Loans in retirement: Time for a rethink?

One of the best things about writing articles and explainers for Retirement Essentials is the quality of the comments we receive in return. A recent article on the ‘classic dilemma’ of paying off debt or retaining a mortgage (but earning more in other ways) is an example. We received some great feedback from members on this topic. They pointed out that this option does not have to be an ‘all-in’ decision. Which has encouraged us to share their thoughts as well as a brief overview of the main decision-making points.

Our view is that there is rarely one right or one wrong approach to most things financial. The main reason is that at the heart of most financial decisions are emotional needs or concerns and lifestage needs which may often involve wrangling two different sets of priorities, should you happen to live as a couple. 

There really is no  one size fits all approach to debt management, hence our suggestions that you explore your options and if you are unsure, you seek further explanations, income projections or support from one of our experienced advisers. 

Here are some of the great comments we received on this topic, followed by an overview of ways to view your options.

Jim is puzzled why paying off the mortgage has downsides:

I’m puzzled as why the only options considered with regard to paying off a mortgage are all in or all out. My strategy was to pay off all but $100 of my mortgage. I get all the Centrelink benefits from a reduced super balance, my repayment is $1 per week, my interest is zero (because of offset accounts). And if I ever need it in case of emergency, I can redraw most of my original mortgage balance, so I haven’t really lost access to the money. Yes, I have the opportunity cost that my money could have earned in my super fund, but it would have needed to exceed 7.8% per annum after tax anyway to counter the pension reduction from Centrelink under the assets test, so all I’m really losing is any potential earning over this amount.
Could you explore the downsides of this strategy please?

And Shakil concurs:

I agree with you Jim. I will be retiring soon and will pay off all the mortgage, bar a nominal amount to keep the account active (with an offset to counter the interest repayments). Just as you correctly pointed out, it gives you an emergency buffer and at the same time provides a lower asset/income threshold to enable access to Centrelink benefits. I also agree that the opportunity cost from not leaving the funds in super is likely to be insignificant compared to the Government pension receipts.

Ron is unequivocal that relieving financial stress relief is the big win:

We paid our mortgage down to a zero balance with pre-tax money in my super (approximately $150,000) This way, we could always redraw on the loan if needed.
I lost my job due to injury, and if we still had the mortgage hanging over our heads, we would have been in a LOT of financial strife.
Yeah, we may have missed out on some interest earned on my super, but the stress was totally eliminated. In my case, totally worth it.

But Raymond was hit with some unexpected costs:

I’ve adopted the same strategy of leaving my super balance as an assessable asset to qualify for the full Age Pension (couple- wife has no super) and can draw down from the mortgage as needed.
When I retired I got hit with extra concessional tax as final payout for the year as it included accumulated annual leave, long service leave, commission, bonus, maximum voluntary super contribution, proportional super contribution as well as employer contribution which exceeded $250K for the year. (You) get hit whichever way you try to save.

What about you? 

Do you agree with the main theme in the feedback that reducing the mortgage is the best plan? Here’s a brief summary of the upsides and downsides involved:

• Using super to repay your mortgage will move super (an assessable asset) into the home (a non-assessable asset) so that could improve many people’s Age Pension entitlements.

• Maintaining the redraw facility on your loan is also a very good strategy for many people as it’s very, very difficult to borrow when retired or over age 60. If you have an equity access loan it can make a lot of sense to maintain it, even with $100 in it as Jim has done.

• Maintaining the mortgage and the larger balance in super will benefit some people if they are taking more risk with the super investment option and have a sufficient time horizon. This strategy must be treated with caution, as the additional returns need to not only exceed the interest costs, but also any Age Pension benefits the homeowners might receive through paying down the mortgage (i.e. by having lower assets). A retirement forecasting appointment can help you to assess if this might benefit you.  

Above all, as our contributors have pointed out, these decisions do not mean that you necessarily have to totally pay off a mortgage. Some people will wish to finance nil debt in retirement. Others will feel okay with repayments of a few hundred dollars. Still others have a clear view that they can use this money much better in other ways. It’s very personal and totally dictated by your personal circumstances and your attitude to risk and debt. That’s where Retirement Essentials mortgage consultation works so well. Your adviser can assist to model future income based upon your different choices so that you can clarify which outcome looks right for you.

This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.