Controversial but nonetheless persuasive, Thomas J. Anderson’s book The Value of Debt in Retirement warns readers that debt, even the “enriching” variety, is not for everybody. But if you can handle the emotional and financial challenges of later-in-life debt, he says there is a way to “borrow smart” to increase your portfolio and liquidity -- and your tax deductions.
“My goal is to reframe the conversation around debt in general and highlight its potential benefits as well as the potential risks of being debt free,” he says in the book. “It is my opinion that the investment process traditionally used by professionals and 'do-it-yourself' investors alike is broken.”
Anderson is the executive director of wealth management and the financial advisor/senior portfolio management director of the Anderson Group at Morgan Stanley in Cedar Rapids, Iowa. He is also a certified investment management analyst and a chartered retirement planning counselor.
In his strategies for retirement debt, Anderson applies the five tenets introduced in an earlier book, 2013’s The Value of Debt, including the ideas that investors should “think like a company" and set their “sights on an optimal personal debt ratio.” CFOs, he writes, “realize that correctly structured debt actually makes their companies stronger, longer lasting and more profitable.”
Anderson originally aimed his concepts toward those with $1 million and more in net worth, but he says in this book that “these ideas will also work for people with far fewer assets.”
Case in point: his strategy for better practices with existing credit card debt. He gives us the example of a man who charged his credit card $25,000 at 20 percent interest to pay for his daughter’s wedding. The man also had a qualifying $150,000 investment portfolio offering a line of credit he could borrow against at 3 percent, which would have offered savings of $4,000 yearly in interest. “Many portfolio lines of credit do not have required minimum monthly payments,” so a borrower can allow the interest to “cap and roll” (add on to principal balance), until the borrower can pay off the interest and the loan.
In another example, he uses a bridge loan: A couple in their late 70s need $250,000 immediately to move into a care facility. They borrow the money, without amortization, by taking out a loan against their taxable investment portfolio of $700,000, and avoid expensive interest payments.
Anderson says there are three kinds of debt: oppressive debt, including credit card balances with high interest rates; working debt, referring to mortgages, small business or student loans; and enriching debt, which is a line of credit against your investment account.
“Virtually everything that the vast majority of popular financial writers have to say about debt applies only to oppressive debt!” he writes. In his next book, he says he will offer strategies for how people with oppressive debt can “break through” the trap they face in paying it off, which limits their access to lower cost debt.
Anderson shows the reader (both those who are retired and those reaching retirement) how to put together a financial picture (with the help of an advisor), using assets, needs, expenses, debts, the distribution rate on investments, Social Security options, insurance and charitable and family giving. If the rate of return is not adequate to cover costs and needs, it’s time to evaluate whether the “wise use of strategic debt” is appropriate.
For example, a person with $1 million in assets and no debt who seeks a 9 percent rate of return can earn more by taking out a mortgage (leveraging his or her investments), than by buying assets that pay 9 percent. But attention must be paid to interest rates, the rate of return versus the cost of debt and other variables, he cautions.
He presents money-saving strategies for refinancing mortgages; lowering tax rates by investing in tax-efficient funds; and financing an expensive vehicle with an assets-based loan at a low interest rate.
Readers are reminded to keep their thinking fluid about risk. “If your needs go down, your risk can go down,” he writes. “If your needs rise, you may need to take more risk to achieve [your] objective.” He discusses fixed versus floating-rate debt and how to achieve diversified investing. And he cautions readers to be skeptical of TV, newspaper and stock strategists. (“They rarely get it right.”)
He says the book’s strategies are viable if the reader has adequate resources and the right disposition, is open-minded and can find and work closely with the right financial advisor.
The book also explains giving strategies that use debt, explains to the reader how to manage a return on investment (with a scenario showing you how to “test run” your retirement) and shows you how to help your family and buy what you need and want (second homes, luxury cars, planes, boats) using debt.
Six appendices, including detailed charts and tables and a glossary of financial terms, complete an exhaustive and compelling examination of the value of debt in the right places.
Anderson invites readers to “feel free to join the debate” at two websites: www.valueofdebtinretirement.com, or www.vodr.com.
Eleanor O’Sullivan is an award-winning freelance journalist who has written for USA Today and Gannett newspapers. She can be reached at email@example.com.