How superannuation won’t help you retire early

Do you want to retire early?

Who doesn’t?  Besides you should. But if you really want to become financially independent before ‘retirement’ then there are some things you absolutely need to know about your superannuation fund and how it isn’t going to help you get there.

The Super Guarantee

Under Australian Law your employer must pay 9.5% of your gross salary into your super fund to contribute toward your retirement.

The exact rules for this can be seen here;

Source: Industry Super Link

Source: ATO SG Link

But in general Overtime and expenses are excluded from the calculation, But Bonuses and allowance are factored in.

So if you’re on a $70,000 package with $4,000 of bonuses then your super contribution will look like this.

$70,000 + $4,000 => $74,000 x 9.5% = $7,030

Do this for your working life with the growth that your fund should accumulate and your retirement fund should add up to something useful.

Related: Why a bank is the worst place to have your money

Preservation Age and Retirement

Regardless of how much your super fund for retirement adds up to you will not be able to access it until you reach your ‘preservation’ age, not your ‘retirement’ age.

This is the minimum age [set by law] that your super must be preserved until. Depending on when you were born your preservation age will be 60 (if born in or after 1965)

That means in most circumstances you can’t touch your retirement fund until you reach at least 60.

Source: Moneysmart Getting your super link

So what does it mean if you want to retire early? Let’s get to that shortly.

Early Access to your Super

There are very limited situations where you might be able to access your super early. These are namely;

  • Incapacity – if you suffer permanent or temporary incapacity.
  • Severe Financial Hardship – If you’ve received Commonwealth benefits for 26 continuous weeks but still can’t meet immediate living expenses.
  • Compassionate grounds – to pay for medical treatment if you’re seriously ill
  • Terminal Medical Condition – If you have a terminal illness or injury to result in death within 2 years as certified by two registered medical practitioners, at least one of whom is a specialist.

As you can see some of these circumstances are pretty rough, and ultimately mean you have to be in a situation where fundamentally you cannot generate income.

However these circumstances play out, gaining access to your super early is in many ways the last roll of the dice for anyone financially. If you’re not generating or not able to generate income then accessing your super early really does put you into a corner.

Accessing super is difficult for a reason and if you want to retire early and live your dreams, the chances are you’re not going to satisfy the above criteria. In fact unless you satisfy any of the above taking from your super is like taking from your future for your present.

This is definitely not ideal!

How does super help me today?

Long story short … it doesn’t!

Let’s say you have the goal of ‘retiring’ or leaving the workforce because you want to achieve financial independence before the age of 45. That still leaves you 15 years before you can even touch your super fund.

Related: Why you can’t buy back your time … yet

If you want to retire early you have to do it on your own.

Your superannuation fund is purely designed for your future, but it does not factor in for those that want to become financially independent earlier in life. Superannuation factors into the ‘safe’ Salary at a job game.

Related: Why Jobs aren’t safe any more and neither are you

However this doesn’t mean that a job is safe. Remembering that Super contributions only come from 9.5% (minimum) of your salary, the amount that your super fund will amount to is directly proportional to your pay check and the percentage your employer contributes. The more you’re earning the more you’ll have – in theory.

Cash Flow is King

If you subscribe to the philosophy that money isn’t everything and that you can get by on less, then so be it. If so stop reading here … I won’t be offended.

However Money is the most useful tool out there and the more you have the more the more you can do with it.

The amount you have in your retirement fund is the sum of what you earn, the growth it earns and the fees taken out over its life time.

If you plan on having a job and working up until mandatory retirement age, then it’s worth making extra contributions. The more you put in today the more compound growth you will have later.

If you want to retire early and make your own money to get there, Super is something you will need to support but really won’t be an active part of your cash flow manufacturing strategy. Cash flow is what you’ll need to focus on.

Related: Why being rich and financially independent are different

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