Superannuation is a great way to boost your retirement savings, but if you are 40 years or younger — don't rely solely on your super fund. I think you will look very smart in 10 years if own ASX shares outside of superannuation today.
How super works
In Australia, individuals contribute to superannuation in one of two ways:
- Before tax
- After tax
Before-tax contributions are the contributions made to your super by your employer. From July 1, these are capped at $25,000 per year. After-tax contributions are the contributions you make to super after your employer has withheld PAYG, using the money you receive in your pocket. These will be capped at $100,000 starting July 1.
Self-employed people — like yours truly — can also make contributions to super.
Under 40? Don't rely on superannuation
Superannuation is great because your money is typically taxed at 15% and the superannuation guarantee must be paid by all employers.
Low tax + mandatory savings = a great way to boost your wealth.
However, the Government continues to meddle with the superannuation rules. Lowering caps, trying to add limits on lifetime contributions and generally making it tougher to do anything else with your superannuation except use it for a retirement lump sum or pension.
But here's the big problem: Within the next 10 years, I believe the rules will change again – for the worse.
Australians' life expectancy is more than 82 years, according to World Bank. That leaves more than 20 years between retirement and expected death.
That's a lotta super.
Or, shall I say, Government pensions!
But with too many baby boomers hitting retirement, I believe the Government will be forced to do one of two things, either:
- Make it harder to retire before 65
- Offer incentives for us to stay in work longer
What's that you say?
Government (tax) revenue is down?
The cost of social security is way up?
There is a massive pool of money in super?
I think I know which option the Government will take.
The Bottom line
Although superannuation is the best place to park your spare investment dollars, it's too easy for the Government to play around with it. And once the Government has digested the baby boomer cohort — a massive headache for the finance department — I'm willing to bet superannuation will not be as attractive for the younger generations.
The bottom line: you need to be investing outside superannuation.
That means, buying ASX shares, like those included in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO); or international shares, like on the US stock exchanges or in Europe. Property is another worthy contender for your extra cash, but consider that you may already own your home, which for most people is a big — sometimes hard to sell — asset.
What shares should I buy?
Remember, real wealth is made from holding shares — not buying and selling them. And share prices rise and fall steeply — so the sharemarket is no place for money that you may need in the next three years. Finally, don't risk your life savings on pot stocks, unprofitable mining companies or the 50% of the companies that, frankly, shouldn't even be available on the sharemarket.
Focus on respected companies, with long-serving management teams and those that have impressive track records over the past five years or longer. Let time do the rest.
