Should You Be Debt-free in Retirement?
Being debt-free by the time you retire is a significant goal for many people. And it can be ideal. But if you find yourself getting close to retirement and still have debts, how hard should you try to get rid of them all? You might be surprised to learn that it can be okay, even financially beneficial, to hang on to some of them rather than struggle to pay them off.
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Full Transcript:
Speaker 1 (00:07):
Welcome back to 30 Minute Money. I'm Scott Fitzgerald from Roc Vox Recording and production in Bushnell's Basin. Steve Wershing from Focused Wealth Advisors, joining me in studio today. Nice to see you, Scott. Nice to see you. Nice to be back. We're going to talk about the big question that we all should be asking ourselves. Should we be debt-free in retirement? Exactly. Sounds good to me.
Speaker 2 (00:29):
It does sound good and it's good if you can do it, but I wanted to talk about this a little bit because sometimes people overdo it a little bit like they want to get out of debt at all costs. And if you have debt and you're going into retirement, or if you have needs, we should think about this a little bit more deeply than it's the ideal. But if you've got to make trade-offs, maybe we should talk about it a little bit. So that's what we're going to talk about today. All
Speaker 1 (00:55):
Right. I'm interested in the trade-offs. Yeah,
Speaker 2 (00:57):
So this is, as I said, one of the main goals that a lot of people have is to be debt-free by the time they retire. That's great if you can do it. But as you do your projections, you might find that you might have to make some trade-offs. You might have to make some sacrifices to be able to be debt-free in retirement. And so we should talk about some of what goes into those decisions. One of the first ones is liquidity. So liquidity means how easily can you convert something into cash. So currency is perfectly liquid. Mutual funds are very liquid. Your house is not very liquid. So one of the things when people say they want to be debt free, a lot of what they mean is they want to not have a mortgage. And if you have to take a lot of your taxable accounts, if you have to take a lot of the money that you have in your taxable bucket and use it to pay off a mortgage just before retirement to accomplish that, that may not be the best idea because you might need liquid assets, you might need money to pay bills, you might need money for an emergency fund if your water heater goes, if your furnace goes, you might even want money because the best idea for you long-term from a tax standpoint is to do Roth conversions.
(02:13):
And you need a pool of money to pull the taxes from when you do the Roth conversion. So liquidity has value, and if you pay off your mortgage, pay off all of your debts the day you retire, and it means that you'd no longer really have any liquid assets,
Speaker 1 (02:29):
It's
Speaker 2 (02:29):
Probably not ideal, probably
Speaker 1 (02:31):
Not ideal, then that something happens. You're going to have to take out another mortgage,
Speaker 2 (02:34):
Take out a mortgage, or put it on a credit card that was more expensive than the mortgage was,
Speaker 1 (02:38):
Or
Speaker 2 (02:39):
One of those kinds of things. And it takes time to do that. And so liquidity has a value. And so the first thing you want to take a look at is if I have debts and I pay them off, how much cash money, how much liquid assets would that leave me with? You want to make sure that it's enough to cover emergencies and cover other things that you may want to do in the next few years. One of the other things that you might want to consider is that you may have an increased need for cash in retirement. There may be things that you want to do in the first few years of retirement that maybe you weren't necessarily doing before retirement. Like you might want to take extra vacations while you're still young and healthy and you can travel easily and those kinds of things.
(03:19):
You may want to look at spending more time in the south or even acquiring a property in the south or those kinds of things. So sometimes the cash needs that you have in the first couple of years of retirement can be bigger than the cash needs that you had in the last five or 10 years of working in your working life. So we want to take a look at before you go liquidating all this debt, what are the special things that you might want to do in that first year of retirement or first couple years of retirement? Again, that's an increased need for liquid assets. One of the things that people may not think about enough is what are your plans? If you need long-term care, if you need long-term care, how will you cover the cost? And there are of course insurance options. There are other strategies that we talk about, but for a lot of people, it's, I'm going to need to pay.
(04:11):
I'm going to need pay out of my bank account or something like that. If you have all your money locked up in your house, that's not available for that, and you might actually have to sell the house to be able to raise the money to pay for the long-term care. And one thing that it's important that people know about long-term care is if you want to get into the facility of your choice, if you want to have a choice of choosing something that's close to home, that's a facility that you like, as a rough rule of thumb, as a rough basic guideline, you need to have about two years worth of money set aside to pay for it. That can be from a bank account, it can be from insurance, it can be whatever. If you can pay the bills for two years, you become very attractive to those institutions.
(04:55):
If you don't have that, if you're cash poor, if even worse, if you need to go on Medicaid to get it, you lose the choice of where you can go. And if you're really out of money, and Medicaid is going to be, if you need Medicaid to come in and pay, you could be half a state away from your family. And so maintaining that liquidity is of more value than getting rid of some debt. So that's something to consider as well. Now, if you have debt and you're coming up on retirement, one of the things that we want to consider is what's the rate that you're paying? If you refinanced your house five years ago and you've got a 3% mortgage, well, you can probably make more than that now in an investment account than you're paying at the bank. So it's better to have of 3% mortgage that's got a hundred thousand dollars balance on it and have a hundred thousand dollars on the bank that may be making 5% or invested in a portfolio that may be making more than that than it is to not have that 3% debt. If you want to use the fancy term for it, that's interest rate arbitrage. That's what that is.
(06:05):
Basically, you're borrowing money from the bank to make money for yourself, and if you can make more than you're paying, then you come out ahead. So that's certainly something to think about. And if you still can put money away as you're coming up on retirement, or if you're getting money from a pension and social security that is more than you need for expenses, it may make sense for a while to be adding to that investment account rather than accelerating the mortgage. So I had somebody in my office a few weeks ago who said, every year I'm putting an extra $10,000 on the principal. And I said, how much are you paying for that mortgage again? And she said, three 8%. I said, don't do that. Keep it in your investment accounts. We're making well over three, three 8% there. Better to do that than to pay it down prematurely. It's cheap money. Yeah,
Speaker 1 (06:55):
Good advice.
Speaker 2 (06:56):
Good advice. Yeah. So just a couple of things to think about before you move headlong into liquidating all debt, just for the sake of liquidating all that debt,
Speaker 3 (07:10):
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Speaker 1 (08:36):
Great advice as always. Steve, 30 minute action item,
Speaker 2 (08:39):
30 minute action item. What debts do you have that are worth paying off?
Speaker 1 (08:45):
All right, I have a long list of debts that are worth paying off. 30 minute money. It's three zero minute money. That's where you can find the podcast. You can watch, listen also on all the platforms, rate, review, and share with your friends. We have all the best information right here for you. Steve Waring at Focused Wealth Advisors and me, Scott Fitzgerald at Roc Vox Recording and production. Thanks again. We'll catch you next time on 30 Minute Money.