Ask Paul: I'm 62 with a mortgage, afraid I can never retire

Can you retire comfortably if you still owe money on your home? Paul tackles a common retirement dilemma.

Reader question

Hello Paul, I am a 62-year-old single teacher with a $165,000 mortgage. I have $110,000 in UniSuper and $500,000 managed by a financial adviser.

I can't see myself retiring before 70.

I need advice about whether I should transfer all my money to UniSuper because I'm not happy with the investments managed by my planner.

Also, should I wait until I retire to pay off my home loan?

I'm concerned that I'll be dropping my standard of living once I hit 70. - Beth

Paul's response

Financial security as we move into later life is one of the big questions of our time, Beth, and no wonder.

In Australia there are more than six million of us aged 60-plus. Some 2.75 million are 60 to 70, 2.5 million 70 to 80 and a little more than 1 million are 80-plus.

This in itself is quite extraordinary.

If we go back to the start of the industrial revolution in the period 1760 to 1840, our life expectancy was only 30 for men and 32 for women, and this was in longer-living countries.

Retirement age

The year 1908 is of particular interest to me. In the long history of humans, it isn't that long ago.

This is the date when Australia introduced the age pension for males. The pension for women was not far behind, starting in 1910 at age 60.

Today the age pension date is 67, which seems a sensible age to consider retirement.

Much has changed and today's life expectancy would shock our forebears who made the age qualification decision in 1908, when life expectancy for males was 58. The age pension was seen as a safety net for those who lived to the ripe old age of 65.

If we applied the 1908 rule of the age pension cutting in seven years beyond our life expectancy, today that would see the male pension age being 88 and women 91.

Despite the proposed change to our tax system, I don't see this idea being put on the table by any government.

Sure, our age pension scheme is not perfect. But if we cast our eyes on other age pension systems around the world, it is better than pretty much anywhere else and it does provide a good, basic safety net.

Where it is remarkably generous is the level of assets you can own and still qualify for at least a part pension.

As a homeowner, Beth, using today's limits, which will increase with inflation, at age 67 you would qualify for a part pension with assets, not including your home, of $722,000.

Invest and diversify

I appreciate that you are not happy with your planner.

In my view, being a planner is not much about investing your money. That's the easy bit.

Today you can own a diversified portfolio at low cost with your fund manager. Outside of super we can have money invested in pretty much whatever we like for next to nothing.

Global managers will spread money across all asset classes, including many hundreds of underlying investments, for as little as 0.1%.

Where I find advisers valuable is with strategy, tax planning, estate planning and providing a lifetime plan.

As a 71-year-old, working part-time, like you I want to do my best to maintain our standard of living in a volatile global economic climate.

I'd need a lot more information than you have given me, and many more pages in this magazine, to answer you fully.

But I can tell you what you need to do.

First, you need to put a dollar amount on your standard of living, in today's dollars.

That number is the key step in moving to an answer. You must have this starting point.

Then we look at your assets and liabilities.

I see you have a mortgage of $165,000, but what is the value of your home?

It may well be this is your home for life. Or if it is bigger than your long-term needs, a longer-term plan may be that it is sold so you free up capital and pay off your mortgage by downsizing.

Work out a life plan

You may also get a part pension at age 67 or later. Any pension amount helps to take pressure off your capital.

Pensioners are also eligible for the government's reverse mortgage, where, for a reasonable interest rate of 3.95%, you can draw up to twice your pension in a reverse mortgage against your home.

This is not repayable until you sell or pass away.

To sort this out you need a meeting with your adviser, a new adviser, or one from your super fund.

There is so much complexity.

I want you to have a life plan that goes with you into your nineties.

With the money you have now and can save in your remaining working years, I suspect you'd be able to draw some $30,000 a year while keeping your capital growing with inflation.

This is probably too little to maintain your standard of living, so you may go into a drawdown strategy, with an age pension gradually cutting in, and possibly the government reverse mortgage.

Your life plan model may gradually incorporate an age pension, which becomes more complex.

You may find your super fund provides advice or can refer you to another adviser.

Having your funds in a low-cost super manager, such as UniSuper, is a sensible strategy, but as I say above, I am not so concerned about investment.

The part that will be a terrific guide to your future standard of living will be a life plan.

What to read next

• Ask Paul: I finally invested - then lost money straight away
• Australians saved hard - why do they still fear retirement?
• The super boost most Australians aren't paying attention to
• What happens if you miss a mortgage payment
• Why thousands of retirees are better off with less super

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