Today I’m chatting to Sam.
A financial planner from around the Byron Bay area who had a really interesting path before he landed in Finance. Sam reached out to me after my Super podcast with James from earlier on in the year and explained that there was so much more to cover when it came to Super and FIRE for Aussies.
This was shocking to me too considering how big that podcast was 😅
One of the most interesting topics from a financial point of view that has come about from this global pandemic is the early access to Super which has become available for a lot of people who meet the criteria.
We’re going to be chatting about the circumstances where it would make financial sense to withdraw the money and use it in your journey towards FIRE, a deeper dive into the First home super saver scheme and a really cool convo about why everyone, FIRE or not, should aim to have $1.6M in their Super account when they hit their preservation age.
Some of the topics we cover:
- Early access to Super and what it means
- Eligibility to get early access
- Circumstances where it makes financial sense to withdraw your Super early
- First Home Super Saver Scheme (FHSSS)
- Sam’s approach to the classic dilemma of investing inside or outside of Super even when aiming for FIRE
Update: Around the 34:05 mark we spoke about withdrawing from the FHSSS. Depending on your tax bracket, you may potentially have to pay more tax. Not everyone will be able to offset their tax return from the tax credit.
Update2: The ATO have released specific information regarding COVID-19 Early release of super – integrity and compliance. In a nutshell, they will come down on people who withdraw their Super and contribute. This new information was not present when the podcast was recorded so please be aware.
Heads up grammar Nazis, the following transcription is half human half machine and not 100% perfect so expect a few typos and errors…
[00:00:00] Aussie Firebug: Welcome to the Aussie Firebug podcast, the financial independence podcast for Australia.
Hey guys, welcome back to another episode of the Aussie Firebug podcast. The financial independence podcast for is where I interview clever people who’ve already reached her on their way to financial independence.
Today on chatting to Sam, a financial planner from around the B Bay area, who had a really interesting path before he landed in finance. Sam reached out to me after my super podcast with James from early on in the year and explained that there was so much more to cover when it come to super and fire for Aussies, which was shocking to me because that first podcast at the start of the year about super was a massive one.
It was close to an hour and a half long. One of the most interesting topics from a financial point of view that has come about from this global pandemic we’re all in, is the early access to super this become available for a lot of people who meet the criteria. We’re going to be chatting about the circumstances where it makes financial sense to withdraw the money and use it in your journey towards fire.
We also go into a deeper dive into the first home super saver scheme. That’s a, that’s a tongue twister. That one and I really cool conversation about why everyone, whether or not you’re aiming for fire or not, should really aim to have 1.6 million in their super account when they hit their preservation age.
It’s a really cool [00:01:30] strategy. Sam talks about, I’ve never had someone explain it exactly how he explains it, so I’m sure you guys are gonna love that one.
So let’s jump into it.
Hi, Sam, welcome to the podcast. Thank you so much for coming on.
Sam Thanks, Matt. It’s good to be here.
Aussie Firebug: Now let’s start with you, mate. How did you get involved with the financial industry?
Sam: so I got into financial advice four years ago. came out of a farming background and before that, a, sort of community service, actually working for my church for about seven years in the U S.
And before that, just backpacking around the, the, European, North Africa for 18 months. So I’m sort of on my [00:03:00] fourth career now. loving this one, loves working with people and yeah, that’s, that’s where I’m at now.
Aussie Firebug: That’s an interesting story there, Sam, and, and an interesting path to get to the financial industry.
I’m curious what, what sort of farming, what background in farming is, did you
Sam: have. well, I grew up on an American quarter horse stud. We always had about 50 horses around. We had cattle as well. And then when I came back from the U S was really interested in sustainable agriculture, did some permaculture courses, holistic management, which is sort of broad acre grazing management stuff.
and yeah, ended up setting up some properties here in the Northern rivers of new South Wales, sort of Byron Bay area. sustainable type self-sufficiency farms for people. And, anyway, there was just sort of a limited scope for growth in that always working for, for others. got given an opportunity to move across into financial advice by a friend who had been in it for about 30 years.
And I knew a little bit about the depth of relationship that he had with his clients and sort of the trust that they had in him. And I thought that was probably a good, good industry to be in, you know, being part of people’s lives, helping them out, and yeah, going deep with people. So that really drew me to it.
And I’m, I’m enjoying it.
Aussie Firebug: I, you an American citizen as well. You sound like your accent sounds Australian to me.
Sam: Yeah. And not yet born and grew up in Australia. Left when I was 18, met and ended up marrying, Austrian American girl.
we met at the Bible college that I went to the U S [00:04:30] for. And then, Yeah. We moved back here, in the second year of being married.
Aussie Firebug: So what an interesting story. Now, I don’t know if you’ve had, this is sort of going off on a tangent already where we’re only two minutes in, but, I wonder if you’ve ever had a look at the us system, like the financial system and the tax laws there?
Because from what I’ve heard, and I’ve had actually a few. American citizens, you know, message me about if they’ve come to Australia and, you know, the whole bunch of really complicated tax questions that I have. No, absolutely no idea how to answer. But, have you ever looked at the American system and just thank your lucky stars that you’re working in the financial industry in Australia?
Sam: Well. Yeah, the pros and cons. I mean, when I was living in the U S I wasn’t making any money, so I didn’t really pay attention to the money system. I was sorta over there for, it was about seven years on a volunteer basis. So didn’t really have reason to pay much attention to it, especially as a, immigrant.
the rules were different for me, but I do have a brother living in Canada. And, so to talk to him and compare notes about what their opportunities are for, you know, fast tracking, their wealth creation. And yeah. Now I’ve got us friends that I’m sort of talking to about it. There’s pros and cons both ways.
you know, to, to both systems. Hmm.
