Financial advice key to retiring debt-free: CFS

According to research from Colonial First State (CFS), the realities of the Australian housing market had led to a growing number of Australians approaching retirement with a mortgage, making financial advice even more critical.

This trend is expected to continue, based on the findings, as Australians buy their first home later in life, loan terms lengthen and house prices continue to soar.

While the latest CFS Rethinking Retirement report found that retiring debt-free is a top priority for most Australians, 28 per cent of Australian pre-retirees aged 50 to 64 have a mortgage and 14 per cent of retirees still carry mortgage debt.

However, accessing financial advice appears to help considerably in this regard, with 63 per cent of home owners with a mortgage confident that they will be able to retire debt-free after receiving advice, compared with just 45 per cent of those who haven’t.

Despite the concerns around debt in retirement, just 13 per cent of pre-retirees with a mortgage plan on moving to a smaller home once they stop working, with the large majority preferring to remain in their current residence.

Furthermore, CFS head of technical services Craig Day explained that uncertainty and a desire to retire debt-free can ultimately lead some to delay their retirement; however, he noted that this decision can sometimes be out of our control.

“For those who don’t get to choose when they retire, one option is to use a lump sum from your super to reduce or pay off your mortgage. However, our research shows that only 15 per cent of Australians plan on taking this option,” Day said.

“The other option is to continue paying your mortgage in retirement using the income from your super, such as an account-based pension. We know that almost one in four retirees are using their pension payments to service some form of debt.”

Financial advice is a valuable tool when it comes to deciding how to make the most of your financial retirement, Day suggested, as it can be challenging to navigate the complexities of financial decisions in retirement, which can often have drastically different outcomes.

“If the net earnings within super are less than the home loan interest rate, you may be better off withdrawing a lump sum to repay your home loan or hold in an offset account,” he said.

“If the net earnings within super are more than the home loan interest rate, you may be better off maintaining your existing income stream and home loan balance. However, many people may not want to bet on future investment returns and would prefer the peace of mind of being debt-free in retirement.

“In these circumstances, using your super to pay off your mortgage will reduce the amount of assets you have available to fund your retirement and could result in you receiving less retirement income or your super savings not lasting as long.”

Day added: “On the flip side, using super to pay off your mortgage could potentially increase your age pension entitlement as it would reduce your assessable assets.”

In order to help the coming wave of older Australians prepare for retirement amid a stark financial advice gap, Day noted the launch of the CFS Retirement Hub earlier this month, designed to guide members through Australia’s complex aged care system and reach their retirement goals.

“There is no one-size-fits-all approach to retirement. Getting advice about your unique circumstances from a professional adviser will give you the confidence to make the right decisions towards achieving a debt-free retirement,” he said.