Author Topic: Extra into Super, pay of mortgage or investments outside of super  (Read 2697 times)

nnls

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Hi everyone,

I did a search on the forum and couldn’t find anything but if this has been answered before let me know. And I do know it’s a matter of opinion, but basically trying to work out what is the best for me out of putting extra money into superannuation or investments out of super or extra on mortgage.

I am 29 years old, single and last financial year I earned a little over $125,000 from regular income and rent from an investment property

Currently each month I put an extra
•   $750 into super (my compulsory super each month is $872.21, the $750 is on top of that)
•   $966 into shares outside of super ($466 into company share scheme, which is the max I can do, and $500 into other account)
•    $615 extra onto my mortgage

Current financial position
•   Superannuation - $100600
•   Investments outside of super - $30082
•   Mortgage - $242300 owing with a variable interest rate of 3.94%
•   I also own an investment property (mortgage $411700, 4.18% interest), which I currently pay the minimum on and there is no real incentive to pay more on to this due to tax incentives ect.

No other debt.

I am currently thinking I should stop making extra contributions into my super and instead try to pay as much off my mortgage while interest rates are low, as they will go up over the course of the loan (Australian mortgages work different to USA ones from what I can gather as our interest rate is not fixed)
Or maybe put more into investments outside of superannuation. I am kinda confused as there seems to be a lot of conflicting advice, and I know I will get a lot of different opinions on here, but maybe something will help me make up my mind.

If you need any more info please let me know

thanks in advance

deborah

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nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #2 on: March 30, 2017, 04:06:13 PM »
https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/msg1333550/#msg1333550 has the investment order we agreed on for Australia.

Thanks Deborah, so then mortgage, super, investments outside of super.

Quote
3. Put money into your PPOR mortgage offset account (if you have one).           
6. If you taxable income is more than $37,000 optimise Salary Sacrifice into Superannuation - you need to work this out individually, because how much depends on at what age you will ER, how much is already inside/outside superannuation, and your marginal tax rate.
7. Invest any extra into low cost index funds (long term investments - 10 years) or high interest accounts (short term - 2 or 3 years).           

I am just concerned since I cant access my super until age 60 (at this stage and the government might make it older) that I will not have enough outside of super for ER.  Which is kinda where the comment after point 6 comes in I suppose. I was hoping people on here may be able to help me workout an approx amount of how much I should be putting into super, but I guess I will need to figure that out myself.

potm

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #3 on: March 30, 2017, 05:57:04 PM »
In your position I would max out the super cap, take money out of the $966 after tax investments. I assume the company share scheme is at a discount so I would continue doing that. Unless you understand your company well and think they have good prospects relative to the current price, I would sell those shares and invest in the indexes when possible.

Your mortgage is not much, I think the amount you are paying extra is fine. If interest rates do really shoot up, you can pay it off in not too long of a timeframe. They will be a lot of other people with much higher mortgages and lower incomes than yours who will be struggling first so interest rates can't really go up too much to be of concern to you.

You're in a good position to take advantage of the super tax advantages. A few years from now, hopefully a couple of raises at work, the employer super guarantee will make a up a significant chunk of the cap, your mortgage will nearly be paid off. You'll be in a position then to crank up the outside super investments.

nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #4 on: March 30, 2017, 06:30:29 PM »
In your position I would max out the super cap, take money out of the $966 after tax investments. I assume the company share scheme is at a discount so I would continue doing that. Unless you understand your company well and think they have good prospects relative to the current price, I would sell those shares and invest in the indexes when possible.

Your mortgage is not much, I think the amount you are paying extra is fine. If interest rates do really shoot up, you can pay it off in not too long of a timeframe. They will be a lot of other people with much higher mortgages and lower incomes than yours who will be struggling first so interest rates can't really go up too much to be of concern to you.

You're in a good position to take advantage of the super tax advantages. A few years from now, hopefully a couple of raises at work, the employer super guarantee will make a up a significant chunk of the cap, your mortgage will nearly be paid off. You'll be in a position then to crank up the outside super investments.

Thanks potm, our company share scheme is basically buy one get one free, but you don't get the free one until you have held on to them for three years. So I could sell some of them but I am wanting to hold on to the others to get my vesting shares.

The cap has dropped to $25k from my understanding, so I will look at increasing my pretax super contributions to try to get close tot his cap

cakie

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #5 on: March 30, 2017, 07:41:02 PM »
What are your overall life goals? Do you have a FI number in mind? Are you planning on RE or downshifting when you hit FI straight away or keep working for fun?

