6 ways to reduce debt before retirement

We all want to face retirement in a good financial position. Ideally, that means having funds socked away to live on, savings in place for any eventualities, and hopefully all your debts paid off.

The alternative could be mortgage payments and credit card bills hanging over your head– which can be stressful if you’ve retired and no longer have a regular paycheck coming in. But unfortunately, a lot of New Zealanders face retirement being unprepared financially and spending in excess of their superannuation payments.

What’s the solution? Well, with a bit of forward planning, you can have a retirement to look forward to; in which you’re debt-free, your finances are sorted and you have the right insurances in place to protect you. Here’s how to get started.

Step 1:  Figure out what you need to retire on

What do you need to live on in retirement? Let’s quickly crunch the numbers. According to the latest Retirement Expenditure Guidelines (produced by Massey’s NZ Fin-Ed Centre), a no-frills retirement for a two-person household in the provinces would largely be covered by super, but would still require savings of $75,000 (assuming retirement at age 65 with a life expectancy of 90 (for both in couples). A two-person household living in a metropolitan area would need to have $195,000 in savings to supplement their super. On the flip side, a ‘choices’ lifestyle (with a few more extras) would require savings of $511,000 for a 2-person household in the provinces, or $809,000 if living in the city.

If your retirement savings fall short of these figures, it’s never too late to start adding to your fund – you can contribute a certain percentage of your salary and your employer must match it with at least 3 percent of your gross salary, so that’s something to consider.

Step 2: Create a budget

Now you have a retirement figure to work towards, it’s a great idea to create a budget to give you a big picture view of your finances. You can also figure out how you can start to save more proactively and look at ways to clear your debts faster. It’s important to create a budget that’s not too restrictive, and one that works for you and your current lifestyle.

To start with, take stock of all your incomings and outgoings over the last six months, so you can figure out what your expenses are, and where you might be able to cut back. Using a budgeting tool like this one to keep you on track can be useful.

Step 3: Clear your debts

There’s nothing worse than facing retirement with a mortgage and credit card bills hanging over your head, so now’s the time to consider to start chipping away at any debts you may have. The good news is, 78 percent of non-retirees in New Zealand say they plan to own their home when they retire. 

There are many strategies to clear or reduce debts. Some financial experts suggest clearing the smaller debts first then working up to the larger ones, as it can be easier to clear smaller debts – and doing so can keep you motivated to keep going. Some suggest clearing the highest interest rate loan first then go down to the next one. Looking at whether you can roll credit card debt into a lower interest rate account and make extra repayments on the debt might be something to think about. A single payment can be a lot easier to manage than multiple ones, and you could by paying less interest however, you just need to be aware that repaying a new loan over a longer period could cost more in interest overall. You could also look at moving any extra funds into your mortgage – every little bit helps.

Step 4: Get your affairs in order

It’s estimated that more than 50 percent of New Zealanders don’t have a legal will in place. As part of your estate planning in general, it’s important to consider having a will or making sure your existing one is up to date. You might also want to take the time to appoint a power of attorney, who can handle decisions for you if you become ill or incapacitated in some way. Most people would choose their spouse, a trusted friend or another relative to step into this role.

Taking care of your health and making sure you have the right insurances in place is also an important consideration – especially if you’re raising a family. Funeral insurance is one such cover worth considering, as it pays out a lump sum in the event of your death, so your family have the money to pay the immediate bills that arise.

Step 5: Seek professional advice

Seeking out a good financial planner is a great idea if you’d like professional advice on how to manage your money. They can also offer help on investing, if that’s something you’re considering, and discuss how to diversify your investments.

A good advisor will also help you figure out your risk profile, and the best kind of investments to be making depending on how close you are to retirement. They can assist you when considering whether a high, low or medium-risk investment would be suitable for you at your life stage, or whether putting spare funds into term deposits or high-interest savings accounts you can access if you need to would be a suitable option.

Step 6: Consider all your options

If you’re feeling stressed at the prospect of retiring or don’t feel ready to transition to life beyond work, you’re not alone. Research shows a quarter of retirees don’t have the money they need to do the things they want in retirement, and nearly half say they’d need to accumulate more funds before they retire.

If that sounds familiar, it might be worth looking at other options – such as continuing at work for a bit longer or downsizing to a smaller home to free up cash.

It’s never too late to start getting organised and preparing yourself financially for retirement – which may mean knuckling down to a budget, clearing your debts, paying off your mortgage (or all three!) Building on your savings, making savvy investments and ensuring you have the right insurances in place can also ensure peace of mind for any retiree.

Being proactive about getting your affairs in order and seeking professional advice if you need it can also help smooth your transition from the work world to a life of leisure. And the more planning you do, the better off you’ll be. Enjoy your retirement!

Considering insurance? Find out how Seniors Funeral Insurance can help for peace of mind.

25 Feb 2022