14 Jul Nearing retirement and holding debt? You need to read this
A mix of low interest rates, high housing prices and waves of baby boomers nearing or already in retirement is increasing the amount of pre-retirees who are servicing debt later than other generations before them – I’m sure a lot of you can attest to that!
Findings from a recent research paper Inquiry into housing policies, labour force participation and economic growth has found that:
- Growing numbers of households are taking higher levels of mortgage debt, relative to their household incomes, and paying that debt down later in life.
- Mortgage stress caused by borrowing more to pay soaring house prices is prompting more homebuyers to extend their working lives.
- Retirement nest eggs such as super may be “raided” to pay off mortgages.
- The take-up of more debt by highly-leveraged households exposes borrowers and the overall economy to “significant risk” if housing prices fall or if interest rates rise.
- Home owners are increasing using flexible mortgage products to unlock housing equity “at all stages of the life cycle”.
It’s clear that holding debt into retirement is a personal finance issue and needs careful planning and consideration.
Ideally, you would enter retirement with home mortgages paid off and completely free of any other kind of debt in order to us to use retirement savings to fully or partly finance retirement. Servicing debt into retirement ultimately leads to the question: “how is the debt to be repaid?”.
Often indebted retirees will consider using at least part of their super to fully pay off or reduce their loans, as per the points above and some will direct part of their super pensions to make repayments.
Other debt-reduction possibilities include remaining in the workforce for longer than perhaps intended or “downsizing” to a less-expensive home.
However, in practice, an attempt at downsizing to repayment debt may not produce the anticipated money – particularly after taking stamp duty and real estate agents’ fees into account. And working past common retirement ages may not be achievable – an appropriate job may not be available or health considerations may act as a barrier.
We’re found that a lot of pre-retirees are holding debt and not considering the impact to their lives once their regular paycheck stops upon semi or full retirement – take a moment to think about how you will manage your debt once your regular income stops?
Don’t overlook debt repayment in your financial planning for retirement.
This is an area we help a lot of clients with to ensure you don’t have to spend your retirement eating baked beans on toast. If you are over 55, moving toward retirement and are still holding debt, especially on property, you might benefit from having an obligation-free discussion with our Financial Adviser Chris Kelly, who has been advising in this space for over 10 years. Call Chris on 02 9633 5530 or book an appointment with him directly.