Are 'Working Age People' Saving Enough?

Whilst reading the Sydney Morning Herald, there was an article saying that, "One of the nation's biggest superannuation funds has urged the government to encourage people to make more voluntary super contributions, saying most working-age people will have inadequate savings to fund a comfortable retirement."

The problem with those type of statements and claims is that the Australian super funds aka retirement funds, have no idea how much assets and investments that the 'working-age people' hold outside of super. So their comments aren't exactly applicable for certain subsets of the population.

Why would 'working-age people' voluntarily contribute more into their super funds when there are inherent risks in contributing more?

Risks such as legislative risk with successive governments constantly fidgeting with the tax rates and tax structures within the super fund environment. Increasing the access age also is a deterrent. Instead of being able to access at 55 years old, later generations are able to access at 68 years old. Lastly, the super fund's performances has been erratic at best. They charge fees to maintain and 'invest' our super money but I've yet to see my own fund outperform the index and justify the 'management' and 'investment' fees that they charge.

Not everyone is driven by the tax incentives and think that contributing the maximum into super is a great strategy simply because the tax on super is 15% on contribution and 15% on earnings. Even marginal tax rates of up to 45% outside of super isn't going to encourage people to maximise their voluntary super contributions.

So on the surface, if the super funds were to look at my balance or my friends' balances for example, then they're likely to see minimal voluntary contributions and think, "this generation has inadequate savings!". But they lack the ability to see that many friends and relatives prefer to invest directly into property and the stock market. It's not all about the tax savings! It's also about accessibility and flexibility to our savings, the ability to use our money however we desire and whenever we desire.

Once any money is voluntarily contributed into super funds, access is restricted. Early access is pretty much nil unless you are under extreme financial hardship and are about to be homeless, then you may be 'lucky' to be able to access $10,000 of your own money that's been locked up in super. The only other way you can have early access is if you've got a terminal illness. Those aren't attractive incentives to encourage my generation to contribute more into super.

Limited access and flexibility is a huge disincentive for the 'working-age people'. If those 'working-age people' are anything like my friends and I, then they'd prefer their funds outside of super so that it can be used to buy a house to live in, fund any family plans such as having children, pay for weddings, travelling and all the other financial demands of living life.

It's feasible for folks over 50 years old to contribute more to super but for Generation X, Y and Generation iGadgets, the restrictions are a HUGE disincentive.

So will my generation have a comfortable retirement just because we don't contribute large amounts voluntarily to our super funds?

Just by looking at my peers and friends' peers, I can resoundingly say yes. The majority that I know of, have invested outside of their super fund. They're saving and they're investing, but they're simply doing it outside of the super fund environment because the freedom and flexibility of using their funds however they wish outweigh the allure of the super funds' 15% tax environment that comes with plenty of strings attached.

Moving From One PPOR To A New PPOR

Sorry to any international readers but this post is particularly for the local readers in Australia.

What is a PPOR? A PPOR is the acronym for Principal Place of Residence. The Australian Tax Office (ATO) has various capital gains tax free arrangements for PPORs depending on when you moved in, when you moved out, when it was sold or how long it has been rented out for.

A friend of mine recently bought a new PPOR home. His previous house is going to be rented out when he moves into the new one. These actions have several tax implications.

If you find yourself in a situation where you've outgrown your current house, need to buy a new one and move into it but still wish to retain and rent out your old home, then there are a few crucial steps to take.

These steps help to ensure that you can minimise the potential income tax payable while the old property is rented and the capital gains tax payable later down the track should the ex-PPOR be sold.

The Three Scenarios

1) PPOR are capital gains tax free if you buy, move in and then sell and move out. Any price appreciation on the PPOR is tax free.

 2) However, if you buy, move in, move out and then rent the property without nominating a new abode as your PPOR(so you are renting your new residency), then the property can be rented out for 6 years before capital gains tax is payable on a pro rata basis.

3) If you buy a new PPOR house, move out of the ex-PPOR house and turn that ex-PPOR into a rental property, then capital gains tax is payable on the price appreciation on the ex-PPOR the moment it is a rental property and there is no 6 years of rental grace with regards to capital gains. Income tax is payable on all rental income, expenses for running and maintaining the property becomes deductible and various items and expenses becomes depreciable.

