financial strategies
1. Invest in your ability to generate income
Your brain is your most valuable asset right now
If it can generate a graduate income of just $50,000 for 40 years
at a required return of 5% per annum then it is worth:

−𝒏𝒏
𝟏𝟏 − 𝟏𝟏 + 𝒓𝒓 𝟏𝟏 − 𝟏𝟏. 𝟎𝟎𝟎𝟎−𝟒𝟒𝟒𝟒
𝑷𝑷𝒏𝒏 = 𝑪𝑪 × = 𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎 × = $𝟖𝟖𝟖𝟖𝟖𝟖, 𝟗𝟗𝟗𝟗𝟗𝟗
𝒓𝒓 𝟎𝟎. 𝟎𝟎𝟎𝟎

Invest time into your career plan (next Unit)

Invest in ongoing work-relevant education
Invest in your physical and mental health
2. Invest in at least one property
Controls dwelling expenses over the long-term
Rent increases with average income and inflation … but mortgage payments do not

Expected price growth linked to growth in average income

Real price growth 2.5% + Inflation 2.5% = Nominal price growth 5.0% per annum
You also save on paying rent of about 3% of property price

May only need a 2 bedroom apartment or small house when you are 60+
There are benefits from downsizing from large house and investing the difference

Property can be used as security on investment loans

We will see in later Units that borrowing to invest is an important strategy

… which gives you the option to acquire multiple properties over time
3. Invest in a diversified portfolio of shares
Provides growth over long-term
… plus regular income through company profits distributed as dividends

Expected price growth linked to average income

Real price growth 2.5% + Inflation 2.5% = Nominal price growth 5.0% per annum
You also receive dividends that average about 3.5% per year

Invest in Exchange Traded Funds

These are diversified across 100 or more companies

Minimum investment time horizon is 5 years

Buy and hold over the long-term

Avoid short-term speculation (gambling)

Avoid platforms that like eToro. Avoid speculating on cryptocurrency, forex or commodities
4. Use your retirement savings effectively
Retirement savings systems have tax advantages
Concessional (low) tax on money going into the system
Concessional (low) tax on investment returns
Tax-free income streams after the age of 60 in Australia
5. Get involved in a start-up
Start-ups can generate millions of dollars of wealth in just a few years
They also provide valuable business lessons whether they succeed or fail
Avoid investing a significant amount of your own money
Best to join as a key staff member and negotiate a generous employee
stock option plan (ESOP) in exchange for a basic salary ‘sweat equity’
‘Do your time’ for a few years then either switch to another startup if it fails
or go back go a large organisation
Remember to diversify
1. Invest in your ability to generate income
2. Invest in at least one property
3. Invest in a diversified portfolio of shares
4. Use your retirement savings effectively
5. Get involved in a start-up

Don’t rely on only one or two strategies

Best to diversify between three or four strategies
The Superannuation System
Superannuation
Retirement savings system in Australia is called ‘superannuation’
‘Superannuate’ means to retire with a pension (regular income stream)
Retirement savings systems elsewhere are usually just called ‘pension system’

You usually cannot access your superannuation until you turn 60

You cannot use it to buy a new car or to go on holiday before age 60!

Your employer makes regular contributions

Those contributions are usually taxed at 15%
… rather than marginal income tax rate + Medicare levy (34.5% for most people)

… which are invested and accumulate over 30+ years

… at which point you start drawing a regular income from your super
‘Superannuation’ or ‘Super’
Most professionals use the full term ‘superannuation’
Calling it ‘super’ is a bit colloquial
I’m going to use ‘super’ from this point for brevity
Super and the Pie
pie is your
Your
1
total income Plan to be
each month
Generous
2 3
Plan for Plan to be
the Future Content
and what you do with it!

Investment income covers all three

Two types of systems
1. Accumulation (also ‘defined contribution’)
Account balance is sum of past contributions + returns
Retirement income depends on account balance
Risk of underfunded retirement is borne by the individual
Risk of default is very low

2. Defined Benefit (this is being phased out in Australia)

Retirement income depends on salary in final years before retirement
Guaranteed income stream until death (with partial reversion to spouse)
Risk of underfunded retirement is borne by the company (or government)
Risk of default is medium to high (often needs to be underwritten by government)
Two key phases
Super Accumulation Phase Retirement Income Phase
1,200,000

1,000,000

800,000

600,000

400,000

200,000

0
20 30 40 50 60 70 80 90

Age
How much can be accumulated in super?
There is a limit to how much you can accumulate in super
… and still receive concessional tax treatment

The limit is called the ‘transfer balance cap’

Lifetime limit that can be transferred from accumulation phase to retirement income phase

Transfer Balance Cap: $1.7 million per person

Indexed in $100,000 increments in line with CPI
This is ‘per individual’ so a couple can accumulate double this if equally balanced

