Planning for retirement should be an exciting chapter, not one weighed down by lingering debt.
Most people plan on having their home loan paid out before they retire, but for some, particularly those who may be older when they take out a loan, or who plan to retire early, may still have a debt when they retire. Fortunately, with smart strategies and disciplined planning, you can eliminate debt and enjoy a financially secure future.
1. Create a Plan and make your Payments Strategically
As you hit your 50s, most people and families find themselves where their disposable income is at their peak. Kids are close to finishing school and careers are well established. It is around this time that planning for a debt-free retirement should be on your radar.
Take the time to review the family budget and identify areas where you can cut back. Review utility and insurance providers, cancel unused subscriptions and shop mindfully.
Next, list all your all-outstanding debts—mortgage, credit cards, personal loans, and any other financial obligations. Categorize them based on interest rates and balances.
Focus on clearing high-interest debts first. Generally, you will find smaller debts have the highest interest rate. Aim to pay them off aggressively. Once they are repaid, you can then re-direct these funds to your larger loan.
Explore the possibility of refinancing to a lower interest rate. Take the scenario of a family with a home loan of $500,000 at a rate of 6%pa and a credit card debt of $20,000 that carries a much higher rate of 20%. They plan to retire in 15 years. By refinancing the home loan to a reduced rate of 5.80%pa, and consolidating the credit card debt, they can save up to $42,000 in total interest charges over the term of the loan.
2. Downsizing of the family home
Selling the large family home and purchasing a smaller, low maintenance property is a popular option for many.
Not only is the benefit in freeing up capital to repay any outstanding debt but also, if you are over 55, there is the added benefit to make a downsizer contribution into your super which in turn can help increase your retirement income.
3. Sale of Assets
Apart from owning your home, you may have assets such as shares or collectables that can be sold to reduce debt. If your loan relates to an investment property, you may look to sell the property to clear any remaining debt with the equity available for retirement funds.
4. Accessing Super
If you meet the condition of release, superannuation can be accessed as a lump sum withdrawal to pay down your mortgage.
Having a debt free retirement requires discipline, planning and action. Starting early, staying consistent and seeking professional advice can help you achieve your retirement goals and enjoy a comfortable retirement.