Even if retirement may seem a long way off, planning for it is not a pipe dream. It’s going to happen eventually, and you want to enjoy life comfortably once your working life is done.
Many people start to get serious about retirement planning around the middle of their working years. If you’re at that stage, you’re likely earning a good pay, and the kids have probably grown up and moved out. As a result, you might have a few extra dollars every month and you want to maximize the benefits from those bonus bucks.
Which leads many people to wonder what to do with the money. Should you pay your home off early? Or should you put more money into your super?
Paying off debt is usually sound financial advice. But not all debt is the same. Eliminating credit card debt, for instance, is definitely a priority. But mortgage debt is not always bad.
If you’re thinking of the benefits of saving on interest costs in the long run, it is possible to create a structure that allows you to save interest on your mortgage.
When you’re considering using extra money to pay off the mortgage, there are some important questions and considerations:
These can all impact your decision about paying more money toward your mortgage. As well, you should think about whether you will live in your home when you retire. You certainly don’t want to finish your career with the stress of mortgage debt.
And if a retiree jumps to the conclusion to sell the home, to either downsize, reduce mortgage costs, or pay off debt, it can have an impact on the Age Pension entitlement.
So the answer is not a simple and straightforward YES to decisions around paying off the family home.
Let’s look at the other option.
Whatever the stage of your career, it’s worth thinking about that time when you won’t have to work any longer. When you get there, you want to have the resources for a comfortable lifestyle.
One of the ways to do that is to ensure you have enough money in your super. Even for those who started working before the superannuation guarantee was introduced in 1992, it’s likely you’ll be relying on your super to help finance your retirement. And as life expectancy continues to improve, you’ll likely need that money to last a little longer than it has for previous generations.
There are some advantages to putting extra money into your super. For one, you’ll realize immediate tax savings. Currently, the limit on concessional (before tax) contributions to your super is $25,000 a year. That includes compulsory employer contributions, salary sacrifice contributions and contributions for which a tax deduction has been claimed.
If you’re asking: What is a salary sacrifice? That’s when you “sacrifice” some of your salary to put extra money into your super. There’s a bonus to doing so as you pay less tax by sheltering that money. You’ll also be putting more money away, and with compound interest, you’ll gain even more in your super.
Once you’re 60 or over and able to access your super, any income payments from your retirement or transition phase account-based pension will be tax-free. Withdrawals from age 60 and over can also be paid tax-free.
There are other government incentives intended to build wealth in your super, such as Spouse Contribution, Government Co-Contribution and Contribution Splitting. Contact us for more information on these benefits.
Finally, you need to understand how much you’ve got in your super, and how much you anticipate you’ll need in your super when you retire. That’s where financial planning experts can help. Adding money into your super can be a good strategy, but it depends on your situation.
In the end, the answer to the question Super or Mortgage is not an easy one. But at least you’re asking it! You’ve made the first step by considering what to do with extra money to maximize its benefits.
Financial planning is always a good idea, and getting the advice of a professional is important, especially when it comes to big decisions. If you’re considering the option of investing in your super or paying off your mortgage, find out more with our Super V Mortgage guide. If you have any questions, please feel free to contact us below.
It is very important that you understand that the information above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. It is also worth noting that the Australian financial and taxation system is ever changing, and the information above may no longer be relevant. Again, we suggest seeking professional advice from a financial adviser before proceeding.