Aussie Firebug: I’ve just shared it. It’s a bit of a nightmare of you move out of the U S you’ve gotta like keep paying taxes even though you’re leaving and stuff
Sam: like that. That side of it is a disaster if you’re a us citizen and you [00:06:00] leave. Yeah, absolutely. Yeah.
Aussie Firebug: No, it’s all good.
It’s a weird, it’s a weird cyst. I don’t know it like. I thought, I don’t really want to know it, but, yeah, it seems a bizarre way to do things. Anyway. Yeah, we’ll jump back on topic. So there is a very hot topic amongst the fire community at the moment and probably the larger just the Australian finance community, and that is the covert 19 early release of super that the government proposed the other month.
So I did a super podcast with James at the start of this year, which was an absolute monster, and I thought it would be good to discuss a few other things in regards to super and fire that maybe wasn’t covered as in depth as we would have liked to in that first podcast. So. With another super expert, coming on being yourself, I thought it’d be good to touch on the hot topic of the `early release two or the early access to super.
And also just a few other things about super that we may have missed in that first one. So let’s begin. Early access to super, what is it? How does it work.
Sam: . So, early access to super is a short term opportunity in response to the Covid 19. And the financial pressure that people are feeling is to be able to withdraw up to $10,000.
In the current financial year. So prior to June 30 and then a further $10,000, or up to $10,000 in the next financial year. So post July one of this year. and [00:07:30] the, obviously the spirit of the, The thing is to help people that are under financial hardship, unable to pay bills, unable to put food on the table.
I’m guessing that. Does not cover a lot of the people that listen to your podcasts and follow, you know, fire blogs and are on the fire journey. Because if, you know, if you’ve been on it for any period of time, you’ve got an emergency account, hopefully with a bit of cash there to get you through, at least until you get onto some of the other government.
the subsidies at the moment, whether it’s job keeper or job seeker, but we won’t go into those for now. We’ll just stick to this. so if, you’re in financial hardship, you can get that money. I think one of the best things about the early access to super is that it’s getting a lot of people to sit up and actually take a look at their super account.
because a lot of non-fire people just ignore it completely. They don’t know what insurances they’re paying there. They don’t know what it’s invested in. They don’t know what their balance is. That didn’t even have their log in set up to be able to check it. So I think that is a secondary benefit. But in my line of work, it’s a good thing.
A lot of people are starting to pay attention. unfortunately a lot of people that are under financial hardship and pull that $10,000 out. we’ll spend it and probably don’t have the intention of repaying, or topping this super [00:09:00] backer, which, , anyone that knows anything about compounding, it’s going to hurt at retirement.
Some of the figures that have been thrown around are obviously on the high side by the superfunds. Because they like to keep as much money under their management as possible because they charge a management fee and there are more realistic numbers as to how much someone’s retirement savings actually going to be affected.
But either way, you know, you’re robbing your future self if you pull that 10 or $20,000 out and don’t top it back up.
Aussie Firebug: , so first of all, I guess I want to make clear that.
This, , early release to super there, there are stipulations and rules, to get access to super. So there is , eligibility testing. I believe that it’s happening. So if you are not eligible to have to do early access to super, you shouldn’t be doing it. That is breaking the law. and you shouldn’t do it.
But for the people that are able to access this early access to super, like you said. $10,000 for this financial year, which we’re recording in, on the 2nd of May 20, 20. So the 19 to 20 financial year and the 20 to 21 financial year, so potentially up to $20,000 out of your super. So just, I don’t want to make it clear the algebra eligibility rules, having trouble saying that.
so they, I did have it up here, so it’s
Sam: easier. I would just stick to the Australian New Zealand citizen one. Otherwise, you podcast is going to be quite long. There’s different rules for temporary visa holders, [00:10:30] et cetera, but your Australian ones are pretty simple. if you’re unemployed, and that’s whether you were unemployed before the 1st of January, 2020 or after just flat blanket rule.
If you’re unemployed, if you’re eligible to receive job seeker. Youth allowance, parenting payment, or other special benefits like farm household allowances, like drought related type things. and then if you have been made redundant after the 1st of January this year, or your working hours were reduced by 20% or more.
After the 1st of January this year, or you’re a sole trader and your business was suspended, or there was a reduction in your turnover of 20% or more since the 1st of January. So the eligibility rules are pretty, pretty straightforward, pretty simple. And the easiest way for people, I think, to pull it up and look at their own situation, see if they are eligible, is just Google early release of super fact sheet treasury.
And that’ll take you straight to the horse’s mouth and you can see the rules there.
Aussie Firebug: Yeah, I’ll, I’ll put a link in the show notes for everyone listening out `there, if they want to go to the website to see the, the rules of , who and who can not get access. Access to this early release. Now these rules, you know, reading through the last couple, if you’re made redundant, if you’re unemployed or the big one, to me, if your working hours were reduced by 20% or [00:12:00] more, like that is a lot of people, especially, it’s a lot of people and that’s, it’s almost a bit hard to.
To quantify, like there’s going to be a few gray areas. I would assume that the government are going to be auditing, but, but regardless, it’s going to be a lot of potential people that have access to to the super. So, or this early release. So a few questions that I have, it’s tax-free. Correct. So when you, if you apply for it and you can get the $10,000 yeah.
