Is Being Debt Free Killing Your Retirement?

Jun 23, 2022

Nothing will test a relationship quite like a home renovation project. As any couple who has gone through this milestone can tell you, “It ain’t no walk in the park.”

Once you start opening walls, things never go as planned… hard and fast “requirements” you had go out the window. That vanity you absolutely wanted, or the stove you absolutely had to have, well, suddenly become negotiable in the face of reality.

You get creative, moving walls, changing designs on the fly, trying to make your wishes fit your budget and the reality of your home.

Retirement is no different.

In retirement, no option is off-limits. Involatile musts become “nice to haves” and we quickly find our lines in the sand blurring.

As a mentor of mine would frequently say, you need to have, “strong beliefs, held loosely.”

This has never been truer in retirement.

Today, I want to explore one of the long-held beliefs we all have, namely, that one should be “debt-free” in retirement.

Debt is often equated to a life of servitude. Many religions and cultures shun debt, for many good reasons…and the truth is that most forms of debt are bonds of servitude.

…But, just like not all houses are created equally…so, too, not all debt is created equally.

In retirement, every penny counts. And we need to explore every option we have at our disposal for stretching our nest egg and protecting our lifestyle.

Oftentimes, we will find that financial tools and options that were “terrible” in our working years, can be the saving grace in our retirement, as I will demonstrate over the next few minutes.

While I will absolutely concede that keeping high-interest credit cards and personal loans is rarely the right move…and generally causes more harm than good.

On the flip side, if you were able to lock in, say, a 30-year mortgage at historically low interest rates, you should be in no rush to pay that down.

That is literally FREE money…and in retirement, every penny counts.

Debt is one of the many reasons why the rich get richer.

Being debt-free should not be your financial focus.

Cash flow and risk management should be!

Debt, like any financial strategy, can be used effectively.

Think of it this way:

If inflation – or your return on investment over the next few years – is greater than your cost to borrow, then you have essentially made a profit.

How’s them apples?

In the case of a mortgage, that’s like having inflation pay off your debt! Yay! (I talk more about this in Episode 13 of my Leibel on FIRE podcast.)

That is just one example of why retiring debt-free is not always the best choice.

Another prime example is something the rich always do. Congress is talking about abolishing this rule in the tax code, but I doubt it’s going to happen – because most of the congress uses this loophole themselves.

And that is to borrow against your investments. This does two things for you.

First, it allows you to use the money without paying taxes since debt isn’t taxed.

Second, it allows you to protect your nest egg during a down market – without sacrificing your quality of life. In a debt-free world, you would sell a portion of your portfolio each year to live off. During a market downturn, you would have to sell more of your portfolio, thus compounding your losses – and possibly causing unrecoverable losses to your portfolio (See my blogs and guides on sequence risk, here and here).

By borrowing against your portfolio instead of selling, you can participate in the market’s recovery, instead of locking in those losses. It is almost like magic.

Historically these options have not been available to the average investor, but recently there has been innovation in this space, making it more accessible.

And so, yes, debt can be a bad thing - if you are in over your head, such as with credit card bills and student loans. It is easy to feel like the weight of your debt is suffocating or crushing you - but that doesn’t mean one should avoid all forms of debt.

There are many forms of both good and bad debt.

For example, student loans that can provide a degree can improve your earning potential. Contrast this with payday loans, designed to trap people into an endless cycle of debt - and should be outlawed.

For a more in-depth discussion on what makes debt good versus bad, check out In Chapter 3 of my book, Living with Financial Anxiety.

The condensed version is this:

“Good Debt” is low-interest, predictable payments, designed to be paid off, has limited downside, and is generally secured by equity.

When used properly, good debt helps you grow your assets and secures your financial future.

Contrast that with “Bad Debt,” which has unpredictable payments, is generally un-affordable, or specifically designed to increase your overall debt. Credit Cards and Payday Loans are examples of bad debt.

The key to financial freedom is to ensure that your assets and your liabilities are working in your favor, helping you accomplish your goals – not actively eroding your security.

Just like going about a big home “reno” on your own is usually a fool’s errand.

The unfortunate aspect of today’s retirement planning media is that debt generally gets a bad rap, which is entirely understandable, considering what happened to most homeowners in 2008, when the housing bubble crashed.

Of course, in times of volatility, in times when the market has extended periods of negative returns, as a retiree who relies on your portfolio for income, debt can be the perfect insulator – and can literally be the difference between running out of money in retirement or leaving a living legacy.

P.S. And you do not need to buy an insurance policy to do this (where do you think the insurance companies stole the idea from?).

At Yields4U, we are on a mission to help one million retirees achieve financial security in retirement.

Achieving financial security in retirement often means using both your equity and even debt to mitigate risk. You can let inflation be your friend by keeping low-interest-rate debt through retirement. Being “debt-free” should not be your goal.

Having a well-balanced portfolio with the right financial planning is the best approach to living a confident retirement!

Let me know your thoughts/questions in the comments below.

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