Anything above this is called an ‘Excess Transfer’

These can be subject to an excess transfer balance tax of 15% (first) to 30% (second +)

Australian Taxation Office (2022), ‘Transfer balance cap’ at ato.gov.au

Australian Taxation Office (2022), ‘Excess transfer balance’ at ato.gov.au
Australian Taxation Office (2022), ‘Excess transfer balance tax’ at ato.gov.au
Types of funds
1. MySuper
Low fees, simple features, few investment options. Offered by many retail and industry funds.
2. Industry super funds
Low to medium fees offered by not-for-profit organisations (some linked to unions)
3. Retail super funds
Medium to high fees offered by financial institutions. More investment choices.
4. Public sector super funds
For government employees
5. Corporate super funds
For employees of large companies such as Telstra and Qantas.
6. Wrap accounts
Popular with financial advisers as they offer sophisticated investment options.
7. Self-managed super funds
Fund set up for a family that maintains direct control over assets. High accounting fees.
Life insurance within super
Death cover
Lump-sum payment upon death of member

Total and Permanent Disability (TPD)

Lump-sum payment upon total and permanent disability

Salary continuance (income protection)

Replaces part of income if accident or illness prevents you from working

Insurance premiums are quite cheap within super

Need to be careful don’t lose benefits when changing funds
Premiums can be a drag on achieving long-term goals
When can I access my super?
You must reach your ‘preservation age’ before you can access your super
Exceptions include First Home Super Saver Scheme, compassionate grounds,
financial hardship and any emergency release programs (such as COVID-19 in 2020)

Date of birth Preservation age

Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60
Australian Taxation Office (2022), ‘Preservation Age’ at ato.gov.au
What if your super fund goes bankrupt?
Unlikely to happen because super funds are closely regulated by APRA.
Superannuation investments are held in a ‘trust’ which is completely
separate from the financial institution’s own accounts and assets.
These ‘trusts’ do not have any significant debts or liabilities so it is not
really possible for them to go bankrupt.
If financial institution goes bankrupt then trust remains separate and
liquidator will sell off trust to another superannuation fun to administer.
Bottom line – DON’T WORRY!
The good
1. Regular savings paid for you by employer
2. Concessional (low) tax on money going into super
3. Concessional (low) tax on investment returns while inside super
4. Concessional (low) tax when drawing income from super
5. Good investment options with good returns
6. You normally can’t access your super until at least age 60
7. The Australian Government supports the system
The bad
1. Super rules are quite complicated and confusing
2. Many different super funds resulting in ‘choice anxiety’
3. Easy to accumulate multiple super funds with changing jobs
4. Some super funds have high fees and poor returns
5. Some funds give you default life insurance when you don’t need it
6. You normally can’t access your super until at least age 60
7. The Government keeps changing the rules … resulting in anxiety
Break
5 Minutes
Consolidating your super
Multiple super accounts is not good
Duplicated account fees
Duplicated insurance
Duplicated premium
Duplicated paperwork
Risk of losing track of it
Stress from disorganisation
Super Stapling … commenced Nov 2021

You are ‘stapled’ to the first fund you sign up with

… or the fund you are with now.

So when you move jobs your super fund will ‘move’ with you
… unless you choose a different super fund.

You are not ‘stuck’ with the same super fund.

You can change fund whenever you like.
Consolidating multiple accounts into one
1. Go to my.gov.au
2. Log in or create an account
3. Link your myGov account to the ATO
4. Select ‘Super’ and then ‘Manage’
5. Select ‘Transfer super’
This option will only appear if you have more than one super account

Moneysmart (Australian Commonwealth Government) ‘Consolidating super funds’ at moneysmart.gov.au (website)

When closing an account, watch out for …
1. Is an employer still making contributions into the old fund?
A few (not many) employers pay higher contributions into selected funds
Closing a fund that receives active employer contributions causes problems
Some employers don’t allow ‘choice of fund’

2. Will you lose insurance cover that cannot be replicated?

You may now have a ‘pre-existing medical condition’ that means you could lose cover

3. Bad behaviour from some ‘industry funds’

If they don’t have a signature on file or the name is slightly different they can be problematic

It can be a good idea to call your old funds before closing the account!
Searching for lost super
Superannuation funds are required to report ‘lost members’
They have not been able to contact you
They have not received any contributions or rollovers for 5 years
Your account was transferred from another fund as a lost member

The ATO keeps a ‘Lost members register’

1. Search online via MyGov (manage my super)
2. Call ‘Lost super search line’ on 13 28 65
3. Submit a ‘Searching for lost super’ form

Australian Taxation Office (2022) ‘Searching for lost super’ at ato.gov.au (website)
What jobs may not have paid super?
You were under 18 and worked less than 30 hours per week
… unless covered by an employer agreement (or your employer was generous!)

