FREE NEWSLETTER

Is it okay to retire with debt?

Go to main Voices page »

Subscribe
Notify of
15 Comments
Inline Feedbacks
View all comments
Roboticus Aquarius
Roboticus Aquarius
15 days ago

My suggestion is that most people retire all their debt before their retirement date if possible… it makes managing one’s resources easier. That’s good not only for the relatively innumerate, but also for all of us as we age and our mental processes become less flexible. There will be plenty of exceptions, though, for many good reasons.

I expect to maintain my mortgage into retirement unless we see a windfall before then. The arbitrage is working well, and my mortgage rate is low enough that my stable value fund returns are outpacing my mortgage interest. The mortgage is also an inflation hedge of sorts. Lastly, avoiding prepaying the mortgage is enabling us to supplement our pre-tax savings with post-tax savings, which we want available as a bridge from retirement to age 59.5 (when we can withdraw from tax deferred accounts) and may give us some tax flexibility.

Jackie
Jackie
1 month ago

Depends. If you have enough guaranteed income to cover it – no problem. If you are living off of uncertain stock market returns, it is better to not be forced to come up with additional income to make the debt payment every month.

Doug Coates
Doug Coates
1 month ago

Having debt or not having debt in retirement — seems like saying “no debt” would be the obvious answer, but the actual decision needs to be made in context of your situation.

I’ll retire this year probably at age 69, start taking social security at age 70, wife will still work and bring in a hefty income for another 2.5 years, and I have a net worth of over $3 million. Debt is part of what got me here.

I have a mortgage on my home of $385K at 3.25% and the house is worth over a million. If the debt became a burden I would downsize the house (which is twice as big as we need now), pull out the $700K of equity and buy a smaller house with cash. Context!

I have 2 other mortgages totaling $600K on vacation rental properties, at 3%, with the rentals being worth $1.1 million, and the rentals will generate a net profit of $35k this year, and can be reliably expected to generate no less than $20K even in bad years. If the debt became a burden I sell the rentals, eliminating the debt, and walk away with $500K. I’ll sell them anyways at some point after I retire. Context.

I have a $2K loan left on a car at 2.5%, an $11K loan left on a home improvement at 0%, and I pay off all my credit cards in full every month. These loans will go away soon, but the cost of the debt is far less than what my investments will earn. I’d rather not have the debt, but in Context, it really doesn’t matter much.

My calculations are that with an income of $125K/yr, I can easily handled the debt for as long as it lasts. And between social security and investment income from retirement accounts, I can easily bring in that annual income. And again, if the economy really tanks, I have assets that can be sold without seriously compromising my lifestyle.

My financial strategy has always been to build my net worth, NOT to build my annual income. Sometimes I leverage debt, to build my net worth.

I started with nothing. Now I have a lot.

I’m not bragging – well maybe a little bit. But my point is to have a strategy, and if the strategy means you have debt, just make sure the strategy generates income to cover debt payments, and gives you have options to eliminate the debt if things go wrong. And a good insurance policy helps too.

The automatic “anti-debt no matter what” point of view is not helpful, unless you have no strategy.

Arpe Gio
Arpe Gio
1 month ago

No, if one can help it. Someone will have to pay it, and it could be your own family.

Richard Gore
Richard Gore
3 months ago

I view debt as part of my investment portfolio. If I hold debt, then I probably also need to hold more safe investment reserves in case the market crashes or some other unexpected event interrupts my cash flow.

Since one’s borrowing rate is typically > their savings rate, it generally seems advisable to pay down debt assuming sufficient liquidity in determining your portfolio allocation.

Another way of thinking of this is to include any debt that you have as negative fixed income investments in evaluating your portfolio allocation. Then the decision to pay down debt or invest in fixed income securities becomes a simple yield comparison.

Roboticus Aquarius
Roboticus Aquarius
15 days ago
Reply to  Richard Gore

I think this is a wise approach for those who fully understand the trade-offs and cash flow implications.

Once you get beyond the very basics of cash flow, however, people frequently make mistakes – so I wouldn’t recommend this for most investors/retirees.

R Quinn
R Quinn
3 months ago

Debt any time for any reason drives me nuts. I can’t even stand credit card balances when I know they will be paid in full by month end. Retirement makes it worse. Any logical argument notwithstanding, I say avoid debt.

Philip Stein
Philip Stein
4 months ago

Ideally, our guaranteed retirement income will cover our monthly fixed costs, or come close to doing so.

If debt service increases our fixed costs such that larger than expected portfolio withdrawals are necessary to raise cash, we may be courting trouble.

