Should you retire while carrying a mortgage – or debt of any kind for that matter? Ideally, no. Practically speaking though, I can appreciate the difficulty in making this decision. With interest rates at an all-time low (and showing no signs of forthcoming increases, aside from rumours and hearsay), carrying debt is not as terrible nor harmful a choice as it once used to be.
Life carries no shortage of surprises and oftentimes carrying debt, even into retirement, may be outside of our control. We are often hit with expenses that we did not count on or plan for. Dependent parents, dependent grandchildren, sudden health issues, and even large-scale home repairs are common examples of such expenses. Taking out even a small mortgage can be a prudent way to finance these types of expenditures; especially if you can manage to make your interest expenses tax deductible (see below).
Despite all the doom and gloom literature that exists in today’s financial press, a fair amount of retirees do hold a sizeable nest egg by the time they retire. For those who do, the rise of an unexpected expense brings with it a second financing choice – should I borrow, or cash in some of my nest egg to pay for my unanticipated expense?
I can offer a possible solution to this dilemma, assuming the nest egg is being drawn from a regular, taxable investment account (i.e., the funds are not coming from a TFSA or RRSP). The solution is as follows:
1. Cash in your investments, and pay the expense from your nest egg.
2. Take out a mortgage or secured line of credit in the same amount.
3. Use the loan proceeds to repurchase new investments.
In taking these steps, your interest expense becomes tax deductible (against your investment income). Thus, your rate of interest effectively falls from low to even lower (after the tax effect).
I am not advocating carrying debt into retirement, nor am I a fan of excess leverage – especially against one’s investments. However, I can appreciate situations where debt is unavoidable, and consequently, an intelligent debt management solution is needed. Tax deductible debt is the best kind of debt; however, it should be considered a lesser evil rather than a primary retirement strategy.
Personable and professional, Brent Soucie specializes in cross-border tax and financial planning for U.S. citizens and/or Green Card holders residing in Canada, as well as Canadian residents with U.S. employment and/or property. His clients include professional athletes, entrepreneurs, and corporate executives.
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