I periodically hear folks push back against the advice that retiring with a financed home or vehicle is a bad idea. The typical counter-argument to the concept of retiring debt free is that money is cheap now, with low mortgage interest rates and 0 percent financing on new vehicle purchases. Thus, the logic goes, it makes sense to take that low-interest loan so that you can keep your retirement money invested. While some of the math relied on by the debt proponents may be correct, here are three reasons owning still beats financing for most retirees.
Tax flexibility. A good retirement income plan allows the retiree to effectively manage his or her income tax burden. This includes minimizing the retiree’s marginal tax rate and the tax implications of receiving Social Security benefits and other income. This is much easier to do if the retiree is not making mortgage or car payments. Consider that your home provides shelter services to you every month and your car provides monthly transportation services. You receive these shelter and transportation services tax free if you own your home and car. On the other hand, if you have mortgage payments or car payments, you need income to make those payments. Unless all of your retirement income is non-taxable (unlikely), taking income to make debt payments will increase your tax burden, or at least make it more difficult to control.
Disaster management. Under normal circumstances, your retirement income may be adequate to cover mortgage or car payments. Let’s assume that some of your household retirement income is derived from part-time work or from your spouse’s Social Security, pension benefits, or annuity. Now let’s assume that you lose that part-time job or your spouse dies. These events can immediately and substantially reduce your retirement income, causing a financial disaster because your loan payments do not also diminish. What were manageable loan payments are now an oppressive burden. Moreover, market conditions may put you underwater on the house or car loans, making it impossible for you to sell.
Peace of mind. One of my goals as I prepare for retirement is to simplify my life so that I have fewer things and obligations to worry about. To me, a no worries status provides value that easily exceeds the mathematical benefits that may be provided by a financed home or vehicle. Do the math if you like. But when contemplating your debt status as you prepare for retirement, consider the bigger picture. When you do, owning will look a lot better.
Mark Patterson is an engineer, patent attorney, baby boomer, and author of The Failsafe Retirement System. He blogs on matters of personal finance and retirement planning at Tough Money Love and Go To Retirement.