Should I Pay Off Debt Before I Retire?

[00:00:00] INTRO: Hi, I’m Ed Slott and I’m Jeff Levine. And we’re two guys who just love to talk about retirement and taxes. Look, our mission is simple to educate you the saver so that you can make better decisions because better decisions on the whole lead to better outcomes, and here’s how we’re going to do that each week. Jeff and I will debate the pros and the cons of a particular retirement strategy or topic with the goal of helping you keep more of your hard earned money. Yeah, but we won’t know which side of the debate we’re taking until we flip a. Winner of the coin flip gets to pick which side of the debate they want to argue and both of us will have to argue in favor of our respective positions, whether we agree with them or not. At the end of each debate, there’s going to be one clear winner. You a more informed saver who can hopefully apply the merits of each side of the debate to your own personal situation, to decide what’s best for you and your family. So here we go. Welcome to the great retirement debate.[00:01:00]

[00:01:02] Ed Slott: Welcome everyone. I’m Ed Slott here with Jeff Levine on the great retirement debate. Jeff, what are we discussing on this new episode?

[00:01:10] Jeff Levine: All right, today, I’ve got a hot topic for us to discuss one that comes up all the time. Uh, should I pay off my debt before I retire. In other words, should I go into retirement debt free? And just to clarify here, Ed, we’re not necessarily talking about, like, you can never use a credit card again. What we’re talking about is

[00:01:30] Ed Slott: Right.

[00:01:31] Jeff Levine: You know, coming into retirement with no mortgage you’ve paid down or paid off your car. You’re, you’re not carrying a debt from month to month. In other words, if you use credit cards, you’re paying that off each month. So you’re not carrying debt forward from, from month to month, you’re still allowed to go use your credit card at the store from time to time. So should I pay off my debt before I retire is what we’re going to debate today. All right. So let us, uh, flip a coin and see which side of the [00:02:00] debate we are on Ed, would you like heads or tails?

[00:02:04] Ed Slott: The winning side, heads.

[00:02:05] Jeff Levine: All right. Heads for Ed once again, once again, here we go. All right. And the answer is tails so I will pick Ed at, I, I will take these, the side of having debt into retirement is, is okay. Carrying debt. And, um, I’ll let you take the, the side of pay off your mortgage, pay everything off before you get there. Does that work for you?

[00:02:29] Ed Slott: Oh wow. You’re a better man than me. I don’t like debt in retirement. So I’m gonna be interested in what you’re saying, your arguments to pile up debt. And as you said, make it clear. Well,

[00:02:39] Jeff Levine: I didn’t say pile up that I said not have to pay off all the time.

[00:02:44] Ed Slott: Uh, you know, it’s interesting when I do programs for consumers, I always ask them, uh, how many of you are debt free in retirement? Most of them raise their hands on. It’s good in my opinion. I think it’s good to be debt free in retirement. [00:03:00] Uh, so you don’t have obligations that’s so that’s why you retired. And then I’ll ask, uh, some of the people who raised their hands, which is almost everybody. Mainly they are retirees. And I’ll say, what does it mean? Why did you raise your hand? What does it mean to you that you’re debt free? They said, well, I paid off my home. I don’t have any mortgage. There have no credit card debt and I don’t owe anybody any money. So I’m debt free. And then of course I add. Well, not if you have an IRA, that’s a different topic.

[00:03:27] Jeff Levine: That’s a, that’s a topic for another day. Yeah.

[00:03:29] Ed Slott: That’s a topic for another day because there is debt in a tax deferred account. But I like that. I mean, who wants, we always talk about simplicity, not worry about paying bills. Uh, this is why you retired to put all that behind you. So I like the idea of not having to worry about owing and building interest and owing bills in retirement. I just don’t think it’s a good thing.

[00:03:54] Jeff Levine: Now I, I understand that. And there is a sense there is a, a good point to simplicity and certainly paying [00:04:00] down debt will have, you know, that many fewer things you have to deal with in your life. But I think of debt as a tool. Right. And I, I don’t hate screwdrivers. I don’t hate hammers. I don’t hate saws. Like when I need one, I use it. And so if I’ve got a situation where I’m thinking. Uh, you know, for instance, the last few years, mortgage rates have been historically low. We’re starting to see that reverse now in 2022, but for years we have been at, you know, rock bottom mortgage rates for those in retirement. I mean, debt, in some cases almost could be an asset. Right. And think about someone who a few years ago, bought a retirement home and they’ve locked in a mortgage at 3% or 4% when inflation today is closer to seven or 8%. Even if that calms down a little bit, you know, they are actually paying, you know, the, the fact that they have debt at 3% or 4% could actually be an asset. Someone [00:05:00] if they could, would, would actually want to buy that debt from them because it’s so inexpensive

