Retiring with debt
TIPS AND TRICKS ON HOW TO MANAGE IT WELL
Retiring with debt is becoming increasingly common thanks to older Australians’ bigger mortgages, lifestyle demands and surging inflation and interest rates. New research by Money.com.au has found almost one-third of people aged between 35 and 60 expect to carry debt into retirement, while Bureau of Statistics data and other research shows sharp falls in the proportion of older Australians who own their own home outright over the past two decades.
Finance experts say retiring with debt is not ideal, but there are ways to manage it, and in some cases it may be beneficial.
Money.com.au spokeswoman and financial planner Helen Baker says fast-rising inflation and interest rates are prompting Australians to factor in price and loan repayment increases into their retirement planning and income expectations.
DEBT SERVICING
“People also have new desires – such as travel – after two years of Covid restrictions,” she says.
Baker says a problem for people retiring with debt is being able to service loans with a lower income.
“In a perfect world, no debt on the mortgage would be great,” she says.
“Sometimes people will use their super to clear out their mortgage.”
People should seek financial advice and ask what alternatives they have for repaying debt, Baker says.
High-interest debts such as personal loans should be cleared before retiring, while credit cards can be used to earn reward points to further fuel travel plans, but Baker says the balance should be paid off monthly before the card’s interestfree period expires.
TAX EFFECTS
Investment debts are sometimes carried into retirement.
For property investment debt, “you have to do the maths” and consider not only interest repayments but management fees, insurance, maintenance and other costs, Baker says.
“Also consider capital gains. It may make sense to sell in retirement rather than while earning an income.”
This would ensure a lower tax bill if the house is sold when you no longer earn a full-time income.
Tribeca Financial chief executive Ryan Watson says carrying debt into retirement is generally a bad idea “largely because it is the time in your life where you need to be drawing on an income stream to provide for your daily expenses, not for continuing to service debt”.
Watson says people heading towards retirement while saddled with large debts could consider reducing or eliminating their mortgage by downsizing their home. “Dependent upon your superannuation balance, it may make sense to use a lump sum to pay down a lot or all of your debt,” he says “If debt … can’t be reduced or eliminated, review your mortgage and loans to ensure you are at least paying a competitive interest rate.”
REVERSE MORTGAGES
Watson says holding investment debt is not desired by most retirees, while equity release and reverse mortgage options can be explored.
Household Capital chief executive Josh Funder says up to 40 per cent of Australians retire with a mortgage, and it is often a small mortgage.
“Using home equity to repay a mortgage or other debt can free up a retiree’s cashflow – regular repayments aren’t required, and the loan doesn’t need to be repaid until the home is sold,” he says.
There are government and private home equity access schemes that can help people aged over 60 refinance their existing mortgage.
“The government’s reverse mortgage, the Home Equity Access Scheme (HEAS), is a great option for retirees who need a modest increase in income or capital,” Funder says.
“HEAS caps the maximum payment at 1.5 times the age pension – those receiving a full age pension can receive an additional payment of half that amount again.
“Those retirees requiring greater income or capital – or a mix of the two – may find greater choice and flexibility in the private market. While private market interest rates are obviously higher than the government’s financed rate, it enables retirees to access more of their home equity.
“Retirees should feel empowered to access their pension, superannuation and home equity throughout retirement.”