Tag Archives: Wealth Accumulation

Mortgage vs super: where should I put my extra money?

By Robert Wright /February 16,2024/

It’s a dilemma many of us face – are we better off directing extra money to our mortgage or super? As with most financial decisions, it’s not a one size fits all approach and here are some factors to consider in deciding what’s right for you.

Key takeaways:

  • There may be tax advantages when you contribute to super, especially if you salary sacrifice or you’re eligible to claim a tax deduction for personal super contributions.
  • The power of compounding returns could mean that even small contributions to your super over many years could make the world of difference.
  • By making extra mortgage repayments, coupled with any potential increase in the value of your property, you will build equity in your property at a faster rate than if you were to make just the minimum repayments.

Building the case for super over mortgage

You might think your super is already being taken care of – after all, that’s what your employer’s compulsory Superannuation Guarantee contributions are all about. But these contributions alone often aren’t enough to ensure you achieve the retirement lifestyle you want to live.

Making extra contributions to your super is a great way to boost your retirement savings. As an investment vehicle, super is a very tax effective way to save for the future.

The power of compounding returns

Super is a long term investment, at least until you retire, and potentially much longer if you leave your money in super and draw a pension after you retire.

This long investment term, coupled with the rate of tax on your super investment (generally 15%), means your money can add up and generate further investment returns on those returns. This is known as compound returns, or compounding.

The expenses of daily life can be considerable. Thinking about directing money to super might not seem like a priority when we feel overwhelmed by the effort to save a deposit for a home, paying down debt, and the costs of raising a family.

However, the benefit of compounding returns means that even small, frequent contributions can make a big difference down the track. It’s about striking a balance that is right for you today and remember, nothing has to be forever. As your life changes, you can simply adjust your contributions strategy to suit your needs.

Building super early

To maximise your retirement savings while allowing compounding returns to do the heavy lifting, the best approach is to start early. The longer compounding continues, the bigger your savings could be. Entering retirement debt free is an attractive prospect. It can be easy to think that you need to repay your debt before you can start thinking about saving for retirement. However, it doesn’t have to be one or the other.

You can see the difference small, regular contributions could make to your final retirement income using the MoneySmart retirement planner calculator.

Tax benefits of super

From a tax point of view, super can be incredibly beneficial. Salary sacrificing some of your before-tax salary or making a voluntary after-tax contribution for which you can claim a tax deduction, can be effective ways to not only grow your retirement savings but also reduce your taxable income.

One great benefit of investing in super is that concessional (before tax) contributions are taxed at a maximum rate of 15%. This can be higher though if you earn over $250,000.

Mortgage repayments are usually made from your take home pay after you’ve paid tax at your marginal tax rate. Your marginal tax rate could be as high as 47%. So, depending on your circumstances, making a voluntary deductible contribution to super or salary sacrificing may result in an overall tax saving of up to 32%.

There is a limit on the amount you can contribute into super every year. These are referred to as contribution caps. Currently, the annual concessional contributions cap is $27,500. If you’re eligible to use the catch-up concessional contributions rules, you may be able to carry forward any unused concessional contributions for up to 5 years. If you exceed these caps, you may be liable to pay more tax.

Tax on super investment earnings

The initial tax savings are only part of the story. The tax on earnings within the super environment are also low.

The earnings generated by your super investments are taxed at a maximum rate of 15%, and eligible capital gains may be taxed as low as 10%. Once you retire and commence an income stream with your super savings, the investment earnings are exempt from tax, including capital gains.

Also, when it comes time to access your super in retirement, if you’re aged 60 or over, amounts that you access as a lump sum are generally tax free.

However, it’s important to remember that once contributions are made to your super, they become ‘preserved’. Generally, this means you can’t access these funds as a lump sum until you retire and reach your preservation age, between 55 and 60 depending on when you were born.

Before you start adding extra into your super, it’s a good idea to think about your broader financial goals and how much you can afford to put away because with limited exceptions, you generally won’t be able to access the money in super until you retire.

In contrast, many mortgages can be set up to allow you to redraw the extra payments you’ve made or access the amounts from an offset account.

