On the path to Financial Independence in Australia? You've probably grappled with this question: should you focus on building an ETF portfolio outside of superannuation, or maximise your contributions within super? Both choices have their perks and pitfalls, and the answer isn't always black and white.

In this Aussie FIRE episode, Dave and Hayden break down the nuances of investing in ETFs versus super . They explore tax efficiency, access to funds, risk considerations, and how you might strategically balance both options to get the best of both worlds.

(Before you listen to the episode or read the summary below, you might want to check out our guide to the differences between ETFs and superannuation !)

The tax efficiency of superannuation

One of the biggest selling points of super is its tax efficiency . Hayden explains:

"When you put money into super, the earnings super generates will be taxed at a certain rate," he says. "When you get money out of super and... you get dividends later on in life, like when you're 70 or 75, that's also taxed differently.”

That’s a possible game-changer. Contributions to super are taxed at just 15%, a far cry from the higher marginal tax rates that apply to many Australians.

Plus, once you hit retirement, withdrawals can be tax-free. This means your investments have the potential to grow more effectively in a low-tax environment, possibly giving you a bigger nest egg in the long run.

But if super is so tax-friendly, why not put everything into it?

The biggest drawback: access to funds

The catch? Your money is locked away. Dave lays it out plainly: “You don't get access to that money, or you lose access to that money for, potentially, a considerable period of time.”

For those looking to retire early, this is a serious trade-off. If all your wealth is tied up in super, you could find yourself “rich on paper” but struggling to access your funds until you hit preservation age . (This is currently 55 to 60 depending on when you were born).

Dave made his decision early on.

“This was actually unattractive enough for me to not put any money additionally into super at all and just focus on exclusively building investments outside super," he says. "I wanted to retire much earlier than traditional retirement age.”

This is where strategy comes in. It's all about balancing investments inside and outside of super to optimise both flexibility and tax benefits.

Finding a balance: The two-phase strategy

A popular approach is the two-phase strategy. This means building a personal investing portfolio to fund early retirement, while still contributing enough to super to benefit from its tax perks later on.

Dave explains with an example:

“Let's take a scenario where someone builds a personal portfolio of, say, half a million dollars in ETFs. Let's say they've also got half a million dollars in super as well. If they managed to do that by 45 years old, that’ll be 15 years where they have to live off their personal portfolio until they can hit their super access age at 60.”

This method may ensure you have enough to retire early without locking up all your wealth in super. But, like any investing strategy, it comes with risks. Chat to a licensed financial adviser if you need support figuring out the right approach.

The risk of relying too much on super

Super can be great – until the rules change. And history shows they can.

“If the government wants to raise more taxes, super is a pretty easy pot to start tinkering with because there’s a huge amount of money just sitting there waiting to be taxed or nibbled at," says Dave.

This uncertainty makes some investors wary of locking away too much in super. While unlikely, changes to access age, tax rates, or withdrawal conditions could impact retirement plans. Keeping some funds outside of super may give you more control over your financial future.

The case for ETFs outside super

For many, ETFs provide a simple and flexible way to grow wealth without the restrictions of super. Here’s why ETFs outside of super are appealing:

• Instant access to your money: Unlike super, ETF investments are liquid, possibly allowing you to withdraw funds more easily.
• No legislative surprises: Governments can change super rules, but your ETF investments remain under your control.
• Customised asset allocation: You get to decide exactly what you invest in, whether that’s Aussie shares, global markets , or niche sectors .

Just remember that, like any investment, ETFs aren’t without their risks. Market volatility can lead to sudden losses, and you need to be mindful of fees (even if they are relatively low) and currency fluctuations in international ETFs.

A hybrid approach: Contributing a little to super

While Dave prefers to keep all his investments outside super, Hayden plays the middle ground. He makes voluntary super contributions when it makes financial sense.

“For a few years there I was earning above-average income, and I thought: 'well, there’s a tax benefit here'," he says. "That’s the dumbest, easiest decision I’ll make with my money.”

Even if you're unsure about super, contributing small amounts regularly may keep your options open while potentially minimising tax.

What’s in their portfolios?

Both Dave and Hayden take a diversified approach to investing inside and outside super.

“In super, it’s currently a 100% international index, which is basically the same as VGS," says Dave, referring to Vanguard MSCI Index International Shares ETF , a popular ETF that tracks some of the biggest global companies.

"The reason for that is, when I started investing in shares outside super, I started with an Aussie share portfolio. Then, over time, I added international shares.”

Hayden, however, enjoys experimenting.

"My super fund started me out on the Balance option, and I decided: 'well, I should probably switch to the High Growth option because I'm young'.”

At the end of the day, the key is to align your super and non-super investments with your personal risk tolerance and long-term financial goals.

Final thoughts

Super can be powerful, but it’s not a one-size-fits-all solution. The best strategy depends on your:

• Retirement timeline
• Tax situation
• Need for financial flexibility
• Trust (or distrust) in government policy

Hayden sums it up well:

“The main takeaway we hope we’ve left you all with is the things to consider. Whether it’s concern about government policy, mortgages, emergencies, or trying to figure out that it’s less a binary decision and more about what is the right amount for you.”

For those wanting to retire early, maintaining a strong investment portfolio outside super might be more crucial. But for those planning a more traditional retirement, maximising super’s tax advantages could be a more lucrative move.

Ultimately, the best investing plan is one that aligns with your personal goals, risk tolerance, and future vision. As always, do your own research, seek advice from a licensed financial adviser if needed, and make informed choices that set you up for financial success."

We're always keen to hear your thoughts and topic suggestions, so hit us up at hello@aussiefirepod.com . Head over to Pearler for resources, calculators, and community insights that complement what we chat about on the show.

Until next time, keep dreaming big and living on your terms. Catch you on the next one, and happy long-term investing.

Dave and Hayden