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The Money Mindset of Debt in Retirement

Debt can be a burden, but it’s also a tool, even in retirement, writes Andrew Ford, General Manager – Retail & Reverse Mortgages at Heartland Bank.

6 February 2023

It’s human nature to judge. Often our judgements are based on our own experiences, values, perceptions and standards. That’s why when someone talks about borrowing in retirement, it’s natural that most of us treat this with caution – and some with outright disapproval.

One in five retirees have a mortgage

The reality is that indebtedness in retirement is on the rise. According to credit reporting bureau Centrix, the number of mortgage holders aged 65 and over increased by 17.2 per cent between 2017 and 2022, with nearly one in five Kiwi pensioners managing a mortgage into retirement in 2021.

While the numbers don’t lie, what they don’t tell us is whether this is a bad thing or not – this is where the psychology of money comes into play. While the number of mortgage-holding retirees has increased significantly, so typically has the value of their property and other assets, meaning their net position may have actually improved. Going back a couple of decades, retiring with a mortgage-free house worth $250k and a small amount of savings may have been the fruits of a productive working life. Now, with the average property price in New Zealand being approximately $1m, homeowners may be in a stronger position comparatively, despite having some debt.

Borrowing to fund a better lifestyle

There is also the dilemma of whether borrowing in retirement is frivolous and irresponsible, or a great way to do the things you enjoy and deserve. Take this example.

Joan and Paul are in their early 70s and have a home worth $750,000, along with $200,000 in savings. They have always dreamed of travelling across the United States on Route 66, and they’ve decided to spend $50,000 of their savings to tick this off their bucket list. I think most people would say, ‘Good on you, Joan and Paul!’ On the other hand, let’s say Joan and Paul didn’t have much in the way of cash savings but did have a house worth $1m. If they decided to borrow $50k via a reverse mortgage in order to fund their dream holiday, would the response be the same?

Most people don’t want debt. Families don’t want a mortgage, they want a home. Individuals don’t want a car loan, but they may need a car or want one that is safer and more efficient. Business owners don’t want credit, but they need capital to grow and prosper. Is debt in retirement any different, provided it’s lent and borrowed in a responsible manner?

What about the inheritance?

Another consideration around borrowing in retirement is the impact on inheritance. This is a valid concern for many – however, many people in their late 60s to mid-70s have children who are independent and are making their own way in the world without wanting or needing support. Often children would prefer their parents enjoyed their retirement, rather than leave it all behind. For many, it’s even become commonplace to pay out inheritances upfront through higher education costs and support through young adulthood.

In saying this, many reverse mortgage customers choose to use some of their funds to support their future generations. Helping with the deposit for a house, educating grandkids or creating memories with an amazing intergenerational holiday are common. We have one customer who gave each of her grandchildren money for a car, on the condition they use it to visit her. She wanted to see their joy while she was alive rather than them benefitting after she was gone.

It’s natural to make judgements based on our experiences and what society has taught us – but the world is changing, and so is the way we approach debt. Having options available, as well as making informed decisions, with input from friends and family, is more important than judgement.

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