You were a ‘domestic worker’ and worked less than 30 hours per week
Examples or private domestic workers include a nanny, cleaner or gardener

Self-employed work (when you are not an employee of the company)

Australian Taxation Office (2022) ‘Work out if you have to pay super’ at ato.gov.au (website)
Investment options
Three layers

Superannuation administrator

Fund manager Fund manager Fund manager

Asset Asset Asset Asset Asset Asset Asset Asset Asset

Investment alternatives
1. Investment options
Super fund chooses both asset allocation and managed funds
You choose between ‘conservative’, ‘balanced’, ‘growth’ …
Low fees but reduced choice and flexibility

2. Asset allocation
You choose asset allocation and super fund chooses the fund managers
You choose allocation between cash, fixed interest, shares, listed property …
Slightly higher fees in exchange for more choice and flexibility

3. Direct investment
You choose both asset allocation and fund managers (and sometimes specific shares)
You choose specific manage funds (or shares) from a large menu of options
Higher fees in exchange for maximum choice and flexibility
Should I invest in low-risk investments?
… these funds are supposed to fund retirement after all!

In Units 9 and 10 we will define ‘total risk’ as the volatility of returns

We will see that there is a trade-off between total risk and expected returns

Better to choose higher total risk below the age of 50

… and then gradually reduce investment risk levels after that
Asset categories
Asset category Asset category
1. Cash Transaction, Savings Account or CMT Lower risk
Short time-horizon
2. Fixed Interest Term deposits, debentures or bonds

3. Residential Property Apartment, townhouse, duplex or house

4. Commercial Property Listed Property Trust

Higher risk
5. Australian Shares Australian Exchange Traded Fund (ETF)
Long time-horizon
6. International Shares Global Exchange Traded Fund (ETF)

Cryptocurrency (bitcoin), commodities (gold) and foreign exchange are speculative investments
CMT is a Cash Management Trust. These are offered by investment banks such as Macquarie Bank and are popular with financial advisers
A ‘speculative investment’ is a euphemism for ‘gambling’. This is because they generate no cash flows. More on this in Units 9 and 10.
Asset categories
Asset category Asset category Time horizon
1. Cash Transaction, Savings Account or CMT 0 – 1 years

2. Fixed Interest Term deposits, debentures or bonds 1 – 5 years

3. Residential Property Apartment, townhouse, duplex or house 5+ years

4. Commercial Property Listed Property Trust 5+ years

5. Australian Shares Australian Exchange Traded Fund (ETF) 5+ years

6. International Shares Global Exchange Traded Fund (ETF) 5+ years

Cryptocurrency (bitcoin), commodities (gold) and foreign exchange are speculative investments
CMT is a Cash Management Trust. These are offered by investment banks such as Macquarie Bank and are popular with financial advisers
A ‘speculative investment’ is a euphemism for ‘gambling’. This is because they generate no cash flows. More on this in Units 9 and 10.
Past returns are no indicator of future returns
Many investors look to the past to extrapolate to the future.

We will see in Units 9 and 10 that this is a very bad idea.

Expected future returns should be based on asset categories

… and not historical returns.
Asset categories real and nominal returns
Asset category Real return Inflation Nominal return
1. Cash 0.5% + 2.5% = 3.0%

2. Fixed Interest 1.5% + 2.5% = 4.0%

3. Residential Property 5.0% + 2.5% = 7.5%

4. Commercial Property 6.0% + 2.5% = 8.5%

5. Australian Shares 6.0% + 2.5% = 8.5%

6. International Shares 6.0% + 2.5% = 8.5%

These are assumed long-term future expected rates of return for this course. The derivation will be discussed further in Units 9 and 10.
Asset categories price gains and income
Asset category Price gains Income Nominal return
1. Cash 0.0% + 3.0% = 3.0%

2. Fixed Interest 0.0% + 4.0% = 4.0%

3. Residential Property 5.0% + 2.5% = 7.5%

4. Commercial Property 5.0% + 3.5% = 8.5%

5. Australian Shares 5.0% + 3.5% = 8.5%

6. International Shares 6.5% + 2.0% = 8.5%

These are assumed long-term future expected rates of return for this course. The derivation will be discussed further in Units 9 and 10.
Financial advisers like wrap accounts
… such as Macquarie Wrap
Provide many investment choices
Allowing tailored asset allocation and selection of assets to suit the client

Adviser fees can be deducted directly from investment returns

Easy administration and reporting across many clients

… at a cost of higher administration fees paid by the client.

