Down Markets and Debt

While some experts will insist that debt in retirement is never beneficial, debt can have a positive impact on a retirement strategy at times. During a market dip, debt can help retirees avoid tapping into their portfolio, which needs time to recover. Additionally, if a retiree is planning on making a large purchase, there can be significant tax benefits by financing. Learn more about debt in down markets in our FinPlan Friday conversation with Joe.

Debt in Down Markets

FinPlan Fridays

In our video blog series, FinPlan Fridays, Covisum® Founder and President, Joe Elsasser, CFP®, offers his take on the issues financial advisors see every day. Joe is a practicing financial planner with a unique perspective into the challenges for which Covisum provides technology solutions. Join us on the first Friday of every month for FinPlan Fridays, and get helpful tips to grow your financial planning practice. 


Hi, this is Joe Elsasser. I'm President and Founder of Covisum and also a practicing financial advisor. Welcome to another Finplan Friday. Today, we're going talk about a little bit of a controversial topic— debt in retirement.

There are plenty of people out there, advisors and financial columnists, who would suggest that there's never a reason to carry debt in retirement. And I cannot agree with that statement. I'd have to suggest that, like just about every other financial vehicle, there are times to use those financial vehicles and certainly times to stay away from them. Debt is one of those things that can have two potential impacts on a retirement income plan.

  1. It can provide unnecessary drag—that's when debt in retirement does not make any sense. 
  2. It can smooth out a retirement income stream either by providing a buffer asset or smoothing out large purchases over a few years that would otherwise cause tax consequences.

Now, what do I mean by a buffer asset? Right now, we happen to be in the midst of a really significant market decline. If I have cash on the sidelines that I am able to use to weather this storm, there's a high likelihood that I can give my portfolio time to recover. So, there are often good reasons to use either a reverse mortgage or a traditional mortgage to keep cash on the sidelines in order to be a buffer asset for times like this.

Now, the second reason is to smooth out large purchases over a number of years. Let's say that I've saved primarily in 401(k)s and IRAs, and really I don't have a lot of non-qualified non-IRA money sitting out there.  I might use debt to finance a vehicle purchase over two, three, four years in order to not spike my tax bracket in any given year. And even after paying the cost of the debt, it can often be worth it in terms of tax savings. Those are two good reasons why debt sometimes makes sense in retirement for some clients.

Given the current environment, right now is a great time to be looking to refinance any debt that has a financial planning purpose. In other words, if I'm not expecting to pay that debt off in the very near term, then I should be out in the marketplace right now looking at rates primarily because rates are at historical lows, and it's a great opportunity to refinance that debt that is taken for a good financial planning reason into a better rate, potentially more favorable terms. That's it for our FinPlan Friday for today. I look forward to seeing you next time.

How Can Covisum Help?

Our Tax Clarity® software can help you quickly identify sub-optimal tax situations and show clients how to make retirement decisions in the most tax-efficient way. Tax Clarity can show the tax impact of a Roth conversion in the current year and help you identify how much to convert without stepping into an unexpected effective marginal rate. Try Tax Clarity for free for 10 days.

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