Young and middle-aged Australians might not often think about what their financial situation might be like once they reach old age. However, it is important to plan for your future and put away money overtime so that one day you can eventually retire.
It can be difficult to plan for your future, especially if you are at the beginning of your professional career or you have to provide for a family of children. If you fit into this category, planning for your financial future has even become more difficult with the impact of the covid-19 pandemic which threw the economy into disarray.
It’s impossible to know what is going to happen to the markets in 2021, let alone what costs will be like when you’re ready to retire. For young and middle-aged Australians here are some strategies you should consider implementing to make sure you have enough money put away for when you reach retirement.
Get results from saving early
Thanks to the rule of compounding, the money you save and then instantly invest when you’re young is much more likely to grow than the money you invest later on in life. If your income decreased in 2020 due to the covid-19 pandemic, it may be tough to save right now, but depositing very small amounts of money in your superfund account over a longer period of time can have a greater impact in the long run than investing a larger amount later on. In 2020, a total of 3 million Australians withdrew a combined total of $36 billion out of their super accounts last year. It’s going to take some time to build this back up – but the sooner you start, the better.
Here are three things to consider that may help you save while also planning for the future and reaching your investment goals:
1) Make the most your earnings
It can be difficult to find extra cash to invest when you’re just starting your career and potentially in your first full-time job, starting a business or raising a young family. But one way to find extra money is to change the amount of taxes withdrawn from your earnings and to make sure that the amount withheld during the income year best meets your end-of-year tax liability. If you typically get a large tax refund, consider reducing your withholdings and putting that regular “extra” money straight into an investment account.
You might also deliberate about earmarking some of or all of any raises or bonuses for retirement investing. This can be a very painless way to save and invest because it doesn’t change your take-home pay.
2) Make voluntary superfund contributions
After retiring, your superfund will likely be your main source of income, it’s therefore crucial that you contribute to it now as often as possible. If you are currently employed, your employer will put an amount equal to 9.5% of your salary into your super at least once a quarter. This amount of money might not be enough to maintain the lifestyle you’re hoping for in retirement.
If this is the case it is advised that you decide to make a voluntary superannuation contribution to your account. Making a voluntary superannuation contribution has many excellent tax benefits that you can take advantage of by donating.
You can also make cash (after-tax) contributions to your superannuation account, but there are also before-tax contributions that can be made via an agreement with your employer. This kind of super contribution is commonly known as salary sacrificing and can be highly beneficial if you make over $45,000 per year.
Although you don’t pay taxes on these contributions, the super tax rates are usually much smaller than the regular tax that is issued on income and normal investment earnings.
3) Explore additional deduction possibilities
Money you save via tax deductions can both decrease your taxable level of income and give you more money for investing at the same time. There are many tax minimisation strategies available for Australian citizens.
If you’re a salaried employee, you may be able to deduct some or all of the following:
- Car and business-related travel expenses
- Membership or union fees
- Home computer or phone costs
- Clothing expenses
- Tools or equipment
- Tax preparation expenses with your accountant
If you work from home or are a business owner, you can usually deduct several expenses necessary for your business to operate such as phone costs, utilities, insurance, rent and capital equipment. It’s crucial to keep a written record of all expenses you wish to claim and to speak with your financial adviser about all possibilities. It would also be a great idea to explore the ATO’s “cents per hour” rate allowed for working from home due to covid-19. This scheme is available until 30 June 2021.
More ways to save money
It is important to remember that for the 2020-21 year financial year, both the individuals income tax rates and the Low-Income Tax Offset (LITO) and Low and Middle-Income Tax Offset (LMITO) levels have been changed. This means that you might be able to save on your taxes and use this “leftover” money to invest.
The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 07 36086800.
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