Making contributions into super
Focussing on the accumulation phase here …
Super Accumulation Phase
1,200,000

1,000,000

800,000

600,000

400,000

200,000

0
20 30 40 50 60 70 80 90

Age
Income tax rates don’t help with saving!
Taxable Income Marginal Tax Rate
Let’s assume
0 – $18,200 Nil a marginal tax
$18,201 – $45,000 19% rate of
$45,000 – $120,000 32.5% + 2% Medicare levy = 34.5%

$120,001 – $180,000 37%

$180,001 and over 45%

The above rates do not include the Medicare levy of 2%

Australian Taxation Office (2022), ‘Individual income tax rates’ on ato.gov.au (website)
Contributions visualised
Income 15%
Contribution Concessional
$100 Tax contributions
(before-tax)
Income Tax
34.5%

Non-concessional
contributions $85
Bank account
(after-tax) Superannuation
$65.50
$65.50
Limits for concessional contributions
These are ‘before income-tax’ contributions
Including employer Super Guarantee contributions or salary sacrifice contributions
Contributions tax rate is 15% rather than paying marginal tax rate plus Medicare Levy

Concessional Contribution Cap (maximum): $27,500 per year

Any contributions above the cap taxed at marginal income tax rate plus Medicare Levy
Can carry-forward unused cap over 5 year rolling period if super balance < $500k

High income earners may pay an additional Division 293 tax of 15%
The Division 293 threshold is $250,000 p.a. based on combined income and contributions
This is still lower than the highest marginal tax rate of 47% (including Medicare Levy)

Personal after-tax contributions (with deductions) limited if aged 67+

Age 67 to 74: must work 40 hours in consecutive 30 day period. Age 75+: not allowed.
Employer and salary sacrifice contributions still allowed until age 75 with no work test.
Australian Taxation Office (2022), ‘Concessional contributions cap’ on ato.gov.au (website)
Australian Taxation Office (2022), ‘Additional tax on concessional contributions (Division 293) – information for individuals’ on ato.gov.au (website)
Limits for non-concessional contributions
These are ‘after income tax’ contributions made from bank account
Including funds released by selling other investments and moving the funds into super

Super account balance must be below Transfer Balance Cap ($1.7 million)
Non-concessional Contribution Cap (maximum): $110,000 per year
Age restrictions:
Age < 75: may be able to ‘bring forward’ 2 years of caps and contribute up to $330,000
Age ≥ 75: not allowed
… although Downsizer Contribution still allowed after 75

Australian Taxation Office (2022), ‘Non-concessional contributions’ on ato.gov.au

The main ways to get money into super
1. Employer contributions (including Super Guarantee Contributions)
2. Self-employed contributions
3. Salary sacrifice contributions
4. Personal after-tax contributions
5. Government co-contribution
6. Spouse contributions
7. Child contributions
8. Downsizing family home
9. Sale of small business
1. Employer contributions (SGC)
Employers contribute percentage of ordinary time earnings into super
If they don’t, they are required to pay a charge to the ATO, which is paid to your super
Ordinary time earnings are just your wage or salary (excluding overtime and allowances)

Minimum requirements are Superannuation Guarantee Contributions (SGC)

These are changing over the next few years and are listed on the following slide

Most employers are required to allow you to choose your own fund
Some employers are exempted when subject to State Awards
They will allocated you to a default fund if you don’t make a choice

Concessional contributions subject to 15% contributions tax

Only for contributions below Concessional Contributions Cap ($27,500 per year)
‘Maximum super contributions base’ for high-income earners (60,220 per quarter in 2022-23)
Super Guarantee Rates
From … SG Rate
1 July 2002 9.00%
1 July 2013 9.25%
1 July 2014 9.50%
1 July 2021 10.00%
1 July 2022 10.50%
1 July 2023 11.00%
1 July 2024 11.50%
1 July 2025 12.00%

Australian Taxation Office (2022), ‘Super guarantee percentage’ at ato.gov.au (website)

2. Self-employed contributions
Self-employed people are not employees of a business
They work for themselves as a sole-trader or under a partnership

… so they don’t receive Superannuation Guarantee Contributions (SGC)

… but can make their own concessional contributions themselves
1. Send a ‘Notice of intent to claim’ form to your super fund before end of financial year
2. Make personal contribution directly to the superannuation fund from bank account
3. Claim a tax deduction for the contribution in your Tax Return to the ATO

Australian Taxation Office (2022), ‘Super for the self-employed’ at ato.gov.au

3. Salary sacrifice contributions
Ask your employer to pay part of your salary into super (15% contributions tax)
… instead of paying it to you (marginal income rate of tax + Medicare levy)
Employer must be notified in writing before the income is earned
Concessional contributions (before-tax)
Are not eligible for government co-contributions
Are eligible for First Home Super Saver scheme (FHSS)

Popular with people approaching retirement (aged 50 to 74)

Under-utilised by young people who could benefit from long-term compound returns
Salary sacrificing can affect termination benefits under some contracts (watch out)

