Are There People Who Should Have Debt in Retirement? Yes.

Piggy bank with a lock on it.
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Many people work hard to pay down debt before they retire and many financial writers, including myself, have been a proponent of this approach, but is it the right approach for everyone?

For those with limited financial savings, or those who have a tendency to use debt to buy things they can’t afford, an active debt reduction plan that includes a plan to pay off the mortgage before retirement can make a lot of sense.

What about high-income earners who have done an excellent job of saving, have always used debt prudently, and have over a million or more in investable assets? For this group, paying down debt before retirement may not be the savviest financial approach.

As your net worth increases, you may want to begin to think of debt differently; thinking of it – and using it - more like a corporation would. Corporations monitor something called their debt ratio, and they work to maintain an appropriate amount of debt because it provides an advantage to them in terms of flexibility, liquidity, leverage (the ability to earn more money by growing the company than they pay on the cost of borrowing), and tax advantages.

Using Debt Like a Corporation

As you accumulate financial and real estate assets begin to think of debt as a tool. This means learning how to use it instead of focusing on getting rid of it at all costs.

You can pick up valuable tips on how to think about debt and apply it to personal finances in the book The Value of Debt: How to Manage Both Sides of the Balance Sheet to Maximize Wealth by Thomas J. Anderson. Tom has his MBA from the University of Chicago, attended the Wharton School of The University of Pennsylvania, and holds several investment-related certifications. He worked in investment banking in New York and takes a unique approach of applying corporate finance concepts to personal balance sheets.

In his book, he discusses things like:

  • Why using amortizing loans makes no sense.
  • How to look at assets and debt from a household level.
  • The advantages of setting up an Asset-Based Loan Facility (which is basically a revolving line of credit using financial assets as collateral).
  • Why, when you look at debt in terms of a debt ratio, it may make sense to have more debt, not less debt, as your net worth grows.
  • The potential tax advantages of using debt to finance expenses in retirement.

We heard Tom speak in Denver in 2014, and he continuously emphasizes that the ideas in his book are based on the premise that you are willing to think of your personal finances in the same way a CFO (Chief Financial Officer) thinks about and manages the finances of a business.

Throughout the book, he proposes the concept that “everything else being equal, a lower-volatility portfolio with debt is better than a high-volatility portfolio with no debt.”

Debt in Retirement

The book helped us see the function of debt for high net worth retirees in a new way. Rather than actively paying down debt to get ready for retirement there may be a more efficient way for high-income families to deploy resources. One option may by using interest-only mortgages in place of amortizing loans, which frees up extra cash. You then use the extra cash to accumulate more assets.

In addition, asset-based loans like home equity lines of credit or collateralized portfolio loans may be great options to have in place to use to purchase cars, invest in businesses, help out an adult child, fund a grandchild’s education, or buy a second home. The advantage to these types of loans is that once you set them up, the cash is ready when you need it. This can eliminate the time and hassle of the cumbersome loan application process that occurs with traditional financing options.

If you’re a high income, higher net worth family, we would advise reading the book and re-thinking your strategy around debt, but as Tom is quick to point out, it is not an approach to be taken by those who have a habit of buying things they can’t afford. Debt is best used as a financial tool for those who are buying things they can afford.