“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
– Albert Einstein
Albert Einstein famously called compound interest the 8th wonder of the world. And when it comes to superannuation for tradies, he’s absolutely right.
Let me tell you why:
The power of compounding returns in your super fund can make an enormous difference to your retirement nest egg over time.
But we often see tradies and other clients who deeply regret not paying more attention to their super earlier in their working lives. They get to retirement age and realise their balance won’t sustain the lifestyle they had hoped for.
The good news is – it’s never too late to take charge of your super.
This article explains the key things every tradie needs to know.
What is superannuation - and why is it important?
Superannuation is money you set aside over your working life to provide an income in retirement. Most Australian employees have compulsory super contributions paid by their employer.
It works by investing your money in various assets, such as shares, property, and bonds, and earning interest on those investments over time.
As a self-employed tradie, it’s up to you to ensure you’re putting money into super. It offers you an income in retirement, which means you don’t rely solely on the government’s age pension.
Here’s something you might find surprising…
You are taxed only 15% on your pre-tax super contributions rather than at your marginal income tax rate. As a result, your savings grow faster.
The real boost comes from compounding returns. Your super balance grows exponentially when the returns are reinvested year after year.
Getting started early makes all the difference. Just $50 per week invested from age 30 may grow to around $500,000 by age 65! (Assuming a 7% p.a. return).
Leaving super until later in life means missing out on that compounding effect.
How Does Super Work for Tradies?
As a sole trader, you have great flexibility with super contributions. You can make tax-deductible contributions of up to $27,500 per year.
Rather than viewing it as lost income you can’t touch for decades, think of super as one part of your overall cash flow strategy.
Even contributing small regular amounts is beneficial.
You could start by putting just $100 weekly into your super fund. That’s tax deductible, so you’re reducing your taxable income. And over ten years, $100 per week could grow to around $70,000 (assuming a 7% return).
You don’t have to lock yourself into fixed contributions, either. We can work with you to tailor a super savings plan to match your cash flow. Review it annually and top up as profits allow.
Setting Up a Superannuation Fund
Different types of super funds are available, including industry funds, retail funds, and self-managed super funds.
Choosing the right one for your needs is important when setting up a super fund.
You can research different funds, compare their fees and investment options, and seek professional advice.
Tips for Managing Super
- Make regular contributions rather than lump sums. Small amounts won’t impact your cash flow but make a big difference over time.
- Claim your super contribution tax deduction. Contact your accountant to complete a Notice of Intent to Claim form.
- Consider other investments through your super. For example, you may be able to purchase a property or shares through a Self Managed Super Fund.
Reasons to Get Professional Advice
Getting professional advice ensures you have the right super strategy tailored to your circumstances.
The rules around super can be complex, but an accountant can guide you in the following:
- Finding a contribution level that matches your cashflow
- Optimising the tax benefits
- Exploring other investment options you may not have thought of
- Avoiding common mistakes that could cost you in the long run
The Earlier You Start, the More You Benefit
Compound interest is a powerful force but requires time to work its magic. That’s why starting super contributions early in your career is so important.
Even if you can only afford small amounts, you’ll reap the rewards later when your super balance reaches critical mass.
Don’t leave it until the last minute and end up regretting lost opportunities.
Book a FREE superannuation consultation with MYC Partners today to discuss your goals and gain personalised advice on optimising your nest egg for the future.