PAY OFF THE MORTGAGE OR BUILD UP YOUR SUPER?

THIS IS THE BIG QUESTION

There is no rational reason to retain any debts in retirement, if you can avoid it. The question is whether to use surplus cash to pay off the debt before you retire, or inject the extra money into super and create a bigger lump sum to clear up the debt later when you stop work.

For someone in their 30s or 40s, paying off the mortgage is a more sensible thing to do. A lot could happen in the superannuation world over the next 20 or 30 years and locking extra money into something you can’t access for decades is risky, even if it’s tax-effective.

For someone in their 50s, and certainly their 60s, these risks start to reduce. Salary-sacrificing extra money into super to get the tax break, ensuring it is invested conservatively while it’s there, and then withdrawing some of the money to pay off your mortgage is a strategy that could save you a lot of money.

“WITHDRAWING MONEY TO PAY OFF YOUR MORTGAGE COULD SAVE YOU A LOT OF MONEY”

We’ll assume you can afford to lose $100 per week from your take-home pay to be applied to the mortgage. We’ll also assume that you’re earning $85,000 a year. That $100 put into the mortgage is after-tax, which means to end up with $100, you’ll have paid tax and Medicare levy worth a total of $52.67. So $152.67 is therefore the amount you could salary sacrifice to super, ending up with the same take-home pay.

If salary sacrificed to super, you have to pay 15 per cent contributions tax because it is a concessional contribution. The $152.67 less 15 per cent tax leaves us with $129.76 in super. Over a year, that’s an extra $1547 more in super than would have been paid off the mortgage.

Now we have the two figures, we need to weigh up the options. We’ll assume that our super fund, after fees and charges, earns an identical rate to the cost of your mortgage: 4.5 per cent. • After 10 years, the extra $100 per week will have knocked $88,830 off the mortgage. • After 10 years, the extra $129.76 per week will be worth $115,266 in super.

That’s an additional $26,436 in your pocket by pumping up your super, and if the cashing out occurs after age 60, no tax is payable.