Retirement

5 Questions to Consider About Holding Debt in Retirement

With interest rates at historic lows, holding long-term debt in retirement may provide several benefits.

by Michelle Crouch - June 26, 2017

Conventional wisdom says you should retire debt-free, and that’s still a good goal.

But in today’s low-interest-rate environment, carrying some debt into retirement may be the best financial decision in certain situations for an affluent investor, says Adam Holtzschue, Head of Lending & Banking Services at Wells Fargo Advisors.

“With interest rates at historic lows and expected to rise, you can’t just default to ‘I should have no debt in retirement,’ “Holtzschue says. “If you are an affluent, high-net-worth investor nearing retirement, these conversations should be part of an in-depth conversation you have with your Financial Advisor.”

Rate matters

For example, he says, if you are holding long-term debt with a fixed interest rate of 3%, you could set a plan to retire that debt on an accelerated schedule, but that would leave you with less cash to invest for retirement and wealth creation. If instead, you continue making regular payments on the debt but direct any extra available cash flow to your investment portfolio, there’s a good chance your returns may outperform your 3% interest rate on the debt, especially given that certain types of interest that you pay, such as on student loans or a primary home mortgage, may have tax benefits.

“If long-term debt rates were 9%, we wouldn’t be having this conversation,” Holtzschue notes.

The caveat, of course, is the risk inherent in any investment, compared to the risk-free return of paying off your -long-term debt.

“If in your heart, it doesn’t feel right or you’re going to worry about it, that’s what is most important.”

— Adam Holtzschue, Head of Lending & Banking Services, Wells Fargo Advisors

“You need some really thoughtful advice from a good planner to help you analyze the pros and cons,” he says. “You should talk about the economics associated with the risk-adjusted, after-tax returns you might get over time relative to your after-tax rate of debt.”

The following questions are worth considering as you determine whether to carry debt into retirement:

What type of debt are you carrying?

If you are thinking about holding some debt in retirement, the amount you consider may be most favorable for long-term, fixed-rate loans. A low-rate auto loan may also fall into this category. Carrying unsecured debt on a credit card is never wise, however; pay that off as soon as you can.

Do you have the cash flow to support your lifestyle?

If you’re going to carry debt into retirement, make sure you have the financial assets to always make the payments on time and still allow you to support your retirement lifestyle. “You should be highly confident you will have no disruption in that cash flow,” Holtzschue says.

Are you committed to investing the capital?

Debt isn’t worth holding if you’re not using the cash flow to help build wealth. Consider putting it in low-risk, low-volatility investments, like cash equivalents or short-term bonds, as opposed to spending it on luxury items or non-necessities. “Financial discipline is important,” Holtzschue says.

Do you need liquidity?

Will paying off debts early deplete your emergency fund or cash reserves? If so, you may be wise to wait, says Donna Peterson, Senior Vice President for Wells Fargo Advisors and seasoned retirement income specialist. Instead, take a steadier approach to paying off your debts so that you don’t run into a cash crunch as you transition from working life to retirement.

How do you feel about debt?

No matter how much debt you think you could carry in retirement, if you are emotionally uncomfortable with the idea, then you should go ahead and pay it off, Holtzschue says.

“If in your heart, it doesn’t feel right or you’re going to worry about it, that’s what is most important.”

Michelle Crouch writes about consumer finance, parenting, and more from her home in Charlotte, North Carolina. Her work has appeared in Reader's Digest, Parents magazine, and The New York Times.

Additional Resources

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