Noel Whittaker's Blog Today’s column is addressed to readers between 45 and retirement age – the baby boomers and gen X-ers. Good news: it’s never too late to get your finances in order. But the quicker you start the easier it’s going to be, so stop procrastinating and make 2021 the year that changed your life.
A great way to start would be to buy my new book, Retirement Made Simple. I wrote it for you, and it covers a whole raft of essential ideas and strategies in a simple way. Obviously, it’s impossible to condense 420 pages to one article, so today I’ll focus on two of the most important ones.
A primary goal should be to arrive at retirement with your home paid off, and one of the most common questions I receive is whether it is better to focus your resources on paying down the mortgage, or on boosting your superannuation. It’s a no-brainer: boost your superannuation.
Think about it – your mortgage interest rate should be no more than 3% per annum, and a good superannuation fund should be returning close to 8%. Furthermore, any money you use to pay down your mortgage is made from after-tax dollars, whereas concessional contributions to superannuation lose just 15% in tax.
CASE STUDY A couple are 15 years away from retirement and owe $300,000 on their mortgage. They have negotiated an interest rate of 2.5%, but due to inertia have left their monthly payments at $1185. At this rate the term will be 30 years. And because of the way the mathematics of compound interest work, their balance after 15 years will still be $180,000. They need to take action.
The most obvious strategy would be raise the repayments to $2,000 a month, which would pay it off in 15 years. This strategy would require extra payments of $815 a month. They are in the 34.5% tax bracket so the pre-tax cost of $815 a month is $1250 a month.
Instead of boosting the mortgage payments, they could contribute $1250 a month as additional superannuation contributions. These payments would be tax-deductible, as long as their total concessional contributions, including the employer contribution, did not exceed $25,000 a year, per person.
After contributions tax of 15%, $1250 a month becomes $1063 a month. If their fund returned 8% there would be an additional $350,000 in super in 15 years. They could withdraw $180,000 tax-free to pay the mortgage off, leaving a bonus of $170,000 in their superannuation.
This highlights the power of a good strategy. By investing $1250 per-tax a month into their future, this couple can achieve $815 a month paid off the mortgage, or $1063 a month invested in super. By choosing the better strategy, they should be able to pay off the house at retirement and retire with an additional $170,000 to draw on.
If your house is paid off, superannuation is the perfect vehicle. If you are earning $100,000 a year now, your employer should be contributing $9500 a year. You can contribute an additional $15,500 a year, for which you can claim a tax deduction. This would be a net $13,175 a year after contributions tax. Keep this up for 15 years and there should be an additional $360,000 in your fund. And of course, you won’t draw it all on the day you retire. If you left the whole sum to grow, a further 10 years could see it worth $1 million. While your own situation will fall somewhere between those extremes, you can be sure you will have given yourself a much more comfortable retirement.
As you have just read, simple, inexpensive strategies can make a major difference to the amount of money you have in retirement. No-one can slow the passing of time, but you can make it work for you by acting now.