Startling new report reveals more retirees than ever are entering retirement in debt
New research figures have revealed that a quarter of workers stopping work over the next 12 months will have unprecedented levels of retirement debt to cope with. Only 17% of people approaching retirement expect to owe money when they stop work, but 30 per cent nevertheless find themselves still mired in debt. The average sum owed is £34,600, but some 19% of retirees have debts of more than £50,000 and almost one in 10 is £100,000 in the red, according to Old Mutual Wealth’s Redefining Retirement report.
While mortgage rates have plummeted over the past decade, credit card interest rates remain excruciatingly high. Mortgage rates, and in particular those borrowers on trackers or standard variable rates, have come down in line with falling Bank of England base rate. However, credit card rates are still hovering around the 19% APR level, with some cards even higher at an eye-watering 39%. Paying off debt at a time when you no longer have a regular wage can have disastrous consequences for your retirement income. This new data shows the harsh reality that many will not be able to release themselves from those ties immediately, as levels of debt are higher than they perhaps imagine.
Prioritise the most expensive debt
The key to getting your financial house in order is to pay down the most expensive debt first. If you have cash to spare, it’s more important to pay off credit or store cards before your mortgage, as these usually have the highest interest rate. Compound interest is your friend when investing in dividend-paying shares, but your enemy when it comes to debt. Now is the time to get your retirement portfolio in the best possible shape and keep a watchful eye on it up to and during your retirement years.
Too few people consider that the income needs of people in retirement are seldom constant. Research has shown that spending in retirement typically exhibits a ‘smile’ pattern: starting off high as people remain fit and have more leisure time, before falling as activity levels drop and eventually rising again as the requirement for additional care increases living costs. With this in mind, it only makes sense to take a sensible approach to your income draw-down and leave plenty of money in your retirement pot for the later years when you’ll need it most.