Understanding Your Wealth
INCOME
ASSETS
EXPENSES
LIABILITY
Liabilities
Liabilities are your debts – anything you owe . It can be in the form of a loan ( like for a mortgage ) or a line of credit ( like credit cards ), and it can have an interest rate that ’ s fixed ( unchanging ) or variable ( goes up and down based on the current federal funds rate ). While some debt is considered to be better than others ( think $ 20,000 in student loan debt to advance your career vs . $ 20,000 in credit card debt ), it all has to get paid off sooner or later – and ideally before retirement , while you still have income to service it .
MORTGAGES
A mortgage is often the largest debt people carry leading up and into retirement , and many try to time their last payment with their entry into retirement to free up cash flow . After all , it ’ s a lot easier to stretch your retirement income and assets if you can remove that hefty monthly payment , and with 2017 ’ s Tax Cuts and Jobs Act reducing or eliminating many of the tax benefits to owning a mortgage , it can make sense to pay it off before retirement .
That said , while a mortgage is often the largest debt people have in retirement , it also tends to be the cheapest in terms of interest rates . If the cash you ’ re using to pay off a mortgage can be used more productively ( like paying off more expensive credit card debt ) or would require a distribution that increases your taxable income , you might be better served keeping it even into retirement . It all depends on your particular financial situation .
As you weigh the pros and cons , be sure to also consider how you feel about debt more broadly . For some , having that burden lifted as they enter retirement is worth missing out on any potential advantages . It comes down to what gives you the most peace of mind .
Reverse Mortgages
You might have seen late-night advertisements for reverse mortgages and wondered if they were legitimate . They are – but they ’ re not for everyone .
A reverse mortgage is an option for anyone over the age of 62 who owns their own home . It essentially lets you take out a loan against the equity in your home – a loan you don ’ t have to repay during your lifetime so long as you are living in your home and don ’ t sell it . When the homeowner dies or moves out , the homeowner or heirs can refinance the loan or sell the home to pay it off , or the lender can sell the home to settle the loan balance .
In some cases , a reverse mortgage can be a useful tool in retirement , such as if you have extensive credit card debt . But there are significant risks that must be considered :
1 . With a reverse mortgage , your debt increases over time due to the interest on the loan .
2 . There are substantial costs involved , such as loan origination and interest payments .
3 . If you need to move out of the house quickly ( due to health reasons , for example ), your property could be sold to pay off the loan .
If not handled carefully , a reverse mortgage can have major repercussions on your finances and what you leave to your heirs . Before considering this option , it ’ s worth having a conversation with your Baird Financial Advisor and estate planning team .
NON-MORTGAGE DEBT
Owning debt isn ’ t necessarily a bad thing – without it first homes aren ’ t purchased , businesses aren ’ t started , cars aren ’ t purchased ( and so jobs aren ’ t driven to ). If not managed carefully and appropriately , though , it can lead to financial ruin – sometimes quickly . This is especially true in retirement , when you likely have less income to service it .
It ’ s a lot easier to enter retirement confidently and enjoying meaningful experiences if you ’ re not burdened by debt ( particularly debt incurred to purchase assets that depreciate over time – think credit cards and car loans ). Here are some tips to reduce your debt burden both leading up to retirement and once you ’ re retired .
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