[00:05:06] Ed Slott: well, I’ve had clients over the years, that kind of make that argument. They’ll say, look, if I could get, and I, I used to agree with them. They, they would, uh, set this premise if I could borrow at 2% or 3% and invest. I mean, this goes back, shows how old I am. Uh, I have clients that used to complain how come, uh, I don’t get 15% on my CDs anymore, these are from the eighties. Uh, I’m waiting till it goes up to 18%. Well, we don’t have those kind of rates, uh, unless you can really make a killing in the market. So they might say, well, if I could borrow, and this is just pure math, three, four, 5% and make 10% a, a year R and I up.

[00:05:46] Ed Slott: As you get closer to retirement or you’re already there. I don’t think what if the tax, what if the stock market crashes and all your projections are off, you may not have the years to recover from that. So [00:06:00] that’s one of the reasons I don’t like that argument. The argument mathematically makes sense. Sure. If you could buy dollars at 3% and settle, sell them at 10%, I’d do that all day long.

[00:06:11] Jeff Levine: Well, I mean, the other thing that using debt does, it allows you more flexibility because if you have debt, it means, uh, well let me put it a different way. If you’ve paid down your debt, it means you have used up some of your other assets. Right. And so having like doesn’t mean you can’t do it again. For instance, let’s say you have a. That’s worth, you know, $500,000 and you had a $300,000 mortgage against it, and you took $300,000 from your bank account to go put it into, uh, you know, to pay off your mortgage. It is true that you have no longer have the interest rate, but a, uh, you know, that you’re paying interest, but, one, you’re not making money with that 300,000. I agree with your point, you don’t know what the future holds. What if you lose money if you’re investing it, but beyond that, what, what if you need those dollars [00:07:00] again? What if you run short because you, you you’re, you’re out of assets or you’re running low on assets.

[00:07:05] Jeff Levine: You don’t feel comfortable anymore because you don’t have as many liquid assets. When people see dollars in the bank, they feel comfortable. They know they can go out and spend it. When people have a house worth a lot of money. Even though the house may have a ton of equity in it. They don’t think about the ability to tap it in the same way. And in fact, even if they do, it might become more expensive. For instance, if interest rates continue to rise taking, uh, you know, the only, the, the thought that you had of what we don’t know what the markets will do, or we don’t know what interest rates will continue to do. If they continue to rise. If we go back to a scenario where you were anywhere close to, you know, 15% back in the eighties, but even if it was seven or 8%, that’s a lot more expensive if you have to take a home equity loan down the line than it would be today, just to leave your mortgage and continue paying it. And with a lot of types of debt, whether it be student loan interest, or uh, home interest, [00:08:00] uh, there are tax benefits associated with it. So it may not even be the true cost of the debt that you’re paying because you get a tax break for some of it.

[00:08:07] Ed Slott: Right. Uh, but many people are not getting the tax break due to the limitations of the most people take, especially older retired people over 65 have largest standard deductions. So they may not get that, uh, that tax benefit. But going back to what you said, you know, if there’s a need for it. Like I remember a client years ago had this decision and I like the idea actually that you said to lock it in. But it may, you may be better off if you really wanna lock in the ability to access money when you need it, you might be better off with a, a credit line or even a reverse mortgage where, you know, the money is there if you need it. And so that takes that worry away. That’s that was one of your points without, uh, having the big mortgage or the big interest payments and the money is there. If you need it, you only pay interest, obviously if you tap into it.

[00:08:58] Jeff Levine: Well, I’m sure we’ll cover this on a, on a [00:09:00] future episode. In fact, I know we will, uh, at some point, but one of the big differences, I agree with you on the reverse mortgage there, a lot of people hate reverse mortgages, whether that’s right or wrong is, is for another day.

[00:09:12] Ed Slott: Yeah I don’t wanna go there because a lot has changed in that marketplace and, uh,

[00:09:17] Jeff Levine: A lot, yes.

[00:09:18] Ed Slott: And there are advantages, but I just used it as an example of having access to money without sort of paying for it with monthly payments.

