Should I carry debt into Retirement?
Whether or not you should carry any debt going into retirement depends on your individual circumstances, your unique preferences around debt, and your goals.
Here are a few things to consider:
Type of debt: Some types of debt, such as mortgage debt, may be considered "good" debt because the interest is tax-deductible, the debt is secured by an asset that may appreciate in value, and the cost of borrowing can be quite modest. Carrying this debt into Retirement may make sense if the after-tax cost of borrowing is less than the after-tax returns you would expect over the long run from your investment accounts.
Other types of debt, such as credit card debt, may be considered "bad" debt because the interest is not tax-deductible, the cost of borrowing is typically higher, and the debt is not secured by an asset. Tackling this debt is often considered a good thing because it reduces your interest charges. Many investors pay down these debts using a snowball approach or an avalanche method. Both approaches involve making minimum payments on all debts while focusing extra payments on one debt at a time until it is paid off. However, the two methods differ in how they prioritize which debt to focus on.
The snowball method involves paying off debts in order from smallest to largest regardless of interest rates. This approach can be psychologically rewarding as it allows individuals to see progress quickly by paying off smaller debts first. By eliminating smaller debts, it creates a sense of accomplishment and motivation to continue paying off debt.
The avalanche method involves paying off debts in order from highest interest rate to lowest, regardless of the balance owed. This method can be more financially efficient as it helps to minimize the amount of interest paid over time. By focusing on debts with higher interest rates first, individuals can save money in the long run by reducing the overall amount of interest they will pay on their debts.
Choosing between the snowball and avalanche methods depends on personal preference and financial goals. The snowball method may be a better fit for those who need a psychological boost to stay motivated, while the avalanche method may be better for those who prioritize saving money on interest over quick wins.
Ultimately, the key to successfully paying off debt is to find a method that works for you and to stick with it consistently over time.
Decisions around debt can also have a significant emotional impact on individuals and can cause feelings of stress, anxiety, and even shame. Be sure to give this side of the decision its fair weight in your ultimate decision.
Debt can affect you emotionally in several ways:
Stress and anxiety: Debt can cause stress and anxiety, especially when it becomes overwhelming. It can be difficult to manage multiple debts and keep up with payments, which can lead to feelings of overwhelm and worry.
Guilt and shame: Some people may feel guilty or ashamed about their debt, especially if they feel like they have mismanaged their finances or made poor decisions.
Fear and uncertainty: Debt can also create a sense of fear and uncertainty about the future. People may worry about their ability to make payments during a down market, and whether they will be able to achieve their other financial goals.
Loss of control: Debt can make people feel like they have lost control of their finances. This can lead to feelings of frustration and helplessness, which can be difficult to manage.
Other major considerations of whether to carry debt into Retirement include:
Amount of debt: Having a large amount of debt going into retirement, especially debt with a variable rate, can be a concern. If rates go up it may make your payments a much larger strain on your cashflow and limit your ability to meet other expenses or enjoy your retirement.
Ability to pay off debt: If you have the ability to pay off your debt before retirement, it may be beneficial to do so. This will not only reduce the amount of interest you will pay over time but also may help reduce the amount needed from pre-tax accounts in the future, allowing for more tax planning opportunities.
Ultimately, it's a good idea to consult a financial advisor who can help you understand your options and create a plan that takes into account your individual circumstances, preferences, and goals.
They can also help you to address any concerns, stressors, or challenges you may have around debt and help you to create a plan to pay it off in an appropriate manner.
