I received a call this week from a client’s son. He is 19 and has just moved to Port Hedland in pursuit of the Great Western Dream as I call it. Adventure, work and a high paying salary, and as I keep saying to these hard workers, there is a reason why they pay you that much!
The reason for his call was that his tax payable was MORE than what he was earning on the east coast before he left. He wanted to know, “If this was right?”
When a 19 year old is paying as much tax as he was previously earning, I think it is a great time to get them financially well organised. If we can get clients at this stage of their financial life to implement some tried and tested strategies, we know that we can take immense pressure off them financially, especially for retirement.
He emailed his latest payslip and I confirmed, yes, the amount of tax was correct. I could hear the sigh over the phone. His gross pay was $2,620 per week and after tax of $1,000 he was left with $1,620. Not bad considering he is only 19. But he now understands the effect of tax and was looking to minimise the effect on his take home pay.
I explained that as an employee, there weren’t too many options other than using salary sacrifice as a strategy. This entails taking pre-tax pay and directing it to a superannuation account (BEFORE) having the tax deducted. Based upon his age, we could contribute an amount of $30,000 per annum.
By diverting $30,000 to super and receiving the balance as pay, the overall weekly tax saving is about $150.00 per week, which isn’t huge, but it is a saving. The real key to younger client’s salary sacrificing at this early stage is:
They can afford it now as they don’t have family or mortgage obligations.
The compound effect of getting this money into super is huge.
In the above scenario, if our client can complete his maximum salary sacrifice, work for 2-3 years and then return home and undertake a job earning say $50,000.00 p.a. His projected super account balance would be $1,104,066 which is $356,157 more than if he did nothing. An additional $356,157 in retirement for a contribution of $60,000 sounds like a sweet plan to me.
The image below shows the benefit of this strategy.
At Evolution Financial Planning, we welcome introductions from our clients. We are buoyed by the confidence that our clients have in our firm to deliver great outcomes.
If you have working children, or grand-children, please make an introduction. We would be more than happy to set them on the right path. Simple, clear and concise advice to assist them in making smart decisions with their money is what we want to achieve. They can register for our blog; connect with us on Facebook, LinkedIn and Twitter. This is how the young ones communicate these days apparently.
If we can provide sound advice for your children, we know that we can strengthen your retirement plans as they will be financially responsible and they will have fewer requirements to draw on your funds.
Sounds like a WIN / WIN to me.