They grow up so quickly, you can hardly believe it. It only seems like yesterday that you were waving goodbye to the kids on their first day at high school. Now they are coming up to their final exams...and schoolies isn’t far away. It’s a big milestone in your family life. And it’s a big milestone for your finances.
If you have a child finishing high school this year, you could find yourself with a new spring in your step come January, particularly with private schools costing as much as $30,000 a year.1 And if you’re close to paying off your home loan you’ll start noticing even more of a difference to your bottom line.
It’s time to think seriously about how to use your newfound disposable income to secure your financial future.
One door closes, another one opens
A useful way to think about your personal finances is in terms of separate ‘cash buckets’.
For a long time, you’ve needed to allocate a substantial amount of cash to immediate priorities—buckets for today marked ‘school fees’ and ‘home loan repayments’. But now you’ve got a bit more breathing space to think about tomorrow. Perhaps you’ve already allocated some of your extra cash to go towards the buckets marked ‘new car’ or ‘overseas trip’.
But it’s also important to think about your future...and that of your kids.
The bottom line is we’re all different. And there are as many different ways to build wealth as there are families. It depends on your personal situation—how many kids you have, how old they are and what sort of lifestyle you lead. It depends on your financial situation—how much you still owe on your home loan, how much tax you pay and whether you already have assets like an education fund or insurance bond to help with future expenses like uni fees. And it depends on your age—the closer you are to super’s ‘preservation age’, the sooner you can start to access your savings.
No more empty nesters?
If you’re expecting some breathing space after the HSC, here’s the reality check. Expenses don’t necessarily end with the 18th birthday party.
The cost of raising children can actually increase when they leave school. Many parents are contributing towards uni fees, first home deposits and weddings, as well as putting a roof over their children’s heads for longer—almost half of young adults aged between 20 and 24 years are still living with their parents.2
So if you need quick access to your funds to help put the kids through uni, get on the property ladder or get hitched, you might want to look at investing outside super. But super remains one of the most tax-effective ways to save so that you can maintain your lifestyle in retirement.
Super still the one
You can invest in a wide variety of investments within super’s tax-friendly framework—anything from direct property to shares, managed funds and property trusts. And depending on your age, you may not be tying up your money for as long as you think. You may be able to enjoy all the tax concessions super has to offer without needing to wait for a long time to get your hands on your money.
Any contributions to your super from your pre-tax salary up to $30,000 (or $35,000 if you’re over 49) are only taxed at the concessional rate of 15%,3 which is lower than most people’s marginal tax rate. Any earnings are taxed at up to 15%. And any withdrawals are tax-free once you can access your super.
With the Government freezing your employer’s super guarantee contributions for seven financial years from 1 July 2014, you’ll need to take your own steps to boost your super in the lead-up to retirement. But the good news is that limits on concessional contributions to super have been raised. So you can put even more of your pre-tax salary into super at the concessional rate of tax.
And in the lead-up to retirement, there’s even a way to start drawing on your savings while continuing to work and ramping up your super. A Transition to Retirement (TtR) strategy may allow you to maintain your work hours, potentially increase your salary sacrifice contributions to super and supplement your income with a TtR pension.
We can help
There are lots of options and so much to think about.
If you still have a home loan, it’s easy to assume that any extra cash should go straight into paying it off. But this isn’t necessarily the best long-term strategy for your retirement savings. We can help you work out whether it’s better to pay off your home loan or build your super.
Call AMP direct on 131 267 or contact your financial adviser to work out the best way to achieve your new financial goals now the kids are finishing school.
1 Source: AMP.NATSEM Income and Wealth Report: The cost of raising children in Australia, Issue 33, May 2013.
2 Source: AMP.NATSEM Income and Wealth Report: The cost of raising children in Australia, Issue 33, May 2013.
3 Unless you earn over $300,000, in which case pre-tax contributions are taxed at 30% for any earnings over that amount.