Superannuation vs. Mortgage in Saving for Retirement

Superannuation vs. Mortgage

Posted: March 23 2023

Australians with extra cash may be asking how to make the most of it given the rising interest rates and volatile investment results. Should you increase your mortgage payments if you have cash, or would it be better in the long term to increase your superannuation?

The answer depends on one’s circumstances. Considerations such as your individual situation, interest rates, taxes and the prospects for investments are all important.

Click here for your Quarterly Insights.

Superannuation vs. Mortgage

Shot of a happy family going for a walk together at the beach

What to think about?

Some of the factors you need to assess and consider before committing your hard-earned cash include:

• Your age and years to retirement.

Setting your super as a priority makes more sense the closer you are to retirement and the smaller your mortgage. Younger people who have a large mortgage, dependent children, and a long time until they can use their retirement savings have more incentive to pay down home debt and may even build up investments outside of retirement savings that they can access if necessary.

Read: 8 Common Retirement Mistakes and How to Avoid Them

• The interest rate on your mortage.

Whether you have a fixed or variable rate will depend on this, but both are rising. Based on the current average variable mortgage interest rate of roughly 4.5 percent, any money put toward your mortgage will effectively yield a 4.5 percent return.

While interest rates were at record lows, you could invest in super and other things to get better returns, but as rates are rising, the emphasis is shifting back to paying off the mortgage. The amount you save during the life of the loan increases as extra payments are made earlier in the period. The next consideration is how much you can save on your mortgage in relation to the earnings you could receive from investing in superannuation.

• Super fund returns

In the ten years up to June 30, 2022, super funds averaged a yearly return of 8.1% but saw a decline of 3.3% in the final 12 months. In the short-term, financial markets can be volatile, but the longer your investing horizon, the more time there is to ride out market swings. The combination of time, compound interest, and favorable tax rates combined with the fact that your money is locked away until you retire make superannuation an alluring investment for retirement savings.

• Tax

Superannuation is a retirement savings vehicle with preferential tax treatment, with tax on investment earnings at 15% as opposed to tax at your marginal rate on assets outside of super.

Contributions are initially taxed at 15%, however, this is probably less than your marginal tax rate.

rate if you pay a portion of your pre-tax income into super. Up to your annual quota, you could even be eligible to claim a tax deduction for your personal contributions. Income from super is typically tax-free once you reach retirement age at 60. Mortgage interest payments, in contrast, are not tax deductible.

• Personal sense of security and confidence

A fully paid-off mortgage and being debt-free as they enter retirement bring a great deal of peace and stability for many people. Younger borrowers are sometimes encouraged to pay off their mortgage as quickly as possible because mortgage interest is tax deductible for the family home (as opposed to investment properties). However, for people who are getting close to retirement, it can make sense to invest additional funds in super and utilize their super to pay off any remaining home debt once they reach retirement.

Many people nowadays are taking on mortgage debt as they approach retirement. The quantity of your outstanding home loan and your superannuation balance will therefore also factor into your selection, regardless of your age. Debt repayment is probably a priority if you have other outstanding bills or if your mortgage is a significant burden.

Considering everything…

It’s quite obvious that figuring out how to maximize your savings is rarely straightforward, and everyone's calculations will be different. Your personal and financial objectives will ultimately determine the best course of action.

Preparing for retirement and purchasing a home are long-term financial commitments that should be regularly reviewed. Contact us at Success Wealth Group, if you'd like to talk about your overall investing plan.


Lan

About Lan Nguyen

Lan is the Founder and Chief Strategist at Success Accounting Group, Melbourne based CA firm. In a matter of short 8 years she has built up a reputable Chartered accounting firm with 3 offices and a team of 6 professional accountants and support team members. Her mission is to provide Innovative and Strategic Financial advice to help her customers make smarter financial decisions today for a brighter future.

Success Accounting Group is for established business owners who would like help to grow a sustained business. As a business owner you understand what drives your business success with our accounting team taking care of the rest.

Connect with Lan Nguyen on Linkedin, Google+, Facebook

To see how you too can benefit from working with us, request your FREE meeting today. Enter your details in the form on the right, or phone us direct on 03 9583 0550.
comments powered by Disqus

Arrange your FREE No-Obligation Meeting

Arrange your FREE No-Obligation Meeting

Either call us on (03) 9583 0550 or complete the form below

Covid-19 Response photo

Latest from our blog

Xero Banner

Success Accounting Group Pty Ltd

Oakleigh, VIC, 3166

5.0 stars

Reviews:

    Disclaimer: The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Therefore, before you decide to buy any product or keep or cancel a similar product that you already hold, it is important that you read and consider the relevant Product Disclosure Statement (PDS) of the product provider to make sure that the product is appropriate for you. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice. You can get a copy of relevant PDSs from Success Accounting Group by email Grow@SuccessAccountingGroup.com.au or by Phone (03) 03 9583 0550. All statements made on this website are made in good faith and we believe they are accurate and reliable. Success Accounting Group does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Success Accounting Group, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Success Accounting Group. You may not alter or modify this information in any way, including the removal of this copyright notice.