[00:09:27] Jeff Levine: And I think that was a good point. The, the one where I, where I would disagree with on the home equity line is a bank can call that in. Right. So where. One of the real benefits. Again, I don’t wanna go into that today too much, but one of the benefits of like the reverse mortgage style of, of home equity line, right? Uh, it’s not a home equity line of credit, but effectively functions in a very similar way is that if it’s a reverse mortgage, the bank can’t call it in. Whereas a home equity loan, if you look back for like, let’s say 2008, 2009, Banks just started saying, Nope, you know what, no more home equity loan, or we’re scaling it down or [00:10:00] we’re taking it away from you.

[00:10:01] Ed Slott: That’s right.

[00:10:01] Jeff Levine: And, uh, and, and so again, that let’s, that’s an unknown, just the same way you’re saying the market is unknown. That home equity line of credit could be an unknown too. If things are really bad and you need to get that money, is it because things are just really bad for you personally? Or is it because things economically have gone really bad for everyone? And if that’s the case, the bank may just take away your line of credit and you’re back to the same situation. What do I do?

[00:10:26] Ed Slott: Well, again, I still don’t like debt for that when you need something. Uh, but there’s a different kind of debt. I was saying before I had a client that wanted something and they took money equity out of their home because they wanted to buy, I don’t even know what to call all those big, uh, I, I don’t know, you know, those big wagons, there’s a name for it, where they were big trailer things. What are those called?

[00:10:50] Jeff Levine: Uh, are you talking about an RV.

[00:10:51] Ed Slott: Yeah. Okay. But a big one. Is that the name of them?

[00:10:54] Jeff Levine: Yeah, an RV. Yeah. Recreational vehicle. Yeah. Like one of the bus style ones where

[00:10:58] Ed Slott: Right, right. You know, [00:11:00] you could live there, you could stay overnight and they traveled all over.

[00:11:02] Jeff Levine: I believe they’re technically known as class a RVs or class, a organization.

[00:11:06] Ed Slott: All right. Whatever class.

[00:11:07] Jeff Levine: You know, in my spare time, Ed, I’m also a, an RV specialist.

[00:11:11] Ed Slott: Yeah, well obviously I am not a big, a very big car that goes up high and long like a truck except you could live in it. And uh, this client, they decided that’s what they wanted to do in retirement and they took about 300,000 out, bought one of these huge things that had everything. And for years they just traveled around the country. So they were getting use out of it. To me, that’s probably a good use of debt because they were using it and enjoying it in, in their retirement years. And they had the income to cover the payments of course.

[00:11:44] Jeff Levine: That’s fair, but you use your house in retirement and a lot of people think about paying off that debt too. All your clients were thinking about in that case was taking their house on the road quite literally. Right?

[00:11:53] Ed Slott: Literally that’s what they did. And I think eventually I lost touch with them over the years, but I think they eventually sold their [00:12:00] house.

[00:12:01] Jeff Levine: Well, and I would also say that, you know, there’s other times when, if you’re looking at debt as a, as a possibility, yes.

[00:12:12] Jeff Levine: The market can do worse than zero. We know that, but there are some things in which you can invest that are at least have some sort of reasonable guarantee. For instance, a treasury bill offered by the federal government, right. Theoretically America could go broke, but we can always add another, like the, the fed can make money.

[00:12:28] Jeff Levine: We’ve seen that in recent history. Right? So what if you are buying, let’s say for instance, you know, In the process of building our home, we’re shopping for furniture. There are a lot of times where we go out and we look at a sizable purchase and they’ll offer us 0% financing for, you know, for three years or five years. Well, I, I, even if I wanna remove all market risk from my, from my life, I can take the dollars that I would pay and cash today. And I could turn around and put them in a, a treasury bill or a CD or something else that has some sort [00:13:00] of, uh, guaranteed rate of return. Even if it’s nominal or even if it’s small, it’s still something and it’s money in my pocket as opposed to the company’s pocket.

[00:13:08] Ed Slott: But it would have to exceed the interest rate you’re paying to make it mathematically viable.

[00:13:14] Jeff Levine: Yeah, but there are a lot of in, well, at least, uh, until recently there have been a lot of interest free promotional. Like you wanna go by furniture, for instance, you can see that on almost, uh, you know, many furniture stores, right? They’ll have five years interest free financing. They just bake it into the cost of their product.

[00:13:29] Jeff Levine: They know that it’s not, you know, it’s not really interest free for them. They’re just selling something at $3,000 that they probably could have sold at 2,500. But they’ve got this financing element baked in there to them. So why, why not take advantage of that? Why, why prohibit yourself from all debt?

[00:13:44] Jeff Levine: I’m not, I’m not saying that you should come into debt trying to accumulate as much debt.