I have just started putting extra into my super. Based on ages and assuming worst case upping to 65 years old, I decided I should aim for 10 yrs expenses in super and calculated backwards accordingly. My calculations say $23k (inc SG) into super for next 5 yrs (+compounding) should get me in the ballpark.

nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #6 on: March 30, 2017, 08:06:34 PM »
What are your overall life goals? Do you have a FI number in mind? Are you planning on RE or downshifting when you hit FI straight away or keep working for fun?

I have just started putting extra into my super. Based on ages and assuming worst case upping to 65 years old, I decided I should aim for 10 yrs expenses in super and calculated backwards accordingly. My calculations say $23k (inc SG) into super for next 5 yrs (+compounding) should get me in the ballpark.

Ideally I would hope to RE, I was hoping for mid 40s, so maybe in 15 years. I may do your calculations of 10 years expenses in super and calculate backwards.

thanks

bigchrisb

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #7 on: March 30, 2017, 11:29:53 PM »
So, you have 15 years until FIRE.  You are currently well into the 39% tax rate, and from the sound of it, are likely to be for quite a few years to come.  You also have (under current rules) 15 years between FIRE and super access.  Allowing for government tinkering, maybe up to 25 years.

I'd give some thought on how to do this keeping your marginal tax rate in mind.  39% means that:
a) you would need to get a 6.4% pre tax return elsewhere to have the same return as paying off your PPOR mortgage.
b) Salary sacrificing into super gets you an instant (.85/.61) = 39% return compared to buying shares in your own name.  The ongoing post tax return will also be ~40% higher each year. 

If it were me, I would:
a) keep the employee share scheme if it is as good as you say - a doubling in 3 years is amazing.  However, I'd be selling these down as they vest and diversifying the investment.
b) max out the salary sacrifice to super, and treat this as shares in my asset allocation.  with $25k a year available next year, you can bump this up another $5,500 a year.  This would cost you $280 a month post tax.  Take this out of your own name share investments.
c) If you want to pay extra off your mortgage, do so with the other $220/month you are currently putting into post-tax shares
d) If you have vested employer shares you can sell to diversify, consider doing so.  This would give some other cash you could plow into the mortgage as a lump sum, if you really want to see it reduced.

I'm also of the view that interest rates are on the up and debt reduction is a current priority.

nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #8 on: March 30, 2017, 11:39:26 PM »
So, you have 15 years until FIRE.  You are currently well into the 39% tax rate, and from the sound of it, are likely to be for quite a few years to come.  You also have (under current rules) 15 years between FIRE and super access.  Allowing for government tinkering, maybe up to 25 years.

I'd give some thought on how to do this keeping your marginal tax rate in mind.  39% means that:
a) you would need to get a 6.4% pre tax return elsewhere to have the same return as paying off your PPOR mortgage.
b) Salary sacrificing into super gets you an instant (.85/.61) = 39% return compared to buying shares in your own name.  The ongoing post tax return will also be ~40% higher each year. 

If it were me, I would:
a) keep the employee share scheme if it is as good as you say - a doubling in 3 years is amazing.  However, I'd be selling these down as they vest and diversifying the investment.
b) max out the salary sacrifice to super, and treat this as shares in my asset allocation.  with $25k a year available next year, you can bump this up another $5,500 a year.  This would cost you $280 a month post tax.  Take this out of your own name share investments.
c) If you want to pay extra off your mortgage, do so with the other $220/month you are currently putting into post-tax shares
d) If you have vested employer shares you can sell to diversify, consider doing so.  This would give some other cash you could plow into the mortgage as a lump sum, if you really want to see it reduced.

I'm also of the view that interest rates are on the up and debt reduction is a current priority.

Thanks Chris,  the way the share scheme works if you buy the shares at market value today, though you can only buy $466 worth a month and in three years you get the matching shares. So I need to hold the shares for that period, but I have some shares that are due for matching next month which would be the first lot I could sell, so I may set up a reminder every year to sell and diversify either on to my mortgage or other investments to save on fees of selling them every month.

I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.

Ozstache

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #9 on: March 31, 2017, 12:59:05 AM »
I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.
This post may be helpful with this particular issue: https://forum.mrmoneymustache.com/post-fire/australian-superannuation-post-fire/msg956270/#msg956270

I keep saying I will make a spreadsheet to roughly work this out. I should just do it!

nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #10 on: March 31, 2017, 01:21:08 AM »
I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.
This post may be helpful with this particular issue: https://forum.mrmoneymustache.com/post-fire/australian-superannuation-post-fire/msg956270/#msg956270

I keep saying I will make a spreadsheet to roughly work this out. I should just do it!

Thanks Ozstache, will have a read of that thread

Anatidae V

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #11 on: March 31, 2017, 02:16:10 AM »
I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.
This post may be helpful with this particular issue: https://forum.mrmoneymustache.com/post-fire/australian-superannuation-post-fire/msg956270/#msg956270

I keep saying I will make a spreadsheet to roughly work this out. I should just do it!

