People often wonder if they’ll be better off paying down their mortgage quickly or investing their extra income into their super. If you have extra income, you’ll want to make the best use of it. But what’s the best use, and what will help you to reach your retirement planning goals soonest? Let’s look into some points to consider in your retirement planning strategy.
The first point to consider is liquidity. If you’re looking for a way to access your savings at any point before retirement, you may want to avoid using your extra income to build your super. Money you invest in your super will not be available to you until you reach the preservation age or retire. If you want to invest your extra income, but still have access to it before retirement age, you might want to consider paying down your mortgage.
Tax considerations may also have an effect on whether you salary sacrifice or fast-track your mortgage payments. If your marginal tax rate is higher than 15%, then making additional super contributions can help you to reduce your taxes. For example, let’s say you earn $80,000 a year, and your marginal tax rate is 32.5%. By sacrificing just $100 per month, you would contribute $1,557 to your super fund after taxes.
It can be helpful to see how that same amount of money would work in your favour if you paid down your mortgage. Without the tax benefits of salary sacrificing, the same $100 per month would equate to $1,200 for paying down your mortgage. When you think of it this way, your money stretches further when you send it to your super.
It’s important to note that you don’t receive the same tax benefits from after-tax super contributions as you do when you salary sacrifice. A $100 after-tax contribution increases your super fund by $100, just like a $100 additional principal payment reduces your mortgage debt by $100. When you’re dealing with after-tax dollars, you’ll have to use factors like investment performance and loan interest rates to make a strategic choice.
There are several different strategies you can use in retirement planning, and by using your extra income now to save for retirement or reduce your mortgage debt, you will have more financial options in the future.