Superannuation Archives - That Girl On Fire

That’s Bloody Super: Ways To Maximise Superannuation

Australia has a slow burn retirement system that’s pretty super, so when it comes to how we maximise superannuation, here are the habitual things we’ve done to help us achieve both a big balance in the amount, and good balance in the distribution.

In 1992, superannuation was introduced as a way to ease pressure on the government to provide a state pension to an ever-increasing ageing population. While the minimum amount employers have to contribute is growing, looking after super really is something that can’t be left up to them alone.

Younger people have the highest levels of dissatisfaction out of any age group with their superfund, and many have no awareness of the retirement planning tools their fund offers them.

Other than the fact that they know their employer pays into their fund mandatorily, it’s clear that there’s a general lack of awareness around how their money is invested, in what risk allocation, how much they could retire with if they added more, or even what options are available to them should they take time out of the workforce to raise babies, or enjoy sabbatical.

For self-employed people, it’s no different. As a business owner myself, I have to make the effort to manage my own super affairs since most of my client arrangements don’t include a super guarantee.

It’s not compulsory for me to make any contributions, either, which is why it’s no surprise that a quarter of self-employed folk have no super at all (or retire with less than half of that of a standard wage earner).

Side note: I always factor in an additional 10% to my service fee to cover super, and just contribute it myself. If I’m eligible for the super guarantee – even as a contractor – I advocate for it and point to the relevant legislation changes to support my request. If you are eligible, you should receive it.

In today’s terms, it’s anticipated that the average Australian individual will need $545,000 in retirement, and a couple $640,000 (supplemented with an aged pension). That assumes a couple of things: firstly, that by the time they retire, most people will realistically have that amount from standard employer contributions alone (or voluntary contributions if self-employed). Even with ambitious calculations, it’s a stretch.

It also assumes that the person has a sizeable enough income that the super guarantee (currently 10%) is a significant enough figure in and of itself to be invested for them, and must be paid consistently from an early age.

The moment they take time out of the workforce, though, the numbers start to scatter.

A couple of years off to raise a baby once, twice or more?

An extended redundancy during a global pandemic or industry depression?

Some time off after a stressful job experience to plan for what’s next? Taking time to study, or return to university to retrain? It’s murky waters.

It also assumes that the aged pension (which currently works to supplement lower super balances) will still be a viable option in twenty to thirty years, which is not a guarantee.

So, taking control of your superannuation by understanding what options are available to you outside of your normal contributions can mean a significant increase in the capital you have to draw from in retirement.

Even though we plan on leaving the traditional workforce three decades earlier than most, we would still like to have a healthy sum of superannuation by the time we’re able to draw it.

To help us do that, there’s a few simple things we’ve made a staple part of our financial routine to help us bolster our capital as quickly as possible.

Salary sacrifice to maximise superannuation.

With many employment contracts (even non-permanent arrangements), the super guarantee equals 10.5% of your ordinary time earnings, paid in addition straight to your superfund.

Making extra contributions in addition to this 10.5% seems like a logical solution to grow the amount, but when it’s taxed as pay-as-you-go (PAYG) withholding tax at your marginal tax rate, it can be a heavy hit.

Salary sacrificing is a smart way to get around this. You need to do a little bit of paperwork with your employer’s HR team to sort it out, and in the short-term it will reduce your take-home pay, but it will mean that amount is taxed at the super tax rate of 15%, versus your marginal tax rate.

I think there’s a psychological benefit to salary sacrificing super too, and why for us it works so well. We can put our money to work for us without feeling the loss of it in the first place – particularly helpful when the FIRE journey starts and you’re having to actively see your money hit your account before putting it away somewhere else.

Plus, it’s just easy as a set and forget system, and any extra time that you spend in the market doesn’t hurt.

Make voluntary super contributions.

Being self-employed, I don’t always get employer contributions under the super guarantee, except in the case of extended contracts where I work over a certain amount of hours, and – for all intents and purposes – behave much like a normal employee.

That means that I have to make a concerted effort to keep growing the balance, given that contributing to my super account isn’t mandatory.

