Would a third super fund help you retire early (before age 60)?

The first one is that their super balance may not be enough to fund their desired level of expenses in retirement for long enough . And secondly , a lot of people would like to have the flexibility to reduce working hours or even retire and fall in their fifties , so really before they can access super .

And often these two financial planning challenges can be solved by establishing what I call a third superfund , and that's what I'd like to talk about today . But before I get there , let's talk about those two things , that is , how long will your super last and how do you fund early retirement or even early partial retirement ?

So over the next five weeks , I'm going to share five episodes on some fun discussing some fundamental financial planning topics , and I'm going to try and solidify them in , make them as simple and easy to understand as possible .

One of those episodes will be on will be about how to maximize your super , and I've got a table that I've prepared for that episode , because I'm actually going to record a video screen , reshare video as well as a podcast episodes . If you want to watch the video , that's always an option too .

In any case , I've drafted this table , prepared this table for that presentation , and what it does is tells you how long your super will last for . So it looks at the starting balance at age 60 , how much you spend each year , and it'll tell you what age you'll be when your super runs out .

So , for example , if you have one and a half million of super , you want to spend $100,000 a year . You can do that , but you'll run out of super around mid 80s 86, . The table says , for example , the problem is with super is that we're restricted to how much we can contribute .

So even if we work out , we don't have enough in super and even if we had access to a whole bunch of cash , we're limited to how much cash we can put in there . So , concessional contributions , which are tax deductible contributions 27,500 a year . Non concessional contributions , which is half , which are after tax contributions $110,000 a year .

So that's the first thing is you know how much super do ? I think I will have by the time I get to 60 , and how long is that going to last ? The next thing I spoke about is , you know , the flexibility reduce working hours before your 60 .

So assuming you were born after one July 1964 , it means that you can access super or start accessing super when you're 60 . If you're still working , you are limited to withdrawing 10% of your balance a year . If you're not working , there's no limit , and once you get to 65 , there's no limit , even if you're still working at that age .

Now one of the concerns a lot of people have is you know , okay , today we can access super when we're age 60 , but will it be by the time I get there ? I think for people that are older than 40 today , I think it'll be 60 . It won't . It won't change . The government , I'm sure , will change the preservation age and push it back .

For example , the age pension age is 67 . So I wouldn't be surprised over the coming decades that they will push back access to super to keep people in the workforce for longer . But I think that's only going to impact people that maybe in their 20s and 30s today , so very unlikely it's going to impact people in their 40s and 50s .

So that's just something you want to think about . And if I was in my 20s today , I would be building my financial plan on the assumption that I can't access super , probably to mid 60s , sort of around that number .

My point is , if you want the ability to retire early or again reduce working hours , partial retirement before your age 60 , you need to have a pool of assets outside of super to help you fund living expenses until you can actually access super . And that's where the third super fund comes in .

You know , you and your spouse , if you have one , each have your own super accounts , so you've got two super accounts . The third super account could be building up a pool of assets in an entity such as a non-trading investment company .

And the reason I like a non-trading investment company to accumulate assets is you'll always get a credit for the tax that you pay , so it's quite tax effective and allows you to sort of plan to reduce taxes as well .

So when I say you get a credit , it means that even if you pay some tax today , some company tax today , eventually when you pay out that dividend you will get a credit for that tax already paid . And if you pay it out to yourself at a time where you don't have any other taxable income , you potentially end up paying zero tax .

You might pay a little bit of tax now and sort of pre-pay that tax if you like , and then you get a refund later on . And this is called an imputation system , and Australia is one of the only Australia and New Zealand are some of the only countries in the world that have dividend imputation and essentially seeks to avoid double taxation of corporate profits .

Because if a company pays tax and then pays out a dividend to its shareholders , if he gets tax again , that's the double taxation it seeks to avoid . So let me try and explain this to you in really simple terms . Let's assume that you have a non-trading investment company and that company generates $40,000 of profit through interest capital gains .

You know , just investment earnings , $40,000 . If you're age 58 and you plan to retire in a couple of years , at age 60 , what the company can do is leave the profit in the company . So $40,000 will then be taxed at 30% . So you'll pay $12,000 of tax and that means you'll have $28,000 of that profit left over parked in the company .

Then in two years time when you're retired , what the company can do is pay a fully frank dividend to you and your spouse . So the $28,000 comes out in dividends , $14,000 each .

And if each view in your spouse don't have any other taxable income you might be receiving pensions , but pensions aren't taxable from super then essentially you'll pay no tax because the $14,000 dividend each comes with a credit of $6,000 each being the $12,000 the company has paid , and so you will actually then receive the dividend of $14,000 and a tax refund for

$6,000 , meaning that you both end up with $20,000 or the $40,000 that the company actually generated in profit . So in that example you can see that the company's made profit . We've left it in . The company paid some tax . We've then waited a couple of years , paid that profit out and got a credit for the tax .

And because we waited a couple of years to pay the profit out when we have very little taxable income in our personal names , we've got a credit for the tax and therefore got a refund in tax as well .

So that's one of the greatest benefits of using a company is that even if you pay tax today , you'll always get a credit for that tax and then , if you pay a dividend out in the future when it's tax effective . To do that , you'll get a tax refund and it potentially allows you to pay zero tax .

