ou may have been steadily saving money all year long to put toward a big payment. Or maybe you won some money or received an unexpected bonus from work. Whatever the case, a lump sum can mean many temptations. For those trying to plan their retirement, the first instinct may be to put the money towards their super.
But what happens if you also own a home and still owe money on the mortgage? Making a lump sum payment can shave years off of the time you have to pay. And paying off a home is a significant financial landmark in a homeowner’s life.
The Best Strategy May Be the Most Unassuming One
Experts advise that, when trying to determine the best place for a lump sum payment, that all options be considered. It can make a lot of sense to place money toward your superannuation, but it can also make a lot of sense to make extra mortgage payments.
At the end of the day, it all depends on the stage of life you are in. To a younger person, the priority may be less on funding their super and more on reducing mortgage interest. Older people who will soon be facing retirement will likely feel more pressure to put the money toward their super.
Putting Money Toward Your Super
Where long-term savings are the goal, the most tax-efficient option is to put that lump sum payment toward the super. This is because the taxation rate on earnings are lower than the marginal rate that must be paid on income. But in placing all that extra cash into your super, it will be inaccessible until the time comes for you to retire.
Putting Money Toward Your Mortgage
There’ s no argument about the sense that paying off a mortgage makes. Not only will making payments in the short term save you money, but any payments made will result in returns that match the interest rate of your mortgage. When you refinance, your savings can be thousands of dollars higher.
Experts advise those who have received a lot of money at once who aren’t sure what to do with it to consider whether or not they want to use the money for another purchase or investment besides a super or mortgage payment. If it isn’t discovered that existing money in the super fund will be enough, it may make more sense to invest the money elsewhere. Another solution can be to split the lump sum payment, placing half into your superannuation and the remaining half into your mortgage.
All the superannuation advice you need is available in our free eBook, which can be downloaded directly from our web site. You can also call us at any time to discuss your retirement needs with one of our professionals.
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