For many, retirement is a time of rest and relaxation. After putting many decades of hard work behind you, retirement is an exciting chance to focus on friends, family, and passions. However, what happens if you retire before your debts have been paid off?
With the average age of retirement in Australia resting around 64, it’s not uncommon to retire before all of your debts have been fully paid. Debt can be a big setback at any age, but it’s especially challenging once you hit the age of retirement. In this guide, we’ll dive into the details to explore what happens if you retire before your debts have been paid off.
How Does Retirement Work?
To begin, let’s clear up any misunderstandings about how the finances of retirement work. When you officially “retire,” you no longer work a traditional job. While some might continue working part-time or on a volunteer basis, the term “retirement” implies you’re no longer working full-time.
If you’re not working, how do you support yourself financially? There are three pillars of income for retirees in Australia:
- Age Pension: This is a government assistance option for those with no savings or super. You’ll need to qualify for this program, and it will only cover basic needs like housing and food.
- Compulsory Super: If you’ve worked a traditional, full-time job for the majority of your career, you’ll have what’s called a compulsory super. Your employer is legally required to contribute to your super fund on your behalf. While the rate changes, it’s currently around 11.5% of your salary.
- Voluntary Super: Additionally, many choose to contribute to their super fund voluntarily. This is because the 11.5% of your salary alone might not be enough to sustain your retirement goals.
While you can technically stop working whenever you wish, you need to ensure you’ve reached your Commonwealth preservation age if you wish to use your super. This age is set by the government, and you can use an online calculator like this one to calculate when you can access your super.
Do You Have to Pay Your Debts Once You Retire?
Unfortunately, your debts don’t disappear when you retire. Regardless of the type of debt you have (mortgage, car loan, credit cards, etc.), these bills are still due upon retirement. This is why it’s a good idea to pay down your debts before you retire, if possible.
If you’re using a portion of your super savings to pay down debt at retirement, this reduces your income. You might need to downsize, stay in the workforce for longer than planned, or rely on friends and family to make ends meet.
The major cause of setbacks to retirement is poor planning. Considering just how much you’ll need to retire comfortably is an important part of long-term retirement planning. This isn’t a perfect science, but retirement calculators are a great first step.
How to Manage Debts in Your Retirement Years
Luckily, having debts doesn’t mean you can’t retire. Like debt at any stage of life, it simply means you’ll need to do more budgeting. The need for a reliable budget never goes away, even when you retire!
Consider the size of your debt. Once you understand how much you owe, create a repayment plan. This will need to factor into your other expenses. For instance, if it costs $1,200 per month for housing, food, and other utilities, you’ll need to make sure you have enough room for your debt payoff plan in this existing budget.
Here are some savvy ways to pay your debt while in retirement:
- Home equity loan: If you qualify, using a home equity loan allows you to tap into your home’s equity to pay debt. This is typically a low-interest option, and it can save you big long-term.
- Downsize: If your children have already left the nest, it might be time to downsize. Moving into a smaller space is more cost-effective, and it’s one of the best ways to stretch your retirement savings further.
- Work part-time: Many retirees prefer to take on part-time work as a way to stay active, connect with their communities, and earn a bit of an income. This is a great supplement to your super, and you can aggressively pay down debt without taking on the burden of a full-time schedule.
- Consolidation: Lastly, a consolidation or debt-repayment loan can help with rising interest rates. When you consolidate debt, you only have one payment vs. several. Not only is this easier to budget, but you can typically get a better rate.
The Bottom Line on Retirement Debt
Tackling debt during your retirement years is never ideal. While the best retirement plan is one you begin as early as possible, it’s always okay to work with where you’re at financially. If you’re creative and take planning seriously, there is a way out of your debt at any age.
When in doubt, reach out for help. The team at Debt Busters understands what you’re going through, and we’re here to help you transition to retirement with ease. Contact us today on 1300 368 322 to review your options.