Should you carry debt in retirement?

Dealing with debt after work can be confronting, but you do have options.

By Michael Jefferies - 3 min 40 sec read

Michael Jefferies

Michael Jefferies

As a Member Solutions Consultant at Russell Investments, Michael Jefferies understands all the ins and outs of super and retirement legislation, and loves to answer questions and help members.

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You may be only as old as you feel, but there are some things that can get harder to carry off after retirement—like doing a pole vault or partying until dawn and, on a more serious note, managing debt.

Debt can be useful when you’re young, but it can be difficult to maintain when you retire and start relying on your savings for income. Like skateboarding or ice dancing, there comes a time when it’s probably best to move on.

The reality is that an increasing number of people will still have debt when they exit the workforce. Living costs are rising, home mortgages are larger than ever, and life events, such as loss of work, divorce or illness, may get in the way of retiring debt-free.

The thought of being in debt after retirement can be a significant source of stress. If you do have debt at retirement, you need a plan for dealing with that debt, so you can relieve the pressure and get on with ageing gracefully—or disgracefully, if that’s more your thing.

Keep calm and carry on

Having a budget will help you understand your position and what adjustments you might be able to or need to make.  

Your income and expenditure will be different in retirement than when you’re working. Some costs may decrease, because as a retiree you may qualify for discounts on utilities, council rates and transport, for example. Other expenses, such as health care costs, may increase.

After crunching the numbers on your budget, you may find that you have the capacity to continue to make debt repayments using your retirement income stream. After age 60, income streams (and lump sums) you draw from a superannuation pension account are tax free. For some people, paying off the remaining part of the debt gradually using a retirement income stream may be a viable option.

Consolidate and refinance

With interest rates rising, now might seem like a good time to shop around to refinance your debts and get a better deal. However, there are pros and cons to refinancing in general and there may be extra complications after retirement.

Before you make any decisions, you will need to understand the implications of switching loans. This might include discharge fees, application and valuation fees and ongoing fees you might incur in refinancing.

It may be more difficult to get a new loan after you’ve retired, as lenders may consider the fact that you no longer have employment income to be a risk.

Depending on your circumstances, you may be able to look at options such as reverse mortgages or home equity release products to top up your income or allow you to repay your debt using the equity in your home. These products for over 60s don’t require you to make repayments like a regular mortgage. Instead, they are repaid when you or your estate sells the property. These are complex financial products, and you should seek financial advice if you are considering this approach.

Downsize and repay

Selling your home and moving to a less expensive property may provide another way to clear debt.

If the equity in your home has increased over time and you no longer need as much space as you did before retirement, you might even find that after repaying your mortgage and buying a smaller home, you have money left over for investment. If you are aged over 601, you can contribute up to $300,000 from the sale of your home into your super account, which you can then use for retirement income. 

Downsizing will not be for everyone. There are costs involved in selling a home and buying a new property, and many people want to stay living in their family home throughout their retirement. Plus freeing up cash through the sale of your home may also affect your government Age Pension entitlements.

The big pay out

After you reach the age at which you can access your super (your preservation age), you can choose to take your money from your super pension account as either an income stream or a lump sum.

Accessing a lump sum from your super might allow you to pay off your mortgage and clear your debt in one go. But as with each of the other alternatives, there are implications to consider.

For example, if you are aged under 60, you might have to pay tax on the lump sum. There may be other tax implications, depending on your own situation. Withdrawing a lump sum from your super account will also leave you with less for retirement income. Think about how much super you have and how much will be left over after the loan is repaid. How would this affect your quality of life? Will you have sufficient income to live on?

Carrying debt in retirement is rarely ideal, but there are several ways to manage this situation. Which option gives you the best outcome will be unique to your circumstances. Think through the pros and cons of each alternative and reach out for expert help to give yourself the best outcome.

1 A Bill has been introduced to Parliament to reduce the age to 55.

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