[00:13:49] Ed Slott: No, no, definitely not. But you know, goes back to the feeling. Think about the people that are approaching retirement listening today are already there. They spent maybe 30 [00:14:00] years of their life paying off a mortgage. And the day they paid it off was like the holy grail. I mean, they used to have parties and mortgage burning parties years ago that I finally paid off my mortgage. Most people don’t wanna go back there. Uh, most people don’t want debt. They, they did that during their working years. It took a chunk of their paycheck. Now they have maybe a fixed income in retirement. They don’t wanna use that going back and paying off debt again. Now mathematically using some of the tools that you’re talking about. It might pay, but I don’t think it it’s good for people just psychologically. They wanna be free of debt going into retirement years, having debt like a whole mortgage to them would be going backwards.

[00:14:44] Jeff Levine: Well, I think that’s one area where we can absolutely agree on Ed is that psychologically. Uh, it may feel good and that your feelings matter, right? Like, right. The reason you work hard over the course of your lifetime is so that you [00:15:00] have freedom. And if that freedom means you’re willing to, to leave a little potentially on the table to enjoy peace of mind. I can get behind that. You wanna enjoy your retirement a hundred percent. That’s why you work hard all those years. No question about it.

[00:15:14] Ed Slott: And the reason I love a debt free retirement, it’s the same reason. I love a tax free retirement, cause as I said up front, uh, taxes are a debt and nobody wants to deal with that.

[00:15:23] Ed Slott: Most people going into retirement don’t want added expenses.

[00:15:30] Jeff Levine: Ed, would you, would you sum up maybe some of the key points here for, for listeners so that if they’re thinking about this, they could walk away with, with some key takeaways here.

[00:15:39] Ed Slott: All right. So I’ll give you the, the, the scenario, which happens a lot, not so much lately. Uh, when I used to see more clients that would come in. And I remember this one banker client and he gave me the argument you gave. No, no. If I can get a, a mortgage, you know, 3% and invest at 10%, uh, I’m going to come out ahead and he would say, don’t you agree at? [00:16:00] Yeah. But what if the market, you know, uh, then you have market risk.

[00:16:03] Ed Slott: Now you are saying, uh, maybe you can get more guaranteed and not guaranteed, but less risky investments. They may pay a lower return and maybe you’re still, uh, maybe you’re still ahead and your points also were that you can lock in the availability of money. My points is, uh, most people in retirement. I think my opinion and I’ve met a lot of them just don’t want added debt in retirement, cause they spent their whole life getting rid of debt, mainly home debt.

[00:16:30] Ed Slott: And that’s what we’re talking about. And just to make it clear, uh, we said this up front, we’re not talking about the regular credit card debt and all of that stuff. That’s fine. If you pay the bill every month.

[00:16:41] Jeff Levine: Agreed. Yeah, right. Make sure you pay that. That’s another one where we definitely agree. Don’t carry credit card debt. That is, that is probably, it’s hard to find a scenario where paying credit card debt with an interest rate associated with it is a good move because those credit card companies, they charge an arm and a leg for that sort of interest. [00:17:00] Well, Ed, you know, there are two sides to every coin, but our listeners lives and retirement decisions are too important to leave up to a coin flip. That’s why the one thing that you and I always agree on is that it’s important to make sure you’re talking through any big decision with a knowledgeable financial advisor or tax professional so that you can weigh the pros and cons of different options against your specific set of goals and circumstances.

[00:17:26] Jeff Levine:
So if you’d like to reach Ed and I to continue the discussion, want to tell us something we missed, want to tell us why you really love carrying debt into retirement, why you’re happy you paid it off or tell us you’ve got a topic for a future debate, we’d love to hear from you. You can reach Ed on Twitter at @TheSlottReport that’s at. The Slott with two T’s report and you can reach me at @CPAPlanner. That’s @CPAPlanner. Let us know, reach out to us. We’d love to hear from you Ed as always an insightful and informative and fun debate. Look forward to our next discussion real soon. [00:18:00]

[00:18:00] Ed Slott: Okay, Jeff. See you on the next episode of the great retirement debate!

[00:18:04] OUTRO: Jeffrey levine is chief planning officer for Buckingham wealth partners. This podcast is for informational and educational purposes only, and should not be construed as specific investment accounting, legal or tax advice. Certain information mentioned may be based on third party information, which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but it’s. And completeness cannot be guaranteed. The topic discussed in corresponding arguments are those of the speakers and may not accurately reflect those of Buckingham wealth partners.