The Value of Debt in Retirement

Why Everything You Have Been Told Is Wrong

Thomas J. Anderson

• Publisher: Wiley
• Year: 2015
• ISBN:
  9781119020004
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Increase the odds you won't run out of money in retirement – using debt!

Conventional wisdom is wrong – being debt free in retirement may actually increase your risk. The Value of Debt in Retirement teaches you how incorporating debt into your retirement strategy may increase your return, lower your taxes and actually lower your risk. You read that right. If handled correctly, debt—that thing we've all been taught to avoid—can play an integral role in your life, especially in retirement. New York Times Best Selling Author and nationally acclaimed financial expert Tom Anderson shows you how to use the time tested strategies of the best companies and the ultra rich to retire comfortably, minimize taxes, buy the things you have always wanted to have and do the things you have always wanted to do.

Thought provoking and against the grain, Anderson explains why your risk tolerance doesn't matter, why being debt free may actually increase your risk and why rushing to pay off your mortgage may be a financial disaster. Full of shocking revelations and tricks high- net-worth individuals have used for years, The Value of Debt in Retirement opens the world to a new approach to wealth management in retirement, one that factors in both sides of the balance sheet as an integrated ecosystem.

Real-world case studies illustrate how informed debt strategies can lead to a happier, healthier retirement. See how an individual with a net worth of more than $5 million can spend $20, 000 per month - after taxes - and pay less than $5, 000 per year in taxes, how it is possible to increase your rate of return by 50%, and how a lower risk portfolio with debt could increase the chances you do not run out of money.

Specifically written to Baby Boomers, practical guides and checklists show how to use debt strategies to fund primary and secondary properties, refinance credit card debt, and finance hobbies, such as cars and boats and recreational vehicles. Additional guides show how you can help your children, help your parents and leave a bigger legacy for your heirs and favorite charities. Regardless of your net worth, The Value of Debt in Retirement provides tools to use to apply these concepts to your personal situation.

There is no free lunch: the book delivers a balanced perspective focusing on the potential risks and benefits of the strategies discussed. A discussion on economic history highlights some of the shocks the economy may face and provides important warnings that you should factor into your retirement plan. Anderson not only shows that your life expectancy may be longer than you think, but also illustrates that many investors may be on track to average returns well under 4% for the next ten years – a potentially devastating combination. Irrespective of your beliefs about debt, The Value of Debt in Retirement proves risk is more important than return for retirees and provides suggestions on ways to minimize that risk.

Not all debt is good and high levels of debt are bad. The Value of Debt in Retirement is about choosing the right debt, in the right amounts, at the right time. Perhaps most importantly, this book isn't for everybody. This book requires responsible actions. If you can't handle the responsibility associated with the ideas then this book then it isn't for you. If you need a rate of return under 3% from your investments then you may not need this book. But if you can handle the responsibility and if you need a return above 3%, this book may offer insights into the best (and potentially only) way to achieve your goals.

Part I
BASIC IDEAS AND CORE CONCEPTS

First comes thought; then organization of that thought into ideas and plans; then transformation of those plans into reality. The beginning, as you will observe, is in your imagination.

—Napoleon Hill

Chapter 1
A Better Path

The debt we owe to the play of imagination is incalculable.

—Carl Jung

The path I am going to outline for a better retirement—how you can retire comfortably, minimize taxes, help your family, and buy the things you have always wanted—is centered around the idea of using the strategic benefits of debt. Give me some time and an open mind, and I will show you some tricks that ultra-high-net-worth individuals have been using for years, including how you may be able to increase your rate of return, minimize taxes, and actually reduce risk by using strategic debt.

Can you—and should you—attempt to benefit from what this book will define and describe as “better” debt? Will a debt-inclusive approach to the entirety of your financial life, including the momentous transition known as retirement, make things better for you and those you love? Or will debt—any debt at all—be the heavy lead anchor that sinks your hopes for achieving happiness now and in your golden years?

