I’ve had many clients who struggle with the idea of retiring with a single dime of debt on their balance sheet. There seems to be this inherent, ingrained notion that all debt is bad debt and it’s impossible to retire successfully when you are still on the hook for repayment. While eliminating debt is generally a good thing for your finances, it is still possible to enjoy a comfortable retirement with some controlled debt scenarios, such as:
1. “Good Debt”. I define “good debt” as any debt that is taken on to positively grow your asset base. Loans for investment in securities, business ventures, or real estate are typically good for a number of reasons. If the asset purchased is of an investment nature, the interest costs may be tax deductible, which makes the net cost of the debt lower than at first glance. Debts secured by appreciating assets can also be cleared by selling the asset in a pinch. This makes unexpected cash crunches less damaging to your finances when you have collateral on your side. “Bad debt,” conversely, is debt that is accrued for depreciating assets or regular spending. If you have lots of bad debt as you approach retirement, it may be a sign that your budget needs realignment.
2. Limited Impact on Your Cash Flow. If you still have a mortgage as you near retirement, or a small balance on your vehicle loan, don’t fret! If the cash flow requirements of these debts can make it into your retirement budget without too much sacrifice elsewhere, then you may still be able to retire on schedule. A helpful trick for those that intend to downsize their home in retirement is to restructure that remaining mortgage balance over a longer amortization. This will reduce your monthly outflows for mortgage payments and the balance can be paid off when you eventually sell the house.
3. Unused Credit Facilities. I’m often asked by clients if they should close out their home equity line of credit that they never use. If it’s not costing them fees to maintain and not harming their credit scores, I will encourage them to keep it open! Access to low-cost debt in retirement can be harder than many realize. Lenders can’t collateralize registered investments,
like RRSPs or LIRAs, and have harder times underwriting investment income than employment income. If you have an emergency crop up in your retirement years, access to low-cost debt sources can help fill the hole without ruining your tax or
investment plans. It’s an excellent tool to keep in your retirement toolbelt!
Don’t let debt deter you from your retirement dreams! Structuring your household liabilities, the right way, can have a positive boost to your balance sheet without hindering your lifestyle. Take the time to understand what you owe and, maybe, that loan can co-exist peacefully with the next chapter of your life.
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