Building the case for reducing your mortgage over super

For many people, paying off debt is the priority. Paying extra off your home loan now will reduce your monthly interest and help you pay off your loan sooner. If your home loan has a redraw or offset facility, you can still access the money if things get tight later.

Depending on your home loan’s size and term, interest paid over the term of the loan can be considerable – for example, interest on a $500,000 loan over a 25-year term, at a rate of 6% works out to be over $460,000. Paying off your mortgage early also frees up that future money for other uses.

Before you start making additional payments to your mortgage, it’s suggested that you should first consider what other non-deductible debt you may have, such as credit cards and personal loans. Generally, these products have higher interest rates attached to them so there is greater benefit in reducing this debt rather than your low interest rate mortgage.

Conclusion: mortgage or super

It’s one of those debates that rarely seems to have a clear-cut winner – should I pay off the mortgage or contribute extra to my super?

The answer, probably somewhat annoyingly, is that it depends on your personal circumstances.

There is no one size fits all solution when it comes to the best way to prepare for retirement. On the one hand, contributing more to your super may increase your final retirement income. On the other, making extra mortgage repayments can help you clear your debt sooner, increase your equity position and put you on the path to financial freedom.

When weighing up the pros and cons of each option, there are a few key points to keep in mind.

One of the key questions to consider is what is the likely balance you’ll need in your super? Work backwards starting with working through what retirement looks like for you, the type of lifestyle you’d like, and how much you need to live on each year.

From there, you can start to consider your sources of income in retirement. This is likely to include super but could also include a full or part Age Pension, or income from an investment property or other sources.

You can then start thinking about your current balance, contributions strategies and whether you’re on track to have enough saved to supplement your other retirement income sources.

The MoneySmart retirement planner calculator can help you to estimate how much super you may have in retirement and how long your super may last. You also need to think about how you plan to spend your money in retirement.

In most cases, there isn’t one set strategy that you should follow and it can quickly change as you grow older, start a family and reach retirement age. You should also consider whether you’ll need to access any additional funds you put aside before you reach retirement. If it’s in your super, it’s locked away. If it’s in your mortgage, there are generally options to redraw.

Home ownership and comfortable retirement are financial goals that many strive towards. If you reach a point where there’s some surplus cash flow to consider where to put your extra money, it’s a good dilemma to have.

Life is complex, so it pays to speak with a financial adviser before you make any big financial decisions when it comes to your super or mortgage.

 

Source: MLC

Australian household wealth

By Robert Wright /February 16,2024/

Is high Australian household wealth a source of support for consumers?

Key points

  • Australia ranked as having one of the lowest rates of disposable income growth per capita amongst OECD countries in mid 2023.
  • An increasing income tax burden and mortgage repayments have weighed on income growth, despite solid wages and salaries.
  • But, household balance sheets in Australia look stronger compared to incomes. Household wealth increased in 2023, as home prices rose.
  • However, growth in household wealth will decline in 2024 as home prices are expected to fall. Household incomes will also be under pressure as earnings growth slows from a softening labour market.
  • As a result, high household wealth holdings will not be enough to offset a challenging environment for households in 2024, despite some easing in cost of living challenges.

Introduction

Household income data from the OECD showed that Australia had one of the lowest rates of annual real household disposable income per person compared to its OECD peers (see the chart below). Over the year to June 2023, Australia’s real per capita household disposable income was down by 5.1%, compared to a 2.6% rise across OECD countries.

 

 

 

 

 

 

 

 

Source: AMP, Macrobond

This occurred despite very healthy labour market conditions in Australia which saw employment growth running above 3.0% per annum all year, the unemployment rate remaining below 3.9% and underemployment continuing to be low, all of which boosted wages growth. Despite this positive earnings backdrop, the income tax burden increased in 2023 as households have been moving into higher income tax brackets (otherwise known as “bracket creep”), as well as the end of income tax concessions. Mortgage interest repayments are also an increasing drag on incomes (see the chart below) as the cash rate has been increased by 425 basis points since May 2022. Australia’s very high population growth in 2023 (running at 2.4% over the year to June 2023) also masked a fall in household disposable income growth per person, relative to other OECD countries.

 

 

 

 

 

 

Source: ABS, AMP

Just looking at household income accounts does not show everything about the position of households. In a country like Australia where home ownership rates are high (66% of Australian households own their home, with or without a mortgage), looking at household wealth is also important.