You don’t pay any tax on
Sam: that. Correct. Now, usually if you pull super out before you reach preservation age, and especially before you reach age 60 it just, it’s silly to do it. You’re shooting yourself in the foot in a major way, but because this is for, you know, financial hardship release, it’ll come out to you.
You withdraw 10,000. And 10,000 will come into your account and it will not show up as part of your taxable income for the financial year.
Aussie Firebug: Yes. Now, this is the big, I guess this is the big question amongst the community. Now let’s say, and this is, it’s personal for me as well, because mrs FIBark has lost her job, so I believe reading the rules that she would be eligible to have early release of the 10,000 offer.
Super. If she was to take out that $10,000 tax free. And put it into the ETFs that we, that we invested in, that she invests in. Although I understand that it’s now that that money has moved from a [00:13:30] low tax environment to a higher tax environment. But other than that, is there anything else I’m missing here for the downside of, doing that?
Eve, you’re eligible to do that to top up your money outside super. That was previously inside super.
Sam: Yeah. Look, if you’re moving it from being invested inside of SU to being invested outside of super as long, you know, this is making the assumption that it’s an intelligent investment. It’s not highly speculative and likely to disappear, but sticking to the script of what, what you cover with your community.
yeah, the only downside on it, as long as it’s legal and you qualify, obviously. Is that you’re moving from a tax concessional environment that exists inside of super to a regular tax environment. That obviously depends on what your, your work situation has been prior to losing your job or having your hours reduced this financial year, and then obviously into the future.
there’s tax implications, but the other thing that I don’t know if you planning to go there, Matt, You could do both in that. and we’re going to talk about this a bit more later. , the pros or cons of growing your, your super as part of your fire number or just trying to do that exclusively or primarily outside of super.
But if you, if you did have a double strategy where you’re trying to grow both you, you’re falling number in ordinary money [00:15:00] and you’re your fire. number for 60, age 60 and beyond. Inside of super, you could technically, and this is a loop hole that isn’t in the spirit of the, early access to super, I’ll be honest, but it, it’s, it’s, it’s playing by the rules of, superannuation.
You could pull $10,000 out. You could re contribute that $10,000 and if you’re, let’s say you’re earning under $90,000 a year, you could save yourself 19 and a half cents in tax on the way in. and then just reinvest it back inside of super so you could actually end up in front by pulling it out, putting it back in, reducing your taxable income for this financial year, and then keep plodding along with your, you know, your fire strategy.
Aussie Firebug: yeah. That is very interesting.
Sam: Does that make sense?
Aussie Firebug: Yeah, it does make sense. I did hear that strategy. It’s very interesting. I wonder,
cause like you said, it isn’t
in the spirit of the law, but it is playing by the rule book, that it can be done and saving tax. And to be honest, if, if you’re playing while the rule book, this is, I guess this is my personal opinion and, a lot of people, like you got, I’m young, there’s gotta be a lot of different opinions about this, but.
If you reducing your tax, legally, I don’t have any issues with that. obviously tax evasion [00:16:30] is illegal and you shouldn’t do that, but tax minimalization is perfectly legal. I do wonder this, this taking it out and putting it back in. I wonder if they like, that seems too obvious to me. Like a lot of people are gonna abuse that, and I wonder if they’re going to somehow, audit that or, or do something with that.
But I guess we’ll wait and see, if anything changes by the time this is recorded, and any, any laws or updated or anything, I will, I’ll make an edit. but that is super interesting. So you pull it out. Tax-free, and then you make a contribution to your super, so you reduce your taxable income and you save the difference in tax.
That’s sort of how it works.
Sam: Yeah. Now, obviously this is not personal advice, I’m sure you say, of course. and you’ve gotta be spot on with the timing of how you do that. And if it is you, generally, if you make a contribution to super, a concessional contribution to super through your employer, so salary sacrifice, then you don’t need to do any extra paperwork.
But if you make a, A personal concessional lump sum contribution. Then there’s extra hoops that you’ve got to jump through, which is shorter. And so you have to submit a notice of intent to claim form, and you don’t want to miss that. Otherwise, the whole point of doing it is, is lost. and you’ve essentially pulled 10 grand out, put it back into super and paid 15.
[00:18:00] No, sorry. If you put it back in, you won’t without doing the notice of intent. It will have just pulled money out, put it back in with no advantage to it. Right. You’ve got to submit the notice of intent to claim form to, to secure the advantage.
Aussie Firebug: Okay. And is there any cutoff date, and, and speaking of this early access to super, I guess this is a good question as well, when, what’s the latest someone can do this?
We’re recording this on the 2nd of May and hopefully I’m going to have this published relatively soon. is there any deadlines or something that people should be keeping an eye on?
Sam: Yeah. Look on the, on the fact sheet, there’s some explanation of timing, but it’s very brief. All it says is that you need to pull it.
You need, you’re able to make the request, sorry, from the 20th of April onwards. Now. Like super funds are, are taking their say about five days to get the money out to you. So I’m guessing though, the timing on this would be, as long as the request is made before the 30th of June, this financial year, then that would tick the box for your, your first part.
And then obviously at the timing for the next financial year, one is you’ve got a lot more room to breathe, cause you’ve got a full 12 months to do it. But if I was doing it, I wouldn’t be leaving it until the last week of June. I’d be doing it sort of first week of June, so that this time for the request to go in the money to come out.
[00:19:30] and then if you, that’s if you needed it for financial hardship. If you were putting it back in, yeah, I’d give yourself a bit more breathing room because you’ve, you’ve only got to get that notice of intent to claim form in before your tax return is done for this financial year or before you roll that superannuation to a different account.
