Mortgage debt and the great retirement of 2021
Written on the 26 October 2021 by Parkside InvestorPlus
In a recent Economic Insights article by CommSec (October 2021), the publication cited the fact that the pandemic had resulted in more workers exiting the job market.
To quote some specific numbers:
In June 2021, the proportion of those not in the workforce, because of retirement, was at a record 39.9%.
In September 2021, this proportion fell to 36.4%.
While many older Australians (60+ years of age), are still quite active in the job market, that trend may fall off in the not-too-distant future – i.e. this cohort will retire and permanently exit the job market.
The reasons why are many, ranging from Covid (and lockdown) concerns through to the sense that ‘I’ve had a gutful and don’t need this stress and uncertainty anymore’.
This ‘great retirement’ phenomenon will naturally put pressure on the job market, (i.e. a tighter job market), with upward pressure on wages and prices.
Yet an equally big concern with the great retirement is that this cohort of retirees will possibly be going into their retirement phase whilst still burdened with a mortgage debt.
Are retirees in for a lifetime of mortgage debt?
There was a time when a retiree was a cashed up, empty nester who outright owned their family home and who may have chosen to see and move up/down the coast for a life of debt free living.
In this scenario, a little bit of superannuation and with the aged pension, they could get to live a relatively modest to comfortable lifestyle.
However, with rising house prices pushing home ownership out of reach for many Australians, paying down/off a mortgage is becoming an increasingly tough challenge.
As a result, more retirees are leaving the workforce with mortgage debt which was far from the norm among middle income Aussies even a decade ago.
A 2018 Grattan Institute report showed that in 1995, 72% of Australians (aged between 55-64, the years prior to retirement), owned their homes outright.
In the period 2015-2016, this figure had dropped to 42%.
The obvious implication here is that 60 and 70-year-old retirees will still have mortgage commitments well into their retirement phase.
To hold on to their home, how can retirees with mortgage debt still hang on to their most valued asset – their home?
Should you use your superannuation to pay down mortgage debt in retirement?
There is a very close relationship between falling superannuation balances and falling mortgage debt, meaning super is being used to pay off outstanding mortgages when in retirement (based on a Productivity Commission report).
This would indicate the trend of paying off a mortgage debt over the longer term of a retiree’s life rather than trying to shoehorn the repayment prior to retirement.
When the superannuation guarantee was introduced by Paul Keating, it was always designed to preserve your lifestyle in retirement rather than using it to pay off a home loan.
However, with skyrocketing home prices coupled with flattening wage growth, there may not be spare cash to throw into your mortgage payments.
The upside of using superannuation to pay off your mortgage
There is an upside of using your superannuation balance to pay down/off your mortgage simply because your primary residence (the home you live in) and any related debt, is exempt from any Age Pension assets test while superannuation is not.
The downside of using superannuation to pay off your mortgage
Grattan research shows that those who own a home outright spend around 5 per cent of their retirement income on housing.
While those who have a mortgage debt or rent spend up to 30 per cent of their retirement income on their home.
In this case, if superannuation balances are used to pay mortgage (or rent), then how can retirees live?
The natural path will be do rely more on the Age Pension system – putting further pressure on financing this scheme.
Of course, curtailing property prices might seem like the logical circuit breaker, however, this is much easier said than done.
Having your wealth tied up in property is not such a bad thing – however, if you are a pre-retiree with a mortgage debt, this is the time to speak with your financial advisor to see how you can minimise (or even better, eliminate), the debt before going into retirement phase.
Parkside InvestorPlus has helped numerous pre-retirees plan and ready themselves for retirement from both a financial and psychological perspective. Our objective has been to maximise your new life phase with the minimal of financial stress.
About: As advisers, we act as a fiduciary sitting on the same side of the table as our clients, providing peace of mind, greater control and visibility.