Household wealth in Australia

The Australian Bureau of Statistics estimates the value of a household’s assets, liabilities and therefore wealth. Net worth or wealth is calculated as a household’s total assets minus its liabilities. Total wealth is close to 11 times the size of household disposable income (or 1083%) and net wealth is 896% of income. The latest data for the year to June 2023 showed a slight fall in wealth as a share of income, after it reached a record high in 2022 – see the chart below. Non financial wealth is worth 647% of income, larger than financial wealth at 436% and well surpassing household debt, which is 187% of income.

 

 

 

 

 

Source: RBA, AMP

Around 70% of Australian household wealth is tied to the value of homes (which is made up of land and dwellings) and moves closely in line with home prices (see the chart below). Household wealth rose throughout 2023, in line with solid growth in home prices.

 

 

 

 

 

 

Source: ABS, AMP

Other components of household wealth are shown in the chart below. Assets include superannuation, shares and currency and deposits. Loans which are mostly for housing are the source of household liabilities.

 

 

 

 

 

 

Source: ABS, AMP

How does household wealth compare around the world?

Australian household wealth, as a share of household disposable income, is at the top end of its OECD peers (see the chart below).

 

 

 

 

 

 

Source: OECD, AMP

High holdings of wealth could be considered a source of support for households, especially against record levels of household debt in Australia. This is a concept known as the “wealth effect”. When household wealth increases, households feel more secure with their financial position and household savings tend to decrease which lifts consumer spending. When wealth decreases, households feel less secure which leads to an increase in savings and decline in spending. However, this relationship does not always work. Most recently in the pandemic, household wealth rose in 2021/22 alongside the lift in home prices but the savings ratio also surged thanks to government driven stimulus cheques. Since then, the household savings ratio has been falling but growth in total consumer spending has been low. We expect that the household savings rate will continue to fall in 2024 as it normalises after the pandemic but growth in consumer spending will still be low.

Implications for investors

Households dealt with a cost of living challenge in 2023 because of high inflation and rising interest rates. Inflation is expected to slow in 2024 and we expect the RBA to start cutting interest rates by mid year which should ease the repayment burden for households with a mortgage, as mortgage interest repayments as a share of income are rising to a record high (see the chart below).

 

 

 

 

 

 

Source: ABS, AMP

So, while cost of living issues should improve for consumers, household wealth will come under pressure in 2024 as we expect home prices will decline by 3.0% to 5%. This is likely to occur alongside a slowing in household incomes as the labour market weakens and the unemployment rate increases. This environment is expected to be negative for consumer spending and GDP growth. We see GDP growth rising by 1.2% over the year to June 2024, below the RBA’s forecast of 1.8% and anticipate the unemployment rate to increase to 4.5% by mid year. This should see the RBA cutting interest rates by June and we expect a total of 3 rate cuts in 2024.

Wealth inequality between households is also an issue in Australia. The top 20% of households (by income quintile) owned 63% of total household wealth in 2019-20 but the bottom income quintile (the bottom 20%) owned less than 1.0% of all household wealth. In Australia, there is also increasing generational wealth gap, with wealth across older households increasing significantly over recent decades but this has not been the case for younger Australians. There are numerous government policies that could address these issues of wealth inequality, including improving the housing affordability issue (through lifting housing supply and/or looking at the favourable treatment of housing investment) and doing a tax review (looking at broadening the GST and examining the merits of a wealth or death tax), which could help the wealth inequality issue.

Source: AMP

Women and superannuation – how the pay gap can impact your super

By Robert Wright /September 08,2021/

According to the Australian Bureau of Statistics, women are retiring with 37% less than men in their super accounts, which is a frightening thought considering women, on average, live up to five years longer.

So, what’s behind the super gap?

The super gap is partly due to the lower average earnings of women. Data from the Workplace Gender Equality Agency, reports that the full-time remuneration gender pay gap in Australia is 13.4% compared to males.

While many have blamed the “wage gap” on gender, Harvard Business Review research suggests women ‘ask’ for pay rises as much as men do, however, they are far less likely to actually get them.

The study also suggests that while men are successful in negotiating a pay rise 20% of the time, women were only successful 15% of the time.