So you wouldn’t want to go changing super funds in the middle of this. Re contribution strategy.
Aussie Firebug: Right? And that’s actually just reminded me of something else that’s happening, as a indirect result of this early access to super, and this isn’t, isn’t a question that, I’ll show you before the podcast.
So if you don’t know the answer to that, like don’t feel free to just pass on it. I didn’t give you any time to prepare for it, but there is a lot of news in the media about super funds. Having issues or having trouble with people wanting access to $10,000 cash because of unlisted investments in the super funds.
And the big one that’s getting a lot of press at the moment is the, the host plus industry super fund, which, Scott pap, the barefoot investor, he promotes heavily the heat. Now he doesn’t promote. The, the option of the unlisted investments, he’s always said that the, the index fund one, like the, the low fee option within that super fund is the one he would go for.
So it’s not like he’s, he’s promoting , the, the product that’s. I’m not going to say failing or that’s [00:21:00] causing a lot of issues at the moment. do you have any opinions or any, anything that you can tell us about why that’s happening? what you think might happen in that space and just general, I’m just generally just interested to hear what you would say in regards to that topic.
Sam: Yeah, so obviously if people have made an investment choice to be invested in an unlisted asset class. or an unlisted asset, if, you know, I’ve just looked at it here, that news news is saying that 360,000 Australians have applied for an early release of super. So we’re not talking lunch money here.
It’s a lot of money that some of the superfunds are having to, to release cough up. And yeah, a lot of the, especially industry super funds have invested in infrastructure, projects. You know, roads, tunnels, you know, big, big office buildings in the city. They sorts of things that you can’t sell one of the offices down the bottom overnight in order to free up some cash to give to members who want to pull it out for one reason or another.
So, yeah, it’s just, it’s a rush on, those assets that would certainly have a cash allocation. Yeah, but not enough cash sitting there to be able to honor. All of the redemption requests that are being made.
Aussie Firebug: Yeah. It’s low
Sam: liquidity, right? That’s like
Aussie Firebug: the crux of the issue, that they’ve invested in a lot of assets of, of low liquidity and [00:22:30] it’s not really their fault to be honest.
Like if the government makes a flips a switch, like , who knew that a pandemic would grip the world in 2020 like, no one knew this was happening. So like, it’s easy to criticize these super funds, but in reality, It’s not like they knew that this was coming and when the government just click their fingers and it’s like, Oh, we’re just going to pass this law really quickly.
Like we can’t think too hard about what’s going to happen and the repercussions like it is, they’re put in a tight situation. But it is, it’s interesting too. You know that this has come out. And I do wonder if there’s going to be some sort of, Royal commission or something, about this. And, you know, some rules are going to be put in place after this all goes down to say that they can’t invest in unlisted funds or something like
Yeah. I’d be surprised if that happened because, I mean, if you went and checked their product disclosure statements, it would, it would address liquidity issues. And you know, it’s a two edged sword. Unlisted assets at the moment haven’t dropped 30%. because they’re not listed on the stock exchange.
They can’t be valued every minute of the day between 10:00 AM and 4:00 PM. They’re valued generally every quarter by certified property valuers or assesses. and that’s why they’re, they’re an investment option that has a lot lower volatility. But part of that is because they’ve got lower liquidity.
And, you know, it’s not, no one plans for a [00:24:00] mass Exodus like this. So I think there’s a lot of, lot of grace is going to be given across, you know, lots of different areas.
Aussie Firebug: , if someone is in. Host plus, I’m pretty sure it’s host. Plus someone is in host plus super and they’re looking to get out.
Like are you seeing in your experience, many people moving super funds or transitioning from one fund to another because of this reason or other media overblowing the issue here.
Sam: Are, look, I mean, bad news sells. so I’m sure they’re overblowing it. I haven’t followed it super close.
We don’t have a lot of people in industry funds. and. Yeah. I just haven’t had my finger on the pulse with that one.
Aussie Firebug: Okay. Fair enough. all right. We’ll move on to the next topic then. And that is the first home super scheme. I think it’s, that’s, the name of it. The FH S. S
Sam: yeah. We spoke. First time Supersaver scheme.
Aussie Firebug: FH SSS. It is a tongue twister. Yeah. Now, I spoke a little bit with James about that in the first podcast, but we really didn’t do a deep dive into it. So I’m keen to chat to you, Sam, about what is it, how it works in, can people chasing fire uses to their advantage on their journey?
Sam: Yeah. So obviously, depends on what people’s circumstances are.
For instance, if you’ve owned property. In your own name before then. It’s a no go zone [00:25:30] because the eligibility criteria is that you cannot have held property in your personal name before. What happens
Aussie Firebug: if your video partner has just, sorry to interrupt that. A real quick question. If you’re
Sam: no good question, they can go.
They can do it themselves. Even if they’re going to buy a property. With someone else who has held property before interest. So you are treated as an individual, not as a couple on it. So I’ll walk you through it as a hypothetical. Let’s say you have owned a property before. mrs Firebug has not, mrs Firebug can put up to $30,000 into super.
an EMR market as being related to the first home super saver scheme. That’s $30,000 is broken down into a maximum of $15,000 per financial year. And so over two years, they could add, mrs Firebug could put $30,000 total in. The advantages of doing that is that. That $15,000 each year would reduce her taxable income.
So let’s say she’s owning that below $90,000 for the $15,000 that she puts in, she’s going to save 19 and a half cents for every dollar. [00:27:00] And her tax return will be larger in both of those financial years. And if you keep track of the difference, you can put that extra texture stone aside towards your home deposit or paying off that mortgage or putting it into whatever investments you’ve got going.
