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More older Americans are carrying significant amounts of debt into retirement. Even with low interest rates, is that wise?

Consider: Older Americans, those 60 and older, had $1 trillion in household debt (mortgages, home equity loans, auto loans, student loans, credit cards and the like) in 2003. And thirteen years later, in 2016, older Americans had $2.84 trillion in household debt, a nearly three-fold increase.

But should you be among those Americans who retire with debt, including a mortgage and/or a home equity line of credit (HELOC)? For most, the answer depends on the math: Can you afford to retire with debt or not? If not, your best option might be working longer to pay down that debt before you retire. What's more, given the new tax law -- the Tax Cuts and Jobs Act of 2017 (TCJA) -- you'll have to evaluate if there are any tax benefits to carrying a mortgage, as well as a HELOC, into retirement. For many, the answer will be no.

Effect on net worth of paying down debt



Net worth









Effect on cash flow of paying down debt






$8,000 (including $1,000 toward debt)






What's the Effect on Cash Flow?

"As Americans enter retirement and reach the end of the accumulation phase of their lifecycle, the optimal management of debt needs to be well-thought-out," said Robert Westley, a wealth adviser at Northern Trust and a member of the AICPA Personal Financial Specialist Credential Committee. "Debt is only one component of the financial puzzle and cannot be assessed in isolation."

First, it's essential to create a reference point by determining capital needs in retirement and how expenses will be funded throughout one's retirement, said Westley. How much income, for instance, will come from earnings, personal assets, Social Security, a traditional pension and the like?

Next, Westley recommends modifying your analysis to illustrate the effect on cash flow -- how much money is coming in versus going out each month -- of using liquid assets (assets that can be converted into cash quickly) to pay down certain debts.

For instance, let's say you have $30,000 sitting in a money market account, $20,000 of credit card and auto loan debt, and you're paying $1,000 per month toward that debt. Well, you could pay down your $20,000 in debt with your liquid assets and free up $1,000 per month to save, for instance, toward retirement or to use for living expenses.

Being aware of where liquid assets are located is, however, crucial, said Westley. "For example, are the liquid assets contained in a tax-deferred account that will incur a tax liability or penalty upon distribution?" he asked. "Additionally, leaving money to compound tax-deferred in a retirement account may overcome the hurdle of paying interest on certain debt and increase wealth over time."

Think Holistically

In the main, Westley said it's essential to think holistically about both the balance sheet (how much you owe vs. how much you own) and cash flow implications of extinguishing any debt before retirement. "Perhaps, the quantitative analysis favors paying off debt," he said. "However, if one is left without a cash cushion or emergency fund, qualitatively they will be worse off."

Further, he noted, since all debt is not created equally, it's important to gauge the quality of the liability side of your balance sheet. "In general, consumer debt with high-interest rates, such as credit cards, personal loans, and auto loans contain no tax benefits and are used to buy depreciating assets," Westley said.

This type of debt, he said, can create a meaningful drag on one's retirement income and the financial assets needed for consumption during the duration of retirement. "Unfortunately, carrying this type of debt into retirement may reduce a retiree's standard of living and, if feasible, should be eliminated before retirement," Westley said.

For other types of debts, however, including mortgages and HELOCs, it's important to consider the interest rate and associated tax benefit, Westley said. "Consider what the interest rate costs you on an after-tax basis and compare that rate to what you may earn by keeping liquid assets invested," he said.

If the analysis is unclear, Westley said erring on the side of paying down debt is prudent since it represents a guaranteed and risk-free return on the funds. "It also helps to keep in mind that when one is on a fixed income, even a low-cost mortgage or other debt re-payments will devour funds that could be better spent elsewhere," he said.

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The calculation being this: The after-tax cost of debt is the interest rate on the debt multiplied by (100% minus the incremental income tax rate). For instance, if a person had a mortgage with a 3.75% annual interest rate and their combined federal and state income tax rate was 30%, the after-tax cost of debt is 2.625%. "If you can earn a higher rate of return on a risk-adjusted basis by investing the funds, then there will be a positive arbitrage," said Westley.

