When Keeping Debt Beats Paying It Off
Terry Levenberg, CFP is a Financial Advisor and Partner at Prime Capital Financial based in Reno. For nearly two decades, Terry has gained skills and knowledge through large financial institutions acquiring experience in multiple facets of investing and financial planning. His passion for a client-first approach allows him to build customized portfolios around the risk temperament, long-term financial goals, and objectives of each client.
SHOULD YOU ENTER RETIREMENT DEBT FREE?
For many people, one of retirement's biggest milestones is becoming debt-free. The thought of entering retirement without a mortgage payment or other monthly obligations can provide tremendous peace of mind. But while eliminating debt often feels like the obvious choice, it isn't always the decision that leaves you in the strongest financial position.
The better question isn't simply, "Can I pay off my debt?" It's, "Should I?" And that answer depends on several factors that deserve careful consideration.
Not All Debt is Created Equal
A mortgage locked in at 2.75% is very different from credit card debt charging 22%. High-interest consumer debt is almost always a priority to eliminate because the guaranteed savings from paying it off far exceed what most investments can reasonably be expected to earn. Low-interest debt, however, deserves a closer look.
If your investments have historically produced returns that exceed the cost of borrowing over long periods, paying off that debt immediately may come with an opportunity cost. However, unlike debt repayment, which offers a guaranteed return equal to the interest saved, investments carry risk; including potential loss of principal. Now this doesn't mean you should keep debt forever, but it does mean the decision should be intentional rather than emotional.
A $0 Mortgage Doesn't Always Mean Financial Freedom
One of the biggest mistakes retirees can make is focusing exclusively on net worth instead of monthly cash flow.
Imagine two retirees with identical portfolios. One owns their home free and clear but had to withdraw a substantial amount from retirement accounts to eliminate the mortgage, generating taxes and permanently reducing investable assets. The other maintains a modest mortgage payment but preserves additional investments that continue generating income and growth. Depending on interest rates, tax brackets, and investment returns, the second retiree may actually enjoy greater long-term financial flexibility despite carrying debt.
Retirement planning isn't simply about reducing liabilities. It's about ensuring your income can comfortably support your desired lifestyle for decades.
Watch Out for the Tax Ripple Effect
Large debt payoffs frequently require large withdrawals from retirement accounts. For many retirees, that means increasing taxable income, potentially pushing them into higher tax brackets. It may also increase the taxation of Social Security benefits, trigger higher Medicare IRMAA premiums, or reduce eligibility for certain tax benefits. So, sometimes spreading debt repayment over several years can significantly reduce the total tax cost. And this is only one reason debt decisions should rarely be made in isolation. They're often tax decisions as much as they are financial decisions.
Don't Ignore the Emotional Side of Debt
Some people simply sleep better knowing they owe nothing to anyone; and that peace of mind has real value. On the flip side, other people are perfectly comfortable carrying a low-interest mortgage if it allows them to preserve liquidity for emergencies, investment opportunities, or future healthcare expenses. Neither perspective is inherently right or wrong.
While financial planning is rooted in numbers, retirement is ultimately about confidence. The goal is finding the balance between maximizing financial efficiency and maintaining personal comfort; this balance looks different for everyone.
Every Situation Is Different
There is no universal rule that says everyone should enter retirement debt-free or that everyone should keep inexpensive debt. Factors including interest rates, retirement income sources, required minimum distributions, investment allocation, taxes, estate planning goals, and expected longevity all influence the analysis. The right strategy often comes from comparing multiple scenarios rather than relying on conventional wisdom or cookie-cutter plans.
Where to Go From Here
If retirement is on the horizon, this is an excellent time to evaluate your liabilities as part of your overall financial plan, not just your balance sheet. A thoughtful analysis can help determine whether paying off debt strengthens your retirement, or whether preserving assets and maintaining flexibility may ultimately leave you in a better position.
Like many financial decisions, the best choice isn't always the one that feels most intuitive. It's the one that aligns your cash flow, taxes, investments, and long-term goals into a retirement plan built to last. To see how our advisors can help you, call our office today at (775) 853-9033 or click here.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.
©2025 Prime Capital Financial. The views and information contained herein are (1) for general educational or informational purposes only, (2) are not to be taken as a recommendation to buy or sell any investment, and (3) should not be construed or acted upon as investment or tax advice. The information contained herein was obtained from sources we believe to be reliable but is not guaranteed as to its accuracy or completeness. This information does not constitute legal advice. Prime Capital Financial and its associates do not provide legal advice. Individuals should consult with an attorney regarding the applicability of this information for their situations.