Dubai: In an ideal world, you’ll retire debt-free, but that might not be realistic. While it depends on how much debt you have, any debt other than home loans should be dealt with quickly, experts reiterate.
According to recent statistics, almost a quarter of current retirees worldwide still have an outstanding mortgage balance. But while you would like to enter the retirement years without monthly mortgage payments, not everyone achieves this goal.
Some Benefits of Having a Mortgage in Retirement
So while it’s not ideal, exiting the workforce with monthly mortgage payments doesn’t have to be a financial disaster, debt restructuring experts reveal, while adding there are some upsides to keeping a mortgage during your retirement years.
1. It’s better than credit card debt
Mortgage debt comes with low interest rates. This makes it much less painful than credit card debt, for example.
“Although your mortgage might have an interest rate of 4% or even less, you would be lucky if the interest rate on your credit card was only 15%,” noted Rupesh, a Dubai-based debt restructuring and financial planning consultant. Naish.
So if you’re nearing retirement and have both mortgage debt and credit card debt, it makes more sense to spend the extra dirhams on paying off your credit cards first.
“You can start worrying about your mortgage after you eliminate your debt with the highest interest rate. Of course, it’s best to retire without a mortgage or credit card debt. If that’s not possible for you, do the right thing and tackle those cards first,” Naish added.
Mortgage debt comes with low interest rates. This makes it much less painful than credit card debt, for example.
2. Sometimes it’s better to invest
Although you can pay off that mortgage before retirement if you invest enough of your extra dirhams in it, it might make more sense to put those same dirhams in the stock market or another investment vehicle.
The average annual return of stock markets since their inception in 1928 has been around 10%. And that takes into account both the great years and the terrible years.
“Instead of pouring more money into your mortgage, you could do better financially by investing your extra dirhams and enjoying higher returns,” said Brody Dun, investment manager at a US-based asset advisory firm. United Arab Emirates.
“That is only true, of course, if you can actually pay your mortgage after you retire. If you’re worried that you won’t have enough monthly cash to make those payments on time, do whatever you can to pay off that mortgage first.
Why it’s better to invest in stocks after 50
If you started investing early and have made regular contributions to your retirement accounts over several decades, you may be able to adopt a conservative investment approach in retirement.
But if you started 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 increase your savings and reach your goal,” Dun added.
“It always makes sense to balance your stocks with more conservative investments, but taking a little more risk in exchange for potentially higher returns can be worth it.”
Dividend stocks are not only more stable than many other stock investments, but they can also generate cash flow at a time when you are not bringing in other income.
“A good dividend-paying stock can produce a return of over 4%, which is higher than what you’ll currently get from many other non-stock investments. This will help ensure that your portfolio growth at least outpaces inflation” , added Dun.
While you can pay off that mortgage before you retire if you invest enough of your extra dirhams in it, it might make more sense to put those same dirhams on the stock exchange.
3. Paying rent can be risky
Your retirement plan might involve selling your house, paying off your mortgage, and downsizing in an apartment. But experts add that you have to be careful, because renting involves many risks.
“If you have a fixed rate mortgage, your payment will stay pretty much constant until you pay it off. If you are a tenant, however, your landlord may increase your monthly payment each time your current tenancy comes to an end,” Naish said.
“When you live on a fixed income, certainty is good. The life of a tenant does not have so much certainty. Again, if you can afford your monthly mortgage payment, you may want to keep it and avoid the uncertainty of rent that could fluctuate from year to year.
A way to cut costs just before you retire
Several surveys indicate that insurance is the highest cost after retiring from a full-time job. If you no longer have dependents who need financial help, experts add, you can opt out of any life insurance coverage you may still have, which can save you up to $100 immediately. significant money every year.
“If you have a deductible of Dh250 for your car insurance policy, for example, you will have to pay the first Dh250 of costs after an accident, while your car insurer will cover everything after that,” said consultant Pamela. in insurance based in the UAE. Barbaglia.
“But lower deductibles increase the amount you pay in insurance premiums. When you increase your deductibles, you pay less for your auto and home insurance policies. By the time you reach retirement age, you may have enough saved to cover those higher deductibles, and switching to lower payments for your insurance policies could help cover your day-to-day expenses.
Your retirement plan might involve selling your house, paying off your mortgage, and downsizing in an apartment.
What to do if you retire with debt
For a growing number of seniors, the golden years have been marred by debt. If you’re retired or soon to be retired and too much debt is weighing you down, here are three common sources of senior debt, along with some suggestions for freeing yourself up.
• What to do when you have mortgage debt
“If your overall housing costs, including home insurance, are more than 25% of your monthly retirement income, consider downsizing,” Barbaglia noted.
Reducing or eliminating your mortgage and reducing what you pay for home 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. Also, if you haven’t already, don’t put medical bills on your credit card,” added Naish.
Instead, see if you can work out a payment plan directly with the medical provider, who may offer more favorable terms.
At the end of the line ? There’s plenty of time to pay off the debt
As you approach retirement, you may be worried about taking on too much debt after leaving the workforce.
“It is important to realize, however, that there are different types of debt, some better than others. Your monthly income in retirement also matters: if you can easily cover your debts while covering your other expenses, your debt won’t be such a big financial burden,” Naish said.
“It can be disheartening to find yourself buried under bills at a time in life when you had hoped to slow down and enjoy the fruit of all your years of hard work. However, the increases seen in longevity currently mean that you probably still have plenty of time to reap those rewards.
You won’t know how bad your retirement debt could be until you first draft a family budget for your after-work years. This budget should include all the money you expect to receive after you retire.
Once you’ve listed your expenses and income, compare the numbers. 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 will also need to determine the financial burden that your debt will represent after you retire. The debt you bring into retirement might not scuttle your after-work plans. But if so, that’s why a little sacrifice now can really pay off later.