Retirement is time to leave all the responsibilities behind and enjoy a relaxed life. Whether it be traveling or staying at home and play with the grandkids. Unfortunately, there are some senior citizens who are spending their golden time being worried about their finances. The reason behind these worries: debt. According to a survey, 60 % of the citizens are into debt even after getting retired. Too much of debt is really a reason to worry and stress which can affect both one’s mental and physical health.
Some people choose to enjoy the peace of mind and hence wants a debt-free retirement. Hence, they clear all the debts before getting retired. But, besides the mental peace and emotional feelings, there are some solid financial facts which emphasize whether it makes sense to pay off all the debts and mortgage before your retirement or not.
It’s a fact that the financial condition varies from individual to individual, there are some who have many sources of income such as- income from rent, pension, income from their investment like FD’s and mutual funds. People with these income sources even after retirement may think to carry their debt as they have enough of money even after retirement. Whereas there are some people who don’t have only one income source and that is their pension. Paying the debts after retirement for these people can be a major reason for stress and tension.
Another important fact is: if the rate on the mortgage is low, one might choose not to pay off a mortgage early. It may be better to keep a hold on the cash, for liquidity, and diversify the assets.
These days mortgages are available at a low-interest rate and it may make sense to hold onto a mortgage as the cost of money is relatively inexpensive and one need to pay very low on the interest and the borrower may avail some of the tax benefits by on holding a loan which may be more than the payable interest. With the uncertainty around health care costs, maybe it’s not smart to tie up assets in an illiquid investment. It is also a better option today to keep paying a monthly mortgage payment or against any loan in retirement rather than using assets to pay it off.
Pros of Paying off all the Debts Before Retirement
- Reduces stress and provides peace of mind
- Increases cash flow which can be tapped for any emergency whether it be a health care emergency or a financial one.
- Clearing a debt helps you to get rid of an anti-asset, a liability. Having a debt is also a hindrance in way of making an investment.
- Paying off or paying down a mortgage adds to your income. Suppose you pay 50% of your loans then this adds to 50% percent to the income with no management fee.
Cons of Paying off all the Loans Before Retirement
- For some of the loans such as home loans interest rate may rise which can end up by paying more on the interest, more than what you calculated.
- Paying a loan or mortgage partly off helps but doesn’t change the cash flow. So, it is a better option to kill the mortgage and pay it off completely by your retirement.
- When repaying some of the loans you can avail of some tax benefits. But when you repay all your debts those tax exemptions cannot be availed.
- In a hurry to clear all the debts or loans before retirement some people use their savings or sell some of their assets. But having a loan and keep paying it even after retirement is far better than using your savings and selling your assets.