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DEBT: Before, near, and during retirement

By John Berry

Many folks head into a new  year with a hope that they will be able to pay off their debt. Note I said “hope,” which is different from a plan.

If you are reading this and are debt free...fantastic! Please share this article with a loved one who might need a little extra motivation. 

If you are reading this and have a long time before retirement, say 15 or 20 years, I challenge you to devise a strategy to become debt free by age 65 or, preferably, earlier. Credit card balances must go first, if you have them, and those cards must never be used again if not paid off monthly. Vehicles will naturally get paid off in that time frame. Commit to paying cash next time. As for your home mortgage, many banks host amortization calculators where you can see the impact of extra payments. If you have a long way to go before retirement age, but still hold a mortgage, figure out how much extra each month it will cost to pay it off earlier.

For those of you nearing retirement, say those older than 55 or within 10 years of your planned resignation, I will describe the challenges of debt in retirement in hopes that you will become serious about not wanting any. 

In my experience, financial plans that we develop for clients who have no debt have a better probability of success. Of course there are exceptions, where for tax purposes or certain other specific reasons the client and I have agreed that it is better to carry debt.

But in general, plans with no debt are stronger to begin with. Why? Well, setting taxes aside, this is because all of the client’s money belongs to the client, rather than to someone else. So, if Client A retires at 65 with no debt and Client B retires with 10 years left on a mortgage, the first client is better off, all other things being equal. While Client A must contend with only maintenance and tax expenses on the home, Client B--now on a fixed income--is still shoveling cash at the bank. Meanwhile, other costs like health care start to creep up. 

Another reason that plans with no debt tend to be stronger is that debt-free clients often have developed different habits. We live in a consumption-minded society. Debt-free clients can have a good time, too, but they have chosen to live on less than they earn and invest funds for their future selves. Unfortunately it is common in the U.S. to not have much, if anything, set aside for retirement, and to still be carrying debt on top of that. Many people spend everything they make their whole working careers.

When it comes to what to do about debt in retirement, we sit down with clients and run the numbers. Our choices are:

  1. Service the debt
  2. Pay off the debt
  3. Some combination of those two

Every situation is different. Sometimes clients become uncomfortable with their debt and want to pay it all off at once. It’s a healthy inclination, though it will reduce their nest egg and forego any chance for growth on that money. We dive deep into their situation to investigate whether this might work.

Often, the best option given the circumstances is to service the debt--just make the monthly payments--on vehicles and mortgages. Of course an alternative is to downsize or downgrade, but many don’t want to do this or the timing doesn’t work out.

Continuing my plea to those who aren’t retired yet, I will note that maintaining debt in retirement comes with heightened risks that financial planners ultimately cannot quantify. There are just too many unknowns. The first risk I mentioned earlier, and that is having more of your income taken up by someone else, leaving less to pay for your desired lifestyle. The other concern I have is that the habits or mindset that led to this predicament haven’t changed, and that you will slowly impoverish yourself as you deplete your resources. 

Debt payments are prevalent in our society, but if avoidable, they shouldn’t be part of your retirement. If you need a second set of eyes on your financial plan, or know someone who could benefit from our services, we would be honored to hear from you!

John R. Berry is a CERTIFIED FINANCIAL PLANNERTM and owner of Corner Post Financial Planning. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.  

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