“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.”