Pre-retirement debt: managing mortgage, investment loans, and personal debt in the years before retirement

More Australians are entering retirement with material debts than was historically typical. Australian Bureau of Statistics census data and housing research consistently document a rising proportion of people aged 55 to 70 carrying mortgage debt — a pattern that reflects later homeownership, property upsizing during working years, and the higher house prices of the past two decades. Investment property loans, personal loans, and credit card balances add to the picture. Understanding the right strategy for each type of debt in the years before retirement — rather than defaulting to either "clear everything" or "ignore it" — shapes retirement cash flow for decades.

Why is managing debt in the approach to retirement more complex than it looks?

Debt in retirement creates several overlapping problems. The repayments must be funded from retirement income that may be fixed or diminishing, competing directly with living expenses. The interest cost continues regardless of whether income is sufficient to cover it. Investment debts affect the Age Pension means test. And many retirees feel a strong discomfort carrying debt that can lead them to make financially suboptimal decisions — like drawing down superannuation rapidly to clear a low-interest mortgage at the cost of future investment returns.

The right strategy depends on the type of debt, the interest rate, the tax position, and individual cash flow needs. The goal is not debt-free retirement as an end in itself — it is the right combination of retirement assets and liabilities to produce sustainable income.

How should you handle a home mortgage in the years before retirement?

For pre-retirees with a mortgage on the principal residence, the decision tree has several branches. The straightforward route is to continue regular repayments throughout the pre-retirement years and enter retirement either mortgage-free or with a small remaining balance manageable from pension drawdown. For those with substantial super balances and a remaining mortgage, another approach is to withdraw a lump sum from super at retirement — tax-free for those aged 60 or older who have met a condition of release — and clear the mortgage entirely at that point, then convert the remaining super to an account-based pension.

The trade-off in using super to clear the mortgage is that the withdrawn funds no longer earn tax-free returns within the retirement-phase pension. For mortgages with interest rates well above expected investment returns, the case for clearance is strong. For lower-rate mortgages held alongside expected long-term investment returns, the mathematics may favour retaining the mortgage and keeping the funds invested. The personal preference factor is also real: many retirees find the psychological benefit of a mortgage-free home worth a modest financial trade-off.

A common comparison in the pre-retirement years is whether to direct additional cash toward mortgage repayment or superannuation. The effective, risk-free return from mortgage repayment is the interest rate saved — whatever rate you are actually paying on the loan. Concessional super contributions offer a tax saving at the contributor's marginal rate versus the 15% contributions tax, plus the expected long-term investment return on the contributed amount, but the funds are inaccessible until preservation age. For most pre-retirees, a balanced approach — maintaining regular mortgage repayments while also contributing to super, particularly through carry-forward concessional contributions where TSB is below $500,000 — tends to produce better overall outcomes than focusing exclusively on either.

How do investment loans and negative gearing change in retirement?

Investment property and margin loans sit in a different category from the home mortgage. Interest on investment loans is generally deductible against the related investment income — the principle underlying negative gearing. The effective cost of these loans, after the tax deduction, depends on the borrower's marginal tax rate. For a worker on a 47% marginal rate during peak earning years, the after-tax cost of a 6% loan is around 3.2%. For a retiree on a 19% marginal rate (applying the low income tax offset), the same loan costs around 4.9% after tax. The tax benefit of negative gearing is materially smaller in retirement.

For retirees holding negatively-geared investment property — particularly where the rental yield is weak relative to the property's current market value — retirement is often the natural point to reconsider the holding. Selling the property, clearing the loan, and redeploying the net equity into superannuation or other income-producing assets may produce better net cash flow and a more favourable Age Pension position, depending on individual circumstances. For Age Pension purposes, investment loans secured against an investment property reduce the assessable value of that property under the assets test — the net equity is what is counted. Selling and converting to financial assets changes this calculation, sometimes favourably and sometimes not, depending on the relative sizes involved.

Why should personal debt and credit cards be cleared before retirement?

Personal debts — credit cards, personal loans, buy-now-pay-later balances — carry interest rates far above any other category of debt in most Australians' financial lives. Standard Australian credit card interest rates are consistently in the range of 15% to 22% per annum or higher. No conservative investment strategy reliably returns more than that on an after-tax basis. Clearing personal debt of this kind should take priority over almost any alternative use of available funds, including additional super contributions.

For pre-retirees carrying material credit card or personal loan balances, the planning priority is clearance before retirement — using surplus income during the final working years, or a structured repayment plan if balances are large. Entering retirement with high-rate personal debt creates ongoing cash flow drain and a guarantee of negative real return on the borrowed amount. In some cases, this points to spending pattern issues that benefit from budget review alongside the debt management strategy.

How do different debts affect the Age Pension assets test?

For Age Pension purposes, the home mortgage sits on exempt assets — the principal residence is not counted in the assets test regardless of mortgage size, so the mortgage itself does not reduce assessable assets. Investment loans secured against investment properties reduce the assessable value of those properties. Margin loans secured against shares reduce the assessable value of the share portfolio. Personal loans and credit card debts, because they are not typically secured against specific assessable assets, generally do not reduce the assets test assessment.

For most pre-retirees, the timing and structuring of debt repayment does not dramatically affect Age Pension entitlement, because the assets test compares total net assessable assets rather than individual asset-and-liability pairings in most cases. For retirees whose position is close to the assets test threshold, however, the sequencing of debt repayment and asset drawdown can matter, and specialist advice on the interaction is worthwhile.