Recent figures from the Australian Bureau of Statistics (ABS) state that only 56% of people aged 55–64 are mortgage-free, and there are fears that more and more Australians will find their retirement plans seriously challenged as they try to survive on a reduced income, with mortgage payments to boot.
The problem can be solved by taking action sooner rather than later. The starting point is figuring out where you are now.
Think about Mal, aged 55, who earns $120,000 a year and has a mortgage of $200,000. Mal hasn’t been all that interested in finance, so his home loan’s interest rate is still 5% and the repayments are drifting along at $1300 a month. He hasn’t given any thought to what would happen when that day finally comes along.
His first step should be to go to my website (www.noelwhittaker.com.au) and start using the loan calculators. Mal would quickly find out that his loan has 20 years to go, and that he will arrive at age 65 with a debt of $127,535 remaining. Luckily he does have a guardian angel — superannuation.
The trick is to take advantage of the different tax rates between money received in the pay packet, and money salary-sacrificed to super. Mal loses 39% of gross pay taken in hand, but just 15% on contributions to super. Furthermore, money paid off the mortgage is effectively earning 5%, while most good superannuation funds are returning around 8% per annum.
Mal’s employer contribution should be $11,400 a year, which leaves room for an additional $14,600 to be contributed to superannuation in one way or another. This can be done either by salary sacrifice, or by making additional personal superannuation contributions.
Let’s suppose Mal makes personal superannuation contributions of $1217 a month ($14,600 a year), which should boost his superannuation by $12,410 a year after the 15% contributions tax is taken off. The payments will be tax-deductible, which should lead to a tax refund of $5700 a year which he could contribute it to superannuation as non-concessional contributions.
In 10 years, when Mal is 65 and ready to retire, the non-concessional contributions should have boosted his superannuation by $87,000, and the deductible concessional contributions by $189,000.
Instead of facing a debt of around $127,000 when he retires, which could take a big chunk of his employer superannuation, he has boosted his personal superannuation by $276,000. He could then withdraw $127,000 tax-free to pay off the debt, and still have an extra $149,000 in super, in addition to the employer superannuation.
There is a lesson here for anybody facing retirement within the next 20 years. The actions you take today will make a huge difference to the kind of retirement you are likely to enjoy. The longer you leave it to start — the harder it will be.