Planning for retirement with an active mortgage

Are you approaching retirement and still paying off a sizable mortgage? Many Australians find themselves in this situation, nearing retirement while still making home loan repayments. While this may seem daunting, careful planning and strategy can achieve your desired lifestyle in your later years.

At First Financial, we understand the unique challenges you face. Our advisers specialise in creating personalised plans tailored to your specific needs, ensuring you can enjoy your retirement years without the burden of financial uncertainty. Here is some general advice on navigating this critical phase effectively.

The first step in planning for retirement with an active mortgage is to thoroughly assess your current financial situation so you can make informed decisions. Take a detailed look at current income, expenses, assets and liabilities.

When considering retirement with a mortgage, a critical step is to evaluate how your mortgage affects your overall strategy. Examine the remaining balance, interest rates and repayment terms to understand their impact.

You will also need to calculate your expected annual expenses during retirement. This process is crucial as it will determine the amount of additional assets required to ensure a comfortable lifestyle throughout your retirement years.

Let’s consider the example of our hypothetical clients, the Smiths—a couple in their early 60s with a beautiful home worth a substantial amount but with a remaining mortgage of $600,000. The Smiths hope to retire in the next few years. However, aside from their home, they have very few other assets available to help pay off the mortgage.

While they understand that they can’t afford to retire while still having the mortgage, they are trying to determine how drastically they need to change their asset mix to fund a comfortable retirement. There’s a potential for an inheritance in the future, but its timing, amount and distribution are uncertain.

The starting point for determining the extent of the change required is assessing how much they want to spend during retirement. They estimate that they will need a minimum of $65,000 per year. Currently, the full-age pension for a couple is about $43,000, which covers part of their needs. The challenge is figuring out how much additional money they need to supplement the age pension to meet their retirement goals. For this example, with minimal other assets, The Smiths are likely to fall short of their goal amount, and this money will need to come from somewhere.

While The Smiths may be able to fill the gap with an inheritance, another alternative is downsizing their home. Fortunately, their home is quite valuable, and if they were to sell it and move to something cheaper, their retirement would be feasible.

Downsizing releases significant equity, allowing them to purchase a property they could own outright while leaving additional funds for retirement. And they don’t necessarily have to choose a smaller home, perhaps they could relocate somewhere more affordable.

The decision to downsize is a deeply personal one and should be considered carefully, factoring in lifestyle preferences, proximity to family and friends and access to amenities. While it can be an emotional transition, the financial benefits often outweigh the drawbacks.

If you still have a significant mortgage but also a few years before retirement, you may be wondering about alternative strategies that will maximise your wealth; you might be considering alternative strategies to maximise your retirement savings. Options like salary sacrificing into your superannuation, consolidating super accounts and making additional contributions while you have the opportunity can significantly boost your retirement savings.

Investment management is equally important. A well-diversified portfolio can amplify your wealth in the long term, providing an income stream to supplement your lifestyle in retirement.

At First Financial, our experienced advisers can customise superannuation and investment strategies to your individual needs and circumstances, catering to your risk tolerance and financial goals.

Returning to the scenario about the hypothetical Smiths, suppose we conduct calculations by combining their superannuation totals to determine the supplementary personal savings required for retirement, in addition to the age pension. For illustration purposes, let’s assume this amount totals to a million dollars. After settling the mortgage, they would have $400,000 remaining to enhance their retirement funds.

That extra million will need to come from somewhere, whether it’s through downsizing their home, receiving an inheritance or building other assets to pay off their debts and have funds left for their remaining years.

While you can run retirement income projections yourself using the MoneySmart retirement planner calculator, our team at First Financial can offer more precise and detailed forecasts and calculations.

If you’re nearing retirement age and still have a mortgage, contact us to speak with one of our experienced advisers today.

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