Tag Archives: tax deductible contributions

Never sacrifice long-term goals with short-term view

Regardless of where we live, what we do for living, we all want to be in control of our lives. We all want to experience financial freedom, live our desired lifestyle and keep our dignity until we die. This requires not only focusing on our short-term goals, but also medium to long term goals NOW.

Unless you are one of the very fortunate few to be independently wealthy, setting aside money today to see that you have enough for the years down the road is mandatory. For those of you who are at their early ages of 20′s and 30′s the idea of saving for your long-term goal – retirement- might be odd and a far away goal. Especially when you are working on fulfilling your short to medium terms (1 year to 5 years) goals.

retirement savingsNevertheless, it is worth noting that the very fact that you are young gives you a huge edge if you want to have financial freedom in retirement. That is because when you are in your 20s, you can invest relatively little for a long period and wind up with far more money than someone older who saves much more over a short period. It is due to the power of compound interest.

Compound interest means that interest accrues not only on the base payments but also on the interest earned. When individuals embrace saving early for retirement and make it a priority throughout their earning years, they put the power of compound interest to work in their favour. As a result, a steady stream of savings can create exponential growth.

Consider this scenario: If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you’ll have around $560,000, assuming earnings grow at 8 percent annually. Now, let’s say you wait until you’re 35 to start saving. You put away the same $2,000 a year, but for 30 years instead, and earnings grow at 8 percent a year. When you are 65, you will wind up with around $245,000 – less than half the money.

Saving for retirement is not facing old age or possibility death. It is about gaining the discipline required to take control of your entire life. To support this, the government in your country might offer great incentives to its people. Those incentives can help you accelerate your long-term savings. All you need to do is to be aware of, and make use of them as much as you can.

For instance in Australia, we have superannuation savings, which is something that employers are forced to pay. The government has imposed on employers to make 9% of each employee’s before tax salary paid as a super guarantee contribution into their superannuation funds. This rate will increase to 12% by 2020.The main aim of compulsory superannuation is to ensure we save and invest our money during our working life so that we can live off the earnings in retirement.

Australian demographic reports indicate that Australians are living longer. Currently, life expectancy in Australia is over 81 years. This reflects a higher level of health awareness, better health and medical services, better diet and a safe workplace environment. Hence, it is believed that the age pension the government pays to retires would be insufficient.

The Australian government also knows that most of Australian’s would not have the required discipline to save consistently for their long-term goal – retirement savings – from early ages. Therefore, it is made compulsory not to be accessed the money accumulated in the superannuation funds until fund members reach their retirement age (except certain conditions).

Moreover, in order to encourage people to save for their retirement the government sacrifices its tax revenue. The tax, which is levied on superannuation funds based on the limited tax-deductible contributions (currently it is $25,000 in total per year) and the total of taxable earnings of the fund, is at 15% rather than individuals marginal tax rates.

When super fund members reach their retirement age, they can convert their fund balance into tax-free income streams if they wish.

Additional benefit of superannuation in Australia is that any assets or benefits that individuals have in their superannuation are protected from bankruptcy. It means that, generally, your superannuation won’t become part of the property that is divided between creditors in the event of bankruptcy.

Although the money saved and invested in superannuation environment is part of people’s earned income, because it is not seen or touched, many people neglect it easily. This neglect also comes from lack of understanding of related rules, regulations and complex investment options of the funds.

Nonetheless, superannuation is the most attractive investment vehicle in Australia for those who are serious about taking control of their financial life and maximising their wealth for retirement. It is important to point out those investments in super environment requires regular monitoring and control as carefully as the money invested outside of super.

You might use superannuation environment or another investment vehicle to save and invest. They all are there to take you from where you are financially to where you want to be some time in the future, financially. All you need to do is to gain the habit of not only just focusing on short term financial goals , also focusing on long term ones with the mindset of getting the most out of what is available for you now for your future.


Halle Yilmaz is a financial adviser and business consultant. As a financial adviser, she gives solid advice that can create rapid and lasting results for her clients. Sign up for her free E-Book and download “7 Steps to Healthy Wealth Management.” Follow Halle on Twitter @halleyilmaz