So, I make these deductions as voluntary contributions and make sure, when I lodge my tax return, I claim a deduction to ensure I’m taxed appropriately on the non-concessional contributions I’ve made up to the limit. You can still make voluntary contributions in normal employment up to the cap, too. It isn’t only a super booster for us self-employed folk.

Double benefit from contributions splitting.

When I was on maternity leave, my income dropped significantly – as did the contribution amount I was able to make to my superfund. If you’re the lower income earner, or your spouse is, contributions splitting can be a smart way to go.

It’s an amount booster in the lower earner’s fund, and a tax offset benefit for the partner who makes the financial contribution.

There are a few eligibility criteria to hit, like being able to prove Australian residency and that you’re both married or de facto. As well as this, the lower partner’s income must remain below $37,000 (for the full tax offset), and below $40,000 (for the partial one).

Because I was receiving the parental payment and doing some freelance work here and there, mine sat just below $40,000 for each year of maternity leave before our son turned two. This meant that my husband could claim a partial offset, which of course helps – but more importantly, my superfund continued to grow in the right direction rather than being eaten into by fees.

Side note: I feel especially passionate about this having had a child. The work I did on maternity leave was, by all accounts, harder than the income-deriving work I was doing before. Yes, I say work because raising kids is work. Even so, I was the one being penalised by a system that didn’t truly see the value in me taking time to do this. Contributions splitting was a way to ensure I could access family income as it was created for personal long-term benefit. I love my husband as I’m sure many women love theirs, but we can’t be foolish around retirement planning. The statistics on women and retirement figures are real.

Enrol in the highest-risk portfolio option.

If you’re young and have time on your side, it may be worth ensuring you’re in a high-risk asset allocation option with your fund. Both myself and my husband are enrolled in the highest risk options, and we will adjust this accordingly as we get older.

High-risk options are typically where fund members will see the most growth, because you can afford to withstand more volatility that happens along the way. Funds have investment managers who are usually quite happy to talk to fund members about what sort of investment portfolio would be best for them to be in for the stage of life they’re at, and plans for the future, so take advantage of that service if you can.

Remember, this isn’t financial advice (and I’m not a financial advisor!). I don’t know you and your circumstances, age, industry, superfund, or really anything about you. High-risk asset allocations (also usually called ‘growth’ funds) would not suit a number of people — it’s not a blanket solution for everyone. It’s best to speak to your fund manager, or a licensed financial advisor if you have a complicated, unique situation.

Cover your fees.

If you can’t add the recommended amount into your superannuation fund because you’re not earning employer contributions, I think it’s worthwhile at the very least to make contributions enough to cover any fees or insurance premiums associated with the account, like for total permanent disability or death.

Perhaps you don’t have a partner who can make spousal contributions on your behalf, and you’ve been out of work for a while, the fees can still take a hit. To ensure that these fees don’t eat away at the balance, it may be worth chucking in enough to cover them, especially when they still count as non-concessional contributions taxed as the super tax rate.

Supplement a little here and there.

As was always our plan, we want to retire early. Before we reach it fully, we’ll be slowing down on work by booting a day here or there as the passive income derived from our other investments supplements the income we receive from traditional 9-5 work.

As superannuation is still a key part of our retirement plan though, continuing to contribute to it (even as we ramp down) is important. This means that we will continue to add 5% of our income into the fund on a consistent basis. A current work-in-progress for us is the building of options on how to do that if we aren’t receiving income in a traditional way any longer.

So far, we’re compiling income from book royalties, this blog, and work arrangements like consulting for a month out of the year on passion projects. The key is that we continue to assist our superfunds to grow rather than stay idle – this is what’s going to help compounding interest work its magic ultimately. To understand what retirement figures would best suit you and the kind of retirement you want to have, this retirement calculator can help.

Additional ways to maximise super:

Find lost super (ATO) and consolidate it.
If you’re a lower income earner, you may be eligible for the government co-contribution of $500.
Cost cut: Canstar reported that just $33 a week can net you an extra $121,267 by 67 (you’re often recommended to take from things like coffees, takeaway, manicures and life’s other little luxuries. If these make you happy though, especially after years of a pandemic, I think there are more efficient ways to find extra money. Reviewing insurances and starting a side hustle are two places to start. I found an additional $1000 simply by doing frugal February, you’re already halfway there in one month by doing that.

