Top up your super or pay off the mortgage: how to boost retirement savings

Tax advantages coupled with the potential for higher investment returns means extra contributions can help set you up in retirement.

Everyone should try to make additional payments into their superannuation.

This can seem challenging if you're a family with bills and a mortgage to pay. However, the federal government now limits your extra payments (both non-concessional and concessional) into super so you cannot easily "catch up" once your home loan is paid off.

Therefore, you are better off taking advantage of the concessional payments you can make every year and let your home loan run a little longer (though in many cases you can do both).

There are two contributions you can make if you are an employee: salary sacrificing and (for lower income earners) a non-concessional payment that generates the federal government's co-contribution.

Let us take the example of John and Maria. John earns $37,000 and Maria earns $80,000 a year. They have a mortgage of $400,000 with an interest rate of 4% and a term of 30 years. They pay off their loan fortnightly (meaning they make a few extra repayments a year) with $881 instalments.

Does it pay to salary sacrifice?

If John salary sacrifices $18,799 ($723 per fortnight) into super and reduces his taxable income, he can save more than $1100 and grow his super balance (see table). Additionally, if John puts $812 into super as a non-concessional (after-tax) payment and then does a tax return, he will be eligible for a $406 co-contribution.

For Maria, she decides to salary sacrifice $17,004 ($654 per fortnight) into super. When evaluating the difference between her marginal tax rate of 32.5% (plus the Medicare levy of 2%) and the super tax rate of 15%, Maria can effectively save more than $3300.

What if they put the money into the mortgage instead?

Over 30 years, if the standard mortgage repayments are made (not including fees), the total repaid will be more than $687,000 - including interest of more than $287,000 - according to ASIC's Moneysmart mortgage calculator.

However, if John and Maria did not salary sacrifice into super and decided those same dollar amounts were to be put towards the mortgage (after tax), they would have about an additional $26,000 or $1000 per fortnight to put towards their loan.

It would effectively pay off the loan in less than 10 years for a total of about $485,000 and with less than $85,000 in interest payments.

However, considering this model does not take into account annual household expenditure, it's likely to need a more realistic middle ground.

Moving the goalposts

Let's say Maria had a surplus income of $8000, or $5400 after tax ($208 per fortnight). If the mortgage repayments were to increase from $881 to $1089 per fortnight, the loan would be repaid in 20 years and 10 months.

In other words, Maria and John would knock more than nine years off their home loan. Total repayments would be more than $589,000 (including interest of more than $189,000), saving the couple about $100,000 from the original 30-year loan term.

Yet if Maria's surplus income of $8000 was instead salary sacrificed to super for 21 years, rather than going towards paying the mortgage earlier, it could enhance her super balance by more than $315,000.

Based on the super guarantee alone (and its increase to 12% in 2024), Maria's balance would grow to more than $350,000 over 21 years (assuming returns of 7%pa after fees). This means her super balance could well be in excess of $665,000.

Put simply, if used to accelerate mortgage repayments, $5400 net over 21 years would result in savings of about $100,000. Whereas if $8000 gross was salary sacrificed to super, it would result in more than $315,000 being saved. However, this would have to
be reduced by the amount of the mortgage still outstanding at the end of year 21, which is around $175,000.

If my logic is correct, salary sacrificing to super as opposed to making additional mortgage payments certainly seems to be the winner.

The reasons for the difference are the higher net investment being made to super on a regular monthly basis as opposed to after-tax mortgage repayments, and the higher earnings being achieved inside the superannuation environment.

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