You are in your mid-50s and on the career home stretch. You’re at, or are approaching peak earning capacity, the kids have finished school, are working and independent, and now’s the time to really focus on setting yourself up for retirement.
Prime suspect: the mortgage.
That is a natural and very visible target. It’s staring at you every time you open your internet banking app, and those monthly statements are a constant reminder of how much you still owe.
But is paying the money directly into your mortgage the smartest and most efficient way of going about it?
Unfortunately, we see many people heading into retirement relying on their super to pay off their house, which is intended to provide for retirement income rather than a debt repayment fallback position.
That doesn’t mean you can’t use your superannuation proactively and consciously as a tool to supercharge your mortgage repayments, and either pay your home off quicker, or provide a nice bonus to your retirement savings out the other end.
And it all comes down to tax.
Superannuation is still one of Australia’s best tax planning vehicles. For most Australians, tax on deductible contributions is only 15 per cent, rather than anywhere up to 49 per cent on earnings in your personal name. And this difference in tax is where the magic can happen.
Let’s take a 55-year-old couple in the second-top marginal tax bracket, which is 39 per cent once you include levies. This means they are earning somewhere between $80,000 and $180,000 per annum.
They are wanting to retire in 10 years, pay off their mortgage in that time, and can find an extra $750 each per month ($1500 in total) to put towards the mortgage.
We will assume they have a $250,000 mortgage with a longer-term average interest rate of 6 per cent. We will also assume they continue paying today’s minimum interest payment on the loan.
The analysis will assume a balanced superannuation portfolio, with long-term average earnings of 6.7 per cent per annum.
Let’s look at two options.
Pay off the mortgage faster
At the 39 per cent tax bracket, you need to earn $1229 gross to be left with $750 net.
If the $750 each, that is an extra $1500 per month, goes into the mortgage, in addition to the interest payments, in 10 years time, the mortgage will be paid off.
You will have a further $19,400 in cash saved.
Boost your super
If we assume, however, that the same gross amount of $1229 each is salary sacrificed into super, at a 15 per cent marginal tax bracket, that leaves $1045 each in the fund. Between the two of them, that’s a $589 per month, or $7071 per annum boost.
After 10 years of paying the monthly grossed up amount of $1229 each, the accumulated superannuation contributions total $400,130. At age 65, $250,000 can be withdrawn, and $150,130 left as a welcome retirement bonus.
This represents a total benefit of $130,730 by utilising super rather than directing extra money straight into the mortgage.
For those nearing retirement, this represents a home renovation if required, funding for a few new small cars during retirement, a number of overseas holidays, or simply an extra couple of hundred dollars per week to make retirement so much more enjoyable.
The West Australian – 18 June 2018 By Raymond Pecotic