From the point of view of retirement, reliable income and Age Pension there are really 3 types of debts that we need to discuss:
1. Personal loans and credit cards
2. Home-loans - so mortgage against your family home
and 3. Investment loans - so loans against the investment property or another types of investment scheme
Very rarely I would say that having a loan during retirement is a good idea.
At the end of the day, the repayments will be reducing your cashflow, therefore your income might not be as
reliable and consistent as you would like it to be.
But let's go over those different types of loans one by one to understand the difference and why some might still be a good idea.
My name is Katherine Isbrandt from About Retirement, I am Certified Financial Planner and you are watching About Retirement TV
the place that provides you with all the information that you need if you are getting ready to retire in few years
or if you have already retired and would like to improve your financial position, your income, your assets and your government benefits.
"The best thing that money can buy is FREEDOM from worrying about money"
There is so much truth in that little quote and a good retirement plan should provide you with just that:
Freedom from all your money worries, certainty and clarity as to the income level, your lifestyle and how long will your money last.
And today's chat is all about loans before or during retirement and whether you should or shouldn't keep them.
1. Personal loan and credit cards
This is the most unaffordable type of the loan one can imagine, therefore if you cannot repay it by due dates, remove them altogether.
Credit cards are great for convenience, for degree of security as you don't have to carry cash in your wallet and for collecting additional benefits
such as flight points or other benefits provided by the credit card company.
But be sure to utilize those benefits, as at the end of the day you still pay for them.
The bigger the member benefit, the higher the annual fee, nothing is for free.
But you have to be able to pay off the outstanding balance monthly, and I don't mean the minimum amount listed on your statement,
but rather the full balance you spent over the previous month.
So if you don't have sufficient cash balance or income to cover such a bill, do not use credit cards, as this will become a huge trap for you
with the highest interest rate payable out of any types of loans that we have.
Personal loans are really not recommended at all to be used during retirement.
They tend to be of such purchases as buying a car, or store loan to buy furniture for your home, or a holiday.
So for example buy a new car of $30,000 value with the full purchase price as a 5 year loan at 8.5% (which could be higher for retirees, as you have no employment income),
that will cost your over that period of 5 years $36,849, but after 5 years that car will only be worth $12,000 based on average car depreciation.
So in retirement, please stick to purchases that you can afford to buy for cash and not through borrowings with high interest,
and most certainly not to buy a depreciating assets
2. Home loan - mortgage against your family home.
Please try to repay your home loan before your retire. If you have any outstanding loan, and at the same time you keep funds in your bank,
the balance of your cash will be counted under Income Test while the loan will be disregarded.
The same will apply if you keep funds in the offset account. Centrelink will calculate those funds as your asset and reduce your Age Pension payments accordingly.
Because according with Centrelink you have access to those funds, therefore, they are still counted as your assets.
If you have an investment property, never ever secure it against your family home.
Why? well the value of the property will be counted under Assets Test, but the value of the mortgage will be disregarded,
so again your Age Pension eligibility will suffer. In a minute I will show you couple of examples to explain this very point more clearly.
So what can be done to improve the situation if you have home-loan outstanding?
Well, 1. You can pay it off with the cash that you keep in a bank account
2. You can use part of your superannuation to pay off your loan
and 3. Sell your family home and downsize - this could work wonders for your retirement,
as your level of your income, Age Pension and overall financial security could improve.
I have created a video explaining the Downsizer Contribution in more details and how this could help you
3. Investment loans
If you have an investment property, any loan you have, should be against that property. I see this so very often when an investment property was purchased
by the loan has been secured against the family home.
As I said before this is terrible planning, because:
1. Centrelink will calculate the full value of your investment property
2. The loan secured by your family home will be disregarded, because the family home is an exempt assets for means testing.
To give you a comparison, let's meet Peter, who is retired, single, and has the following set up:
He owns his home to the value of $1 million.
He has a loan of of $300,000 that is secured by his family home used to buy an investment property with repayments of $10,500pa
and for simplicity let's even disregard any other expenses with the rental property
So and he also owns that rental property that is valued at $650,000 with a net rental income of $25,000
As the outcome of this setup, Peter's income is $25,000 less $10,500 repayments,
therefore his net income is $14,500
and he is not eligible for any Age Pension based on Assets Test.
And now let's meet Steven, who is in exactly the same situation, but the loan is secured by investment property
and not the family home.
Steven's income consists of $14,500 of rental income plus $19,477 of Age Pension.
That’s because under Assets Test, the property value is being reduced by the value of investment loan.
Therefore Steven’s total income is $33,977.
This might not be a fortune, but most certainly one can live on that level of income much more comfortably.
So as you can see a very similar situation you might say, but two completely different outcomes with Peter below the income poverty line,
and Steven being quite comfortable and enjoying his retirement.
So we might say that Steven's debt would be one of the very few examples, when having a debt is justifiable
as otherwise he would not be eligible for Age Pension under the Assets test.
His overall income would have been still higher than Peter's but still lower than in a current scenario described, even with the loan running.
And this is a very simple example of how a specialist retirement planner can assist and reshuffle your assets so you can access the highest benefit from Age Pension
or other government benefits as well as setting up your savings with income certainly and security.
I hope you found this video helpful. If you have a question or a comment, please list it below my video.
Also, visit my website AboutRetirement.com.au.
My website is fully devoted to the issue of retirement, and when you are there, please don't forget to sign up to my newsletter.
And please LIKE this video and SUBSCRIBE to my channel never to miss my next video.
And now my further video recommendations: first one previously mentioned
Downsizer Contribution to super
and how this could help you to improve your retirement.
The second recommended video for today is the list of videos
Retirement Planning - Superannuation Strategies
starting with: Which type of super is the best for me?
I will see you in my next video. Bye