Fearless debtors approach retirement with big loans

One of the great truisms of retirement is being sorely tested – or mugged by necessity – by the idea that people who retire should not carry any debt.

That might be a fine and dandy goal but in an era of fearless borrowers, racing home prices and volatile interest rates it will be a goal that many fewer people will be able to meet.

According to an AMP (ASX: AMP) study, a staggering one in every nine Australians now expect to have more than $250,000 in debt when they retire.

Debt of $250,000 or more along for the retirement ride

Along with this pile of debt AMP also found that fewer than one in 10 Australians expect they will have enough savings for retirement, and one in three are not confident that their nest egg will provide for an adequate lifestyle.

However, it is the main finding that one in nine expect to enter retirement with more than $250,000 owing in debt that has really stopped a lot of financial planners in their tracks and sent them scurrying for their spreadsheets to see how this might work.

Added to the retiring debtors, more than two in five said they would opt to sell and downsize to reduce their debt – a scenario that adds some further layers of uncertainty and risk into already complex retirement calculations.

Australian Bureau of Statistics backs up findings

There is little doubt that the AMP study is close to being very accurate with the Australian Bureau of Statistics (ABS) finding that the amount of household debt now sits at an average of $242,000 for Australians over 55.

What remains clear through the study is that staying in the family home remains important to retirees, even if that comes at the expense of what could be a higher income in retirement.

“For as long as we can remember the Australian dream has been debt-free home ownership, which provides the financial foundation and security for a comfortable retirement,” AMP director retirement Ben Hillier said.

“While home values and super balances are increasing, research shows that more and more Australians will be retiring with increasing levels of household debt, leaving more retirees exposed to interest rate fluctuations, and presenting an evolving challenge in financial planning for retirement.”

Could retirement debts be a risk for banks?

That is undoubtedly very true, with long lingering housing debt adding to financial risk in many different ways.

It could also be a risk for banking sector, which may become less excited about lending big to those in their late 40’s and 50’s if there is a likelihood they could drag those loans over to a lengthy and uncertain retirement period.

Interestingly, another survey showed that while these retirees are determined to carry quite large debts into retirement, they are also quite happy to do so.

Indeed, they may have become so used to large debts that they see no problems with them even as their income needs become met by superannuation.

The TAL and Investment Trends Retirement Income report found fewer than 5% of retirees are concerned about still having debts to pay off in retirement.

Confidence on the rise

Overall, the TAL research showed that Australians are more confident about funding their retirement, with a higher percentage of retirees anticipate that their savings will last them throughout their retirement.

That has risen to 35% of retirees in 2023, up from 28% in 2022, who expect their savings to outlast their retirement.

Even more surprisingly, the report found that three in five retirees feel they can live comfortably, up from 55% in 2022.

People might be confident and dead wrong

Of course, they may be absolutely mistaken and only time will tell but it is perhaps not surprising that a generation raised on big and growing debts are nowhere near as frightened of them as their parent’s generation.

The report also found that the retirement funding gap, which is the difference between expected income and perceived income needed for a comfortable retirement, has decreased for non-retirees.

The average funding gap has gone down to 27%, from 34% last year even as the perceived income needed for a comfortable retirement has increased to a record high of $4,700 per month, from $4,300 last year.

Those who had a retirement funding gap were solving it by working longer (51%), reducing spending (49%), contributing more to super (39%), or seeking advice from a financial adviser (35%).

Fearless debtor retirees will be interesting breed to watch

The TAL answer is that lifetime annuity products might help to fill the gap but if you look at this another way, a whole pile of retirees who are unafraid of debt and growing more confident about their ability to manage it into retirement could produce some very interesting outcomes.

Given the rising cost of aged care and the inevitable uncertainty around interest rates and property prices, not all of the ensuing surprises might be pleasant ones.