What Is a Pre-Tax Dollar Worth V a Post-Tax Dollar in The Market

arthurbach4 on 18/06/2023 - 13:19

Scott pape made a statement once about the value of a pre-tax dollar put into Super versus what you would need to earn on a post-tax dollar put to work in the stock market to equal it.

You had to earn something like 12% or something on the post-tax dollar to equal the value of the pre-tax dollar.

If my yearly salary is $113,000 what would I need to earn on my post-tax dollar to equal the tax savings I would enjoy on the pre-tax dollar?

Thanks.

Ps. Let's presume that I haven't maxed out my concessional $27,500

Financial

Comments

  • deme on 18/06/2023 - 13:22
    +1

    What?

  • Shadowsfury on 18/06/2023 - 13:32
    +8

    $113k means you're in the 32.5c + 2c medicare levy bracket - so every dollar you invest from your post tax salary is actually $1 - 34.5c = 65.5c being put into the market. Plus any dividends/distributions are at your marginal rate of 34.5c as well (plus CGT and associated 50% discount if applicable)

    With super, it gets taxed at 15% on the way in - so your $1 is now $1 - 15c = 85c into the market. Big difference already - 19.5c headstart. Plus all future earnings are at 15% tax as well instead of your marginal rate.

    Thus if my math/understanding is right, essentially the difference here (if we simplify a little) is that each dollar outside super needs to earn 19.5c/65.5c = 30% more to be equivalent as inside super. Market return of 9% and adding 30% brings us to roughly 12%.

  • freefall101 on 18/06/2023 - 13:44
    +1

    Depends how much tax you pay and how many years you're figuring it out over

    $1 in pre-tax = 85c (taxed at super concessional rate of 15%)
    $1 post-tax = $1 less whatever your tax rate is

    Let's say it's 30%, you only get 70c in your pocket. Then it's basic maths, 70c * 1+x% = 85c, which works out to x = 85/70-1 = 21%, i.e. 85c is 21% more than 70c.

    Over 10 years, let's say you earn 5% on your super, that 85c turns into about $1.20 after 15% tax. To turn the 70c into that while continuing to have 30% tax you need to earn 8%.

    edit: above post did it better!

  • tsunamisurfer on 18/06/2023 - 20:57
    +2

    These comparisons offer only part of the picture. One of the key differences is you cannot touch your superannuation money.

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