When the time comes to purchase the property, that money is pulled out, and needs to be spent on your first home. You need to live in the property. For six months of the first 12 months of owning it. So if you’re someone that’s looking to rent best, buy an investment property in a good growth area, but you’re living somewhere else because of work or lifestyle, whatever it is, it’s probably not for you because you do have to satisfy the requirement of living in it.
As your first home for six of the first 12 months. but one of the other advantages to it, and I think this is a big one at the moment, when you’ve got term deposits, you know, under 2%. which is generally a sensible place for people to start stockpiling a a house deposit. You certainly don’t want to go putting it into the markets in case something like what we’re in the middle of now happens and it pushes your home purchase plans back, you know, a couple of years, depending on what happens going forward.
Instead of putting your home deposit savings into a term, deposit it to less than 2%. [00:28:30] If, if mrs Firebug puts $15,000 into super tomorrow and pulls it out in two years time, the deemed right of return that will be given to mrs Firebug when she tries to pull that $15,000 out, is around 4%. So even if the Superfund value goes down, when that money is pulled out.
It will be the amount that was put in minus the 15% tax plus a deemed right of return of about 4%. So guaranteed rate of return tax concession. It’s a pretty sensible strategy. I was helped to, you know, a good number of couples through it. But you gotta, you know, by the time you look at has anyone owned property before?
Do you have the money, to do it? All those sorts of things. It doesn’t fit everyone, but it’s certainly worth exploring if people have known property and and want to pick up a bit more tax
Aussie Firebug: short. Now there’s a bit to unpack there so that the 4% guaranteed return, w what is that based on? Is that based on the tax that you save by doing this strategy?
Sam: No. So that’s totally separate. So the tax that you save is based on your taxable income. So, you know, let’s say someone’s in the 45 cent tax bracket, there’s strategies and [00:30:00] absolute goldmine for them because, you know, they’re saving 30%. in tax by putting the money in, and then that obviously comes back to them in their tax returns.
So that’s one part of it. Yeah. The 4%, and I’m using 4% as around figure it’s roughly 4%. That, this is a same sort of equation that the government uses for, retirees, and people on. Yeah. Pensions with a look at their assets and it would be a compliance nightmare to try and keep track of. Okay. Sam’s retirement account returned 7% but Matt’s returns 6.3% and so the income from that for the income test for is.
His government benefit is 6.3 of what he’s got invested, but Sam’s rate of return was seven instead of getting into that level of complexity, they just say, if Sam has a hundred thousand in investible assets and Matt has 200,000 in investible assets, we are going to assume that the right of return on those investments is.
It’s about 4% that deeming is the process. That is the name that’s given to that process.
Aussie Firebug: Interesting.
Sam: And so the money that, [00:31:30] the money that goes into super for the first home super saver scheme, once you apply for the release through the ATO website, you go on there, you say, okay, I’m ready to buy a house.
How much am I allowed to pull out? They look backwards and see the date that the money was added to super. Then they do a calculation of, an annual rate of return of about 4% while that money was in there. They add that to the money that you put in, and then that’s what you can pull out.
Aussie Firebug: That is very interesting.
I’m not too sure many people know that that’s how that works. That’s, that’s, that’s super interesting. So even if, and I think you spoke on it a little a little bit before, but I just want to clarify. Even if the market drops, you’re guaranteed a 4% rate of return.
Sam: Yeah, and just on that point, that’s one of the risks with it is it’s a safe option for buying your first home.
It can be a bad option for growing your time and savings within super, because. Let’s say someone put in $15,000 on the 30th of June before the 30th of June last year, they put $15,000 in in the first week of July this year, they put $30,000 into the markets. They’ve got a deemed rate of return of 4% for the six months that it’s been in there, but if they want to buy a house next week, they’re [00:33:00] pulling $30,000.
Out of their super account after it’s dropped 20% so it’s stunting the growth of their retirement savings inside of super, but it’s helping them get towards their house deposit.
Aussie Firebug: Interesting. Okay. so , when, when the money goes into, I don’t know, is it separated or that they just, they just.
Bookmark it to say
Sam: you could put it in and just earmark it in a cash account. so that.
It’s not effected that way. Yeah. and then you would just get the tax risk. You’d get the tax saving, you’d get the deemed rate of return, and then you’d pull it out. It can be done, but you’d have to get into your super fund , and nominate that that portion of your investment pool stays in cash.
Aussie Firebug: Right. Okay. Okay. Very interesting. So, so it’s a, and this is sort of super basics that I’m hoping for getting, but it’s not, sorry, it is tax when it goes in, but then it’s not tax when it comes out.
Is that right? Or is it tax both ways.
Sam: Yes, no, no, no. It’s not text when it comes out.
Aussie Firebug: Yeah. I guess what I thought. So 15% going in and then you get that you lower your taxable income and then it’s not taxed when you want to bring it out. And the, the really important bit there, which I never knew is a guaranteed rate of 4% when it’s in there.
which is very cool. It can vary. It can definitely help out. So, yeah. Awesome. That’s [00:34:30] definitely, that’s a big one. that I’ve learned and mrs Firebug actually hasn’t bought a house for herself. Now. She’s not eligible for the first home buyers grant because we’re a de facto relationship. We’re getting married soon, so that makes her ineligible for that part.
But this one, what you’re saying is she actually is eligible for this one, even though I’ve used the first home buyers grant and I’ve already bought a home. Which is very interesting.