Thanks Ozstache, will have a read of that thread
Use the FIRE super allocation calculators that were posted on my previous journal to work out, based on your spending etc and FIRE age, how much you need in Super at that time. I can dig them up and post them here later.

nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #12 on: March 31, 2017, 02:51:26 AM »
I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.
This post may be helpful with this particular issue: https://forum.mrmoneymustache.com/post-fire/australian-superannuation-post-fire/msg956270/#msg956270

I keep saying I will make a spreadsheet to roughly work this out. I should just do it!

Thanks Ozstache, will have a read of that thread
Use the FIRE super allocation calculators that were posted on my previous journal to work out, based on your spending etc and FIRE age, how much you need in Super at that time. I can dig them up and post them here later.

Thanks, I can probably find them if they were on your journal :)

the link that Ozstache had before makes me think I should have more of my stache out of super than in, since mine will  about a 15 years maybe longer

Quote
Nonetheless, I like the idea of splitting the stash into pre and post super portions, however the maths of SWR shows that as the pre-super timespan exceeds 20 years, you end up needing to have most of your stash in non-super regardless of how long you think you will live post-super ie. it is not a direct ratio of the two time spans. eg. say your pre and post super time span estimates are 20 and 20 years respectively and you plan to draw down at the standard 4% SWR.

Ozstache

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #13 on: March 31, 2017, 03:58:05 PM »
I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.
This post may be helpful with this particular issue: https://forum.mrmoneymustache.com/post-fire/australian-superannuation-post-fire/msg956270/#msg956270

I keep saying I will make a spreadsheet to roughly work this out. I should just do it!

Thanks Ozstache, will have a read of that thread
Use the FIRE super allocation calculators that were posted on my previous journal to work out, based on your spending etc and FIRE age, how much you need in Super at that time. I can dig them up and post them here later.

I'm having trouble locating this post. Can you post a link please.

deborah

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #14 on: March 31, 2017, 04:04:21 PM »
I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.
This post may be helpful with this particular issue: https://forum.mrmoneymustache.com/post-fire/australian-superannuation-post-fire/msg956270/#msg956270

I keep saying I will make a spreadsheet to roughly work this out. I should just do it!

Thanks Ozstache, will have a read of that thread
Use the FIRE super allocation calculators that were posted on my previous journal to work out, based on your spending etc and FIRE age, how much you need in Super at that time. I can dig them up and post them here later.

I'm having trouble locating this post. Can you post a link please.
https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/msg1333550/#msg1333550

nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #15 on: March 31, 2017, 05:18:54 PM »
I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.
This post may be helpful with this particular issue: https://forum.mrmoneymustache.com/post-fire/australian-superannuation-post-fire/msg956270/#msg956270

I keep saying I will make a spreadsheet to roughly work this out. I should just do it!

Thanks Ozstache, will have a read of that thread
Use the FIRE super allocation calculators that were posted on my previous journal to work out, based on your spending etc and FIRE age, how much you need in Super at that time. I can dig them up and post them here later.

I'm having trouble locating this post. Can you post a link please.

Hi OZStach I think they can be found here https://forum.mrmoneymustache.com/journals/building-an-efficient-lifestyle-while-growing-a-'stache-(australia)/2607/


Quote
For those wondering how SUper affects their retirement, two things I've picked up via MMM forums are:

Aussie Firebugs spreadsheet, you have to email him for a copy:

http://www.aussiefirebug.com/australian-financial-independence-calculator/

And LadyFIRE built one up using Flash:

http://firebythirtyfive.blogspot.com.au/2017/01/i-made-calculator.html

Which now has it's own page:

http://firebythirtyfive.blogspot.com.au/p/superannuation-needed-to-reach.html

Though Anatidae V might have meant other ones?

Anatidae V

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #16 on: March 31, 2017, 05:30:39 PM »
I am just converned that putting everything into super like you suggest wont leave me enough outside of super. Though I do understand that super gives me the best return.
This post may be helpful with this particular issue: https://forum.mrmoneymustache.com/post-fire/australian-superannuation-post-fire/msg956270/#msg956270

I keep saying I will make a spreadsheet to roughly work this out. I should just do it!

Thanks Ozstache, will have a read of that thread
Use the FIRE super allocation calculators that were posted on my previous journal to work out, based on your spending etc and FIRE age, how much you need in Super at that time. I can dig them up and post them here later.

I'm having trouble locating this post. Can you post a link please.

