Should I withdraw from super
to pay off my loan

For years Australian retirement was so very straight forward. You work, you live in the city, you pay off your home-loan. Then at retirement, you just go for a half-year trip along the coastline, care-free, debt-free sounds like a very happy retirement.  

Now, when the property prices have risen so much, not only it is more difficult for younger generation to buy their first home, but it is also more difficult for older generation to pay off all their loans. Therefore, a number of retirees have to face the fact of having the mortgage when they reach the retirement age.  

So why is this happening, that more and more people face to enter retirement with the mortgage still not fully paid off?  And is withdrawing funds from super an answer?  

Let’s try to first find the answer to this question: Why is it more difficult to pay off the home-loan now than years ago?  

1. Higher property prices – this is a pretty obvious reason. It takes now 10 times the average wage to service the loan, comparing to 3 or 4 times 20 years ago.  

2. Delayed entry – The high property prices in many cases delay the entry time to buy a family home, therefore it leaves fewer working years to have that loan paid off.  

3. Lifestyle – I think these days it is also a different way of looking at life and priorities. 20 years ago a couple would sacrifice their lifestyle to the maximum to have that home loan paid off asap, but now we look at home loan as one of our responsibilities, but at the same time, we want to have lifestyle, holidays, nice things in the house, social life etc. that is reducing your capabilities of additional repayments.  

4. Current low interest rate environment – well maybe that does not apply to everyone, but most certainly some people are taking advantage of higher earnings from shares or superannuation or investment properties, with all providing great deal of tax benefits.  

So now then we know the reasons behind having a mortgage when facing a retirement decision, the questions is what to do? When getting ready to retire, most likely the last thing you want hanging over your head is that loan. After all, once you stop working, there is no more income, so it is only logical that repaying whatever loans you have would bring you a great deal of peace of mind and feeling of security, but financially, is it a wise decision? Is it better to reduce the value of your super to be mortgage free? 

The answer is not as straight forward as you would like it to be. Why?  well each one of us is different and we want different things, different things are making us happy or worry, and this is a bottom line why there is no straight answer.  

So let’s review what I mean: 

1. Your Interest payments vs Superannuation earnings  
one can argue very successfully too, that there is no point in repaying that mortgage, as most certainly a super can earn more that my mortgage repayments. From purely math’s and calculations perspective, it might be correct: 

If your super fund is earning 6% but your mortgage is charging an interest of 3%, you are still 3% in front. However, please don’t forget that if your savings are in super – accumulation stage, there is still 15% tax payable on that 6% return. Therefore, it is no longer a return of 6%, but closer to 5%. Still higher, but those returns are not guaranteed, therefore you could have years of negative returns and then your loan repayments are really costing you.   

2. Cashflow 
If your cashflow is not sufficient to sustain those monthly mortgage repayments, then it becomes not only difficult to meet those repayments, which could lead to issues with your bank, which then introduces a great deal of personal stress.  

3. Age Pension  
If you have reached your Age Pension age, your mortgage against your home is not providing you with any benefit. Because your home is an exempt asset under Income and Assets test, so is your home loan. Centrelink does not care about your financial issues because you have a home loan.  

But if you have savings in super, pension account, or even in your offset account, those are all counted under Income and Assets Test and will reduce your Age Pension eligibility accordingly. 

If you are unsure how much your Age Pension could be reduced under either of those tests, just read  “The truth about Assets Test” and “Age Pension Income Test madness” 

So what’s the verdict? 

Well, it is up to your decision and dispute, but after over 20 years of working and advising retirees, I believe that if you are in a situation of retirement with a mortgage and good super savings then you have those choices:  

1. Withdraw from super and pay off the loan  

I actually list this as one of the ways to improve your retirement, you can read it here: “31 ways to Improve Retirement Planning Part 1″. Paying off your mortgage will not only help you with your cashflow, yes it will be lower, but you can adjust and live within your means, but at least it will be reliable. But even a bigger benefit is feeling of safety and security, knowing that your home is really yours and no bank will come to take it away from you. If you wish, which I think is not a bad idea, keep the loan facility open. It might help you in the future if you need extra funds for emergency, but it is only a good idea, if you are not a spender and you can control and budget your expenses.  

But obviously you need to meet specific rules in order to be eligible to withdraw from super, such as reaching your preservation age. If you don’t know what that is, read: “When can I access my super, please” 

2. Downsizing  
I believe for some people this might be the best idea. Your home has gone up in value considerable over the years. But now, that kids left, who needs all that space. An idea to sell might be a blessing. Not only it is exciting to start fresh, but by selling, you can pay off the loan, so no need to withdraw from super, and maybe there is some money left over, then you can benefit from downsizer contributions, if how this works just read: “Downsizer contributions to super – part 1 – Rules” and  “Downsizer contributions to super – part 2 Who can benefit” 

Whichever way you choose is best for you, get the full financial and retirement advice, if for no other reason to compare those options to see where you end up financially most secure and happy.   

“Retirement is a Journey not a Destination, so be well prepared for the Ride” 

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement