Which Came First Dilemma: Super vs Mortgage
Paying off debt is very important strategy is reducing risk in your financial situation but we suggest that your superannuation shouldn’t be forgotten either.
A vast majority of Australians prioritize their paying off their mortgage over their retirement savings, which could be potentially placing them in a risky situation when they stop working, especially if they don’t have other investment assets and savings to rely on.
A recent study of Aussies aged 35 to 49 found that only 14% put retirement savings, first in their list of financial priorities.
Debt reduction is a sensible and necessary financial goal, but this should never be to the detriment of planning for the future in a holistic sense. Our experience is that Aussies don’t engage with their super until very late in life, by which time they can’t get the effect compounding investment working for them to their maximum potential.
A one-eyed concentration on paying off the family home means that over half of Aussies solely on their employer’s contribution of 9.5 per cent to save for retirement. In the face of hard evidence that in excess of 12% is regarded mandatory for a comfortable retirement.
We feel that the right time to put super first could be once you feel that your mortgage is manageable and once you have enough “rainy day” savings for emergencies and the unexpected. We are not saying to substitute super for your mortgage but being in retirement with enough capital to draw on could be a long time to be locked in a meager lifestyle or poverty.
Extra super contributions can be a better investment option even when your super fund return is lower than your mortgage interest rate because of taxation. For example, money salary sacrificed into super is taxed at 15 per cent, whereas money credited to your mortgage is taxed at your marginal tax rate, likely to be much higher.
For example, a person earning $60,000 a year wanting to invest $1000 of pre-tax income would be able to put $850 of that money into super, compared to only $675 into their mortgage. It may not seem a lot but over the long haul it can make a significant difference.
Voluntary super contributions can be a good way to diversify your investment portfolio, rather than putting every extra cent into the property market and being over exposed to property. It is important to try and spread your investments out into a number of assets. For instance, there are some property markets that are falling. Paying off debt on a property asset that is reducing in value may not work as well as a pre-tax contribution to super in a fund where there is good growth potential.
So, is it the chicken or the egg? We will let you decide on that one!