With the increase in property prices across Australia retirees are finding it more difficult than ever to retire with no outstanding debt on their place of residence. In his article this month, ROD LINGARD looks into the concept of Salary Sacrificing and how it can be used to pay down outstanding home loan debt prior to retirement.
Last month my blog was all about ‘exit strategies’ for mature age borrowers faced with the possibility of carrying mortgage debt into retirement. As a financial planner, there are few issues I am more passionate about.
In my last blog I mentioned there are some strategies that can be put in place, so this month I’ve decided to share my favourite strategy to address this problem.
I should provide the warning up front there will be a few numbers to contend with, but if you can hang in there and follow the logic, I think it will be worth it.
Let’s consider a 50-year-old who would like to retire at age 65 and has a $300,000 home loan.
If the borrow can secure a rate of 3.5%, in order to pay the loan out by age 65, the required repayment is $2,145 per month.
Let’s call this Option 1.
Now let’s consider the situation whereby the borrower can secure a 30-year term at the same interest rate of 3.5%.
I know this seems in direct contradiction to the borrower’s goal of paying out debt but hang in there for a moment. Under this situation, the required repayment is $1,348 per month.
That is $797 per month less than the repayment associated with the shorter term.
Let’s call this Option 2.
The secret to my strategy is to make use of the $797 which has been saved.
One of the options at our disposal is to salary sacrifice the savings into superannuation.
For the purpose of this blog, I’m going to assume a moderate long-term superannuation return of 6% per annum.
I’m also going to assume that our hypothetical borrower has a Marginal Tax Rate of 32.5% + Medicare (that is, the borrower earns between $37,001 and $90,000 for the 2020 tax year).
So, what are our hypothetical borrower’s positions at age 65 under both options?
|Mortgage Balance at 65||Additional Superannuation||Net Benefit|
In both Options 1 and 2, the borrower has contributed an amount of $2,144.65 per month.
The benefit arises from the substantial tax benefits gained by a salary sacrifice strategy. Very simply, reducing your home loan payments, and salary sacrificing the saving into superannuation could provide a significant and tangible benefit.
The borrower who adopts Option 2 is over $100,000 better off at retirement than the borrower how follows the conventional path.
The sceptics might ask, what if the return is superannuation is much lower? Even if the return from superannuation was as low as 3.5%, the benefit is still in excess of $50,000.
If you’d like to discuss a strategy that could improve your bottom line at retirement, please get in touch for an obligation free consultation give me a call.
Rod Lingard is a Licensed Financial Adviser with Lifestyle Connexion and can be contacted on 0400 160 461. Financial Advice is provided by Rod Lingard – Authorised Representative No: 248734 of MASU Financial Management Pty Ltd | AFS Licence Number 231140 ABN: 78 069 358 498.
General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.