Now , one of the downsides to investing in a company that a lot of accountants will cite is that , unlike individuals and trusts , companies aren't entitled to the general 50% capital gains tax reduction or discount . Sometimes it's called so .

If you own CGT asset in individual or trust names and you hold that asset for more than 12 months and you sell it and make a capital gain , you can discount that gain by 50% and then the remaining 50% is taxed at your marginal tax rate . Instead , in a company , it's not allowed to reduce the gain by 50% and so pays a flat 30% on all capital gains .

Because in individual names you know your top marginal tax rate is 47% . Because you get a 50% discount , all you're paying is 23.5% on any capital gains tax versus 30% in a company . So an extra 6.5% in the company .

And in that situation most accountants or many accounts would say look , we don't want to invest in a company because we're paying more capital gains tax . Well , that is true , but remember we get a credit for that any tax that's already paid .

So if I made a make a really large capital gain in a company , what I can do is retain that profit in the company and then pay it out via a dividend over maybe the next 20 years , for example , to sort of spread that tax burden over many , many tax years and thereby reducing the overall tax that I pay .

Sure , I'll have to pay the 30% upfront , but remember , I get a credit for that and then potentially a refund as a result . So we're not too concerned by the fact that or not , to put off by the fact that company doesn't get a CJT discount . Now , typically we would have ungeared investments in a company .

So if we're thinking about borrowing to invest in properties , I have a high level of gearing .

We would typically want to have that in our personal names because really what we want to do is enjoy the negative gearing benefits and my past analysis shows that the value of those negative gearing benefits over time , particularly in the earlier years of owning that investment , are very valuable .

Whereas if you have a geared investment in a company and so it records a tax loss , that tax loss is trapped inside the company . You really can't get the negative gearing benefits in your personal name , and so for that reason we wouldn't recommend typically putting geared property investments in a company name .

So then , how would we use an investment company or this third super fund ? Well , typically , the most common way we would use it is with a regular share investing strategy . So , for example , a client invests a certain amount each month , a set amount each month , into the share market and that portfolio would be owned by the company .

And I've discussed that previously . There's a link in the blog on the website to that previous blog . If the client is self-employed , quite often it's possible for them to distribute business income into that company , thereby capping their income tax rate at 25 or 30% .

If the client is an employee , then we will record the contributions as a loan to the company and that way it allows them to withdraw that capital contribution in the future without crystallizing any tax consequences . Depending on the amounts involved , it is actually possible to maybe add a little bit of gearing into the portfolio .

Now , you wouldn't do it to a really high LVR that it's going to crystallize a tax loss . You still want it to be positive cash flow , but it's possible to add a little bit of gearing into that regular investment strategy as well .

An investment trust can also be a good entity to build a portfolio in so that third super fund , especially if we have someone to distribute to an individual to distribute to , that's on a low income tax bracket , and also a trust , can distribute into a corporate beneficiary , into a company to cap the tax rate at 30% as well . So that's also an opportunity .

Now , running a non-trady investment company is not without cost and so that's something we need to think about . Company costs about $1500 to establish and in terms of ongoing fees , there's two major ongoing fees . The first one is ASIC , which is regulates companies . Their annual fees about $310 . And then , of course , tax and accounting fees .

The companies don't necessarily have to prepare financial statements , but they do have to obviously prepare a tax return and they've got to maintain adequate financial records . Therefore , by avoiding preparing financial statements , you can kind of keep your accounting fees relatively low .

It's gonna depend on the complexity of the company and the size of the portfolio and transactions and so forth , but as a rough guess I would say accounting fees are gonna be around about $1,500 a year . So all up with asset fee , you're looking around about $2,000 a year .

This begs the question what portfolio size really warrants establishing a company , cause if you've got $10,000 invested . You're certainly not gonna pay $2,000 a year to hold those investments .

Look , it's difficult to give you one exact number , cause it really does depend on a client's individual circumstances , but as a rough goal I would think that if I expect the portfolio to exceed half a million dollars within the next five to 10 years , it starts to warrant putting it into an entity .

And or if you and your spouse are on already paying highest marginal tax rates so we don't have anyone else to distribute to , that can also mean or add further weight to investing in a non-trading investment company . Let me finish by saying superannuation is very , very tax effective and you should not ignore it .

Everyone can have up to $1.9 million in super and pay zero tax . So therefore you and your spouse could have up to $3.8 million in super and really that kind of beat should be your target of your total wealth . You know , having as much as possible , but up to 3.8 inside super by the time you

get to round . You don't have to have it by the time you get to 60 , but even if you can achieve it by the time you get to sort of mid 60s , that kind of should be your goal .

But if you don't have that much or you can't get enough into super to accumulate that much , then you've got to start thinking about pool of assets outside of super , and that's where this third concept of the third super fund comes in .

And having either an investment company or investment trust to hold those assets has a lot of merit and will help you achieve your goals , particularly if one of those goals is not only enjoying a comfortable retirement but also having the flexibility to consider early retirement as well .

Okay , so , as I said , over the next five weeks I'm going to share some basic , fundamental concepts , financial planning concepts , in each episode and , as I said , there's a video also that goes along with each of those presentations . So I look forward to sharing those with you and until next week . Bye for now .