Dubai: In an ideal world, you'll retire with no debt, but that might not be realistic. While that depends on what debt you have, any debt apart from home loans need to be addressed quickly, experts reiterate.
According to recent statistics, nearly a quarter of the world’s current retirees still have an outstanding mortgage balance. But while you would want to enter retirement years without monthly mortgage payments, not everyone meets this goal.
Some perks of carrying a mortgage into your retirement
So while it's not ideal, quitting the workforce with monthly mortgage payments doesn't have to be a financial disaster, debt restructuring experts reveal, while adding that there are some benefits of carrying a mortgage into your retirement years.
1. It is better than credit card debt
Mortgage debt comes with low interest rates. That makes it much less painful than credit card debt, for example.
“While your mortgage loan might come with an interest rate of 4 per cent or even lower, you'd be lucky if the interest rate on your credit card was only 15 per cent,” noted Dubai-based debt restructuring and financial planning consultant Rupesh Naish.
So if you are nearing retirement and you have both mortgage and credit card debt, it makes more sense to devote any extra dirhams to paying off your credit cards first.
“You can start worrying about your mortgage after you've eliminated your debt with the highest interest. Of course, it's best to enter retirement with neither mortgage nor credit card debt. If this isn't possible for you, do the smart thing and tackle those cards first,” Naish added.
2. Sometimes it's better to invest
While you might be able to pay off that mortgage loan before retirement if you sink enough of your extra dirhams into it, it might make more sense to place those same dirhams into the stock market or other investment vehicle.
The average annual return for stock markets since it was first launched in 1928 has been about 10 per cent. And that's factoring in both great years and terrible years.
“Instead of pouring more money into your mortgage, you might do better financially by investing your extra dirhams and enjoying the higher returns,” said Brody Dun, an investment manager at a UAE-based asset advisory firm.
“This only holds true, of course, if you can actually afford your mortgage payment once you move into retirement. If you're worried that you won't have enough monthly cash flow to make these payments on time, do everything you can to pay off that mortgage first.”
But if you began investing late, your portfolio may not have had time to grow enough to fund a comfortable retirement. “Continuing to invest in stocks will allow you to expand your savings and reach your target figure,” Dun added.
“It still makes sense to balance your stocks with more conservative investments, but taking on a little bit more risk in exchange for potentially higher returns may be worth it.”
Dividend stocks are not only more stable than many other stock investments, but also they can generate cash flow at a time when you're not bringing in other income.
“A good dividend stock can produce a yield of more than 4 percent, which is more than what you'll get from many other non-stock investments right now. This will help ensure the growth of your portfolio is at least outpacing inflation,” Dun further noted.
3. Paying rent can be risky
Your retirement plan might involve selling your home, paying off your mortgage, and downsizing to an apartment. But experts add that one needs to be careful, when doing just that as renting comes with plenty of risk.
“If you have a fixed-rate mortgage, your payment will remain mostly constant until you pay it off. If you're renting, though, your landlord can raise your monthly payment every time your current lease agreement comes to an end,” said Naish.
“When living on a fixed income, certainty is good. The life of a renter doesn't have as much certainty.” Again, if you can afford your monthly mortgage payment, you might want to keep it and avoid the uncertainty of rent that could fluctuate from year to year.
“If you have a deductible of Dh250 for your auto insurance policy, for instance, you'll have to pay for the first Dh250 in costs after an accident while your auto insurer will cover anything after that,” explained UAE-based insurance consultant Pamela Barbaglia.
“But lower deductibles increase the amount you pay in insurance premiums. When you raise your deductibles, you'll pay less for your auto and homeowners' insurance policies. By the time you reach your retirement age, you might have enough saved to cover these higher deductibles, and moving to lower payments for your insurance policies might help you cover your daily living expenses.”
What to do if you're retiring with debt
For a growing number of older people, the golden years have been tarnished by debt. If you're retired or will be soon, and too much debt is weighing you down, here are three common sources of senior debt, along with some suggestions for breaking free.
• What to do when you have mortgage debt
“If your overall housing costs, including home insurance, take up more than 25 per cent of your monthly retirement income, consider downsizing,” noted Barbaglia.
Reducing or eliminating your mortgage and lowering what you pay for homeowners insurance, utilities, and maintenance could do wonders for your financial peace of mind, experts reiterate.
• What to do when you have credit card debt
“If your credit card debt is unmanageable, consider negotiating lower interest rates. In addition, if you haven't done so already, don't put medical bills on your credit card,” Naish added.
Instead, see if you can work out a payment plan directly with the medical provider, which may offer more favourable terms.
Bottom line? There's plenty of time to retire debt
As you near retirement, you might worry that you'll be saddled with too much debt after you leave the workforce.
“It's important to realise, though, that there are different types of debt, some better than others. Your monthly income in retirement matters, too: If you can easily cover your debts, and still cover your other expenses, your debt won't be as much of a financial burden,” said Naish.
“It may be discouraging to find yourself buried in bills at a time of life when you had hoped to slow down and enjoy the fruit of all your years of labour. However, increases seen in longevity currently mean you probably still have plenty of time to reap those rewards.”
You won't know how bad your retirement debt might be until you first draft a household budget for your after-work years. This budget should include all of the money you expect to flow into your hands after you retire.
Once you have your expenses and your income listed, compare the figures. Will you have enough money to cover everything each month? Or will you be short? Once you've determined your budget, it's time to look at your debt.
You'll also have to determine how much of a financial burden your debt will be after you retire. The debt you bring into retirement might not scuttle your after-work plans. But if it might, that's why a bit of sacrifice now can really pay off later.