Inadequate Resources?

To be sure, having the resources to pay down your debt before retiring is critical and absent those resources other options must be considered.

In general, households aged 65 and older spend about 35% of their income on housing costs, which could include a mortgage, a HELOC, as well as property taxes, home insurance, maintenance and the like.

And those who have little in the way of resources and who are entering retirement with a mortgage and/or a balance on their HELOC will learn that debt is an additional burden, according to Anthony Webb, the research director of the Retirement Equity Lab at The New School.

Given that, he said, households that don't have the income to support the expense of a mortgage might consider working longer.

To be sure, downsizing is an option. "But people don't like doing it, and it is often difficult to get a less expensive house in the same neighborhood," Webb said. "So, these workers have little choice but to carry on working -- if health and employment opportunities permit."

Other share that opinion. "While there are 'tax and investment tricks,' I think the unfortunate advice is to spend less and work longer," said Paul Hamilton, an associate professor at Asbury University.

Adequate Resources?

If, on the other hand, if you fall into what is a smaller group of older Americans who have a mortgage and adequate financial assets, your debt increases your liquidity, said Webb. "It may also get them to a more preferred position on the risk/reward frontier," he said. "They are in effect borrowing at a low fixed rate to purchase financial assets."

But for this to make sense, they shouldn't be simultaneously investing in bonds, said Webb. "A mortgage is a short bond position, and tax arbitrage apart, being both short and long the bond market is unlikely to be profitable, given lenders' margins and so on," he said.

So, carrying a mortgage into retirement only makes sense for a small number of wealthy risk-tolerant people who are 100% invested in equities, said Webb.

The New Tax Law

Of course, those who are trying to decide whether to retire debt-free or not must now consider the new tax law. Under the new tax law, fewer Americans will get the chance to deduct their mortgage interest on their tax returns. That's because the new tax law increased the standard deduction to $12,000 for single tax payers, $18,000 for head of household taxpayers, and $24,000 for married filed jointly taxpayers. The new tax law also eliminates the interest deduction for home equity indebtedness, Westley.

And this, "will substantially reduce the number of people who find it profitable to itemize," said Webb.

Married filing jointly taxpayers would need, say, $10,000 from state and local taxes and more than $14,000 in mortgage interest (not including any gifts to charity) to itemize. And that, according to Hamilton, would require about a $350,000 mortgage at 4% just to hit the threshold.

Given that fewer people can deduct their mortgage interest to lower their tax bill, Webb said retirees and pre-retirees might consider paying down their mortgage sooner rather than later because of the new law. "I can see that (the new tax law) might tip the balance of advantage for some wealthy retirees in favor of paying down the mortgage," he said.

Of note, in 2013, 30.1% of households (mostly those with incomes of $75,000 and more) chose to itemize their deductions. But under the new tax law, it's estimated that just 5% of taxpayers will be able to itemize their deductions.

Less Incentive to Save for Retirement

Others also say the new tax law decreased the tax incentives to borrow against your home by substantially increasing the standard deduction, by reducing the mortgage debt that is tax-deductible, and by lowering marginal tax rates for most households.

In addition, the tax law also slightly reduced the incentives to contribute to tax-deferred retirement accounts, such as 401(k) and IRA accounts, due to the reduction in marginal tax rates, said Clemens Sialm, a professor at the McCombs School of Business at the University of Texas at Austin. "These changes might motivate households to increase prepayments on mortgage debt and to reduce their contributions to their retirement accounts," he said.

However, Sialm noted, it must be kept in mind that contributions to tax-qualified retirement accounts still have significant benefits primarily because of the tax deferral and the matches provided by many employers. "Due to the reduction in the generosity of Social Security and due to the shift from defined-benefit to defined-contribution pension systems, it is more important than ever that households save by regularly contributing to tax-qualified accounts and by reducing their mortgage, student, and credit card debt," he said. "Over long horizons these savings can accumulate substantially to help provide for a secure retirement."

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