August 16, 2022/0 Comments/by Michelle

Financial Independence, Investing, Superannuation, Zero Waste

Ethical Investing for Beginners

“The secret to a fulfilled life is not only to do well, but to do good.” That’s ethical investing 101.

Whatever your personal, political or social view of the world, there’s one thing we can all agree on: it’s never been as batshit crazy as right now.

Reeling off the back of (and sometimes dipping back into) a global pandemic, sandwiched somewhere between ravaging bushfires, devastating floods and arid drought – ethical investing is on the mind of many of us looking to be cleaner with our investments.

How can we still amass wealth without ruining the planet in our efforts?

What’s the point of retiring into a world that’s unravelling at the seams anyway?

Is it possible to make ethical and sustainable choices with our money – and if so, how?

More importantly, how do we know what’s really green – and not just greenwashed?

Today we’ll cover ethical investing for beginners. Buckle up, FIREpioneers, we got some serious whips to crack.

Where do I start with ethical investing?

There’s a deep-rooted conundrum at the heart of ethical investing; a simple effort-to-return equation that has most people putting it on the ‘later’ list. Cost-effectiveness.

Is it cost-effective, and profitable, to invest ethically?

In my opinion, yes. In fact, our ethical index fund stock has performed significantly better than their dirtier, more rascally counterparts – with FAIR and VESG in particular smashing excellent annual and five-year returns.

Analysts at The Guardian agree, too, a year ago publishing promising Morningstar research that showed how well ethical funds did leading up to, and even despite COVID’s economical fallout.

Better, in fact, than industry-leading traditional funds.

So, yeah, ethical investing makes total sense – so long as you can actually get a return that matches, or exceeds, non-ethical funds of a comparable structure. Luckily, the odds of that aren’t so odd in 2021, meaning you shouldn’t be penalised for trying to do the right thing by mother E.

Paying a premium that only morally outweighs the alternative, only to wear the virtue signal as a badge of sacrifice is just silly. We’re lucky we’re living in a time where we don’t have to choose between fiscally sound investments, and ones that make us feel less disgusting.

So, with that said, what’s the easiest way to figure out if an index fund is truly ethical?

ESG-accreditation.

Funds that meet the stringent criteria for environmental, social and governance standards can be safely invested in with the knowledge that rootin’ tootin’ pollutin’ industries aren’t benefitting from your dollars.

Think fossil fuels, but also the tobacco, alcohol and porn industries, companies that test on animals, export live animals or are known to support offshore sweatshops, and companies that support gambling and violence. These are usually referred to as “sin stocks”, meaning defensive assets that perform well even during economic dips (because, well… humans).

The Morningstar Sustainability Rating offers a good overview on ESG criteria here if you’re skeptical, but the accreditation does stack up well by all accounts.

Ways to ethically invest.

In ethical indexes and ethical funds, fund managers are tasked with investing in companies and industries that have a meaningful level of oversight into not just the impact of the industry, but all people involved in the supply chain and all materials and resources used – including where they end up.

Given that share investing is such an integral part of many people’s path to financial independence (you can even ‘paper trade’ for practice!), investing in ESG funds is a good place to start on your ethical investing journey – but it’s not the only way. Let’s take a look at some others.

Consider how to gear property investments more effectively.

I don’t mean that kind of gearing.

Owning and tenanting investment real estate is often the subject of many ethical criticisms, but I think that in a market where we have gross undersupply of good homes to the amount of people needing to live in them, tenanting an investment property out responsibly is crucial to ensure well-managed, tenant-focused housing.

Case in point: we put our Sydney property on the rental market during the first serious Australian COVID lockdown of 2020.

At one point, we had two very different tenancy applications presented to us. One was of a double-income couple (one in a full-time paramedic role, a position that would be considered largely safe in the context of a global health crisis), and the other from a jobless and divorced single mum of two.

