Designing a debt-free retirement
When our grandparents looked towards their golden years, things were a lot simpler. While they knew they might not be flush with cash once they stopped working, they would always have a place to live and a legacy to leave their descendants in the form of the family home, owned outright and mortgage-free.
Living comfortably on the aged pension or your superannuation in retirement relies pretty heavily on the fact that the house you live in is paid off in full. But for more and more older Australians, this simply is not the case.
Increasing numbers of us are retiring burdened by debt, leading to financial stress and housing insecurity. Statistics and news reports tell us that Australians approaching retirement age, particularly women, are becoming the fastest growing homeless demographic. It is a scary thought.
How does this happen?
It is surprisingly more common, and less complex, than you might think.
Divorce or the death of a partner is not something we like to think about, but it is always a possibility and could have a shocking impact on your finances.
What if you become ill or injured and need to retire earlier than you planned?
Alternatively, if you have a physical job, you might find yourself unable to work in your usual position as you get older, and it is not only tradesmen who need to consider this - nurses, childcare educators and warehouse workers are all on borrowed time until their body begins to object to the daily strain.
Meanwhile, essential medical expenses could obliterate your savings or force you to re-draw on your home loan.
This means that when you should be enjoying your retirement, basking in the fruits of your years of hard work, you could be worrying about keeping your roof over your head.
Borrowing in retirement
Banks may lend to older borrowers on one condition: that they have an exit strategy to ensure they can pay out the loan once they retire. This could mean taking into account your superannuation balance and your ability to continue paying the mortgage, or the fact that you are likely to sell up your larger property and downsize, leaving you mortgage-free.
This makes sense. After all, they want to mitigate their risk and lend responsibly. But how many of us have actually sat down and pondered what our exit strategy might be?
Could you continue making mortgage repayments if you had to retire in the near future? If not, do you have enough equity in your home to buy a smaller property outright? And would you even want to do that?
If you answered no to these questions, you still have options.
One way to prepare for a debt-free retirement is to salary sacrifice or make personal contributions to your super. This has the potential to reduce your tax bill, as well as increase the amount you will have to draw upon when you retire. If you are a lower income earner there are also government contributions available.
Alternatively, you could use any extra funds to pay down your mortgage as quickly as possible. Remember, interest rates are at record lows, so any extra amounts you can pay off now will be more effective in reducing the principal than when the rates inevitably rise again. Your dollars will be working smarter and harder.
The first step to designing your own debt-free retirement is to speak to your financial advisor in consultation with your mortgage broker. They can take into account your unique circumstances and set you up with a plan that will best prepare you for what lies ahead, so you can spend your retirement babysitting the grandkids or relaxing at the beach, rather than crunching numbers.
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