Sam: Yeah. Yeah. And then if you wanted to double back on our first part of our conversation, if you wanted to sort of start, start to layer your strategies.
If, if you fit into the unique sort of demographic that ticked all the boxes on both the early release of super as well as the first home super saver scheme, you can potentially pull 10 out, put it in. Get the tax deduction and then pull it out in the future for your first home super saver scheme after getting a deemed rate of return of 4% but that’s for people that want to be real tricky.
Aussie Firebug: Yeah, that’s definitely something cause I believe. she will be eligible for both of those things, but yeah, I’ll have to do my research, but it’s very good to know. So, yeah, very, very interesting.
Sam: But again, on, on that one, just a real encouragement to people there. There are more, so to tick boxes that you’ve got to go through with the first time super savers games.
So go straight to the horse’s mouth, Google, you know, first home, super saver scheme, ATO [00:36:00] and read it all there. And that, the most frustrating thing about that is the timeframes on release. Generally when people go to buy a house, it’s like, you know, they find a dream property. They want it tomorrow. There is a bit of a lead time on getting that money released from super, it ends up being about a month if everything goes smooth.
So if you’re going to go house shopping in, say October, start the process 1st of July. Take care. Give yourself plenty of time of requesting the determination from the ATO, and then they do the calculations until your super fund to release that money to you. And there’s some lag times that sort of build up there that you want to be cautious of.
Aussie Firebug: Yeah, right. Oh, that’s very interesting. Anyway, I’ll, we’ll put a link in the show notes too. go to the FHS, link on the ATO website for people to check that out. I will definitely be checking it out. So, yeah, very good to know. let’s shift gears for a second here and chat about the pension balance cap of 1.6 million and why that should be a target for people in the fly community.
Sam: . So superannuation is, divided into two phases. The first phase that anyone under preservation age. and for most of your audience, I’m assuming, you know, we’re sort of younger, our preservation age at the moment is, is going to be 60, so let’s just talk about [00:37:30] 60. Sure. up, up to 60, you’re going to be in accumulation phase.
post 60, you have the option of moving that money. It stays inside the superannuation environment, but it moves across the half way line from accumulation phase to pension phase. The difference of those two is, A regular withdrawal amount can be set up from a pension account and account based pension inside of super, and the money that is paid out from there is tax free because you’re over 60 and the investment earnings on money’s invested inside of the pension phase are tax free.
Whereas in accumulation phase, the rate of tax on investment earnings is still 15%. So let’s imagine that you’ve got, 1.6, in super, well, let’s call it two mil. If you’ve got 400,000, Over that 1.6 cap, then it’s going to be sitting in an environment where it’s taxed at 15%. and the advantage of having it there versus outside of super is maybe questionable [00:39:00] depending on your taxable income that you’re drawing.
Keeping in mind that if you’ve got 1.6 in pension, when you pull it out, it’s tax free. So. You’re not really probably gonna have a tax problem and having it inside in an environment where it’s going to be taxed at 15% you might be worse off.
Aussie Firebug: So, so that 1.6 is really the, the gravy boat. Like everyone should be taking advantage of the tax free environment of that 1.6 it’s, it should be the target.
Regardless of where you’re at in your journey. You should be a preservation age. You want to have at least 1.6 mil in super.
Sam: No, I wouldn’t say, at least I would just say. The benefit of having more than 1.6 diminishes significantly. Sure.
Aussie Firebug: Yeah. Yeah, yeah.
Sam: I wouldn’t say it’s a minimum target. It’s a maximum target.
Aussie Firebug: Yeah. Okay. That’s a good point. Yes. Because especially in the fly crowd, if you’re going to be leaving off such a low amount of income from your investments, that you have the potential to be paying more. If you have all your investments in super, right. Then if you have it outside.
Sam: Yeah. And the reason, I think the 1.6 balance cap as it’s called, is helpful to the fire community is, you know, the debate of do we grow our fire savings outside of super or inside of super?
my personal [00:40:30] sort of approach to it is it doesn’t have to be either or. It should be both. If you start early and make, let’s say the first year or two of your employment while you’re still living at home, or you know, you’re able to really keep your, your expenses down. If you could put.
The, the maximum concessional amount into super each year, which is $25,000 at the moment per year, which includes the nine and a half percent that your employer has to put in. If you max that out and ended up with $50,000 in super in your first two or three years of your career. You pretty much wouldn’t have to do any other contributions between then and age 60.
obviously this depends on your, your, wage and, or whether or not you’re getting a wage. Like if you’re a contractor, you’re responsible for paying your own super. Yeah. But let’s assume that someone’s just making 50 grand a year, the average Australian wage, and they’re getting nine and a half percent of that put into super.
Well, if, if, if a young fire bug gets themselves off to a great start by putting, say 50 grand into super in the first couple of years, you can sort of set and forget that. And because of the power of compounding in a tax concessional environment, you’re not going to be far off that 1.6 [00:42:00] cap. If you choose your investments correctly and make sure your fees are kept low and all of those basics, and then, then you would turn your attention to focusing on your savings outside of super,
Aussie Firebug: the power of compound interest,
Yeah. But if, if I’ve got 50 grand in super and I’m 25 then. I don’t really need to be having the debate. Should I put more into super or should I save money outside of super? Well, if your projections show that you’re going to hit the 1.6 cap, by the time you reach age 60, then there’s not really, there’s not as much advantage to putting more into super versus putting it into your, You’ll ordinary money investments.
Aussie Firebug: That’s, that’s a really interesting point Sam. Cause we spoke a bit before this podcast started recording about the fly calculator that I’ve got on my website and. I speak about that as well, and a lot of people, a lot of people ask me the same question over and over again.
