7 ways to make debt disappear

As retirement rears its head, the anticipation of more leisure time need not be overshadowed by lingering debts. If financial concerns are dampening your retirement dreams, here are 7 actionable debt tips to consider.

By Alex Brooks
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Saying goodbye to a boss and finally drawing down a retirement income from your super, investments or aged pension means killing one thing: debt.

Debt - whether it’s mortgage debt (which is a good debt) or credit card debt (typically a bad debt) - is best disappeared when you rely on a retirement income.

Who wants their finite retirement income eaten away by interest payments? No-one. Yet more and more of us are entering our older years carrying debt.

More of us are in more debt than previous generations (and that’s OK if you have a debt-disappearing plan)

Plenty of Australians are still carrying debt into retirement.

On average, each older Australian with a mortgage debt owes much more relative to their income than 30 years ago.

Microdata from the Bureau of Statistics survey of income and housing shows an increase in the proportion of homeowners owing money on mortgages across every home-owning age group between 1990 and 2015.

The sharpest increase is among homeowners approaching retirement.

The good news is that Australia has an excellent (though not perfect) retirement income system, with aged pension and Medicare protections to help support our needs as we age.

The bad news is that growing indebtedness will increase after-housing-cost poverty among older Australians and create pressure to boost the age pension.

People with mortgage debt are likely to be sitting on an asset they can sell, so there isn't a great need to feel worried if you are in that position.

People who carry debt but don’t have a home to call their own are the people who will need to clamber out of debt as quickly as possible. (Sorry, non-homeowners, you probably don’t want to hear that).

Moneysmart does have some good advice about your home in retirement for people in both positions.

Essentially, where you live - and whether you rent, own or leasehold a property such as in a retirement community - will affect your retirement income and lifestyle.

Housing debt will prolong your need to work - but is that a bad thing?

Debt-free home ownership in old age used to be known as the fourth pillar of the retirement incomes system because it allowed older people to live on small pensions without slipping into poverty.

Being in debt adds to psychological distress (no matter how old you are). But debt can be more problematic for older people who don’t earn a salary or have large incomes - it means they don’t have the same ability to recover from financial shocks, or even deal with fast-rising costs of living.

Growing indebtedness has been found to increase after-housing-cost poverty among older Australians and create pressure to boost the age pension.

Home owners - even those with large mortgage debts - will be able to explore the benefits of downsizing their home or refinancing a mortgage to enhance retirement savings. Understand the rules and potential advantages of making a tax-free super contribution from the proceeds of selling your home. Read more about downsizer contributions.

7 basic steps to make debt disappear

It’s easier to plan ahead to build a debt-free financial position over years than try to do it in a few weeks.

Plenty of us would rather put our blinders on (and some of us don’t have a choice but to take on debt) about our financial situation. Here are 7 tips to help you forge a debt-free path to retirement:

Debt-disappearance step 1: Assess your financial situation

Start by calculating the total amount of debt you owe and compare it to your income and expenses. Identify areas where you can cut back on spending.

Debt-disappearance step 2: Debt consolidation

Explore the possibility of consolidating multiple debts into a single loan, which may have a lower interest rate.

Debt-disappearance step 3: Timely payments

Ensure that you pay your debts on time to avoid additional charges and penalties.

Debt-disappearance step 4: Credit card payments

Whenever possible, pay the full outstanding balance on your credit cards, rather than just the minimum required.

Debt-disappearance step 5: Extra repayments

Consider making extra repayments on your debts if your budget allows.

Debt-disappearance step 6: Shop for better rates

Look for financial providers offering lower interest rates and no annual fees. Compare options to find the most favourable terms.

Debt-disappearance step 7: Seek assistance

If you're facing financial hardship, don't hesitate to discuss your situation with your creditors. Many of them can help you explore alternative payment plans.

Australia has excellent financial hardship provisions which mean banks and financial institutions can’t take people to the cleaners, no matter how much financial trouble they are in (the key is to talk to your banks and debtors before you’re in trouble).

The National Debt Helpline is also a great resource to help anyone get their head above water - you can ring them to get referrals to free debt counsellors, for example, as well as clarify your legal position.

Financial advice can be an expense that saves you in the long run

Financial advice can be expensive in Australia, but may also be invaluable to maximise your money opportunities and stretch your retirement income as far as possible. It’s important to know your goals from financial advice (and to choose a good adviser using a fee structure that you understand and adds value to your overall financial position!).

Moneysmart has this advice for people looking to pay for financial advice for their retirement.

Some superannuation funds also offer a free, or highly discounted, financial advisory service to get a basic plan before committing to the higher fees needed for more detailed personal advice. Call yours to ask what’s available.

Get serious about budgeting (but do it slowly)

Budgets are boring. But as you approach retirement, your budget becomes critical. Consider your living expenses, daily bills, health care, and potential support for your children. To create a workable budget, determine your income, expenses, and savings goals.

Read more advice from Moneysmart about how to put together your own personal budget.

Explore all retirement income sources

Your retirement income will come from various sources, including superannuation, investments, savings, inheritances, and government aged pensions.

Knowing your superannuation balance and understanding the advantages and disadvantages of consolidating multiple accounts can be crucial. Hey, and plenty of people un-retire to maintain part-time work to supplement their retirement income (but you need to know how it might affect your pension or superannuation income streams before you make that decision).

You can always un-retire, too

Working a bit longer can boost your savings and super balance, leading to a more comfortable retirement. Many older individuals choose to stay in the workforce for financial security, and some even return to employment after retiring.

You can also consider freelancing to keep your hand in and have a side hustle going.

Managing your money for good returns

Make sure your money isn't just sitting idle. Consider investing it in opportunities that can generate better returns.

You need to constantly balance the risks you are willing to take to earn higher returns against the safety of a guaranteed income that won’t be ripped out from under you if there’s an economic shock.  

Proactive financial planning can help you reduce your debts and achieve a more comfortable and stress-free retirement. After all, you deserve it, don’t you?

^{Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.}