What’s bet­ter? Tip­ping money into su­per or pay­ing off the mort­gage

Townsville Bulletin - - NEWS -

THERE’S no right or wrong an­swer.

Salary sac­ri­fic­ing money into su­per­an­nu­a­tion has the ben­e­fit of a juicy tax con­ces­sion; be­fore- tax money you tip in is taxed at 15 per cent ( as op­posed to your mar­ginal tax rate – say 34.5 per cent, in­clud­ing Medi­care levy). So al­ready you’re ahead.

As an ex­am­ple, $ 100 of be­fore- tax money gives you $ 85 in su­per.

But if you take the $ 100 you’d only have $ 65.50 to spend, af­ter tax.

An ex­tra $ 85 a week into your su­per fund for 30 years, at an earn­ing rate of 6 per cent, could give you an ex­tra $ 370,000 at re­tire­ment.

Buy­ing a home is chal­leng­ing and chances are you’ll be mort­gaged up to the hilt. Any ex­tra money that you can tip into your home loan, es­pe­cially while in­ter­est rates are low, can save you a huge amount of in­ter­est over the life of your loan.

So from the ex­am­ple above, let’s as­sume you have an ex­tra $ 65 a week. Cur­rently on the canstar. com. au data­base, the av­er­age vari­able mort­gage is 4.6 per cent. On a $ 300,000 home loan over 30 years, an ex­tra $ 65 a week can pay your loan off eight years sooner and save around $ 79,000 in in­ter­est.

It will also free up eight years of re­pay­ments ( around $ 174,000) to in­vest, which you could then salary sac­ri­fice and use to su­per­charge your su­per.

All up, the re­sult would likely be sim­i­lar.

The case for su­per:

The case for your home loan:

BET­TER ques­tions. Who would you rather be with? Ladies, Brad Pitt or Matthew McConaughey? Lads, Jen­nifer Love He­witt or Heather Lock­lear?

Per­haps you an­swered a scream­ing “BOTH!” If you’re a Gen Xer and an­swered one or less . . . then we sim­ply ain’t on the same page when it comes to what’s hot. Se­ri­ously con­cerned for you.

And that’s the thing about this mort­gage ver­sus su­per ques­tion. Both op­tions are sexy. Dead sexy.

Pay­ing wads ex­tra into your mort­gage is awe­some – own it out­right sooner. Re­duc­ing tax by con­tribut­ing to su­per, while build­ing your­self an awe­some re­tire­ment? Hard to beat.

A tough bal­anc­ing act for Gen Xers. It’s lit­er­ally like scales. So, here’s a rough plan.

Pre­vi­ous gen­er­a­tions – those bug­gers to the right – were able to get into their 50s and shovel money into su­per. Lit­er­ally, at $ 100,000- plus a year.

Xers can’t do that. We’re re­stricted to $ 30k. So, the an­swer is we need to do a bit of both.

Pay a lit­tle ex­tra off the mort­gage. Ev­ery. Sin­gle. Month. But we also need to start putting some­thing ex­tra into su­per. Now.

Xers, from your late 30s, roughly, do both. Get ahead on your mort­gage by all means. But start putting in a lit­tle ex­tra to su­per as well.

Su­per is the ugly cousin , I know. But even if you only put in an ex­tra $ 3000 or $ 5000 a year now, you will thank me for it in years to come. I’D ad­vise any­one to see an ex­pert ad­viser on this ques­tion. But here are the ba­sic con­sid­er­a­tions.

First, there’s age ( or life stage). If you’re at the be­gin­ning of your work­ing life, you’d want to get ahead on your mort­gage. This gives you in­creased eq­uity wealth in a hard as­set. Peo­ple with young kids usu­ally put wind­falls into the mort­gage. If you’re in your late 50s or 60s, you’d prob­a­bly be con­tribut­ing as much as pos­si­ble into su­per be­cause it rep­re­sents a tax con­ces­sion to con­trib­ute ( 15 per cent com­pared to your top mar­ginal rate as in­come).

There are also ques­tions of tim­ing. If you’re closer to re­tire­ment, you may pay off rem­nants of a mort­gage with your su­per – in which case, you con­trib­ute the cash to su­per. But if you want to be debt- free at re­tire­ment, you pay down the home loan. Or if you’re build­ing wealth, cash into the mort­gage boosts eq­uity and there­fore lever­age into other prop­erty.

Tax dif­fer­ences are in­ter­est­ing: if you put cash into su­per from a salary sac­ri­fice, it is taxed at 15 per cent and the earn­ings are taxed at 15 per cent; but earn­ings into the mort­gage have al­ready been taxed as in­come, while gains on your pri­mary res­i­dence will be tax- free.

Another per­spec­tive: if you’re self­em­ployed you can con­trib­ute up to $ 30,000 a year to your su­per and claim it as a tax de­duc­tion. You can’t do that with a mort­gage!

In the end su­per ver­sus mort­gage de­pend on your cir­cum­stances and goals.

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