A recent survey published by leading insurance company, Aviva, revealed that the age group most affected by personal debt is those aged between 55 and 64.

Read on to find out why debt is a serious issue for people in that particular age group as they approach retirement, and why you should consider clearing your debt before you stop working.

Debt can be a millstone around your neck

By definition, once you fully retire, you are no longer working and no longer have any income from employment.

This means that all your retirement income is derived from your State Pension, and any assets you have built up during your working life. For most people this will mean your accrued pension fund, but it could include other savings and investments, or even the proceeds from a business.

With a fixed income, dependent on investment growth, it is easy to see how repaying debt can eat into your disposable income, especially if this debt comes with a high rate of interest.

If not dealt with promptly, credit card interest, for example, can hang over you for years.

As of October 2022, the average credit card interest rate is currently 22.2%, the highest it has been for 24 years. At this rate, the average credit card debt of £6,000 would incur annual interest of £1,332. Repaying the actual debt itself comes on top of that, too.

The impact of compounding interest means that it becomes increasingly more expensive to repay the debt the longer it remains outstanding. This means that the amount of disposable income you have each month is reduced unless you take proactive steps to reduce and clear outstanding debt.

You should have a plan for clearing your debt

Given the effect it can have on your financial stability, if you do have large credit card debts, you should make it a priority to clear them as soon as possible if you are approaching retirement.

Some steps you can take include:

  • List all the debts you have and the interest rates on each
  • Put a plan in place to clear the debt as expeditiously as possible
  • Use direct debits and standing orders so you keep repayments up to date
  • Target the debt with the highest interest rate first
  • Make sure your spouse or partner are aware of the debt and your plans to clear it.

Switching debt to credit cards offering a nil-interest period can be a useful tool to help you, but you need to manage them carefully.

According to MoneySavingExpert, the current best nil-rate term is 34 months. By treating this as an interest-free loan, you can stop interest accruing and aim to clear the debt over the period.

Most card providers offer a fixed repayment amount facility on direct debits, so it is easy to calculate your monthly repayment. For example, based on the debt of £6,000 referred to earlier, monthly repayments of £176.47 would clear the debt over a 34-month term.

Dealing with outstanding mortgage debt

As it is secured against your property, mortgage interest rates tend to be lower than those on unsecured debt.

However, after an unprecedented period of low mortgage rates, they are now starting to climb. This makes it important to include clearing your mortgage debt in your plans, although relatively lower rates may make this a slightly lower priority.

Bear in mind, though, that paying off your mortgage debt once you have fully retired can be more difficult without employment income. Without careful planning it can easily put pressure on your retirement savings. Factor the cost of this debt when deciding on your future goals and ambitions.

Inflation alongside debt can create a double headache

As well as considering attitudes to debt, the Aviva survey also looked at how the effect of inflation can vary subject to how old you are.

The underlying message is that, because older households tend to spend a greater percentage of their budget on domestic energy and food, they experience a higher inflation rate than the publicised headline figure.

According to the Office for National Statistics (ONS), the overall inflation rate reached 10.1% in the 12 months to September 2022.

Meanwhile, the dramatic price rises you have seen in household energy, for example, mean that electricity prices rose by 54% in the same period, with gas prices increasing by 95.7%.

While less dramatic, the current rate of food inflation of 14.6% is well above the overall rate of inflation.

This concept is often referred to as “pensioner-inflation” and can help explain why older age groups can suffer financially.

When set alongside the cost of servicing debt, it can create a “double whammy” that can easily blow your financial plans off course.

Planning for retirement becomes all the more important

The potentially negative effect both excessive debt and high inflation can have on your finances make it increasingly important for you to have a robust retirement plan in place.

Having key information set out clearly makes it much easier to plan ahead, and ensure you are on track to meet your goals.

The sort of information you should put in your plan includes:

  • When you want to retire
  • What you want to do once you do retire
  • How much income you will need in retirement.

From this it is easy to see how debt can be an inhibitor, and how important it is to be as debt-free as possible.

Get in touch

For advice around the best ways to clear your debt, or any other wealth matters, contact us today.

Email enquiries@dbl-am.com or call 01625 529 499 today to find out what we can do for you.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.

Think carefully before securing other debts against your home.