The FIRE movement has gained serious popularity in the last few years however information relating specifically to Australian FIRE enthusiasts can still be hard to come by. One of the key differences between those working towards FIRE in Australia and those elsewhere is superannuation.
Superannuation is a government-mandated ‘retirement’ fund- most working Australians should have a super fund and generally speaking their employers pay a minimum of 9.5% of their wage into this fund. There are many different super funds with different options including fee schedules, investment portfolios, investment returns, insurances and financial advice. All of these factors mean ‘benefits’ can vary greatly between funds, however for most Australians, the single greatest advantage of investing inside of super is access to the lower taxation rate. There are limits relating to how much you can invest into your super (dependent on your super balance, total invested per year, invested before or after-tax etc) however if you are able to invest additional amounts into your super before tax you can secure a 15% tax rate as opposed to your personal tax rate which could be as high as 45% depending on your tax bracket.
So if you can pay less tax and save money by investing inside your super, why bother investing outside your super? This is where it gets a bit more complicated!
One of the downsides of investing in super is that withdrawals are monitored and while it is your money, you cannot just take it out whenever you want. The government want you to use your superannuation when you reach retirement age so the general rule for withdrawing superannuation is you need to be at least 60 (depending on when you were born) to access your super (though there are some exceptions for hardship, First Home Savers Scheme etc). This means for anyone aiming for the retire early part of FIRE, superannuation might not be the best vehicle to get you there!
Investing outside of super can be a helpful tool to help bridge the gap between early retirement and reaching an age where you can access your super. While investing in the share market (whether that be ETFs, LICs, bonds or individual stocks) does not come with any tax concessions, you have the added benefit of this being wholly YOUR money which you can access at any time.
This is why I choose to invest in both my superannuation and the share market (outside of super). My ‘retirement’ will consist of two phases- pre and post super access. I will be able to use the dividends generated by my personal share portfolio (or sell off some units) to fund the early retirement years, and then transition to using my super after I reach the government retirement age. By thinking about my retirement as a two stage process, I am able to maximise the advantages of both investments options and enjoy the FIRE lifestyle.
By The Thrifty Millennial ;)
Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.