When it can pay to delay paying off debt

Getting older has its pluses. Sure, by our 50s and beyond, the days of notching up a personal best in a marathon are likely behind us. But the good news is that we are often approaching peak wealth.  

Research by KPMG found baby boomers enjoy average net wealth of $2.31 million per household - significantly higher than either Gen X ($1.88 million) or Millennials ($757,000). 

The thing is, it's not just about having more assets. The boomers have the lead on wealth largely because of lower debt levels.  

Average household debt among boomers is just $82,000. It's a drop in the ocean compared to $448,000 average debt among Gen X and $410,000 across the Millennial generation. 

On the face of it, this shows many seniors are embracing the wisdom of paying down debt ahead of retirement. 

However, there is a potential downside to being completely debt-free in your 50s, 60s, and even 70s: it can be a lot harder to be approved for new debt if funds are needed. This is something InvestSMART's Head of Funds Management, Alastair Davidson, discovered and wrote about in his Diary of a self-funded retiree column, which inspired me to write this article.

Hang on to the credit card  

Credit cards can be handy for retirees for anything from making restaurant reservations to paying for expenses when travelling. 

Once you reach retirement though, and are no longer earning a regular salary, lenders can get cold feet if you apply for a new card.  

On one hand, the Age Discrimination Act makes it illegal to treat borrowers unfairly because of their age.  

On the flipside, banks are keenly aware of responsible lending obligations, and they can be nervous about handing out credit to seniors. 

That's not to say it's impossible to score a credit card when you retire. You may just need to jump through more hoops. 

Landing a new credit card in retirement 

If you've hung up your work boots, skip a card issuer's online application process. Chances are you will be rejected by the bank's automated system.  

Unsteady income is one of the main reasons people are rejected for a credit card. So the onus is on you to pull together paperwork confirming a reliable income stream.  

Phone the bank's call centre, confirm what's needed - such as copies of your latest super fund statement, tax assessments and maybe even your accountant's details  - and plug away at applying for a card.  

Some credit cards are actively pitched at older borrowers. National Seniors Australia offers a 'National Seniors Credit Card'. It's actually issued by Community First Bank, and two years of tax assessment notices is listed as acceptable evidence of income. 

Finder says plenty of mainstream card issuers, including the big four banks, have the scope to issue credit cards to retirees. It's all about finding out what your bank is looking for as proof of income. Most will take a keen interest in your super statements.  

Your home loan - it doesn't always pay to clear the slate 

In retirement, every dollar counts, and mortgage interest is money you could be spending on lifestyle, not your loan. 

Even so, there can be reasons to delay fast-tracking your way to mortgage freedom if you are close to retirement.  

These situations include:  

• You have high-interest 'bad' debt 

It can be worth pausing extra home loan repayments if you are also paying down 'bad' debts. 

By this I mean high interest credit cards, personal loans, and car loans that fund a steadily depreciating vehicle.   

It can make financial sense to channel extra cash towards paying off expensive bad debts so the slate is cleared before retirement.  

Your mortgage can play second fiddle until then. Not only are mortgage rates some of the cheapest available, your home is likely to steadily rise in value.  

Once you've ditched the bad debts, you can turn your attention to the home loan. 

• You're low on super heading into retirement 

If you're several years out from retirement, there can be compelling reasons to put spare cash into super rather than your home loan.  

Yes, the recent US tariffs have sent share markets into the red. But most Australians have their super in a 'balanced' option, where around 30% of investments are held outside of share markets.  

This means the value of your super savings is likely to fall by less than the broader sharemarket.  

Moreover, history tells us that stock markets go on to recover over time. That was the case with the global financial crisis of 2008-09, and more recently at the start of COVID, when Australian shares dived 9.7% in one day. Yet the ASX had returned to pre-COVID levels just over 12 months later.  

Growing your super means being able to enjoy more tax-free income in retirement while also providing benefits today. 

You may be able to claim a tax deduction for personal contributions to super - up to $30,000 annually in the current financial year. This total includes the boss's compulsory contributions plus any salary sacrifice contributions.  

The tax saved on deductible contributions can be used to help pay down your loan, or continue growing your super.  

If you're worried about further market falls, talk to your super fund. You may be able to direct current contributions into a conservative or capital stable investment option to minimise any immediate share market pain. 

• You're likely to need to borrow money again 

If you're ahead with your home loan, you can always claw back extra repayments through redraw.  

It can provide cash to kick a few goals - like renovating your home or buying a new car. And it can be a lot quicker and easier than applying for a new loan. 

Just be aware that clawing cash out of your loan can see you paying off the balance for longer.  

The trick is finding the sweet spot between how much you'd like to withdraw, and when you would like to farewell the mortgage for good.   

What to weigh up 

Planning for retirement calls for a close look at many aspects of life.  

You may want to add 'review credit card' to your pre-retirement plans. Switching to a new credit card offering a lower rate, a reduced annual fee or better reward points can be a lot simpler when you are still in the workforce and earning a regular wage.   

It's also sensible to put your home loan under the spotlight.  

The market turmoil fuelled by the Trump administration's tariffs are seeing financial markets price in a 100% chance of a rate cut in May. 

It may not end there. NAB expects a further 0.75% easing of rates beyond May. ANZ expects the cash rate to reach 3.35% come August, down from 4.1% in April. 

If rates do fall, your variable rate loan repayments will head south also, relieving the pressure to clear the mortgage slate ahead of retirement.