Age restrictions
Not permitted for those aged 75 or above

Australian Taxation Office (2022), ‘Salary sacrificing super’ at ato.gov.au

4. Personal after-tax contributions with deduction
Payments direct from your bank account into superannuation
… for which you do claim a tax deduction in your income tax return (15% contributions tax)
Concessional Contributions subject to Cap ($27,500 per year)
Note that Employer and Salary Sacrifice contributions are also included in this amount!
Popular way to increase super and reduce income tax
You must notify your super fund of your intent to claim a deduction and receive
NAT71121 Notice of intent to claim or vary a deduction for personal contributions
Usually eligible for First Home Super Saver (FHSS) scheme
Not eligible for Government Co-Contribution
Age restrictions
Age 67 to 74 you must satisfy ‘work test’ of 40 hours in consecutive 30-day period
Not permitted for those aged 75 or above

Australian Taxation Office (2022), ‘Claiming deductions for personal super contributions’ at ato.gov.au
5. Personal after-tax contributions with no deduction
Payments direct from your bank account into superannuation
… for which you do not claim a tax deduction in your income tax return
Non-Concessional Contributions subject to Cap ($110,000 per year)
$330,000 if bring forward 2 years (balance must be below Transfer Balance Cap $1.7 million)

Popular with people approaching retirement (aged 50 to 74)

Sell investment property and invest proceeds into superannuation

Usually eligible for First Home Super Saver (FHSS) scheme

Age restrictions
Not permitted for those aged 75 or above

Australian Taxation Office (2022), ‘Non-concessional contributions and contributions caps’ at ato.gov.au
6. Government super co-contribution
A government ‘top-up’ of $0.50 for each $1 (up to $500)
of personal after-tax contributions (up to $1,000)
Income must be below $42,016 (2022-23) to get the full amount … and
1. Not claim a tax deduction on the personal contribution
2. Must earn >$1 wage income (must be >10% of total income) and lodge tax return
3. Not hold a temporary visa at any time in the financial year
4. Must be aged below 71 (no restrictions on children)
5. … a few other things (see ATO website)

ATO and super fund arrange it automatically

Possible strategy for spouses or uni students with casual work

Australian Taxation Office (2022), ‘Super co-contribution’ at ato.gov.au

7. Spouse contributions
Superannuation contributions on behalf of a low-income spouse
Sum of spouse’s assessable income, fringe benefits and super < $40,000
Spouse can be married or de facto and must be living together
Both you and spouse are Australian residents

Non-concessional contribution (after-tax)

Contributor is eligible for tax rebate (maximum $540)
Tax offset is calculated as 18% of the minimum of:
1. $3,000 minus spouse’s income over $37,000
2. The value of the spouse contribution
… tax rebate gradually reduces to zero as spouse’s income increases from $37k to $40k

Australian Taxation Office (2022), ‘Super-related tax offsets’ on ato.gov.au

Australian Taxation Office (2022), ‘Spouse and child contributions’ on ato.gov.au
8. Child contributions
Infants and children can have superannuation accounts
Some superannuation funds will not permit infant accounts due to inability to sign forms!

Adults can make contributions into the child or infant’s accounts

Non-concessional after-tax contributions
No tax deductions can be claimed by the adults making the contributions

$50,000 can be withdrawn for First Home Super Saver Scheme (FHSS)
The annual contribution is still limited to $15,000 per year
… so the contributions need to be made over at least 4 years

Australian Taxation Office (2022), ‘Spouse and child contributions’ on ato.gov.au

Australian Taxation Office (2022), ‘First Home Super Saver scheme’ on ato.gov.au
9. Downsizing contributions
Contribute up to $300,000 from the sale of your home into superannuation
Home must have been owned by you or spouse for 10 years prior to sale

Can only be accessed once by people aged 60 years or older

… and still can be used by those aged 75 and above

An after-tax contribution made into superannuation (no tax on main residence)

Neither a non-concessional or concessional contribution
Does not contribute to Non-concessional Contributions Cap
Can still be made even if super balance is greater than Transfer Balance Cap ($1.7 million)
Does contribute to Transfer Balance Cap ($1.7 million) when moving super into income phase

Australian Taxation Office (2022), ‘Downsizing contributions into superannuation’ on ato.gov.au

10. Sale of small business
Rollover proceeds from sale of small business into superannuation
… and defer tax on up to $500,000 in capital gains
Details are complex (not covered in this course)

Australian Taxation Office (2022), ‘Small business rollover’ at ato.gov.au

Summary of age restrictions for contributions
Contribution < 60 60 - 66 67 - 74 75 +

Employer SGC Yes Yes Yes Yes

(concessional contribution)

Salary sacrifice Yes Yes Yes No

(concessional contribution)

Personal after-tax (with deduction) Yes Yes

Work
No
(concessional contribution) Test

Personal after-tax (no deduction) Yes Yes Yes No

(non-concessional contribution)

