Do you have debts? Don’t be so quick to throw it away. That’s what financial advisors say these days to clients with fixed, low-interest debt.
“There’s never been a worse time to pay more than required on low-interest, fixed-rate loans, especially if you have predictable and reliable cash flow,” says Adam Scott, Senior Advisor and Senior Investment Advisor at Los Angeles-based Argyle. Capital partners.
Of course, this advice may be difficult for customers, especially older ones, to accept. That’s because, for so many years, the conventional wisdom has been to avoid debt in retirement at all costs. “They have a hard time practicing the idea that debt isn’t a bad thing,” Scott says.
However, this way of thinking is slowly changing. Even with rising interest rates, they’re still low by historical standards and, coupled with increased longevity and other factors, keeping the right kind of debt shouldn’t be taboo, experts say. Here’s what the pros advise.
Understand that not all debt is equal. “Leverage isn’t a terrible thing right now,” says Michael Wagner, co-founder and COO of Omnia Family Wealth in Aventura, Florida. But it’s important to understand which types of debt can be kept and which should be. got rid of. For example, people shouldn’t keep their credit card debt because interest rates can easily be between 18 and 20%. On the other hand, it might be a good idea to hold on to lower-rate secured credits such as mortgages, home equity lines of credit, and lines of credit on securities accounts. “It’s the whole idea of good debt and bad debt,” he says.
Plan your attack. Kelly Welch, Certified Financial Planner and Wealth Advisor at Girard Advisory Services in King of Prussia, Pennsylvania, recommends clients make a list of their debts and the rates associated with them. Another consideration is whether they are fixed or variable rate loans. This helps people come up with a plan to settle the debt at the highest rate first, she says.
Welch gives the example of a client in her 50s who used extra money to pay off two mortgages. The woman was paying about 3.7% on one mortgage and 2.8% on another. The client had paid more than the monthly minimum on the lower rate loan, even though it had a smaller balance, just so she could eliminate that mortgage. Instead, Welch recommended that the client use her extra money to attack the higher balance loan first. If the client had had credit card debt or higher-rate student loans, Welch says she would have recommended using the extra money for those debts first.
Don’t play by your parents’ rules. Many people think they have to get rid of their debt when they retire because they won’t have a stable income. But if you’re financially sound, you may be able to do better financially by sticking to low-interest, fixed-rate debt like a mortgage, advisers say. For example, the rates are so low that they may be able to earn more by investing the amount it would take to repay the loan in a higher-yielding account, advisers say. Refinancing to a lower rate loan may also be possible for some people.
Holding low-interest debt can be even more attractive during periods of high inflation, such as the ones we are experiencing now. This is because in times of inflation, debt actually becomes cheaper over time as the value of a dollar decreases. A fixed-rate mortgage payment, for example, doesn’t change, but house prices are likely to rise, making your low-rate monthly payment a pro-inflation move.
“In an inflationary environment, the people who are going to win are the people who have borrowed money,” said Dean Harman, managing director of Harman Wealth Management in The Woodlands, Texas, recently. said Barron’s adviser. He recently advised clients who were looking for a home to put down the minimum, finance as much as possible and take out a 30-year mortgage. They had the money for a bigger down payment, but he told them to keep it in their wallet so the money would keep growing. “All the rules your parents followed have gone out the window,” he told them.
Go for growth. Elizabeth Evans, Certified Financial Planner and Managing Partner of Evans May Wealth in Carmel, Ind., recently met a couple in their 40s who had an extra cash flow of $2,000 a month and were using it to pay off their 3% fixed. mortgage rate. The couple also had student loans with a higher interest rate of 3.875%.
She advised them to pay the minimum on both debts and then invest their extra $2,000 per month in their investment account. Generally speaking, if the interest rate is below 5% and the client can mentally manage maintaining their debt, she advises clients to pay the minimum and invest the extra money instead of rushing to repay the debt. Despite the volatility, “I strongly believe that over time you’ll outgrow the 3% of a 30-year mortgage,” she adds.
Think creatively. There are other creative things people can do with mortgage debt. Scott of Argyle Capital gives the example of a single retiree in the late 70s who was looking to pay off his mortgage. Instead, Scott encouraged him to take out a loan on his investment portfolio because he was paying almost 5% interest on the house, but refinancing was not a good option. The client then used these funds to pay off the mortgage. He still has the same amount of debt, but he has reduced his interest charges to less than 2%. He could repay the loan from the investment portfolio if he feels more comfortable, but as long as the rate is lower than he expects to earn, he will maximize his returns on the portfolio by not repaying line of credit,” Scott said.
Weigh the emotional toll. Of course, for some, the psychology of continuing to hold a mortgage or other low-interest debt, even if the math makes it viable, is too stressful. you, then pay it back,” says Wagner of Omnia Family Wealth.