To many, this question may seem to have a simple answer. Well, as with most financial topics, there is more to this than what meets the eye. Retiring with debt has always been a sore topic, as consistent credit card and mortgage bills have made it difficult for many to survive on a fixed income once they get older. The good news for those who are nearing retirement, but are also carrying a little bit of debt, is that to retire while in debt isn’t always the worst decision. In fact, there are some ways to turn it into an advantage.
Picking and Choosing
So, you’re about to finally end your career, and you have a few different bills you’re paying every month. What should your priorities be when planning for your upcoming retirement? One thing you need to do is parse out which debts are “good” and which are “bad”. The way to start this process is to check out your interest rates. For example, if your credit card has a 20% APR, the likelihood that you are going to be able to leverage that positively is slim. On the other hand, if you have a 3-4% rate on your mortgage, you could easily put the cash in your pocket into an index fund that brings in 8% a year, successfully turning that debt into income. This may be tough to follow, but here is the golden rule: Pay down any debts with interest rates that your investments can’t beat.
Debts to Avoid
As stated above, credit cards are a major no-no. There is no way you are going to beat a rate like that with any reasonable investment. Your goal should be to mitigate the risk you need to take on in order to compensate for your debts. Car loans can also be trouble, because with a sub-par credit file, you can easily have an APR over 10%. Not only that, but the car you bought with that loan depreciates, so there is no natural return on that money. Use index funds as your litmus test. Index funds routinely average around 8% a year, and you can dump as much money into one of those as you’d like. So, if a debt that you carry is greater than or equal to 8%, you have no real consistent way to make up for that once you stop working.
The primary goal should still be, in my opinion, to go in with as little debt as possible. That being said, if you are carrying a low-interest mortgage, it doesn’t necessarily spell disaster. Homes tend to appreciate, and if you’ve chosen wisely, your home could easily appreciate more that the mortgage interest each year. Not only that, but some smart, conservative investments can easily turn that debt into a positive. In this case, by not pouring your liquid assets into the home, you are actually increasing your net worth by keeping your mortgage. This doesn’t mean you should take on any new debt during retirement, but it means that your low-interest debt may be able to improve your retirement planning overall.