Is debt ruining your retirement?

Just like the proverbial frog in boiling water, many retirees are unaware that they need to jump out of their pot of debt.

We often hear disturbing reports about household debt, but in an age of information overload, we tend to simply switch off. But there is good cause for concern when it comes to retirement and how much debt you are carrying into your post-work years.

In fact, the numbers are truly scary. Back in 2012 the CPA undertook research that confirmed that the percentage of boomers hitting retirement with a mortgage is rapidly increasing. CPA Australia – Household Savings in Retirement 2012 noted an average debt of $117,000 for those aged 60-69 and not retired, and $55,000 for those of the same age who are.

The breakdown on this debt is instructive, with the average household aged 50-64 with a $75,000 mortgage, other property loans of $39,000 and credit card debt of $2300. Those yet to retire, aged 50-54, had a debt to superannuation ration of 91 per cent, whilst those closer to pension eligibility (60-64) had a debt to superannuation of 42 per cent.

A more recent survey conducted by the Australian Centre of Financial Studies (ACFS) on behalf of the Australian Institute of Superannuation Trustees (AIST) found that low-income households were struggling in retirement, either due to increasing debt or having to sell down assets to support living expenses. In particular, the 15 per cent who are renting and the 8 per cent still paying a mortgage, means one in 12 retirees has expenses which are not even listed on the widely accepted ASFA Retirement Living Standard, which ranks a modest single retirement income at $23,767.

Financial services company, ING measured the average retiree debt at $158,000. Whilst the above mentioned three surveys will have used different databases and measurements, it is nothing short of alarming to note the increasingly high rate of debt for retirees. And it is not just individuals who are in denial about their household debt – so too are the so-called experts. Why? Because of the ready acceptance of the ASFA Retirement Living Standard which notes income levels required for modest and comfortable retirements for singles and couples. These ‘standards’ automatically assume that you fully own your own dwelling. Yet for 23 per cent of the population this is a patently false assumption. The other 77 per cent may be carrying other forms of debt, including credit card debt, so repayments on these loans should also be factored into any predictions of costs of living in retirement.

The reasons for debt in retirement vary. In many cases, people have simply forgotten how to save. With higher incomes, expectations have risen and frequent holidays, meals out and consumer ‘toys’ have often been paid for by easy access to equity in the home. Somehow that mortgage has risen instead of being paid off. It must be noted that there are many cases of genuine hardship, including unexpected ill health, divorce and redundancies, which mean that the expected income has suddenly disappeared. In particular, many older women have found themselves alone, with insufficient funds from a divorce settlement to buy another home, and little prospect of finding work if they have a fragmented work history. Not an ‘exciting’ time to be an Australian at all.

So now I have truly depressed you about the role and significance of debt in retirement, what can you do if you believe your debt is ballooning out of control and threatening your quality of life in later years?

For some retirees it probably is too late and the house will eventually need to be sold to fund later life needs, perhaps including aged care. But others may be able to take steps to correct this problem. There are three necessary steps:

Face the facts
This is the first non-negotiable step in the journey to financial survival. Unless you recognise that you have a problem, you are hardly likely to take the steps necessary to solve it. So force yourself to sit down with a sheet of paper and access to your key financial indicators – your super balance, savings balance, value of assets excluding the family home and recurring income. Compare this to your consolidated debt and interest repayments.

Measure the shortfall
You may have had a nice surprise – your assets and income far outweigh your liabilities and outgoings. Good for you. A dignified retirement awaits. But if not, use this handy calculator to predict your likely longevity, and then assess how long your money will last in retirement. You may be close to covering your needs, you may need a full Age Pension or you may find that you are seriously overstretched. In which case, the next step is vital.

Seek help
Being financially strapped does not mean all is lost. If you feel your debt is out of control, then talking to a financial professional is the next requirement. If you have a trusted contact, perhaps a family accountant, then that is a good start. If you do not know someone who you can trust, and do not have enough to pay for advice, then a financial counsellor is probably the best port of call. Different states offer different services, through varying agencies, but this national number is helpful as you will be automatically transferred to the right contact in state in which you live.

National Debt Helpline 1800 007 007
The free hotline is open from 9:30am to 4.30pm, Monday to Friday

Find a financial counsellor in your area

Last, but definitely not least, take a deep breath and remind yourself that, whatever your situation, it is important to remember that only you can control your own finances. It’s fine to blame the banks for too-easy access to equity in your home. It’s much more helpful to remember that it was you who accessed this money and spent it. Poor health, or bad luck in marriage or employment are external factors over which we often have little control. But if your future retirement prospects are marred by this misfortune, it is only by facing this unpalatable reality and determining to access the help required to deal with it, that you will deal with the debt in your life.

What about you? Are you living debt-free in retirement? Or have life circumstances spoilt the journey? Or are you one of the rare individuals who admits that they didn’t save enough?

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