Why being debt-free isn’t always the best strategy for your superannuation

Many people think it’s best to reach retirement with zero debt, but that’s not the be-all and end-all, according to financial experts.

It seems logical to avoid debt repayment once you’ve established a regular income, but there are financial and lifestyle considerations, says Jason Chew, head of advice at Vista Financial Group.

He explains that while many Australians are accessing superannuation to pay off debt, including mortgages, the potential downside of compounding returns is being overlooked.

“You are depleting your retirement savings, which will undoubtedly impact how much you can spend when you retire,” says Chew.

Know your financial situation

Deciding whether to pay off or manage outstanding debt after retirement is determined by a number of factors, says Peter Hogg, managing director of guidance and advice at Aware Super.

“The important thing is to understand the trade-offs between the financial, emotional and resilience dimensions and make informed choices rather than sticking to a single approach,” he says.

“Being debt-free in retirement can provide peace of mind, and for many people, that peace of mind is as important as the financial math.

“But some people prefer to carry a manageable level of debt if they have the right income streams and a clear payment plan.”

Smart strategies for debt management

Chew explains that one approach is to transfer your retirement income into a retirement income account. “Then you can accelerate your monthly loan repayments, which will not pay off your debt completely, but will accelerate the reduction of the debt.

“It decreases faster without having a huge negative impact on your retirement savings.”

Chew says any Australian over the age of 65 can access superannuation while they’re still working (in some cases sooner if certain requirements are met), and accessing it while they’re still working can make a real difference.

“Let’s say you have $150,000 remaining on your mortgage. [a lump sum] While you’re still working full time and not planning on retiring, coming out of retirement makes a big difference in what little debt you have left on your mortgage.

Hogg says supplementing your retirement through pre-tax contributions is another approach to consider: “For higher earners, salary sacrifice can be a powerful strategy.”

Downsizing and changing lifestyles

Another strategy Australians often use to boost their pension pot towards retirement is to sell the family home.

“This could solve the debt problem and free up cash at the same time,” says Hogg.

supplied Certain conditions are met, including length of time to own a homeChew explains that this provides access to the diminutive additive.

“If you downsize and have money left over, you can put up to $300,000 in retirement funds per person, so a couple [add] $600,000.”

The reality of retirement expenses

Determining what your retirement life will look like can really help with planning. Many make the mistake of assuming that their expenses will decrease just because they stop working.

“There are usually stages [to retirement]” explains Hogg. “The early years can be the ‘honeymoon phase’ where you go on holiday, buy a caravan, maybe help out with the kids.”

Spending may plateau towards mid-retirement, before health and aged care costs come to the fore.

Hogg says the good news for many people is that they don’t rely solely on retirement and savings: “Age pensions play a much more important role in retirement than many people expect.”

If you’re wondering when is a good time to start thinking about this, the answer is ‘now’.

“Many people start thinking seriously about retirement in their late 50s and 60s,” says Hogg. “But those who act earlier tend to have more options and more confidence in their plans.”

Planning ahead, educating yourself, and talking to professionals are good ways to reduce debt-related anxiety as you move toward retirement.

• The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.

Expert tips on saving, investing and making the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.