Should I boost my super or pay off my mortgage?

Should I focus on paying off my mortgage or growing my super? I have just turned 62, and I still owe $253,954 on my mortgage. I have $194,700 in my super, and I have another 5 years to go before I will retire.

A foundational assumption here is that the goal at retirement is to be debt-free and own the roof over our heads. This makes both financial and psychological sense.

Owning a roof over our heads and being debt-free in retirement is a common goal. But doing so can come at the expense of extra earnings.

Flowing from this assumption, you want that mortgage cleared five years from now. There are a few ways this could be achieved. If you have sufficient surplus income, it could simply be paid off over the next five years. I say simply, but realistically, that requires about $50,000 a year of repayments, which is no small ask.

You could instead continue at your current level of repayments and then do a lump sum withdrawal from super at retirement to clear whatever balance remains. The drawback here is that you then have less retirement income due to your lower remaining superannuation balance.

At 67 years of age you will likely qualify for the age pension, however, so there would be at least some income coming into the household.

A third option would be to downsize your home, clearing any remaining mortgage and potentially even boosting your superannuation savings.

I don’t know enough about your circumstance to know whether this third option is viable for you, but I’d certainly encourage you to give it some thought and exploration, as this path is likely to provide you with the highest quality retirement given the potential for greater retirement income.

Assuming our focus is on one of the first two options, we need to balance the interest saved on the mortgage by directing savings there versus the growth on the super fund if you were to instead point your savings in that direction. Tax complicates matters considerably.

If we assume you earn $100,000 per year, your employer will contribute $11,500 to your superannuation account this financial year. The maximum tax-deductible super contributions that could be made are currently $30,000 in a given year. You, therefore, have $18,500 of headroom.

If you can afford to salary sacrifice $18,500 to super, this will be taxed at 15 per cent, meaning $15,725 will be added to your superannuation account.

If, instead, you took this amount of money as normal take-home pay, a 30 per cent tax would be levied. This means you would have $12,950 available to pay off your mortgage.

We can’t know what the future return will be on the super fund, and what the rate of interest will be on your mortgage, but unless your super fund is invested particularly conservatively, it would seem likely that the super fund returns would be at least equivalent to your mortgage rate.

If you’re comfortable with this assumption, then directing savings towards superannuation is likely to produce the best outcome given the figures used here. At retirement, you can then make a lump sum withdrawal from your inflated superannuation balance to clear your mortgage.

It’s important to recognise that the risk you run here is poor performance by the super fund relative to the interest charged on your mortgage.

If you have a savings capacity beyond the amount that can be salary sacrificed, the decision of where to direct your savings would be far more line ball. I’d likely lean towards focusing on the mortgage, as the interest saving is a certain outcome, whereas the superannuation return is unknown.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He produces the weekly email GainingCHOICE. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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