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When It’s OK to Retire With Debt

The key is understanding the difference between good and bad debt

By Robert Powell and MarketWatch

(This article appeared previously on Conventional wisdom suggests that you shouldn’t retire with any debt.

But Americans are seemingly ignoring that advice, according to a new research report from the Michigan Retirement Research Center.

Older Americans on the verge of retirement are more likely to retire with debt than in the past, according to that report, “Older Adult Debt and Financial Frailty.”

In fact, more than 70 percent of boomers held debt compared with a dozen years ago, when 64 percent did, according to the authors of the report, Annamaria Lusardi, a professor at George Washington University School of Business, and Olivia Mitchell, a professor at Wharton School, University of Pennsylvania.

Boomers are not only more likely to hold debt, but the value of that debt has also grown sharply, say the authors. In fact, median debt for those age 56 to 61 has more than quadrupled, from about $6,200 in 1992 to $28,300 in 2008 (in 2012 dollars).

A key reason that debt rose so rapidly for boomers is this: That group spent more on housing and took out larger mortgages, compared with earlier cohorts. And, the authors say, boomers retiring in the next several years are more likely to carry this debt into retirement, compared with previous cohorts.

But not all experts think that retiring with debt is an inherently bad financial plan. Rather, they say, there is good debt and bad debt and it’s OK to retire with good debt. So, what sort of debt might be good?(MORE: Pay Down Debt or Save?)

Good Debt vs. Bad Debt

Well, take mortgage debt. Most folks suggest that you retire without a mortgage. But Larry Kotlikoff, a professor at Boston University and president of Economic Security Planning, says long-term mortgage debt is a smart thing to have in your portfolio if you face inflation risk, which may be the case if, for example, you have a retirement pension that is not indexed to inflation.

“When inflation takes off, you get to pay back your mortgage in watered-down dollars and this offsets the fact that your pension or other stream of fixed nominal income loses real purchasing power,” he said. “So retiring with debt can be a hedge against inflation, provided it’s long-term. fixed-term borrowing.”

(MORE: Strategies to Help Handle Debt)

Other Types of Good Debt


Other experts are OK with folks retiring with debt too, though only under certain circumstances.For instance, Larry Cohen, a director at Strategic Business Insights, said retiring with a mortgage might be allright, provided it was less than one year from being paid off and assuming that you had the resources to pay it off.

And, Cohen said, “it probably would be OK to have some debt collateralized using the home to provide liquidity with deductible interest.”

In addition, Cohen said, debt that was held in joint tenancy with an heir with rights of survivorship might be OK, too. For instance, retirees who want to help their children buy a home or a car might consider co-purchasing those assets.

“As part of this arrangement, the child makes a monthly payment to his or her parents which is larger than any payment for the debt the parent has,” said Cohen. “The parent gets an income stream and, in the case of the mortgage debt, a tax write-off for the interest. When they pass away, the house or the car becomes the child’s, who may no longer have to make any payments.”

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Robert Powell writes about retirement issues for and produces the Retirement Weekly subscription newsletter. Read More
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