Mortgage or retirement: putting your extra cash to best use
For many people, funding retirement isn’t front of mind – especially when there are more immediate concerns like mortgage repayments or school fees.
“Unfortunately, the compulsory employer super contribution of 9.5 per cent won’t be enough for the average Australian worker,” explains Noel Yeates, Senior Wealth Adviser with Macquarie Wealth Management. “If you want to have a self-funded retirement, your lifestyle could fall short of expectations.”
That’s one good reason to make up the difference with extra contributions to your super. But is this where your money works best for you? Or should you be using any extra cash to pay off debt, like your home loan?
Noel says the answer largely depends on your age and tax position.
“Both are positive things to do. But the closer you are to retirement age, the more urgently you need to build up your superannuation balance – time is running out to top up your super.”
He says it’s important to think about how many more years you have left in the workforce, your target amount for superannuation or retirement income, and how manageable your current home loan is.
“I would say the ‘magic age’ is 50,” explains Noel. “That’s the point where you should have significantly reduced your home loan – it may be a regular expense but not a major burden on the household finances, and you should be on track to eliminate it altogether before you retire.”
He says this is also typically when you reduce the expenses associated with children living at home. “Hopefully, conditions will be more favourable for adding to your super fund.”
The case for paying down the mortgage
Paying off your mortgage has both financial and psychological benefits. When you make extra mortgage repayments, you’ll reduce the total interest you pay over the duration of your mortgage and also secure yourself a place to live in retirement.
You may also be able to tap into the increased equity in your home to invest in other property, as part of your long-term retirement plan. But bear in mind this is adding to your debt, rather than reducing it.
Plus, any money you deposit into your mortgage offset can be accessed at any time. Obviously, the longer you leave it in there, the sooner you’ll pay down your mortgage.
It’s about finding balance between having a debt free home and having enough income during retirement.
The case for topping up your super
It may feel reassuring to know you’re retiring with a debt-free home. But if you prioritise this at the expense of your retirement savings, you may be forced to downsize sooner than expected.
“It’s about finding balance between having a debt free home and having enough income during retirement,” says Noel, emphasising that many retirees underestimate how much income they’ll really need.
“You need money to enjoy your free time. Your spending patterns will change but they probably won’t decline – you’ll spend more on travel, hobbies, entertainment and healthcare.”
Obviously, any extra super contributions you make today will make a big difference to your lifestyle in retirement.
Plus, under current regulations you may benefit from favourable tax incentives. When you make contributions from pre-tax income (salary sacrificing) they are taxed at 15 per cent (up to a capped amount), or 30 per cent if you earn more than $300,000. If you earn less than $37,000 the Government may pay a Low Income Superannuation Contribution of up to $500 into your super account.
You may also potentially benefit from the flat 15 per cent tax rate on earnings your money makes within super, and 10 per cent on capital gains for assets held for 12 months or longer. Those tax rates generally reduce to nil when you start a pension.
Remember to always keep an eye on the various rules and laws. The Government, in the 2016 Federal Budget, proposed a number of changes to the superannuation environment that will affect the concessions available for both pre and post retirees. Seeking professional advice will help make the most of these concessions.
Keep your options open
It’s important to remember that when you make super contributions, you’re locking your money away until you retire. But equally, the clock is ticking on how much more you can add to your super fund – and if you’re considering moving or downsizing you may not need to pay the mortgage off completely.
It’s reassuring to know that whether you put your extra cash towards your super or your mortgage, both options will set you up for a more secure future, and give you more choices when you retire.