Income Solutions Insight Article My Home is (not) My Super If you’re relying on your family home to provide a large chunk of your retirement savings, you could end-up disappointed. The shortcomings of home ownership Many people think that owning a home is the key to long-term financial security. However, unless you plan to rent out a bedroom, your home will not provide an income to meet your living expenses in retirement. Even if you plan to ‘downsize’ your home (i.e. buy a cheaper one and invest the difference) you may not have much left over after paying real estate agents fees, legal fees and stamp duty. You also need to consider whether you are prepared to part with the family home and all the memories that come with it. When it comes to the crunch, a study conducted by ANOP found that only 16% of retirees under age 70 have actually sold their house to fund their retirement. If you want to live comfortably, you should aim to build a substantial nest egg outside the family home. And for most people, it’s hard to go past superannuation because of the tax advantages. Your mortgage or your super? If you currently have a mortgage, you will need to make the minimum loan repayments. But what should you do if you have some surplus cashflow? Should you pay more off your mortgage or invest it in super? The traditional view has usually been to make additional loan repayments. The reason is that each dollar you pay off your mortgage can effectively earn an after-tax return equivalent to the home loan interest rate, without taking any investment risk. But what this view ignores is that, depending on your circumstances, you may be able to put more of your cashflow to work if you make salary sacrifice super contributions. Salary sacrifice super contributions are made from your pre-tax salary and are taxed at a maximum rate of 15% in the fund. Conversely, home loan principal repayments are made from your after-tax salary (ie after tax is deducted at your marginal rate of up to 46.5%*). The best approach for you will depend on a range of factors. For example, paying as much as you can off your home loan may still be the best approach if you prefer a guaranteed rate of return and don’t want to lock away your money in super. * includes a Medicare Levy of 1.5%.
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