Debt and retirement

Fish and chips, knife and fork, bat and ball …. they’re all things that go well together. Debt and retirement certainly do not!

Unfortunately, debt is something an increasing number of us are carrying into retirement.

Most of us would ideally like to, at the very least, maintain our current standard of living in retirement, but having debts to service in retirement means that there’s less money to spend on living essentials.

Let’s face it, the last thing you want to be doing in retirement is worrying about debt. 

Some of us will still be paying off a mortgage at retirement

In a perfect world, we’d retire with our home paid off. However, according to the Australian Bureau of Statistics (ABS), the number of people between 55-66 owing money on mortgages has trebled since 2002, from 14% to 47%. It’s a worrying trend because repayment risk becomes a real concern in retirement, with the fear of losing the family home keeping many retirees awake at night.

And this trend isn’t going anywhere but up; the next generation to retire – Gen X – are expected to retire with even greater mortgage debt, simply because Gen Xers typically delayed having children and didn’t ‘upsize’ their homes until later in life, taking out large mortgages later in life which won’t be paid before they’re 60.

According to the ABS, homeowners also use flexible mortgage products (such as redraw facilities) to draw down on their housing equity as needed for other purposes. In fact, 20% of homeowners aged between 45-64 increased their mortgage debt even though they did not move house.

Is it ever ok to retire with some debt? 

Ideally, we all want to sail into retirement debt-free, but unfortunately, that’s not always the case. 

Most Australians are entering retirement these days with some form of debt, such as the mortgage, credit cards, car or personal loans. Research shows that many intend to use some of their retirement lump sum to pay off their mortgage. But will this leave you with enough to live comfortably in retirement? 

It’s worth paying off debts as much as you can while you’re still working so that you don’t have to draw down your retirement savings.

Some ways to reduce debt

The ‘pay off one debt at a time’ approach 

Make a list of all the things you owe money on (for example, your credit cards, car loans, personal loans). Rank this list by highest interest to lowest. Now, focus on paying off the debt with the highest interest first, paying it off until it’s cleared in full.

Then, go to the next item on the list, focusing on paying it off until it’s cleared. As you eliminate debts, you’ll have more to put onto other debts, so it’s like a snowball effect. 

Eliminating one debt at a time also gives you the sense that you’re regaining control of your finances while giving you the satisfaction of clearing the debt and reducing stress.

Look into debt consolidation 

Debt consolidation (or refinancing your loan) can make it easier to manage your repayments (plus it has the psychological benefit of there being only one debt to service). Do your research, though, and shop around to compare the interest rate for the new loan against your current loans because you want to be sure you’re paying less.

Look into downsizing

Selling your home to downsize will free up some money for you, but there may be social security implications if you hope to receive the Age Pension.

Another benefit of downsizing is that if you are aged 65 or older and selling your home to downsize, you may be able to contribute up to $300,000 ($600,000 as a couple) into super in addition to existing non-concessional caps. That’s another way of growing your super account balance for retirement.

Get professional advice

Our financial planners are here to help you retire on your terms. The importance of getting financial advice in the lead-up to retirement cannot be overstated and could be the difference between having an ok retirement versus having a great retirement.

Call Member Services on 1800 757 607 with any questions or to make an appointment with one of our planners.

The information on this page has been issued by Maritime Financial Services Pty Limited (MFS). It contains general information that doesn’t take into account your individual objectives, financial situation or needs. It’s important to consider how appropriate this general information is in relation to your situation before making an investment decision. We recommend that you seek financial advice before making any decisions regarding your super or investments. The information on this page is current at the time of publishing.