For many Australians nearing retirement, debt can feel like a looming shadow over what should be a rewarding and carefree stage of life. Whether it’s a lingering mortgage, credit card balances, or a personal loan, carrying debt into retirement can significantly affect your financial security, superannuation strategy, and even your age pension entitlements.
If you’re aged 50 to 70 and planning the next stage of life, now is the time to take a serious look at your debt—and what to do about it.
Why Managing Debt Matters Before Retirement
During your working years, repaying debt is more manageable thanks to a steady income stream. But in retirement, income typically shifts to a mix of superannuation drawdowns, government benefits, and personal savings. Servicing debt with reduced income can strain your finances, and may compromise your lifestyle.
Eliminating or reducing debt before retirement can provide peace of mind, improve cash flow, and offer greater spending flexibility.
Types of Debt: What to Prioritise
Not all debt is equal. As you near retirement, review what you owe and develop a strategy to reduce or eliminate it.
- High-interest debt: Credit card balances and personal loans carry the highest interest and should be paid off first.
- Mortgage debt: Home loans are common for older Australians. Though interest rates are lower, repayments still reduce retirement income.
- Investment loans: Debt on investment properties or margin loans may offer tax deductions but come with market risk.
A Financial Adviser can help assess whether paying off certain debts—especially using super or savings, is worthwhile.
Should You Use Superannuation to Pay Down Debt?
It’s tempting to use your super to wipe the slate clean. But be cautious, super is designed to provide income throughout retirement, and drawing a large lump sum early can reduce long-term financial stability.
Consider:
- Accessing super: Once you reach preservation age and retire, or turn 65, you can access your super. But taking a lump sum may reduce future income.
- Opportunity cost: Super is concessionally taxed and often earns more than the interest on home loans, especially in a low-rate environment.
- Cash flow relief: On the other hand, eliminating debt might ease monthly expenses and reduce stress, sometimes justifying the trade-off.
Speak to a Financial Adviser before deciding. They can model different scenarios to show long-term impacts.
Debt and the Age Pension: How Centrelink Sees It
If you plan to rely on the age pension, know how debt affects your eligibility. Centrelink assesses your assets and income, but not all debts reduce your assessable assets:
- Secured debt – Investment property: This reduces the net value of the asset. A $700,000 property with a $200,000 mortgage is assessed at $500,000.
- Secured debt – Own home: Your home is exempt from Centrelink’s asset test, so debt against it does not lower your assessable assets.
- Unsecured debt (credit cards, personal loans): These do not reduce your assessable assets, which could result in a lower pension entitlement.
Be aware: using lump sums to pay off unsecured debt may not improve pension eligibility and could reduce your cash reserves without increasing benefits.
Balancing Debt Repayment and Retirement Living
Managing debt isn’t just about the numbers—it’s about maintaining your desired lifestyle. While paying off debt feels satisfying, don’t leave yourself asset-rich but income-poor.
Ask yourself:
- Will repaying debt reduce my retirement income too much?
- Are there more tax-effective or strategic ways to manage liabilities?
- Do I have an emergency buffer if I use all spare cash on debt?
The best solution often lies in balancing reduced financial obligations with enough resources to enjoy retirement comfortably.
Final Thoughts
Approaching retirement with a clear debt strategy can mean the difference between financial stress and financial freedom. Take the time to assess your situation, prioritise your debts, and weigh the impact on your superannuation and Centrelink entitlements.
Professional advice tailored to your specific needs can help ensure that any decisions you make today will support a more secure and enjoyable retirement tomorrow. Reach out to our Financial Planning Team:
E financialplanning@highview.com.au
T (03) 5990 1000
