Before retiring, clients must retire debt first

To his clients in their 50’s and early 60’s, who are gearing up for retirement, Scott Anderson imparts his golden rule: Before the client can retire, the client has to retire his debt. “You cannot have debt in retirement,” insists Anderson, a fee-only planner based in Newport Beach, Calif. That’s because “it’s extremely inefficient to pull money from an IRA to pay down debt,” he points out. At age 50 he says, it’s more important for a client to unload debt than to increase savings. Otherwise the client is just deferring the debt payments and accruing more interest. For most people, getting out of debt means paying off their mortgage, which means before they retire they either need to sell their home and move someplace where they don’t need a mortgage, or continue working until it’s paid off. Anderson is sharply critical of what he calls “the fallacy of the mortgage interest deduction.” Most people, he says, don’t realize how inefficient this is. Without a mortgage they’ll pay more in taxes but they will also end up with more cash in their pockets. The second most important thing for near-retirees to take stock of, according to Anderson, is other major expenses that could consume their retirement savings. These may include house remodeling, car purchases and anything the client needs to do to get ready for retirement—such as fulfilling lifelong dreams like extensive foreign travel. Items like these should be purchased and paid off before retiring, he says, so the client can avoid major expenditures in retirement. The third most important conversation that Anderson has with his clients nearing retirement age is when to begin drawing social security. His message: Don’t start until you’ve reached full retirement age, and if you can delay another five years until age 70, when you’ll receive the maximum allowable payout, so much the better. What’s important, he notes, is not how much money in total the client gets from the government, but what that check will look like when the client turns 80 and can no longer work. “People say they’ll take the money now, invest it and pocket the interest. But no-one, he says, “ever really does that.”