It is time to provide some real savings and out some secrets. How to maintain your cash-flow for investments all while having measures in place to insure yourself (risk protection). I will give you a running example of how and why this can be done with no effect to your cash-flow- An insurance policy for my IP and Life insurance premium is $2200 p.a. If I was a teacher earning $75,000- After tax and Medicare I may receive $59,000. I would then spend $175 pw on groceries, $100 pw on all car expense, $25 pw on medical, $150 pw on phone rates, electricity, water, gas, house insurance, mobile, internet etc, $50 pw on clothing, education, sports, entertainment and $100 on the children or where applicable( Christmas gifts, beer, cigarettes etc), $350 pw on the mortgage or rent, $50 pw miscellaneous (holiday, furniture, accountant, bank fees, paint, hair etc) = $1000 pw = $52,000.
Your yearly surplus is approximately $59,000 – $52000 = $7000.
Your personal insurance is $2200 / $7000 = 33%
My thoughts are: this is almost the cost of an investment property. I am happy to have my Super sort out this bill and I will keep the 33% of my surplus funds for a rainy day, investment or like.
I understand we are all different and all have different numbers then listed above, but, thinking like this is why I retired at thirty three with 8 properties on a teacher’s wage.
The common argument for not getting IP insurance through super is the release of payment and the short period (2 years) for IP. Times are changing, you can now get IP insurance up to 65 years of age. Further, under APRA's conditions of release policy, Superannuation Circular No. I.C.2 -Payment Standards for Regulated Superannuation Funds. You will find the release is not as difficult as is often published.
I have provided relevant sections of the above circular:
Temporary incapacity
Regulations 5.08, 6.01(2) and Schedule 1 (Part 1)
84. Subject to the governing rules of the fund a member may access benefits where the trustee is satisfied that temporary incapacity exists, i.e. the member has temporarily ceased work as a result of physical or mental ill-health which does not constitute permanent incapacity (refer paragraphs 89 to 91). It is not necessary for the member’s employment to fully cease.
85. Benefits may be paid where a member makes a partial return to gainful employment whilst incapacitated, provided that the member’s remuneration plus the temporary incapacity benefits do not exceed the member’s remuneration at the time the member became ill.It is easy for many wealthy people (including FP's) to say spend your last bit of hard earned cash on insurance, so I often encourage this new way of thinking. It is better than no insurance at all.
A few years ago I mentioned to a friend that I had life and trauma insurances, his reply was why waste your money on that. Now he has a few months to live with sudden discovery of advanced cancer which has spread to his organs.
My insurance cost me less than $200 per month for both life and trauma.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Terry,
Life, TPD and Income Protection can all can be paid from your super. Trauma sometimes called critical illness is the only one that must be paid out of pocket. Like you mentioned above, it can be very important and costly, This is where super monies kick in, particularly for those who are just making ends meet or require there own wage / salary for for investments, children or like…
Yep, i run mine thru my super.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
Why do you want to use your super
as max salary sacrifice is 25k/year?Might as well use the cash and claim the tax deductoin for income protection
I have my insurance done thru the super so I don't have to pay out of pocket.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
Yes.. it is true.. but you have only 25k to salary sacrifice it to super..
would it better to invest somewhere?GOM, I don't understand??? I am only paying less than $200 per month from super. I am not salary sacrificing
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Salary sacrificing, although giving you greater after tax dollars is a mis-conception to gaining wealth for a majority. Young people and anyone with time (at least one property cycle) should not decrease cash-flow by locking salary sacrificed cash in a restricted environment. When you roll through the numbers on a scenario of leveraging dollars external to super vs salary sacrificing and no leveraging you will see a remarkable benefit in the former idea.
I often see advertisements plug the idea, if you place $100pw in a super fund the result will be $531,487 over 30 years (7% return) when you retire. They are correct… but if you place $70pw to cover the shortfall of a property that you have purchased for $250k you have leveraged and it is worth $2M after three property cycles. Further, rent will increase and unlike in a super environment you may withdraw the equity to place the money in another appreciating asset. This can show you how investors may have differing views that can all be right, and they are right in some shape or form, but the key is to look beyond the common theory so as to achieve better results……
This isn't to say salary sacrificing is not a good tool, but it should be used where applicable and cautiously. i.e. For high income earners, people approaching retirement, apart from the investments that already have been established earlier in there life, they could salary sacrifice up to the maximum contributions limit, whilst setting up a transition income stream. Very useful in this example. Others on lower incomes ,nearing retirement, may not take an income stream. Yet they may salary sacrifice as suggested by many people.
Another thought, it takes an income of over $277,000 to go over the 9% SGC limit of $25,000.
The beauty of this approach is that the super can maintain the payment from its own income especially if you for some or other reason are unable to contribute to your super for a period.
number 8
I need to bring down my gross income from 200k to as less as I could. One way is using salary sacrifice to super.
Terry,
How much super do you contribute? I mean A$1000/year ( to pay income protection) is better to invest in super. I prefer to pay with cash and can claim 46.5% tax deduction
Sorry if this is still confused youI don't contribute to super at all.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry, so how do you minimise your tax? how do you increase your super?
I don't pay much income tax at the moment. Pretty soon I will be returning to work as an employee, then I will have to do some rethinking.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Problem with putting Life and TPD in super (I have) is yes you do get a tax deduction but at the other end you or your beneficiaries pay tax on that payout.
GOM,
I do not know all your personal details(age etc), but, I still see super as a lost opportunity. while money disappears into the super hole, it cannot be used until retirement. If you have excess cash, then spend it on appreciating assets, this will effectively do the same as putting it into super. A negative geared property appreciates at a far greater rate than the savings on tax via salary sacrificing. This is the power of leveraging.
Yes, there is significant savings on salary sacrificing, no arguments from me.
Here's another thought, I am the planner that could make money on someone saving into their super, but why is it I advise, in many cases the opposite.
Limited Recourse,
I agree, but, when you see the gains you make with the money you saved by using your super, the tax on the way out (death) is minimal. i.e. the insurance bill is the cost of another house and for the privilege of not using my own cash-flow, my children are now sitting pretty….
Number 8,
I'm fascinated by your 'secret'. I'm nearly 30 and am looking to aggresively create wealth in the next couple of years…how do I use my super the way you did? Can you direct me towards some reading…?
Thanks!From my understanding, his secret is to forget the whole idea of super because banks dont consider it when you apply for a loan.
Cyndre,
No reading on the above (and definately nothing to do with the banks), it is simply a strategy I use to pay for my insurances throughout my life. At the moment it is saving me approximately $2500 p.a. Be careful of the FP you use to do this, don't allow them to charge you for the advice.
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