Six ways to manage debt in retirement

As you approach retirement, managing debt becomes crucial to ensure financial stability and peace of mind during your golden years. Leveraging your super effectively can play a significant role in achieving this goal.

Here are six ways you can manage debt in retirement and make the most of your super.

Assess your financial situation

The first step is to take a deep dive into your finances. List all your debts, including mortgages, personal loans and credit card balances. Then assess your sources of income, including your super, pensions, investments, and any part-time work. Understanding your complete financial situation will help you craft a realistic and effective debt management plan.

Consider prioritising high interest debt

Without an employment income coming in, high interest debts, such as credit card balances and personal loans, can quickly erode your savings. It might be worth paying off these debts to reduce your interest burden. This could help lower your monthly expenses to free up cash flow for other necessities. This, of course, can reduce your overall savings, so make sure you consider your own personal circumstances before taking an action.

Moving super to a retirement income account

Once you retire, you can move your super from the accumulation phase to the retirement phase by opening an income account. This allows you to receive regular (tax effective) income payments, which can be used to manage and pay off your debts. It can also offer flexibility in terms of payment frequency and amount, making it easier to align your income with debt repayment schedules.

Lump sum withdrawals

If you have significant debt, such as a mortgage, you might consider paying this off with a lump sum withdrawal from your super. This strategy can provide immediate relief from debt and eliminate ongoing interest payments, allowing you to enjoy a debt-free retirement. However, it’s essential to carefully evaluate this option and seek financial advice, as withdrawing a large sum can deplete your retirement savings.

Consider downsizing

Downsizing your home can be a practical way to manage debt and increase your retirement savings. Selling a large property and moving to a smaller, more affordable home can reduce maintenance costs, lower utility bills, and potentially free up some equity. This equity can then be used to pay off outstanding debts or boost your super balance.
Learn more about downsizing and your super.

Avoid new debt

Finally, it’s worthwhile thinking carefully about taking on new debt in retirement. It might be worth being more cautious with credit card usage, refraining from taking out new loans, and consider delaying major purchases unless you are financially confident.

Managing debt in retirement requires careful planning and strategic use of your super. Remember, the key is to be proactive and ensure you make decisions that are aligned with your long-term financial goals.

For more tips on managing debt, the Moneysmart website is a great place to start.

Disclaimer:

This information is general advice only and does not take into account your particular financial needs, circumstances or objectives. You should consider your own investment objectives, financial situation and needs and read the appropriate Product Disclosure Statement and Target Market Determination before making an investment decision. You may also wish to consult a licensed financial adviser.

Information correct as at 8 August 2024.