Downsizer No Yes Yes Yes

(special contribution)
Work Test = Must work 40 hours in consecutive 30 day period
Contributions visualised (recap)
Income 15%
Contribution Concessional
$100 Tax contributions
(before-tax)
Income Tax
34.5%

Non-concessional
contributions $85
Bank account
(after-tax) Superannuation
$65.50
$65.50
Drawing an income from super
When can I access my super?
You must reach your ‘preservation age’ before you can access your super
Exceptions include First Home Super Saver Scheme, compassionate grounds,
financial hardship and any emergency release programs (such as COVID-19 in 2020)

Date of birth Preservation age

Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
We will assume
1 July 1961 – 30 June 1962 57
preservation age
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59 is age 60 from this
From 1 July 1964 60 point forwards

Australian Taxation Office (2022), ‘Preservation Age’ at ato.gov.au

Focussing on retirement income phase here …
Super Retirement Income Phase
1,200,000

1,000,000

800,000

600,000

400,000

200,000

0
20 30 40 50 60 70 80 90

Age
Minimum pension payments based on age
Age Percentage factors Once a pension starts a
Under 65 4% minimum percentage of the
65 to 74 5% account balance is required
75 to 79 6% to be paid each financial year

80 to 84 7%
85 to 89 9%
90 to 94 11%
Aged 95 or older 14%
Transition to retirement (TTR) pension
Allows you to access some super once you reach preservation age
… even if you you’re still receiving income from employer or business
Must draw minimum of 4% each year if under age 65
Lump-sum withdrawals not allowed unless you permanently retire
Can start as early as age 55 under some circumstances
We won’t be covering TTR pensions for under the age of 60 in this course

If you are aged 60+ the income you receive is tax-free

Investment earnings subject to 15% tax rate
Account Based Pensions (ABP) previously Allocated Pensions

Allows you draw a regular income from super savings

… once you have reached preservation age and permanently retired
You can still make lump-sum withdrawals

If you are aged 60+ the income you receive is tax-free

Investment earnings are tax-free
Lump-sum withdrawals are usually tax-free
Maximum transferred into pension is Transfer Balance Cap ($1.7 million)
Anything above this must be kept in super accumulation phase (earnings taxed at 15%)
… or withdrawn from super completely
Annuity
Pays a regular income regardless of market returns
Income can be linked to inflation

Term can be fixed or lifetime

Lifetime annuities can revert part of income to spouse upon death

Limited or no access to lump sum withdrawals

If you are aged 60+ the income you receive is tax-free

Investment earnings are not relevant
Maximum transferred into annuity is Transfer Balance Cap ($1.7 million)
Anything above this must be kept in super accumulation phase (earnings taxed at 15%)
… or withdrawn from super completely
Comparison of retirement income streams
TTR ABP Annuity

Preservation age   
Must be permanently retired   
Can easily make withdrawals   
Income is tax-free (age 60+)   
Investment returns tax-free   
Withdrawing funds from super
Why withdraw money from super?
Still have home loan payable upon retirement (unfortunate)
Don’t trust the government … get it all out! (bad reason)
Don’t trust the super funds … get it all out! (bad reason)
Health expenses
Retiring overseas (may still be better to leave it in)
Helping adult children (in 40s) reduce their debt
Helping grandchildren (in 20s) buy their first property
Lavish family holiday
Types of withdrawals
1. Withdrawals after age 60 7. Incapacity
2. Economic crises 8. Super less than $200
3. First Home Super Saver scheme 9. Departing Australia
4. Compassionate grounds 10. Divorce
5. Severe financial hardship 11. Death
6. Terminal medical condition
When can I access my super?
You must reach your ‘preservation age’ before you can access your super
Exceptions include First Home Super Saver Scheme, compassionate grounds,
financial hardship and any emergency release programs (such as COVID-19 in 2020)

Date of birth Preservation age

Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60
Australian Taxation Office (2022), ‘Preservation Age’ at ato.gov.au
What is a ‘condition of release’ after age 60?
Can be complicated …
1. Cease work with an employer
2. Permanently retire
1. Withdrawals after age 60
Withdrawals from super after the age of 60 are often largely tax-free
Tax-free component 0% tax
Taxable (taxed) 0% tax
Taxable (untaxed) 15% tax up to a limit then 45%

… but you need to satisfy a ‘condition of release’

Such as ceasing work with an employer or permanently retiring

If you invest the funds outside the super environment

… then investment returns are assessable at marginal income tax rates
2. Economic crises
COVID-19 early release of super
$20,000 over 2020 and 2021 financial years

Withdrawals were tax free

Provided emergency financial slack to Australians in economic crisis
Could be repeated in future economic crises
3. First Home Super Saver scheme (FHSS)
Withdraw up to $50,000 to help buy your first home
Can only access $15,000 of contributions per year (so must have contributed at least 4 years)