When You Turn The Old PPOR Into A Rental Property

This is a crucial moment for a few important steps to be taken if you wish to save yourself a lot of taxation headaches.

1) The moment that you move out, engage a professional property valuer to value your old PPOR before it is rented out so that any property price appreciation that the property has experienced thus far is capital gains tax free and you will only be taxed capital gains on any price appreciation once the property is available for rent.

2) Engage a Quantity Surveyor to provide you with a property depreciation schedule which consists of two parts:
       A) Capital Works Allowances which is depreciation on the construction cost of the building(items such built ins, kitchen cupboards, floor tiles, clothes hoist, toilet bowls and tubs) if the residential building was built after 18 July 1985. For applicable residential properties, refurbishments and renovation works are also deductible. Capital Works Allowances also applies to any structural improvements such as fencing, paving, pergolas, garden sheds etc that have been constructed after February 2002. 
       B) Plant And Equipment Depreciation covers items such as carpets, curtains, washing machines, stoves and hot water tanks for example.

Both Capital Works Allowances and Plant And Equipment Depreciation will be applied to reduce your rental income and thus, your income tax.

These are a few important steps that can save you thousands of dollars of income tax annually and should you sell the old-ex-PPOR in the future, potentially save you thousands in capital gains tax as well. And just when you thought relocating all the furniture was the hardest part...

Bought A House And My Portfolio Is Up 20%

Finally, Mr SMG and I have bought a house. If you've been visiting my progress bars on my homepage then you will have noticed that last year in June, I reached my goal for a house deposit and have since then, been house hunting madly. It's either dump the funds into another asset or leave it earning a pitiful amount of bank interest that becomes bugger all after tax.

After checking out almost seventy open house inspections, making a few multiple re-visits, reading property contracts after contracts, I can definitely say that I'm much more of a walking encyclopaedia when it relates to property structures, easements, covenants, location, aspects and layouts.

It's significantly tougher looking for a house to live in than buying an investment property(IP).

With IPs, you can literally overlook annoying little things like the ceiling being an average standard height or the bedrooms are smaller than usual. But oh my...when looking for a house to actually live in, the hunt is tougher because of minor things like some rooms not receiving sufficient sunlight(installing skylights being impractical or impossible due to the house being double storey), the kitchen pantry is too small, the ceilings aren't high enough, there is scruffy or dingy carpet that has to be pulled off and wooden floorboards installed, the master bedroom is too small, no built ins, the stove isn't gas but electric, the house isn't double brick, three bedrooms and one bathroom aren't big enough, it's strata or community titled and not free standing...so on and so forth.

I have absolutely no qualms about renovating but at this stage of my life, I don't have time to sniff paint, rip carpets off, drill and rebuild. Theoretically, ripping up the carpets, installing polished wooden floorboards, adding skylights, building outdoor alfresco dining areas, fresh paint, building built ins, renovating kitchens and bathrooms all add value to property than buying one that already has all those features in place(thus building equity to enable refinancing for further acquisitions) . However, like mentioned, I simply haven't got the time to do those things in the near future...perhaps with the next property in the coming years.

All these fussy complaints would have been overlooked if we were just buying another IP. If it was just another investment property, I'd have no issues with buying a single brick, fibro, cladding or whatever type of property as long as it met the simple requisites of location, transport, shops and possibly schools (it depends on which type of tenants you wish to target).

With our latest acquisition, my finances have become merged somewhat with Mr SMG's finances so it is getting rather difficult to break down the performance of my investment portfolio. The only thing that hasn't been merged or intermingled is my stock portfolio, which I'm happy to say actually grew by 20% over the past year. If you have read previous posts of mine, then you'll know which stocks I hold across the various sectors (mining, agricultural, retail and financial).

The power of compounding is nothing to be sneezed at. Every single dollar has been working hard over these years and it's amazing how much capital growth and passive income there have been from investing and reinvesting the income from those investments back into obtaining additional assets.

So far, so good.