Brought to you by Aware Super
Cameron Bayley
Many people assume it’s best to reach retirement with zero debt, but it’s not the be-all and end-all, according to financial experts.
Avoiding debt repayments after you’ve finished earning a regular income seems sensible, but there are financial and lifestyle considerations, says Jason Chew, head of advice at Vista Financial Group.
He explains that although many Australians access their superannuation to clear debt, including their mortgage, the potential downside is missing out on compounding returns.
“You’re eating into your retirement savings, which will undoubtedly have an impact on how much you can spend while retired,” says Chew.
Know your financial position
Deciding whether to pay down or manage outstanding debt upon retirement is informed by a range of factors, says Peter Hogg, general manager guidance and advice at Aware Super.
“The key is understanding the trade-offs across financial, emotional and flexibility dimensions, and making informed choices rather than just defaulting to one approach,” he says.
“Being debt-free in retirement can bring peace of mind, and for many people that comfort is just as important as the financial maths.
“But some people choose to carry a manageable level of debt if they have the right income streams and a clear plan to service it.”
Smart strategies for managing debt
Chew explains one approach is to channel your super into a retirement income account. “Then you can accelerate your monthly loan repayments, which doesn’t extinguish the debt all together, but it fast tracks the reduction of debt.
“It diminishes quicker without having as big a negative impact on your retirement savings.”
Any Australian over 65 can access super while still employed (in some instances earlier if certain requirements are met) and tapping that while still working can make a real difference, says Chew.
“Say you’ve got $150,000 left on your mortgage, getting [a lump sum] out of super, while you’re still working full-time and not planning to retire, makes a massive difference to that small debt left on your home loan.”
Giving your super a boost via before-tax contributions is another approach to consider, says Hogg: “For higher income earners, salary sacrifice can be a powerful strategy.”
Downsizing and changing lifestyles
Another strategy frequently utilised by Australians to boost their super in the lead up to retirement is selling the family home.
“That can solve the debt problem and free up cash at the same time,” says Hogg.
Provided certain conditions are met, including length of home ownership, this provides access to the downsizer contribution, explains Chew.
“If you downsize and there’s money left over, you can put up to $300,000 into super, per person, so a couple could [add] $600,000.”
The reality of retirement spending
Establishing what your retirement life is going to look like can really help when it comes to planning. Many make the mistake of assuming their spending will drop just because they’ve stopped working.
“There are usually phases [to retirement],” explains Hogg. “The early years can be the ‘honeymoon phase’ where you’re taking holidays, buying a caravan, maybe helping the kids out.”
Spending can then plateau around mid-retirement before the period where health and aged-care costs come to the fore.
Hogg says the good news for many people is they’re not relying solely on super and savings: “The age pension plays a much more prominent role in retirement than many expect.”
If you’re wondering when’s a good time to start thinking about this, the answer is ‘now’.
“Many people start thinking seriously about retirement in their late 50s and 60s,” says Hogg. “But those who engage earlier tend to have more options available to them and more confidence in their plan.”
Planning ahead, educating yourself and talking to professionals are all good ways to help reduce anxiety around debt as you head towards retirement.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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