As the cost of living continues to rise, many Australians are finding themselves carrying debt into retirement. According to recent ABS figures, household debt has surged over the past two decades, with the average debt increasing from $62,000 in 2003-04 to a staggering $242,000 in 2021-22. For older Australians, this trend is particularly concerning, as debt can place significant strain on retirement plans.
Ideally, retirement should be a time to enjoy the fruits of your labour—travelling, pursuing hobbies, and spending time with loved ones. However, when debt is part of the equation, it can feel like your hard-earned savings are being channelled into mortgage repayments, personal loans, or credit card debt instead of fulfilling your retirement dreams. While managing debt during retirement may not be ideal, some strategies can help you navigate this challenge.
Review your mortgage options
Your mortgage is likely the largest financial commitment you have, and even a small reduction in monthly repayments can provide significant relief. Start by reviewing your current mortgage arrangements and compare them with what other lenders are offering. If you find that you could secure a lower interest rate elsewhere, refinancing might be worth considering.
Refinancing could involve switching to a different lender or negotiating a better rate with your current one. Alternatively, you might be able to switch to a more affordable loan product with your existing lender. Keep in mind that some features, such as an offset account, may not be available with cheaper loan options, so weigh the pros and cons carefully. We encourage you to speak with a Mortgage Broker to find the best loan option for your family.
Create a realistic budget
A well-thought-out budget is crucial when managing debt, especially during retirement. Start by calculating your total income from all sources, including superannuation, pensions, and any part-time work. Once you have a clear picture of your income, you can allocate funds to essential expenses, savings, and debt repayments.
Budgets can be as detailed or as flexible as you need them to be. Some retirees find comfort in budgeting down to the last dollar, while others prefer a broader approach. The key is to gain a clear understanding of your financial situation and identify areas where you can make small sacrifices without compromising your quality of life.
Consider debt consolidation
If you have multiple debts—such as a mortgage, credit card debt, and a personal loan—it can be overwhelming to manage them all. Consolidating your debts into a single loan can simplify your financial obligations and make it easier to stay on top of repayments.
Many retirees choose to consolidate their debts by rolling them into their home loan, as home loans typically have lower interest rates compared to other types of debt. However, it’s important to remember that consolidating debt into your mortgage will reduce the equity in your home and may extend the time it takes to pay off your mortgage.
Explore downsizing
If your current home is larger than you need, downsizing could be a practical solution. Selling your home and purchasing a smaller, more affordable property can help you pay off the remaining balance on your mortgage. Additionally, if you’re 55 or older, you may be eligible to contribute up to $300,000 from the sale proceeds to your superannuation, giving your retirement savings a significant boost.
Consider delaying retirement
Finally, if you’re concerned about debt during retirement, you might consider delaying retirement for a few more years. Continuing to work can provide additional income to pay down your debt, reducing your financial stress once you do retire. Additionally, staying in the workforce longer may allow you to build up your superannuation, providing you with a more comfortable retirement.
Managing debt while planning for retirement
While managing debt during retirement can be challenging, it’s not impossible. By taking proactive steps, such as reviewing your mortgage, creating a realistic budget, considering debt consolidation, exploring downsizing, and potentially delaying retirement, you can better position yourself for a financially secure and fulfilling retirement. Remember, it’s never too late to take control of your finances, and seeking advice from a financial professional can help you navigate these decisions with confidence.
Chat with the team at APS Financial Planning.
Written by APS Senior Financial Advisor, Paul Hatzigeorgiadis.
Paul has over 25 years of experience in the financial services sector. Over Paul’s history, he has provided advice to an extensive range of clients from wealth accumulators to pre and post retirees advising them on Wealth Creation, Cash Flow Management, maximising Centrelink benefits in Retirement, Personal Insurances, Debt minimisation strategies and Superannuation. Paul is married with a 12-year-old daughter and enjoys spending time with family and friends. Whether it’s assisting clients to meet their short-term goals or working with them over a longer term, Paul enjoys helping guide his clients with their financial future.