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There’s more than one way to fund a retirement

If you’re aged 40 or under, there are serious choices to make. You won’t be able to access the age pension until you are 70, and it’s likely the superannuation access age may also be raised to 70. Unless you’re prepared to work until then, you need to invest enough money outside super to live on until you can access your superannuation, or the age pension, or a combination of both.

I have stressed repeatedly that every investment decision has disadvantages as well as advantages, and any decision to invest should take into account the negative as well as the positive.

Superannuation is the only investment you can make with pre tax dollars, but contributions are capped and the money is inaccessible until you reach your preservation age. It also enables you to hold money in a low tax environment which allows it to grow faster.

If you invest outside the system there are no caps, and no loss of access. The price is a lower after tax return.

Let’s think about two people who we’ll call Robin and Kim. They are both aged 40, have substantial equity in their houses, and wish to build wealth with the aim of retiring earlier rather than later. They both decide they can afford $25,000 a year out of their pay package to boost their retirement savings.

Robin is nervous about borrowing, and makes an arrangement with her employer to structure her package so that $25,000 is contributed each year into super via salary sacrifice. After deduction of the entry tax of $3750, she will have $21,250 working for her in a 15% tax environment. If her funds can produce 8% per annum long term after tax, she should have $1.7 million at age 65. The problem is, she may not be able to access it then unless transition to retirement pensions are still available.

Kim is not fussed about super because he’s worried about rule changes, and decides to take out a home equity loan of $350,000 to invest in a portfolio of managed share trusts. He likes the idea of share trusts because of diversification and he’s not worried about short term price volatility, and by securing the mortgage over his home he’s unlikely to be caught with a margin call. The interest will be a tax deductible $25,000 a year.

Notice that in the first year, Robin has just $21,250 working for her while Kim has $350,000. The name of the game is to maximise the amount of assets working for you at an early an age as possible, so at this stage Kim is the winner.

But, our old friend compounding is going to play a part. Let’s assume that both Kim and Robin have an identical share portfolio, but that Kim’s produces 7% per annum after tax (1% less than Robin because the earnings will be taxed at his marginal rate). He will have just over $2 million at age 65 but will still have a mortgage of $350,000. Just that 1% difference in earnings has a big impact after many years of compounding. However, he has the advantage of access to his funds at any stage in the investment programme.

This is not a recommendation of any sort – the sole purpose of this article is to help you think about the range of options available and suggest you seek advice about strategies that may speed you on the way to wealth. Our present welfare system is unsustainable, and those who don’t take action will be the losers. The more options you have, the better informed you will be.


Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His website is


Philomena Vegter
April 03, 2019

In Melbourne and Sydney there is a scheme available whereby pensioners can release the equity in their home to borrow against it, not pay anything till the house is sold, is there such a product in Queensland?

August 22, 2014

Despite what is increasingly called over-generous tax breaks for super, I think these are now insufficient to compensate me for the risk of building retirement funds in super when a Government can change the rules and delay me accessing my savings when I actually want to retire. I have been saving in self managed super in the belief that these were my retirement funds. I'm not happy the Govt could delay my access to my funds to help them solve their own budget mess.

Graham Hand
August 22, 2014

Agree, Gary. Borrowing against home equity to invest in shares requires a long term horizon and a full appreciation of the downside risk. It's certainly not suitable for many people who could not tolerate the risk and potential loss.

August 22, 2014

Important to understand leveraged risk Kim is taking in this strategy, borrowing $350K against his home. If stockmarket takes a hit, it will take a long time for this strategy to recover its value. I suggest should only be for those with high tolerance for market falls.

August 22, 2014

Please enlighten me as to wether under the grandfathering rules for super pensions in 2015 a small drawdown will trigger a new start to the pension and thus lose the benefits of the grandfathering rule?


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