Investing and the Government
The Dividend Guy posted some interesting thoughts on our governments’ impact on our investing.
The point I am trying to make here (although not very eloquently), is that one of the factors that impacts an investor is the government in their home country. Depending on the pension plan you will receive, more or less of your disposable income must go towards saving for future income. In addition, government rules on the taxation of investment assets must be factored into many of your investment decisions.
In summary, I am suggesting that as individual investors you consider the impact of your local government on the investment decisions you are making. Investing is not complicated but many things must be given some think-time. The government is certainly one of them.
Australia has the least tax advantaged retirement saving that I know of, but as I don’t know many, I guess Australia could be one of the best. In the UK they have ISAs which allow for £7,200 ($15,000AUD) in tax free saving a year in the USA they have IRA, 401k and 403b which are all tax free once the money goes in. The best we get in Australia is superannuation, which is taxed at 15% on all income. Despite that extra tax burden Australia is a world leader in retirement saving due to the compulsory employer contribution of 9% of wages to superannuation which was introduced in 1992. Despite the tax, superannuation remains one of, if not the best, form of retirement saving in Australia. The big BUT was highlighted this year when the Rudd Labor government continued a tradition of political tinkering with superannuation.
Once Australian’s put money into super it is trapped until they retire and even the age they retire can be changed by the government. While I may wish to retire at 60 and have enough funds in superannuation to support myself the government may decree that I can’t retire to 67. There is nothing sacrosanct about supernnuation, the government may decide to increase the tax, remove the tax deductions, stop lump sum payments or implement any other change they so desire. Therefore, in Australia it is important to also build a nest egg outside of the superannuation system.
One of the keys to maximising long term wealth generation is understanding the rules of the game and using them to your utmost benefit. Retirement saving is one of few areas where most people can gain a tax break thanks to Western government fear of ageing populations. So make sure you know how to maximise your retirement savings in the best tax advantaged way.
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