Is debt a good or bad thing when you’re retired?

Having debt in retirement can be a good thing, but only if it is managed well.

When we were young, some of us were taught it’s important to save for a rainy day and to avoid getting into debt. These days, our view of debt is a bit more relaxed. For example, many of us use credit cards to buy things now and pay later to improve our lifestyle.

But is this the best way to manage our finances, especially as we get older?

Understanding how to manage debt, and being able to identify the difference between good and bad debt could help you to achieve a comfortable retirement.

The current situation

Let’s look at some statistics:

  • Australian households have more debt than other similar countries, such as Canada, where the ratio of debt to household income was 164% in 2013 compared to Australia’s 201%1
  • The ratio of household debt to disposable income has almost tripled from 64% in 1988 to 185% in 20152
  • Home loan debt in Australia makes up almost 30% of debt for households headed by a person age 65 or older – up by around a third from 2004 to 20153.
Good debt versus bad debt

So, is having debt a good thing?

There is a strong argument that debt is good if it’s efficient— that is, it increases your long-term wealth.

One of the most efficient ways to use debt is borrowing to invest in an asset—such as shares—which can generate income and grow in value over time, while the interest charged on the debt is tax deductible.

But, debt also has downsides. So it’s important to understand the difference between ‘good’ and ‘bad’ debt.

An example of ‘bad’ or inefficient debt is when you have borrowed to buy something that decreases in value, doesn’t earn any money and is not tax deductible, such as credit card debt.

Put simply, good debt builds wealth, bad debt diminishes it.

Level of debt in older households

A troubling trend in Australia is households with occupants 65 and over have the highest ratio of debt to income (180 percentage points). This group has also doubled their level of debt repayments (from 9% to 17.2%), making it the largest of any age group with household debt4.

If you are an older Australian, having bad debt near or while you’re in retirement could have a destabilising effect on your finances, because your ability to manage the debt will diminish over time.

It could also affect your ability to deal with unexpected financial events, such as deteriorating health, changes to tax laws, financial markets affecting your super or having to move house – all of which could put a drain on your finances.

What to do if you’re heading into retirement with debt

So, if you’re about to retire, or have already, how can you can make your debt work for you? And what are your options for reducing bad debt?

Here are some things to consider:

  • Review which of your debts you should hold on to (good debt) and which ones you could do without (bad debt). Find out how you could prioritise and pay off your debts
  • If you haven’t retired yet, consider how working a bit longer might help you manage your debt and achieve a better lifestyle in retirement
  • Think about whether you could use a lump sum from your super to pay off your home loan
  • Read about the pros and cons of selling the family home to free up your finances.
Want to know more?

Everyone’s situation is different. So what is right for someone else may not be right for you.

If you would like to explore your goals or get some professional advice about managing debt and retiring right, please contact us.

1 AMP.NATSEM Income and Wealth Report: Buy now, pay later, Household debt in Australia, Issue 38 – December 2015, p6
2 AMP.NATSEM Income and Wealth Report: Buy now, pay later, Household debt in Australia, Issue 38 – December 2015, p4
AMP.NATSEM Income and Wealth Report: Buy now, pay later, Household debt in Australia, Issue 38 – December 2015, p7
4 AMP.NATSEM Income and Wealth Report: Buy now, pay later, Household debt in Australia, Issue 38 – December 2015, p13