Assessed individually … so couples can withdraw $100,000

Must be from either:
1. Salary sacrifice contributions (concessional)
2. Personal after-tax contributions with deduction (concessional)
3. Personal after-tax contributions with no deduction (non-concessional)
… NOT Employer contributions (concessional)
Withdrawal of concessional contributions for FHSS to buy first home
… pay marginal income tax rate less 30% tax offset when withdrawn
… so you effectively save 15% tax on any savings channelled via super to buy first home

Australian Taxation Office (2022), ‘First Home Super Saver scheme’ at ato.gov.au
4. Compassionate Grounds
1. Medical treatment or transport for you or your dependent
2. Palliative care for you or dependent
3. Making payment on home loan or council rates so you don’t lose home
4. Accommodating a disability for you or your dependent
5. Expenses associated with the death, funeral or burial of dependent

Tax is payable on the withdrawals

Contact Australian Taxation Office

Australian Taxation Office (2022), ‘Early access to your super’ at ato.gov.au

5. Severe Financial Hardship
You must meet all of the following:
1. Unable to pay essential family living costs
2. Receiving income support payment for at least 26 weeks in a row
Not including Veteran Payment, ABSTUDY, Austudy or Youth Allowance as full-time student

Tax is payable on the withdrawals

Contact your super fund

Australian Taxation Office (2022), ‘Early access to your super’ at ato.gov.au

6. Terminal medical condition
1. Certified by two registered medical practitioners
One must be a specialist

2. Illness likely to result in death within 2 years

Withdrawal is tax-free
Contact your super fund

Australian Taxation Office (2022), ‘Early access to your super’ at ato.gov.au

7. Temporary or permanent incapacity
Temporary incapacity
Unable to work due to physical or mental medical condition
Can generally access insurance within super
Super is received as regular payment (income stream)
Normal tax

Permanent incapacity
Permanent physical or mental medical condition
Can receive super as lump-sum or regular payment (income stream)
Concessional tax

Contact your super fund

Australian Taxation Office (2022), ‘Early access to your super’ at ato.gov.au

8. Super less than $200
Your employment is terminated and balance is below $200

No tax is payable
Contact your super fund

Australian Taxation Office (2022), ‘Early access to your super’ at ato.gov.au

9. Departing Australia super payment (DASP)
Temporary visa holders can withdraw super upon leaving Australia
DASP ordinary tax rate is 35%
Contributions tax of 15% was also paid
Total tax paid is 50%

Australian Taxation Office (2022), ‘Departing Australia superannuation payment (DASP)’ on ato.gov.au
10. Divorce
Super assets are included in the ‘asset pool’ distributed in a divorce
Family Court can order super funds to pay part of super to ex-spouse

Note: Relationship counselling is usually cheaper than a divorce!

11. Death
Your super is held ‘in trust’ by the super fund on your behalf
It is not directly owned by you so you cannot give instructions via your will

Trustee of fund is obliged to pay super to your financial dependents

If none can be found, it will be paid to your estate

You can nominate beneficiaries with your super fund

You can make ‘binding nominations’ but it must be to a dependent

Paid to a dependant for tax purposes: tax-free

Usually spouse (including de factor and same-sex) or child under 18 years of age

Paid to a non-dependant for tax purposes: taxed at 15% plus Medicare levy
Usually adult children or siblings

Australian Taxation Office (2022) ‘Paying superannuation death benefits’ on ato.gov.au

Super strategies
1. Make additional contributions into super
Salary sacrifice at least 10% of your salary
… or make personal after-tax contributions and claim a tax deduction
Take advantage of long-term compounding of returns
Stay under the Concessional Contributions Cap ($27,500 per year)
Note that employer contributions are included in this cap

Problems
Also need to be saving for buffer, financial slack, future expenses
No liquidity … cannot access salary sacrificed contributions in emergency
… but you can access them to buy your first home
2. First Home Super Saver (FHSS)
Withdraw salary sacrifice or personal contributions to help buy first home
$50,000 per individual ($100,000 for a couple)
Only $15,000 in contributions from any individual year can be withdrawn to buy a home
… so need to have contributed over at least 4 years

Note that concessional contributions still pay tax

Pay 15% contributions tax rather than marginal income tax rate when you make contribution
Pay marginal income tax rate less 30% tax offset when withdrawn to buy first home
… so you effectively save 15% tax on any savings channelled via super to buy first home

Problems
Employer contributions cannot be used for FHSS
Tax advantaged returns may be replicated by borrowing to invest in diversified share portfolio
Low liquidity … can access for first home but nothing else (except for early release)
Australian Taxation Office (2022), ‘First Home Super Saver scheme’ on ato.gov.au
3. Invest in high-growth investment option
While under 50 … consider investing in high-growth option
Higher volatility (risk) in exchange for higher expected average return
Mainly Australian and international shares
Extra 1% per annum makes a big difference over 30+ years
4. Children’s super
Open a super account for each child when they are born
Ask grandparents to make small monthly personal after-tax contribution
… preferably made via a bank account under the child’s name

