superFIRE - What happens if you are overweight from the superannuation honeytrap [Part 3] 

Lured by incredible tax advantages, it’s easy to find yourself rich in super and early retirement poor. Australia only has 0.33% of the world’s population. From this tiny there is perhaps 1% of people lucky enough to find themselves in a position of having too much in super. Within this subset, only perhaps 1% of people would even consider it possible to have too much super. So if you are one of the 250 people who could possibly be interested in this subject, read on!

So what is too much super? For this post, it is when you have or will have too many assets and not be able to access the Australian pension. Means testing result into what some have called the “taper trap” where:


 $1 million [of assets] has less disposable income than the couple who retired with $400,000.

Ofcourse $1 Million of capital is better than less than half but capital doesn’t come from nowhere. You had to work for it. $600k in savings could be a decade of work that could otherwise be avoided. Some argue this results in a disincentive to save and I agree. 

This post isn’t interested in advocating policy but look into ways one could optimise their life. So, to get back to the original question, how much is enough. Well thats reasonably easy, pull out componding interest calculator to figure it out. Here are a couple of examples with a 5% inflation adjusted return:

AgeSuper BalanceAt Preservation Age (60) for full pension
30100,000432,195
40160,000424,528
50260,000423,513

Compounding interest is indeed magic. With 100k by 30, you are set for retirement. Showing that it doesn’t take a tremendous amount for super to grow into a very nice nest-egg with pension benefits. Anything extra and your pension will be reduced.

In the typical FIRE space, financial planners have been neglected, but optimising retirement has been a problem they have long creatively explored. Much to the ire of the Superannuation industry and perhaps the governement. Where clients have been advised to reduce assets, not increase them. Some methods suggested include:

  • Renovate the family home

  • Repay the mortgage

  • Taking holidays

  • Pre-purchasing solar panels & funerals

  • Gifts 

  • Super splitting 

  • Even purchasing a MORE EXPENSIVE HOME 

These strategies are legal, even Vanguard suggests some of them. Beyond these strategies, what can an early retiree do? Simple, accumulate fewer assets by quitting work early. 

A forward thinking early retiree planner could consider: 

  1. Not paying off their mortgage. Use this money to invest and live off and at preservation age, use a lump sum Super payment to pay finally pay off the mortgage.

  2. Reconsider Super contributions for the long term. 

  3. When closer to the time of traditional retirement, consider asset reduction strategies (I.e. renovate, spend, gift).

  4. Monitor governmental legislation, the more optimised your plan is for the current legislation, the more affected it will be with future changes.

  5. Save as much as possible outside of super to retire on and have a balance to coast traditional retirement (Aussie FireBug strategy).

 

Note: This is from a three part post.

 

 

This article was updated on September 30, 2021

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