Retirement Planning: A new year, a new approach to debt in retirement

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on December 25, 2017 - December 31, 2017.
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Retirement is wonderful, but it certainly is not easy. Planning ahead involves many fears, uncertainties and doubts. By reframing the broader conversation around debt and specifically through how utilising a debt strategy can address the challenges retirees will face in 2018, I want to highlight its potential benefits and risks as a tool in retirement. 

Conventional wisdom and advice tell us that we must be debt-free in retirement and that all debt is bad. Not so! Although we cannot fully predict what the new year may bring, taking a new viewpoint of utilising enriching or good debt before and upon retirement can be a valuable strategy to help us achieve our retirement goals. Perhaps that means caring for elderly parents or buying the second home we have always dreamt of. 

By no means should we think of utilising debt as a way to buy things we cannot afford. But many lending products can be a better way to purchase what we can afford. And utilising enriching debt, such as a securities-based line of credit, means building wealth before and during retirement. 

Only a small number of investors who are able to have a securities-based line of credit in place have done so, even though the tools can be quite useful, especially for people looking at retirement. Securities-based lines of credit are set up against taxable investment accounts and borrowers can borrow against their assets. The benefit of these types of lending products is that there is generally no cost to set them up, no ongoing fee to have them and you are only paying interest expense on the amount you borrow, if you borrow at all. 

Generally, you will find that these facilities offer incredible flexibility with respect to the terms. Typically, there is no amortisation and you can pay down any amount at any time you want. What is pretty amazing is that typically, there is also no required monthly payment. You can let the interest “cap and roll”, which means that it just adds on to your principal balance. This may or may not be a good long-term strategy, but it offers tremendous flexibility for the borrower — in good times and in bad. Due to the great rates and flexible terms, this is truly enriching debt. 

Utilising a securities-based loan is just one example of distinguishing different types of debt used to continue to build liquidity and ensure security in retirement. For example, perhaps you come into a windfall due to an inheritance just as a beautiful vacation home appears on the market. By using a lending product, including working debt such as a mortgage, you can invest the money to have it continue working for you and increase your rate of return while still achieving your retirement goal of buying a place to relax in during retirement. 

Having no debt in retirement has been the advice in the past, but retirees face a new world in 2018. We are living longer and need to make sure that we have planned ahead and have the resources to enjoy our retirement. Utilising good debt can mean that our assets continue to work for us, creating income in retirement. 

Retirees will always face unexpected challenges and crises. By being proactive about using debt and setting up something like a securities-based line of credit, retirees do not have to face the stress and anxiety of liquidating their assets. 

Life will always throw us curve balls — perhaps your children rack up unexpected hospital bills or a storm damages your house. Instead of selling off your investments or dipping into savings, what if you could use a loan to fix the problem immediately? With good debt, meaning lower rates and flexible payment schedules, you could quickly move beyond the crisis and stay on your retirement track. 

As we look to 2018 and beyond, we must think about how debt can benefit us in retirement. More and more options are available with regard to using securities-based lines of credit. And if you have not talked to your financial adviser about this, discussing the option can only bring you benefits. 

Financial freedom reduces fear, uncertainty and doubt in retirement, creating a more relaxed state of mind and letting you worry less and enjoy more. This will be true long into the future. We have had so many transformations with regard to health, technology and the way we live, so why not transform how we think about debt and our financial lives?


Thomas J Anderson is the author of The Value of Debt in Building Wealth