All this week we bring you Morningstar’s Guide to Finding Investment Income. Here, as part of our Perspectives series, David Aird, Managing Director at Investec Asset Management outlines how less fortunate baby boomers can boost their retirement income.
Retiring this year? Chances are you’ll be doing so in the red, with new figures from Prudential revealing that a quarter of workers retiring over the next 12 months will be doing so in debt.
The level of retirement debt is rising too; with the average debt up 30% over the past year to £24,300. Mortgage debt is the biggest contributor to the figure, but credit cards are also large contributors – with half of borrowers admitting they had credit card debt nearing retirement.
While mortgage rates have plummeted over the past decade, credit card interest rates remain eye-wateringly high. Mortgage rates, and in particular those borrowers on trackers or standard variable rates, have come down in line with falling Bank of England base rate. According to Moneyfacts.co.uk, borrowers on variable rate mortgages can pay as little as 1% interest. But rates on credit cards remain at around 19%, with some charging as much as 30% on balances.
Paying off debt at a time when you no longer have a regular wage can have disastrous consequences for your retirement income. With interests at record low levels, stock markets at all-time highs and plenty of economic uncertainty, retirees face considerable headwinds to their investment portfolios already – without adding the burden of debt.
Vince Smith-Hughes, a retirement income expert at Prudential, said: “For most people the move from work into retirement will see them having to cope with a drop in their income. So having to use precious retirement income to pay off debts could make life even more tricky for the newly retired.
“With this in mind, it is a worry that we’ve seen a big jump, not only in the proportion of retirees with outstanding debt but also the amount that they owe. Many people will benefit from a consultation with a professional financial adviser to help get their finances in the best possible shape before they retire.
Prioritise the Most Expensive Debt
The key to getting your financial house in order is to pay down the most expensive debt first. If you have cash to spare, it is more important to pay off credit or store cards before your mortgage, as these usually have the highest interest rate. Compound interest is your friend when investing in dividend-paying shares, but your enemy when it comes to debt.
Now is the time to ensure your retirement portfolio is in the best possible shape, in order to tackle the problem of longevity – making your money last through retirement.
The income needs of people in retirement are seldom constant. Research by Morningstar has showed that spending in retirement typically exhibits a 'smile' pattern: starting off high as people remain fit and have more leisure time, before falling as activity levels drop and eventually rising again as the requirement for additional care increases living costs. Portfolio planning that takes account of this expected spending pattern is likely to result in a better outcome for investors.
