Bruce Brammall: Are savings from two RBA interest rate cuts better off in your mortgage or superannuation?

I know we financial advisers bang on a bit, trying to teach y’all that superannuation is sexy and cool.

That if you show your super some love, treat them right, take them out for dinner and a few drinks, that they’ll eventually show you a good time (wink, wink, you know what I mean?).

Whether you’ve noticed it or not, your super has had a rocky start to the year. More downs than ups. But it has come good in recent weeks. Could be time to show it some attention.

And a large part of the population has just been handed the opportunity to do so — with a second rate cut.

Have you thought about what you’re going to do with the rate cut? Is showing your super some love in the mix?

Spare cash choices

This second rate cut means that someone on an average $665,000 home loan will have seen loan repayments drop by around $211 a month since early February.

Sure, that’s only around $2534 a year. But only if you look at it that way. If you look at it through the “love thy super” lens, it’s actually more than that. I’ll come back to that.

The rate cuts open some options for people with mortgages. Some will want to rebuild their savings. Others will want to splash out a little after the belt-tightening of recent years.

But if you’re thinking of doing something positive, it can be hard to go past giving your super a wink. Particularly for the right people, at the right stage of life.

How do you figure that out? Let me help you.

Base level love

The closer you get to being able to access your super, the more love you should be showing it.

If you’re within five years of retirement and you’re not pushing everything you can into super, I’m going to call you out — you’re bats**t crazy.

Why? Because super is so lightly taxed. If you’re close to retirement, you can put money into super (via salary sacrifice or personal deductible contributions) and have that money taxed at 15 per cent, rather than your marginal tax rate of up to 47 per cent.

Let’s take someone who’s late 50s, retiring in five years, earning $100,000, still with a reasonable mortgage. They’re receiving $11,500 a year in superannuation guarantee from their employer.

While there are many options, let’s look at “mortgage v super”.

They could put $18,500 of pre-tax income into super, which would be $15,725 after contributions tax. Over five years, there’s $78,625 in your super (where it will be subject to investment returns).

However, if they take that $18,500 as income, they only receive $12,580 a year (because the marginal tax rate is 32 per cent), or $62,900 after five years.

They will save some interest, depending on what happens to interest rates. But they’re starting from $15,725 behind.

And if you’re part of a couple? Well, you can double the benefits — depending on what you’re both earning.

And the youth?

The decision to max-out super instead of the mortgage will still make sense for those a little further away from retirement.

But the younger you are and the further from retirement you are, the more difficult it can be to justify contributing larger amounts to a vehicle you can’t access for 10, 20 or 30 years.

Particularly when your mortgage is still probably causing significant financial pain, and you feel a need to get on top of it.

However, everyone should be contributing something extra to their super, through most of their working life. And the younger, the better.

And here’s something to think about.

That $211 a month that you’re saving on your mortgage, if you’re earning $100,000 a year, means that you had to earn $310.

If you sacrifice that $310 to super? Your super fund ends up with about $264.

That extra $53 a month, with compounded earnings, over the course of 25 years (if you’re 40 now) . . . that is truly showing your super some love.

For which you will be properly rewarded.

Everyone’s situation is unique. And little is going to beat personalised financial advice when it comes to maximising your situation.

But getting extra into super, even a little each month or year, from a young age, maximising it the closer you get to retirement age, is rarely going to be a flawed strategy.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. bruce@brucebrammallfinancial.com.au