We were also doing this at a time where a national moratorium on rent payments had been announced. If our tenant couldn’t pay their rent, given the circumstances of the pandemic we would have no right to evict them. The shortfall would be on us.

The single mum had written us a beautiful application that stated her case clearly. She told us that she had been looking for a while (been rejected from many), had fallen in love with our place and was excited to gain back some normalcy there with her daughters. She told us that her ex-husband had agreed to cover her rent payments, given she had no permanent income.

It was risky, but when my husband and I discussed our responsibility to conduct ourselves in our investment position for the good of all, the decision was clear.

We accepted her application, against our agent’s advice. We figured that in a renter’s market, which it was at the time, the dual income couple would have no issue finding a place. They didn’t – they were accepted on another they had applied for by the next day – and we welcomed her into our home. She’s just renewed another year and has been a fabulous tenant to date. We have reciprocated by making sure that we are open to fair and reasonable negotiations in regards to rent price, repairs are made swiftly and without fuss and that the agent’s we have chosen always behave in good faith to her.

Now, I’m not saying that you should run around as a bleeding heart.

We asked our tenant if she could mitigate the risk by paying for three months upfront. Similarly, there will be contingencies you can put in place around your property and you’ll know when a tenancy application just doesn’t feel right. At the crux of it, though, I believe that properties owned by everyday Australians, rather than by developers or corporate entities, are always better for the community in the long-run.

Look at your ethical investing potential as a whole.

Superannuation is a great and tax-effective way to achieve financial independence.

Given that for many people their employers have to pay into it mandatorily, and they can’t access it until they reach “preservation age” (can we just take a minute to let that horrible term sink in?!), it’s got all of the factors a good FIRE investment-eth make.

Early start. Regular contributions. Compounds long-term. Lovely jubbly.

…But there are ways to do it ethically.

Super is essentially share investing, just within a specific company structure, and you don’t do the investing because the fund management team does – less their transaction fees which are built into the model.

Superannuation funds like Verve Super and Future Super come to mind straightaway, but you can find a few out there. Investment returns data for these funds is really promising, too – I encourage you to go and have a look.

Another option is to move into a self-managed super fund, where you choose and manage your own investments and insurances. I know that for me, though, with my age and the fact that I’m proactive in the share market already, an industry fund is the one that gives me that same exposure but with one less asset to actively think about.

If you have any cash held in a savings bank account, you might be pleased to know that you can move to banks who prioritise ethical practices now, too.

Personally, I think it’ll be hard to find a bank completely green but there are certainly options whose lending clientele don’t extend to the likes of fossil fuel conglomerates at the very least.

Bendigo, Suncorp, Heritage and ME are included in this list, with Bank Australia up there as the most generally clean bank. Financial products within certain non-ethical banks might also have an ethical component, but to me that’s akin to invading a country by force and then setting up a sweet little hospital to deal with the casualties. Cynical but true.

Ultimately, you’re probably not going to see a huge return on bank savings compared to having it invested elsewhere, but it’s worth looking at your money holistically. Many day-to-day transactions happen through a bank account, so why shouldn’t it be scrutinised to the same degree?

Other ways to pursue ethical investments.

Use everyday spending cash flow for good. Invest in solar panels for your house, or opt for the green power energy plan from your energy provider (many have one). Adopt minimalism into your life more broadly.
Use your money to make tax-deductible donations to registered charities, and use that to offset your income tax. If it’s going somewhere, better to be in the pockets of a registered charity than the tax office.
Can’t afford to free up extra cash from your income to donate for causes you care about? Use dividend income instead. Dividends, when donated to registered charities, can be tax-deductible too, avoiding the CGT component.
Invest your time. Head to the local pound or homeless shelter – or any organisation in an area you’re passionate about – and invest some elbow grease and hours. Even contributing to a community garden or beach cleanup is a better use of time when the alternative is sitting in an office chair, wiling away.

Good luck! As you move through the stages of financial independence, it’s very commendable to think about ethical investing on the way. Luckily these days, making sure your FIRE aspirations don’t start the next bushfire is not only morally right – but fiscally sound.

July 28, 2021/2 Comments/by Michelle