The average Aussie needs a whopping $2.7 million to retire, but there’s an easy way to add $558,000 to your stash without doing any extra work.
Most of the people I talk to have pretty big financial goals. It’s not that they want piles of money to roll around in, it’s just that living well in Australia doesn’t come cheap.
If you want to have a good home in a nice area, take good care of your family, loved ones or community, and eventually have the opportunity to retire on something close to an average salary, then you have serious work to do. to do.
How much do you need?
I calculated that this is an ‘average’ pension in Australia today, you’ll need about $2,744,443 in . to have investments† this amount of wealth would you buy a home at the median property value in Australia’s capitals of $926,107, and would also give you an investment portfolio worth $1,818,336, assuming a 5 percent return on income would give you the average Australian income of $90,916.
Building up a $2.7 million net worth is no small feat, so you should give yourself every possible advantage.
For individuals, fiscally smart investing is one area that can make a big difference to how quickly you move forward. Different types of investments have different tax treatments, so the difference between a good strategy and an OK strategy can mean the difference between meeting your goals and falling short.
Hello postage credits
Most companies in Australia that are publicly traded distribute some or all of their profits to shareholders in the form of dividends each year. Since corporate tax has already been paid on these corporate profits, when investors receive dividend payments, the ATO is kind enough not to double the tax payable on these earnings, so the majority of dividends in Australia are paid with ‘postage credits‘ attached to them.
This may seem confusing, but in reality it is quite simple. When profits are distributed to shareholders through dividends, tax that has already been paid on the profit is recorded, and when you file your tax return and withdraw your dividend income, the tax already paid will count towards reducing the amount of tax you owe.
Basically, the impact on your tax is the difference between your tax rate and the tax rate paid by the company paying your dividends. This can be a positive or negative difference. For example, you can taxwhether tax may be owed to you.
For example, if your current marginal tax rate is 39 percent (for annual income over $120,000) and your dividends were taxed at the 30 percent corporate tax rate, you only have to pay the difference of 9 per year. cent tax. Not bad, but it could be even better.
If your tax rate is 19 percent (you earn income up to $45,000 annually) and 30 percent tax has been paid again, you will actually receive an 11 percent tax refund on your dividends. This amount is paid as part of your tax refund and is not something that is simply carried over to future tax years.
How much impact do postage really have?
I wanted to illustrate this with an example that shows the difference between having your investment income composed of dividends franked versus unstamped dividends assuming your goal is to replace the average Australian pre-tax annual salary of $90,916. The tax that would apply to this salary under current tax rules is $21,863, meaning net income after tax is $69,053.
To replace this level of income with investment income that does not have postage associated with it, you must replace the full amount of $90,916 and then pay taxes at marginal rates to be left with $69,053 after tax.
But if you were to accrue dividend income fully prepaid with taxes paid at the 30 percent corporate tax rate, you would only need to receive dividends of $63,000, with associated tax credits of $27,000. As a result, you would end up having the same amount of after-tax income, but needing less principal income (and therefore capital) to get there.
For the engineers, educators, and other analytic types out there, here’s how it’s being worked on:
Postage Credit = (Dividend Amount / (1-Corporate Tax Rate)) – Dividend Amount.
Postage credit [$27,000] = (dividend amount [63,000] / (1 business tax rate) [30 per cent])) – dividend amount [63,000]†
The implication of this, going back to our assumption of 5 percent for initial investment income, means that you can have less in your investment portfolio to generate the same level of income.
Once you’re retired, to generate income of $63,000 assuming a 5 percent income percentage, you’ll need $1,260,000, compared to the $1,818,336 needed if your investment income isn’t delivered with postage credits.
This reflects a difference of $558,336, and no matter how much you save, if you invest in companies that pay prepaid dividends, you are more likely to build your target equity level.
Beware of your risk
I should point out that the above is a pretty simple example and there are a number of considerations when it comes to wealth building – not least diversification.
While Australian stocks are great, the Australian stock market is small compared to the rest of the world. having your investments concentrated in one country is something that carries risks.
Each money option has advantages and disadvantages. The key to making the smartest moves for you is understanding your risks and which ones are right for you.
If you want to lead a reasonable lifestyle in the future, you will have to put in some work to get there. Any hack you can use on your journey to wealth can help you get where you want to be faster or easier (or both).
Take the time to understand the rules and how to use them to your advantage, the different investments you can include in your portfolio and be tax smart when you invest.
Ben Nash is a financial expert commentator, podcaster, financial advisor and founder of Turning wealthand author of the Amazon bestselling book ‘Get Unstuck: Your Guide to Creating a Life Not Bounded by Money’†
Ben has just launched a series of free online money education events to help you get on the first financial foot. You can view all details here and reserve your place†
Disclaimer: The information in this article is of a general nature and does not take into account your personal goals, financial situation or needs. Therefore, you should consider whether the information is appropriate for your circumstances before acting on it, and seek professional advice from a financial professional if necessary.