I have heard debt defined as work you have yet to do. Thinking of debt in this way highlights the need to be debt free in retirement. If retirement is to be a time when you no longer exchange labor for a paycheck, then you do not want ‘work you haven’t done yet’ to be in the equation.
Carrying consumer debt like credit cards and home equity loans is the biggest no-no. It is important to remember that the safest and easiest way to earn 12% to 18% on your money is to not pay 12% to 18% for your money.
Home mortgages are not as bad as consumer debt since you are financing an asset that will likely appreciate, or at least keep even with inflation. However, if you can eliminate that monthly payment you will find you can sleep better when you reach your retirement years. The two most common objections I have run into when recommending clients pay off a mortgage are:
1) They like the mortgage interest deduction when they file their income tax return
2) They like the security of having a large balance in their savings accounts.
To which I explain:
1) The mortgage interest deduction only reduces the effective interest rate you pay, it does not eliminate it. Plus, your marginal income tax rate is likely to be lower during your retirement years anyway.
2) You are likely earning less on your savings than you are paying in mortgage interest, and even if you invested the money, you then end up with more assets at risk to market fluctuations during a part of your life when lowering your exposure to risk makes sense.
Having a reasonable budget and the discipline to live within it is equally critical to your happiness and peace of mind during both accumulation and retirement phases. Having no mortgage keeps your monthly expenses low and which makes living within your means during retirement much easier. If all you really have to worry about is paying taxes, insurance, utilities, and for food you will find less stress in your life.
So, based on your anticipated retirement date, you should develop a plan to eliminate as much debt and monthly payments as possible. It is much easier to develop and implement a plan in the years leading up to retirement than it is to address these needs after you have retired. If you need help developing a debt elimination plan, then reach out to us here at Oak Street Advisors, we have decades of experience helping pre-retirees fine tune their finances to make retirement less stressful and more enjoyable.
