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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
So which are you more comfortable with? A guaranteed 3% against you or the potential of more, but the risk of also losing money? Welcome to the retire on time podcast, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is all about getting into the nitty gritty.
Mike:Now that said, remember, this is just a show. Everything you hear should be considered informational. This is not financial advice, so do your research. As always, text your questions to (913) 363-1234, and we will feature them on the show. David, what do we got today?
David:Hey, Mike. Is there ever a situation where you should keep your debt when you retire? Uh-huh. Yeah. I mean, what debt are we talking about here?
David:Car? House?
Mike:Well, I think mean, overall, just should you have debt in retirement or not.
David:Okay.
Mike:There are many reasonable arguments of saying, well, you shouldn't have debt at all. Yeah. If you retire, that means you've paid off all of your debt. I would disagree with that oversimplified stance, and here's why. There's good debt and there's bad debt.
Mike:Mhmm. So I define good debt as any debt that is tied to an asset that is appreciating in value. Okay. Yeah. You appreciate what appreciates.
Mike:Yeah. Okay. Yes. So what do I what do I mean what do I mean by that? Your house should appreciate in value.
Mike:Yeah. Your car is depreciating in value. Oh, yeah. K? So so when you understand that, paying off car loans sooner, that makes sense to me.
Mike:Paying off a house sooner doesn't always make sense to me. So that's the kind of the first level. The second one is what's the interest rate that you're paying based on the debt? As a general rule, I like to look at the ten year treasury, and whatever the ten year treasury is, that rate times it by 1.5. K?
Mike:If your debt is less than that, what is the ten year treasury right now? Yeah.
David:How often does that change? Does that does it fluctuate daily?
Mike:Yeah.
David:Ten year treasury yield.
Mike:So as of the time of this recording, it's about 4.1%, roughly. It was earlier. February, it was, like, 4.8. So let's just say 4% times that by one one and a half, so 6%. If your debt is 6% interest or less, maybe you keep it.
Mike:If it's 6% or more, maybe you get rid of it. Now another way to look at this instead of it kind of being that and the reason why I I I use that metric because everything boils down to the support that the bond market or the debt market can offer. If the treasury is up at a higher rate, then it's I mean, that affects your lending. Right? You could buy a ten year treasury for a reasonable rate at that point.
Mike:So that it's a different environment than if the ten year treasury is like 1%. Oh. You know, it's buying an investment for 1%. That's pretty rough. Yeah.
Mike:So now the the opposite of that is if if the ten year treasury is low, you could borrow money very cheaply. So there's there's it's it's kind of a juxtaposition with this. But Right. But the point I'm getting is you have to look at the interest rate itself that you're paying and what could you get elsewhere.
David:So typically on a on a home that it's appreciating in value, those you probably have a lower than 6% interest rate. Sometimes. Yes. Maybe not recently if you've got a loan recently. Yeah.
David:But a few years ago. Right? But car loans are maybe higher.
Mike:Well, so think of it this way. Let's say you got a 3% loan. You locked in at that low rate years ago. Yeah. You are guaranteed and let's say there's a $100,000 for easy math.
Mike:Okay. So a $100,000 of cash is guaranteed to go 3% against you. And then over here, you've got a 100,000 in your brokerage account. Let's say that let's say it's in a high yield savings that's that's growing at 4%. At any moment, you can sell the brokerage account, the money market, whatever is at 4%, and just pay off the house loan.
Mike:But you're making 1% positive arbitrage. Oh, yeah. Explain that. So 3% against you, 4% for you. Your overall net worth is increasing on the 100,000 by 1%.
David:Oh, okay.
Mike:So you make 4,000 here, you pay 3,000 here. You're up 1,000 overall. That's what positive arbitrage really means. So now you you need to understand, okay. Well, what about the markets?
Mike:Well, the market could get you, let's say, six, seven, eight, nine, ten percent, but it could get you zero. So which are you more comfortable with? A guaranteed 3% against you or the potential of more, but the risk of also losing money. Because a crappy situation is, let's say, your your 100,000 goes down by 30%, now you're down 70,000. Uh-huh.
Mike:Right? And you also pay 3,000 over here. So that's where you have to look at, well, what are you comfortable with? What risks are you willing to take? And some people, even though they have the low rate, even though they could make positive arbitrage on a a high yield savings account, even though all that makes sense
David:Mhmm.
Mike:Some people will sleep better at night just because they paid off their house.
David:They they want that. They wanna be able to know I'm debt free.
Mike:Yeah. And in those situations, even though it's not technically financially prudent, do it anyway.
David:Because it's emotionally prudent, maybe.
Mike:Yeah. Yeah. You will live better, your cash flow needs or your income needs decrease, you sleep better at night, why not? Yeah. You can if you can afford to do it, why wouldn't you do it?
Mike:So it's it's a balancing act. But don't say that all debt is bad. That's not true. It's also not biblical as some would say to say.
David:Mhmm.
Mike:If you're if you have debt on something that is appreciating in value on a nonpredatory amount or rate, so again, in today's dollar, 6% or less would be considered a reasonable amount, you it's okay to keep it and slowly pay it
David:off Yeah.
Mike:If you're comfortable with it. If not, it's okay to pay it out, but those are the the different layers to to consider.