An article in the SMH recently reported an analysis by the Melbourne Institute showed the top 0.1 per cent – a mere 18,750 people – took in 2.7 per cent of income in Australia, the highest take since the 1950s. The starting income for the top 1 per cent was $237,300 and on average each earned $438,100, compared to the national average of $48,000.
Salaries have been rising, but it’s interesting to note the top 10 per cent earned about a quarter of their income from other sources. This would relate to investments, and I suspect this figure is actually higher due to effective tax planning by this group to divert income to lower taxed family members or entities.
What this tells me is that successful long term wealth creation requires families to accumulate assets above what they have in superannuation and in their home. However, with a large mortgage and the costs to bring children up, it makes it difficult for families to save. Access to superannuation is moving to age 60 and the minimum contributions alone will not be enough to provide for a comfortable retirement. Yet the focus for most still tends to be paying down the home loan, having a nice lifestyle and educating the children – sadly, for many families this will not be enough and it will not provide the type of income streams the top 1% are enjoying.
However, we all know over the past few years there has been a significant increase in house prices, as much as 50 per cent in Sydney since 2011. This large increase in wealth (on paper) does present an opportunity for families to access the equity in their home and build an income stream by investing in other assets such as shares, property or alternative investments. Furthermore, this can be done tax effectively via the use of family trusts that provide the flexibility with how income is distributed, with the added benefits of asset protection and ease of transfer to the next generation.
It is important to note that strategies like this require time, preferably at least 20 years, but the sooner you start the better. The gap between the top 1 per cent and the rest continue to get wider over time, mainly because they are planning ahead, saving tax and don’t solely rely on the fruits of their labour to get ahead!
Rob
Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.