Fifty-somethings often feel a long way from retirement. Currently, they’re generally too busy working, supporting families and managing cost of living pressures.
Yet, they are probably at their ‘peak mortgage’ moment. And the decisions they make today can have a profound impact on their lives in 10 or 20 years. Here’s how.
Take the example of Gavin – 55, single, and paying off a home in Adelaide. He is typical of his age group, according to Australian Bureau of Statistics (ABS) data which notes that more than half of the 55-64 demographic is still paying down a home loan. Here’s what he wants to know:
“I have about $30 per week I can save. My father says to put money away for retirement, by salary sacrificing, saying the tax saving and compounding of super will be the most effective long-term use of this money.
But with a $600,000 mortgage, and an interest rate of 6.75 per cent I wonder if an extra $30 per week against the principal is a smarter way to go? What are the numbers over a 10-year period? What are the final dollars for each option?”
Financial Adviser, Nicole Bell from Retirement Essentials agreed to answer Gavin’s question. To do so, she made the following assumptions:
- that super compounds at 7.5 per cent over the period,
- that Gavin’s marginal tax rate is 30 per cent
- he is making minimum mortgage repayments over a loan term of 20 years
So which option delivers a higher net gain?
Option 1: Additional $30 per week mortgage repayments: An extra $30 repayment means that Gavin will now pay $1082 ($1052 plus $30) weekly, saving $5255 in interest and reducing his principal by $15,600. The total benefit over 10 years is $20,855.
Option 2: Salary sacrifice $42.86 to super per week: This option will reduce Gavin’s net income by $30 per week. His salary sacrifice amount is $42.86, less a contributions tax of 15 per cent or $6.43, thus $36.43.
Using a projected compounding rate of 7.5 per cent, the total extra super Gavin will have after 10 years is $28,185. This means that the net benefit of the second option, salary sacrifice, delivers $7330 more than the first option, paying extra off the mortgage.
However, this result is not advice that Gavin should choose salary sacrifice over mortgage repayments. There is more to Gavin’s decision than this net benefit from the super contribution option.
His attitude to carrying higher debt is one factor. If he has a mortgage with a redraw facility, he may consider that the extra money in this account provides an accessible financial buffer for unexpected needs – not available if the money is tied up in super, at least until he turns 60.
His planned date of retirement is also relevant. And if he was partnered, his other half’s financial situation would also need to be considered.
Nevertheless, it’s always helpful to have some straightforward sums at hand when you have a financial ‘turning point’ decision to make.
Kaye Fallick is an author, publisher, commentator and retirement income explainer, as well as co-creator of the Retirement Affordability Index.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.
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