The approaches for seniors who carry mortgage debt into retirement may be determined by the nature of the debt itself, as well as whether or not that type of debt will impact their retirement financing goals. This is according to a column at CNBC, examining the best practices for paying off debt ahead of a person’s transition out of the workforce and into retirement.
While some very visible commentators in the financial advice world may explain single, catch-all rules for paying off debt ahead of retirement, such rules may not be as productive in positioning a successful retirement especially if someone considers all debt to be the same.
High-interest debt — which usually accompanies things like credit cards or auto loans — should likely be paid off as soon as possible, as it can have a demonstrable impact on the health of a worker’s future retirement.
“Keeping a balance on a credit card can easily cost you thousands in interest and take you years to pay off unless you prioritize a plan of attack,” writes CNBC’s Megan DeMatteo.
Citing an example of a credit card with a balance of $5,311.57 at 25.47% APR, such a balance would take 21 years to pay off if only paying the minimum amount due, she says. That would come with nearly $16,000 in interest payments, a much higher risk to a portfolio when compared with the debt that accompanies a traditional, forward mortgage.
“That money would be much better off earning a person compound interest in a retirement fund over the next 21 years, as opposed to paying credit card companies more in interest fees,” she says. “However, for credit products with lower interest rates, such as mortgages and even 0% APR car loans, every borrower must make the decision that works for their wallet and budget.”
If a person’s debt costs them less than they expect to make in investments based on an individual’s asset allocation, then a financial advisor may give the go-ahead for making smaller payments to that kind of debt, DeMatteo writes.
“[A] financial advisor may advise you that it’s OK to make lower payments on debt and have more to invest in your retirement fund,” she says. “The latest data from the Federal Reserve shows that older consumers are carrying mortgages well into retirement, especially now that mortgage rates are at a historic low.”
Brokerage company Charles Schwab also espouses an idea that may help determine why seniors choose to carry their existing, forward mortgage debt into retirement.
“On the psychological side, you need to weigh the value of having more money in the bank (or in your portfolio) versus being mortgage-free,” according to the Charles Schwab Guide to Finances After Fifty. “Only you know which will ultimately give you more peace of mind. It could also be a matter of proportion.”
Read the article at CNBC.