You know, what is the most optimal way to reach a fire? Should I be investing in inside or outside? Super. And I don’t think I’ve ever heard that phrase like you just phrase it there, Sam. It’s, it was very, very interesting to hear, like, we all know, if you invest in super at an early age, the power of compound interest, you know, you’re almost.
Like you [00:43:30] said, that the math shows that you only have to invest so much at the very start of your career and then that will grow over time, but I actually never thought about it like that. If you get to that maximum amount, by the time you hit your preservation age of 1.6 then anything on top of that isn’t necessarily going to help you out that much and you can really focus on building the snowball outside super.
so that’s a, that’s a great, great way to look at it. Just do maybe do the hard yards at the very start and get a decent snowball rolling down that Hill, and then let the power of. Four decades of compound interest do its thing, and the snowball’s going to get to the magical 1.6. Hopefully, fingers crossed.
It doesn’t change by the time we get there. 1.6 mil, by the time you hit your preservation age and then you can focus on building your snowball outside super and you don’t have to worry, you don’t have to have that conversation with yourself. I like it.
Sam: Yeah. Interesting.
Everyone’s situation is different. So there might be different factors. You know, you’re saving, you know, maybe property is your, your gig, and you really believe in the power of leverage and you’re happy with a lot of debt. And you say, look, you know, that 50 grand that I could put into super. I can leverage that into $300,000 in an investment unit, and that’s going to have me better off, go for it.
But for those that are, that are always having that debate, or should I, shouldn’t I, and this is probably something that comes out of the financial advice sort of [00:45:00] track record so far, is when someone walks into the office and they say, Oh, what should I do? It’s up. There’s a thousand things you could do.
Tell me what you want to achieve and we’ll reverse engineer it. I think if you, if you solve that eternal debate of inside or outside of super by reverse engineering your super account balance to that 1.6 mil cap, you realize how easy it is to hit that target. If you know the markets do what the markets have always done, and you get an early start on your contributions.
And the fact that the, the snowball rolls down the Hill so much faster when you’re only paying 15% tax on those investment earnings.
Aussie Firebug: Good. Yeah, it’s a very good point. And it’s something that my calculator,
Sam: it’s on compounding on, it’s on compounding, on steroids because of the tax environment. And if you get an early enough start.
You can have your cake and eat it too. You can have enough money outside of super that you finish it. Say, you know, 33 you’ve hit your fire number that will help you coast until you hit 60 and then that, that money is going to come. And I’d probably just make a comment. I mean, everyone will have their opinion on this too, but I think especially when we’re young, it’s.
It’s a antiestablishment. It’s cool [00:46:30] to be skeptical, and sort of down on the government. But I think if we just think of what motivates governments votes, what’s the fastest way to lose votes? Tell people they can’t access their money. Like. That I think the financial situation would have to be the least of our concern.
If it gets to a point where the government isn’t going to give, , a whole generation of retiring people access to their money at 60
Aussie Firebug: I see what you’re saying. Stuff.
Sam: I’m just not as skeptical on that.
Aussie Firebug: Fair. Fair enough as well. But wouldn’t you agree that. The government hasn’t done themselves any , favors, how they’ve, how they’ve already tinkered with the rules of super in the last decade or two.
Sam: I think a lot of that tinkering falls into the category of, it affects very few people. The tinkering, I think that has been done. And look, full disclosure, I’m new to this. You know, I’ve been paying attention to this, you know, at an increase level over the last four years. Before that, I didn’t have any super because I had volunteered overseas and I just wasn’t paying attention to money.
but a lot of the tinkering that has gone [00:48:00] on has to. To reduce the lucrative nature of the superannuation environment for wealthy people who don’t need tax concessions. That’s what a lot of it has been. And the other part of it, like you think of the increasing preservation age, the people that were allowed to access their money at 55 did not have 40 years.
Of nine and a half percent of their paycheck going into super. So there, there was a strategy and there is a strategy called a transition to retirement strategy where people, once they reach preservation age, they can pull money out of super to allow them to put more money into super to save tax and therefore boost their retirement savings.
Well, someone that’s 30 years of age now does not need. That extra help to get their retirement savings on track by the time they’re 60 but someone who was 55 and had only had, you know, what would it be 1520 years in the superannuation environment. They needed that little bit of extra help to get there and the preservation age has been increased as people don’t need that extra help.
Fed sort of tinkering to cater for the, it’s [00:49:30] tinkering to cater for the, the generational changes of, you know, the different waves of people that are coming through and the opportunities that they’ve had to save for their retirement.
Aussie Firebug: Fair enough, Sam. And that’s a, it’s a good way to look at. And you know what?
I hope, I hope you are right. And maybe I have been, I guess more skeptical of the government than most, but I do hope that, it doesn’t change too much and they keep the, they keep the rules relatively consistent over the next couple of decades when. you and me can finally get access to it. So, yeah, I’m definitely hoping, but either way, you look at it, what you’ve, what you’ve discussed is super interesting.
And you know, I’ve got my calculator on my website that does the whole, how much should you need inside? Super. How much should you need outside for like, optimal, tax optimization, but it still doesn’t factor in the, Maximum you can contribute to super the 25 K a year, because that depends on your tax rate.
And it was just too confusing. And I think I’ve got a disclaimer in the calculator that says, I just can’t be bothered putting it in. Like it’s, it’s too hard to, to, To factoring everyone circumstances, like this is the blanket general rule that I’ve got, but it’s very hard to factor it in. But yeah, I really liked the way you look at it, that 1.6 as a target, as a max that you want to reach in just doing the hard yards at the start and having this snowball, as you said, on steroids rolling down that Hill to get to that point.
