Just how bad is it to retire with a mortgage?

There’s a fierce debate – and a fairly life-changing one – about how much money you really need to retire comfortably.

There’s long been a “standard”, called exactly that, calculated by the Association of Superannuation Funds of Australia, which, currently, looks like this:

Home ownership indisputably makes a significant difference to your ultimate standard of living as a retiree.Credit: Dominic Lorrimer

• The annual cost of a comfy retirement is $73,031 for a couple and $51,814 for a single (until age 85, when expenses fall – less travel; more medical – along with the overall income requirement).
• The lump sum that provides this level of annual income, from retirement at age 67, is $690,000 for a couple and $595,000 for singles.

Now, groups including the Grattan Institute contend that such annual income would, in fact, afford a “lavish” lifestyle. But how do you think you’d fare on $73,031 (couple) or $51,814 (single) a year? Because – though ASFA’s modelling is granular and robust – spending is a very individual thing.

For comparison, the “standard” includes some domestic travel ($86.09 a week for a couple) and even more infrequent international trips ($37.75 a week), maybe one good-value restaurant meal a week ($98), a takeaway meal more like every two weeks ($32.95) and probably two streaming services ($12.77).

But however close this is to covering the lifestyle you’d like in retirement, there is something notably, crucially absent in the “ideal” income amount: rent or a mortgage.

If outright home ownership at retirement is the comfortable-lifestyle dream, be sure to use all the help on offer to get there.

The annual expenses (and therefore the lump sum that generates enough to cover them) only includes the cost of running a house; principally bills, rates and insurance.

So whether you are mortgage-free is going to make an enormous difference to the relevance of this projection and the super (or other investments) you need. And with interest rates and home loan repayments comparatively high for so long now, that’s feeding into retirement anxiety for many.

Most Australians (59 per cent) over 50 can no longer see themselves achieving a “comfortable retirement”, says the new Rethinking Retirement report from Colonial First State (CFS).

And compared to 12 months ago, fewer retirees report enjoying a comfortable retirement now – down from 71 per cent 12 months ago to 64 per cent today.

The CFS report, which surveyed a representative sample of 2250 Australians, also gives insight into just how much pressure ongoing repayments puts on retirees’ purse strings. One in four – 22 per cent – are using their super pension to pay off remaining debt. But, tellingly, this jumps to 30 per cent for those who do not own a home. The report also reveals:

• Retired renters (43 per cent) spend less on healthcare and medical expenses than retired home owners (63 per cent).
• Retired home owners (53 per cent) are more likely to be able to fund travel and holidays than retired renters (27 per cent).
• Retired home owners (54 per cent) are more likely to be able to fund leisure activities than retired renters (26 per cent).

So forget any disagreements about the cost of retirement; home ownership indisputably makes a significant difference to your ultimate standard of living. What, then, can be done to try and achieve it?

Well, the system stacked in favour – if not of the mortgage – of loading super in at the end.

Firstly, in the last 10 years of work – when you are only 10 years away from being able to access your super – there is an argument for choosing to make tax-advantaged super contributions instead of extra mortgage payments, with a view to clearing your mortgage from those super funds at retirement.

Remember, mortgage payments are made with post-tax dollars (with tax as high as 47 per cent) whereas super contributions are taxed at only 15 per cent (if you make them by salary sacrifice or a personal deductible contribution).

This super-charged strategy could pay off your mortgage sooner and cheaper. There is also an opportunity to downsize, which CFS’s report says 13 per cent of us want to do, and shelter a chunk of money from the sale of your home into super.

Provided you are 55-plus and have owned for 10 years, you can squirrel away $300,000 into super from its sale – for both co-owners. And should there be any spare cash after that, each person could bring forward two years of after-tax super contributions (totalling three), so pay in a further $360,000.

If outright home ownership at retirement is the comfortable-lifestyle dream, be sure to use all the help on offer to get there.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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