What’s the cost of going into retirement with debt? In Steve’s view, credit card debt is a no-brainer: It’s not worth it, so pay it off. But what about mortgages? In some cases, they can leave you on the hook for at least 30 years…
Taking a piece of advice from his father, Steve has the Two-Minute Retirement Solution on what to do about your debt – particularly your mortgage – as you move into retirement.
To retire with or without debt: That is the question! And it has nothing to do with “the slings and arrows of outrageous fortune” as mentioned in Hamlet.
My father’s advice about paying off anything was this: “Never be in a hurry to give your money away. Once you do, it’s gone forever.”
You can always pay it off. You can’t always get it back.
This very important decision comes down to four variables, starting with the rate on the debt.
If we’re talking credit cards, don’t bother. You have to get rid of it. But in most cases, we’re talking mortgages. The 30-year type has most of us roped in for a long time.
Obviously, the cost of your debt weighs heavily on this decision.
Four percent is easier to consider holding than the rates of 7% and higher that we saw before 2008.
If you got your mortgage in the last few years, there’s a very good chance it is very low cost; 3.5% to 5% is not unusual. The lower the rate, the greater the probability you won’t pay it off.
But that leads us to the next variable: Is there enough of a balance left on the mortgage to generate a deduction large enough to reduce your real cost?
When you combine the low-cost mortgages available today with a reduced balance, the tax advantage may be so little, it isn’t worth holding.
I actually had a big tax surprise in 2013 after I dumped an old 7% mortgage for one that was under 4%… a six-figure surprise. The new lower rate cut my interest deductions on two houses in half!
So make sure you work this variable from several directions: rate, balance, the real cost after interest deduction and your cash flow.
Now, here’s the toughest question for most: Can you earn more on the money you would use to pay off the mortgage than your current mortgage costs?
If you’re thinking CDs and savings, there’s no way you can do it. You probably won’t be able to earn money with those choices for a long time!
That leaves the markets, and that means risk. You have to decide how much risk you can stand in order to make enough to earn more than your costs.
Most planners agree a 7% long-term return is realistic… which, with most new mortgages, gives you a 2% or 3% net before the tax advantage.
But can you handle the volatility involved in getting there? Some folks can; most can’t. You have to figure out which side of that line you’re on.
And don’t forget to consider lower-risk choices like bonds. Don’t just consider stocks. Bonds can get the volatility down and make this an easier choice.
(You knew I’d get in a plug for bonds, didn’t you?)
Finally, here’s the last question to ask yourself: How far along are you in retirement?
In the early stages, when you can assume more risk, the investment side of the equation makes more sense. But as we age and have to move into more conservative holdings, the debt-or-no-debt decision may be made for us.
For the more conservative among us, that might mean moving to more bonds than stocks.
There are a lot of variables in this debt equation. This is not – and should not – be a snap decision. Give it lots of thought before you write that check.
After all, you can’t always get it back.
Gotta love my father’s advice.