This in turn impacts retirement savings, as the less money you earn, the less superannuation you will receive because your Superannuation Guarantee contributions are based on your level of income.

The second reason for the super gap, is that women typically take time out of the workforce to raise children. The absence of ongoing superannuation contributions can have a significant impact on the final amount women can end up with in super.

What can be done to address the super gap?

One of the simplest ways to catch up on lost super contributions, is to make additional contributions to super along the way. Small amounts over longer periods of time may be easier to commit to, for example, making additional contributions may be enough to narrow the gap caused by taking time out for the workforce.

If you are getting closer to retirement, you may consider maximising the amount you are contributing each year in concessional contributions up to the $27,500 limit (or higher if you have previous unused concessional cap amounts).

Keep in mind, however that any contribution you do make to super will be preserved, and unable to be accessed until you meet a condition of release from super. Most commonly this would be reaching your preservation age and then retiring.

In addition, it’s worth considering if you are in an appropriate super fund, which meets your needs, including the level of insurance cover you have and whether you may reduce this if you no longer need it.

Consider the fee structure of the super fund and also pay attention to how your super is being invested, for example – if you have a long time until retirement, you may benefit from increasing your exposure to growth assets.

For women in relationships, a problem shared could help close the retirement gap. This is because your spouse can split up to 85% of their concessional contributions each year with you.

Furthermore, if you earn less than $40,000 per annum, your spouse may be eligible for a tax offset of up to $540 for a $3,000 contribution (made with after-tax money).

Take control of your super as soon as possible; little changes early can potentially make a big difference in the long-term.

Source: BT

Retirement Realities: Five Tips for Rebuilding a Super Future

By Robert Wright /August 26,2021/

Australians will need to rebuild their superannuation and retirement savings, after withdrawing more than $36 billion in early super release payments in 2020, according to Colonial First State’s Retirement Realities Series.

The research found that the largest number of early super payments were made to Australians under age 40 with Australians under 30 receiving nearly one-third of these payments.

The research also revealed that Coronavirus had a big impact on the retirement savings of women, with the average super balances for men consistently higher than women – $110,000 vs $93,000 in December 2020, with a faster rate of growth for men.

But there is positive news. Half of Australians who withdrew their super early, have now made headway in making contributions either through their employer or by making their own contributions.

Despite the challenges there are a number of practical ways for Australians to get their super back on track and live a comfortable life in retirement.

Five Tips to Consider to rebuild your Super

1. Make small and regular top-ups

Even a small contribution to your super makes a big difference in the long term and to how much money you have in retirement.

How does it work? Your employer can pay some of your salary into your super before tax is taken out, instead of our bank account. And yes, that means a tax benefit. It is also a very simple and effective strategy.

If you withdrew $10,000 from your super, making additional contributions of just $20 per fortnight pre-tax (salary sacrifice) at age 30, can mean an additional $25,000 at retirement.

2. Seek advice

Advice can come in different shapes and sizes. Make the most of free online resources and calculators that provide useful tips and information.

A financial adviser can also help you plan for your future. According to Colonial First State, women who received financial advice made a 199% higher average voluntary contribution in 2020 compared with women who did not get advice.

Similarly, the research found that men who sought financial advice were 85% ahead of those who didn’t get advice.

3. Manage your debts

The majority of people who accessed their superannuation early used it to pay their mortgage or rent (29%), household bills (27%) or credit card bills or personal debts (15%) . It might be a personal loan, a credit card or a mortgage (or a combination of all). The general rule is that it’s always good to pay off any high-interest debts first.

4. Take an interest and get control

Understanding what measures are available can make a big impact on how much money you have in retirement. For example, if you earn less than $54,837 you may qualify for a government co-contribution of up to $500 where you make a non-concessional contribution in a year.

Other measures including spousal, after-tax and concessional contributions which again could deliver tax breaks or qualify you for government contributions. Talk to us about the different ways you can grow your super.

5. Check in on your super with online reminders

Just like scheduling diary reminders for work or social events or for bill payments, set yourself diary reminders to check your super every month. It is easy to set up these regular reminders on your online balance. Think of it as a ‘reality check’ on whether you are on track for a comfortable retirement.

Source: Colonial First State