Take advantage of 60+ years of compounding

$50,000 can be withdrawn for First Home Super Saver (FHSS) scheme
Contributions should be made from a bank account in child’s name
5. Increase contributions once you reach 45
From age 45+ try to salary sacrifice
… or make personal after-tax contributions and claim a deduction
Watch out for the Concessional Contributions Cap ($27,500 per year)
This reduces income tax payable

Problems
At that age you have high living expenses from private school fees, food, holidays …
Mid-life challenges could result in career change or lavish purchases
6. Self-Managed Super Fund (SMSFs)
Create your own fund with 6 or fewer members
Before July 2021 SMSFs could only contain 4 or fewer members

Direct control over investments with more choice (including property)

Rules include ‘related parties’ or deriving benefits from assets (in-house assets)

Better control over tax when moving from accumulation to payment phase
Borrow to invest using limited recourse borrowing arrangement (LRBA)
Ability to transfer residual amounts to other fund members upon death

… but pretty high admin costs and an accountant needs to be involved.

Australian Taxation Office (2022), ‘Self-managed super funds’ at ato.gov.au

7. Super balancing
Attempt to equalise account balances for you and spouse
Spouse contributions
Super splitting
An individual can split up to 85% of concessional contributions to a spouse
Receiving spouse must be under the age of 65
Non-concessional contributions cannot be split

Personal after-tax contributions

Sale of assets outside super … direct into spouse’s super account (subject to limits)

Helps to avoid breaching Transfer Balance Cap ($1.7 million)

8. Transition to Retirement (TTR)
Lot’s of interesting strategies here!
Continue working part-time after the age of 60 as long as possible
This will allow your super balance to continue growing

Salary sacrifice income above $45,000 into superannuation

Pay 15% contributions tax rather than 34.5% marginal income tax (including Medicare levy)
Subject to concessional cap of $27,500 per year (but can be higher with unused caps)

Draw tax-free income from TTR pension to help cover living expenses
Net effect is to lower marginal tax rate to 19% + 2% Medicare levy
9. Sell investments outside super
Before retirement …
Simplify your investments by selling properties or shares outside super
Invest proceeds into super as personal after-tax contributions
Watch out for the Non-concessional Contributions Cap ($110,000 per year)
… or $330,000 in one year by bringing forward 2 years of caps

Watch out for timing of capital gains on sale of assets

Best to sell those assets in a financial year in which you are earning little other income!
10. Downsize home after age 60
After age 60, downsize the family home to a smaller one
You must have lived in the home for 10 years prior to sale

Downsizing contribution of $300,000 into super

For a couple, this is $600,000 in total
Watch out for Transfer Balance Cap ($1.7 million per person)
This is still available to those aged 75 and over
11. If all else fails … there is the Age Pension
Age Pension is a form of social security
Aged 67 or above for those born from 1 Jan 1957 onwards (from 1 July 2023 onwards)

The regular income can help your super to last a lot longer
There is both an ‘asset’ and ‘income’ test
There are limits on ‘gifting’ assets to others
There is ‘deemed income’ rates on investments

Receiving even $1 dollar entitles you to Pensioner Concession Card

Cheaper health care, medicines and other services
12. You will not live forever in perfect health
Plan to enjoy life, hobbies, voluntary work, family and grand children
Avoid complex super arrangements, tax structures and investments
Remember that your brain will age
More confusion, more human bias, less trusting, poor memory, possible dementia

Draw a regular income

Keep the next 5 years of pension payments in low-risk (fixed interest)
Keep the remainder in growth investments (shares and listed property)
Preferably use Exchange Traded Funds to avoid gambling
Your Financial Plan
Apply what you have learned in this Unit for your financial plan:
4. Financial Independence
Describe you plan to achieve financial independence (preferably with calculations!)
Detailed description of how you plan to use super during accumulation phase
Detailed description of how you plan to use super during payment phase

More information under ‘Financial Plan Instructions’ document

… on the course website under ‘Financial Plan’ section

For assessment purposes …

You may assume that you are living in a different country
… but you must assume the Australian superannuation system applies in that country
Join us in a Drop-in Session
This course adopts a Flipped Classroom approach to give you maximum flexibility
1. Lectures are pre-recorded and can be watched at any time
2. The lecture time for discussion and questions

Joining a drop-in session helps you feel part of a ‘Learning Community’

Attendance is encouraged … but not recorded or assessed

Details of the drop-in session are towards the top of the course website
If you can’t attend then you are welcome to ask questions on General Forums