Sacrificing salary to your advantage
LAST week I pointed out the extra opportunities offered by salary sacrifice now that the concessional cap has been increased to $35,000 for people aged 60 and over.
Let's think about a person aged 60 who still owes $100, 000 money on his home - he would like it to be paid off in five years when he retires at age 65.
Option One is to repay $1933 a month ($23,196 a year) which will have the loan paid off in five years if the rate remains a 6%. The cost to his salary package will be $3143 a month ($37,716 a year) in pre-tax dollars. After five years his home loan would be paid off at a total cost of $188,580 in pre-tax dollars.
Option Two is to leave the loan on an interest only basis and salary sacrificed an additional $25,288 a year to super. After deduction of the entry tax of 15%, he would have an additional $21,495 a year going into super. If his fund earned 9% per annum, these contributions would put an extra $135,000 in his fund.
The interest only cost would be $6000 a year in after tax dollars or $9756 in pre-tax dollars.
At the end of the five years, his total contribution in pre-tax dollars would be $175,220 which is a saving of $13,360 over Option One. Furthermore, after withdrawing $100,000 tax free from his super to pay off his loan, he'd have a bonus of $35,000 left over. Obviously the second option is much better than the first.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.