Sam: interesting. Either way. I think it could moderate not to hop on the [00:51:00] skepticism thing because I like to have views about the future, but, The skepticism can be moderated a little bit when you look at, okay, so I put 20 grand a year in, in my first two years of employment, and that gets me on the road to the 1.6 cap.
Well, if they move the goalposts a little bit, it’s not like I was putting 20 grand every year. Yeah, too. Like I wasn’t robbing my ordinary money investments or I wasn’t depriving myself of that second investment property because I was focusing on super, and now they’ve moved the goalposts on me. So that was two years of surplus income.
And then you forget about it and if they move the goalposts, it’s like, well, that sucks, but
Aussie Firebug: you know, we’ll live,
Sam: I’m going to hit the 1.6 cap.
Aussie Firebug: Yeah, yeah, it is. It is. You know, even I, I wrote a big article about like, when they label, we’re thinking about changing the Frank and credit refunds, and at the end of the day, it’s, you know, we will leave.
We will, we’ll get through it. there’s plenty of ways to get around it anyway, but, it just is. I guess it’s a, it is frustrating for some people that plan their retirement on certain rules and then the government want to change it and it can affect some people in certain circumstances greatly. And the majority of the population probably not as much.
Like you said, it goes back to votes, right? They, they make these changes. They try to get the best bang for their buck. Whilst also being empowered. They don’t want to lose the [00:52:30] vote. That’s like the number one focus, but they try to do everything in their power to shift, to shift the money around, to like do, more projects to get them more votes and keep them in power longer.
Anyway, we could go, that could be a whole
Sam: nother podcast where the first home super saver scheme came from. It was to get some votes. Of, you know, younger people that were struggling to get into the house market. That’s why we’ve got this opportunity with the first home super saver.
Aussie Firebug: I’m sure some people will be interested for sure.
Sam: Yeah. No worries.
Aussie Firebug: that is it. That is it. Sam, we’ve come to the end of the podcast. thank you so much for coming on and spending, spending time with us and offering us your expertise.
It’s been an absolute pleasure.
Sam: Hi, thanks for having Matt. I hope I’ve been helpful and yeah, love what you do and just keep people learning and it’s, that’s good. That’s
Aussie Firebug: good. Cheers mate. Appreciate it.
Sam: Catch up.
Aussie Firebug: I hope you guys enjoyed that one. I love Sam’s thinking behind, maxing out your super for the first few years of your employment and then lending the power of compound interest, do its thing in a low tax environment. I’ve never really thought about it like that before, but I think it’s brilliant. Now check this out.
I did some quick mass and let’s say you’re able to max out your super contributions for just over two years. When you first start working and say you have a roundabout 50 K in super by the time you’re 22 let’s say you’re. A tradie. You might’ve been earning a little bit more money earlier on in the piece, and people that went to uni or something like that, you would have over 1.7 million in super by the [00:54:00] time you hit 60 without ever having to add anything extra yourself, assuming that your employer is contributing at least 5k year during that time.
Now, obviously there’s a few factors at play there. But let’s say that you get to that number in that situation, you could focus solely on your snowball outside of super, completely after the first initial two years that you’ve done the salary sacrificing, and you would still end up with a super balance around that really important 1.6 mil Mark.
Really cool to think about. There’s been a lot of coverage out there about the early access to super from very credible people basically saying, don’t do it. But the thing about all that general advice is it’s targeted towards every everyday normal people who won’t have the financial discipline to stick to a strategy.
Ask fire bugs are different. Accessing your super early can have financial benefits, especially if your goal is to retire early. We’re still getting confirmation on mrs firebox eligibility, but if she is eligible, she will be taking out the 10 K this financial year and the 10 K next financial year because our strategy is to build up our financial independence number outside of super.
And the only downside of doing this. Is the potential that that money will be sitting in a higher tax environment. However, there is also the possibility that we can save money on tax because retiring young puts you in a very unique position of an even [00:55:30] lower tax environment. Then super in some circumstances.
So for our situation, it actually makes financial sense. Make sure you read the show notes and fully understand the eligibility testing before considering this strategy though, and I want to make one last point about this topic because there’s been a lot of chatter on Facebook groups, online forums, and comment sections of news articles.
I’m not sure if everyone realizes, but super is actually your own money. It’s not a handout from the government, and people that qualify for the early release can spend their own money however they see fit. I’m constantly seeing comments from people judging others on how they spend their own money and somehow justifying this judgmental behavior with the fact that they’re going to have to pay for these people’s welfare checks.
Well, I hate to break it to anyone out there that thinks like this, but. That’s how welfare works. You don’t get to dictate how people spend their own money just because you don’t want to support them when they run out of money in retirement. Also, there’s nothing stopping them from taking a lump sum when they hit their preservation age anyway.
I’ve already spoken enough about how the government wastes billions of taxpayers dollars, and that’s billions with a B. But at the end of the day, I’m more than happy to pay my fair share of taxes because the overall positives far outweigh the negatives. But I’m not campaigning anytime soon to pay more tax, but [00:57:00] that’s enough ranting for me.
I hope you guys enjoy that one and I’ll catch you on the next episode. Peace. Thanks guys for listening to another episode of the Aussie Firebug podcast for links to all of the resources plus an entire transcript of this episode. Head over to dot com make sure you never miss out on another episode by subscribing now on iTunes or SoundCloud.