Hi OZStach I think they can be found here https://forum.mrmoneymustache.com/journals/building-an-efficient-lifestyle-while-growing-a-'stache-(australia)/2607/


Quote
For those wondering how SUper affects their retirement, two things I've picked up via MMM forums are:

Aussie Firebugs spreadsheet, you have to email him for a copy:

http://www.aussiefirebug.com/australian-financial-independence-calculator/

And LadyFIRE built one up using Flash:

http://firebythirtyfive.blogspot.com.au/2017/01/i-made-calculator.html

Which now has it's own page:

http://firebythirtyfive.blogspot.com.au/p/superannuation-needed-to-reach.html

Though Anatidae V might have meant other ones?
Those are the ones I meant! I just hadn't had a chance at a computer, and it's hard to find on my phone :D

nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #17 on: March 31, 2017, 10:34:52 PM »

Hi OZStach I think they can be found here https://forum.mrmoneymustache.com/journals/building-an-efficient-lifestyle-while-growing-a-'stache-(australia)/2607/


Quote
For those wondering how SUper affects their retirement, two things I've picked up via MMM forums are:

Aussie Firebugs spreadsheet, you have to email him for a copy:

http://www.aussiefirebug.com/australian-financial-independence-calculator/

And LadyFIRE built one up using Flash:

http://firebythirtyfive.blogspot.com.au/2017/01/i-made-calculator.html

Which now has it's own page:

http://firebythirtyfive.blogspot.com.au/p/superannuation-needed-to-reach.html

Though Anatidae V might have meant other ones?
Those are the ones I meant! I just hadn't had a chance at a computer, and it's hard to find on my phone :D

Thanks Anatidae V for directing me to them.

They all basically say that I should stop putting extra into super and instead be investing outside of super. And I think I will put extra towards my mortgage while interest rates are still quite low.

Adram

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #18 on: April 01, 2017, 12:18:21 AM »
I saw some comments on the tax benefits of using super, but i don't think anyone mentioned the tax drawbacks of using super for early retirees.

If you have your stash outside super, when you retire you may have a tax bill of zero, for example a couple earning investment income jointly can have taxable income of around $40,000 tax free (about $20,000 each).

In the above example but with half inside super, your tax bill would be $3,000 per year until you reached preservation and could convert the super to a pension fund. Doesn't totally negate the tax benefits on salary sacrificing and investment income while working but should be taken into account.

All depends on intended stash size of course, if your stash was going to earn $100,000 per year, you might put much more into the super environment.

In your case i would pay off the mortgage, then build up your investments outside super and in the last few years of work look at topping up the super if your calculations show it is needed.


englyn

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #19 on: April 03, 2017, 11:18:58 PM »
OK, back-of-envelope calculation follows:
What if you stopped adding anything whatever to super right now?

Years until you have access to super = 65-30 = 35
Average return of super funds in last 22 years, according to a quick googling = 7%
Average return of stock market in same period = 10%
Englyn's half-arsed guess at average super performance if you chose a more aggressive option than default= 8.5%
Average inflation =~2.5%
Therefore super performance after accounting for inflation = 6%
Therefore super after 35 years (inflation adjusted) = 100,000*1.06^35 = $768,608
Income from that using 4% rule: $30,744.
That is enough for a single mustachian to live off, especially if you own your own home.

Given that you have the whopping great safety net that you're going to have to continue contributing to compulsory super while you accumulate an out-of-super stash, my advice: stop adding voluntarily to super and go accumulate said out-of-super stash. :)

Feel free to correct my numbers, eg. I used 65 as a super start date, might be better to use age 60 as that is more conservative. And play around with other possible growth rates.
« Last Edit: April 03, 2017, 11:23:59 PM by englyn »

nnls

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Re: Extra into Super, pay of mortgage or investments outside of super
« Reply #20 on: April 03, 2017, 11:26:28 PM »
OK, back-of-envelope calculation follows:
What if you stopped adding anything whatever to super right now?

Years until you have access to super = 65-30 = 35
Average return of super funds in last 22 years, according to a quick googling = 7%
Average return of stock market in same period = 10%
Englyn's half-arsed guess at average super performance if you chose a more aggressive option than default= 8.5%
Average inflation =~2.5%
Therefore super performance after accounting for inflation = 6%
Therefore super after 35 years (inflation adjusted) = 100,000*1.06^35 = $768,608
Income from that using 4% rule: $30,744.
That is enough for a single mustachian to live off, especially if you own your own home.

Given that you have the whopping great safety net that you're going to have to continue contributing to compulsory super while you accumulate an out-of-super stash, my advice: stop adding voluntarily to super and go accumulate said out-of-super stash. :)

Feel free to correct my numbers, eg. I used 65 as a super start date, might be better to use age 60 as that is more conservative. And play around with other possible growth rates.

Thanks englyn :)

Thats kinda the conclusion that I came to, now that I have $100k and will still get the compulsory super I should hopefully have enough by the time I retire.

Thanks everyone for taking the time to answer :)