Most South Africans don't know how much time is left before they retire. They don't have a financial plan in place to settle their debts and start investing. Unfortunately, the majority of income earners will have to seriously downgrade their lifestyles when regular income stops coming in.

Liberty financial adviser Phillip Kassel says heavily indebted income earners need to be debt-free by the time they retire. Kassel says, "Most employees earn approximately 480 pay cheques in their working lifetime between the ages of 25 to 65. The average person can expect to live until at least 85. This means they need to use these limited pay cheques to fund a retirement income of at least 240 months. At this rate it is hard enough to meet basic day-to-day expenses in retirement without being saddled with debt repayments – so any successful retirement savings strategy must include a debt repayment plan."Ideally, all debt should be cleared by age 45. This allows enough time to boost your retirement fund contributions instead of paying interest over to the bank. In the worst-case scenario, the aim should be to have no debt by the age of 60. This means that, from at least the age of 45, debt repayments should be a top priority.

Kassel says you need to bear the following in mind if you are aiming for a comfortable retirement:

1. A home loan shouldn't be an ATM

By the age of 45, there are only 15 years left to achieve the goal of being debt-free. Individuals buying a home at the age of 45 should ensure that the loan term does not exceed 15 years. Investors with an existing bond should not be drawing down capital from an access bond, unless there is a plan in place to settle this debt in a shorter time. This is particularly important for those people looking to use this capital to pay for home renovations or children's education.

2. Eliminate short-term debt

Short-term debt could derail retirement planning, so paying these off is highly important.  Draw up a list of all the short-term debts and calculate the date the last debt will be paid off. Those who find that their debts will not be paid in time for retirement, should make significant lifestyle changes now in order to accelerate debt repayments. Debt consolidation might be a solution as it reduces multiple payments to one payment over a shorter period of time. It is absolutely essential that no further debts are taken during this time.

3. Be realistic about university fees

During this time, bread winners will be sending their children to university. If there are no savings and investments set aside for tertiary education, don't be tempted to make additional debt. Be realistic about affordability because children should not have to carry the burden of financially supporting their parents during retirement. Kassel says, "Children could apply for bursaries, apply for student loans or turn to family for financial assistance. Of course, the main bread winner could assist in paying off the interest on these loans, but the child should take full responsibility for the student debt when they start working."

4. Don’t cash in pension savings to pay off debt

It may be tempting to cash in investments that are growing at 10 to 12% per year to pay off debt with higher interest rates. However, this will result in the individuals missing out on the power of compound growth on the retirement investments.

Kassel explains, "You may be tempted to cash in R100 000 of your investments to repay short-term debt. If you rather focused on paying off the debt by budgeting and cutting back on your lifestyle, you could probably pay off the debts within five years with a payment of R2 900 per month, or by using your bonuses and tax rebates to pay it off even faster."

"Over five years at an interest rate of 25%, you would spend R174 000 to settle the R100 000 of debt. It takes discipline to start saving R2 900 a month once those debts were paid off. In the meantime, if the R100 000 is growing at 10% a year, it doubles in value every seven years. So, after seven years it is worth R200 000, after 14 years it is worth R400 000 and after 21 years, it is worth R800 000. 

"The same applies to home loans. While cashing in your retirement fund to be mortgage-free means you don’t have a mortgage repayment, you still need retirement funds to pay for your day-to-day expenses. Don’t pay off debt with your nest egg – make the necessary lifestyle changes instead."