In most countries, there’s a way to save for retirement that costs you less than it seems.
In Australia it’s called salary sacrifice to superannuation. In the US it’s called 401(k) pre-tax contributions. In the UK it’s called pension salary sacrifice. The names change. The mechanics are identical.
You route some of your income directly into retirement savings before tax is calculated. Because it’s pre-tax, you pay less tax on your take-home pay. The “cost” to you is much smaller than the amount that ends up in retirement.
An example. You sacrifice $10,000 of salary into super. Your tax rate is 32.5%. Your take-home pay drops by $6,750, not $10,000, because you would have paid $3,250 in tax on that $10,000 anyway.
So you invest $10,000 into retirement for a real cost of $6,750. That’s a 48% instant return. Before any investment growth. Before compounding over 20 years.
Very few financial decisions have a 48% instant return. Most people under-use this because it sounds technical or they don’t think they can afford it.
Rule
If your country has tax-advantaged retirement accounts, they’re the first place spare savings should go, up to the legal limit. Nothing else gives you that return.
Action for this week
Check if your country has a salary sacrifice or pre-tax retirement contribution option. If yes, find out what you’d need to change in your payroll or tax setup to start. One phone call usually does it.
Next week
Why budgets fail and what works instead.
Know someone not using salary sacrifice? Forward this.
P.S. The reason governments offer this is that retirement savings take pressure off public pension systems. Use it. It’s designed to be used.
Decide Your Money
Not how much you earn. How well you decide.
Decide Your Money Educational content only. Not financial advice. Decide Your Money is not a licensed financial adviser. Speak with a qualified professional before making financial decisions.