Debt in retirement is probably okay if its manageable. Otherwise, it may be best to avoid it.

Mike Zaccardi
Mike Zaccardi
4 months ago

Sure, but it’s more dependent on the person and their feelings/stress about debt. Holding fixed-rate debt can actually be a hedge against inflation–if inflation soars, your fixed-rate debt dwindles in real value. So taking out a 15yr fixed-rate mortgage at 2.3% today with inflation expected to be 2.6% over the next 5 years is absolutely no problem (on a spreadsheet).

But if you are one of those folks just freaked out about debt, chances are your feelings are not going to change at this point if you are a retiree.

BenefitJack
BenefitJack
5 months ago

Remember to distinguish debt in retirement from debt at old age. When the median age at retirement was 60 or 61, carrying debt into old age and retirement was essentially the same thing and mostly unthinkable. Today:

  • 65 ain’t what it used to be. Back in 2004, I sat through a presentation by John Shoven in Las Vegas where he opened my eyes to the fact that an individual age 65 in 2004 had, on average, (and of course averages can be deceiving) pretty much the same health and wellbeing as a 59 year old in 1970. CDC tables show an average life expectancy for a 65 year old is 19.1 years in 2020 (don’t know if that has been adjusted for COVID) but only 15.2 years in 1970.   
  • Debt ain’t what it used to be. Debt at older ages is much more varied – including lots of student loan debt as well as mortgage debt – both Home Equity, and Home Equity Conversion Mortgages (HECM). After the 1986 Tax Reform Act, tax-deductible interest was mostly limited to debt secured with a home mortgage. So, unsurprisingly, people who have home equity used it to finance stuff like a kid’s college education – many didn’t pay it off until a later age. Just as importantly, almost 3 years ago, I was speaking with an Epcon sales rep (back when we were first looking to move from our two story home to a single story condo) and he confirmed to me that he expected to sell 80+% of the condos to age 62+ seniors using HECM – for seniors who were going to use home equity as a source of income in retirement. In fact, in 2020, there was $10.6 billion in total HMBS issuance, eclipsing a recent industry high of $10.5 billion of issuance in 2017 according to publicly available Ginnie Mae data and private sources compiled by New View Advisors.
  • Retirement ain’t what it used to be. Starting with Social Security Full Retirement Age, and the dramatic change in older workers who remain in the workforce after reaching age 65 (including me). 
  • Poverty ain’t as prevalent as it used to be. Back in 1959, 35% of Americans age 65+ lived in poverty (an income definition). Today, it is less than 10%, and some estimate the real number should be less than 5% once adjusted for accumulated assets/wealth.  

Should we really be as concerned about debt at “older ages” or in our “redefined” retirement as we might have been decades ago when retirement often occurred at earlier ages, net worth was less, poverty was less, etc.?  

Barbara Arendt
Barbara Arendt
5 months ago

I have a mortgage but I’ve garnered 72% equity not taking into account today’s hot hot market value. I have to have a roof over my head regardless. Do I pay off a 2.3% mortgage where 50% of the $900 payment is insurance and tax? I’m not convinced, yet.

Last edited 5 months ago by Barbara Arendt
Joe Kesler
Joe Kesler
6 months ago

I’m not a big fan of debt in retirement, but I think there is an interesting angle for those wanting a hedge of inflation to maintain a low cost mortgage. If the currency is debased we would pay that mortgage off with cheaper dollars. Other than as an inflation hedge, I’d rather lower my monthly expenses by not having any debt payments.

Rick Connor
Rick Connor
6 months ago

This is another interesting question that garners voices on both sides. The obvious answer is yes, if you have the income or resources to pay the debt. Some FPs, like Rick Edelman, worry that by paying off a mortgage you leave your self with no liquid assets. If a problem occurs that requires ready cash, you could be in trouble. For me it is a balance with what you are comfortable carrying, vs. your resources. But it does feel nice to say you have no debt.

DrLefty
DrLefty
5 months ago
Reply to  Rick Connor

We will go into retirement with our mortgage debt, but we’re not worried about it. Why? Well, it’s not that big of a payment, especially not after refinancing to a really low rate last year. We have guaranteed retirement income, with very good pensions and Social Security. We have ample 401K/IRA savings to cover anything else and are mainly seeing that as fun money or “help the kids” money.

For many years, we had a big chunk of our net worth tied up in our house, which we’d bought in the 90s and had appreciated a great deal. We sold it, put some of the money down on our new condo, and now have a nice cash cushion. This felt really good to have when COVID hit. I’m not really interested in having buckets of money tied up in a house again.

Free Newsletter

SHARE