It depends. It certainly isn’t my belief that all debt is good, nor is it my belief that everybody needs debt. The goal of this book is to offer some perspective, a whole different way of thinking about things, a (w)holistic way that includes both sides of the balance sheet—that is, both your assets and your debts. I hope to raise questions worth considering and make suggestions potentially worth implementing. Then I will give you my take on what some of your best next steps might be. I hope to present a realistic case of what’s possible, and to guide you in the right general direction. I will offer many everyday examples of how you can obviously, immediately, and substantially benefit from my ideas, while also pointing out pitfalls, obstacles, and dangers along the way.

But honestly, it’s an uphill battle. Our culture is replete with fearsome admonitions about all debt being inherently evil, how debt will always make you poorer and worse off, and how the only way to retire with peace of mind is to get rid of—ideally, get rid of all—your debt, before it’s too late. Nobody wants to burden their children with debt when they are gone, right?

Consider Shakespeare’s Hamlet, in which Polonius tells his son Laertes, “Neither a lender nor a borrower be.” Or consider financial author and radio host Dave Ramsey’s advice: “You can’t be in debt and win. It doesn’t work.”¹

Not so fast!

In the first book in this series, The Value of Debt (John Wiley & Sons, 2013),² I describe a variety of ways that debt can make a huge positive difference in the lives of those mentally, emotionally, and financially equipped to take advantage of it. In this book, I will reinforce and expand on the key ideas from the first book and illustrate how with a debt strategy it is possible to increase your returns, reduce your taxes, and reduce your risk, which can increase the chances that you will not outlive your money. I’ll also show you ways to pay for the lifestyle you have always wanted to have.

A Successful but Controversial Debut

I was humbled when the first book in this series, The Value of Debt, made it onto the New York Times bestseller list and was named one of the Top 10 business books of 2013 by WealthManagement.Com, one of the wealth-management industry’s most prestigious magazines. The Value of Debt begins with the five tenets, or action principles, that anchor a debt-inclusive philosophy and practice, and they are worth repeating here.

---

FIVE TENETS OF A DEBT-INCLUSIVE PHILOSOPHY

1. Adopt a Holistic—Not Atomistic—Approach
2. Explore Thinking and Acting Like a Company
3. Understand Limitations on Commonly Held Views of Personal Debt
4. Set Your Sights on an Optimal Personal Debt Ratio
5. Stay Open-Minded, Ask Questions, and Verify What Works

---

Now, would you guess that any of these ideas would be controversial? In fact, to a lesser or greater extent, they all are! To begin with, the idea of a comprehensive, inclusive approach that takes debt seriously was, until The Value of Debt, virtually missing from personal-finance literature. You might think that the many promoters of a comprehensive and holistic wealth-management approach would naturally want to include both sides of the balance sheet—both assets and debts—but literally none have done so. (It’s okay to be comprehensive and holistic, they seem to say, but debt is a special case, and there must be a reason why it has been intellectually and emotionally off-limits for so long, right?) Pointing to such an idea as the central premise for a book naturally raised a good deal of suspicion in certain quarters, both professional and academic.

The second idea, another real shocker, is that individuals and families—especially but not only well-off ones—should consider applying the same sort of thinking and acting with respect to debt that companies utilize. Consider this: The total number of sizeable companies in the United States with zero long-term or short-term debt can literally be counted on one hand.³ Why? Is it because they can’t afford to pay off their debt? No. It’s because the well-educated and well-paid CFOs of these companies—who all realize that correctly structured debt actually makes their companies stronger, longer lasting, and more profitable—don’t want to be fired. These CFOs all intuitively understand the Indebted Strengths that arise from strategic debt, which we will briefly review in the next section. They also understand why the use of enriching debt available to their organization is both efficient and rational, as we explore throughout this book.

Rooms full of books and studies—including Nobel Prize–winning studies⁴—show how companies benefit from debt. Given this, you might have thought that someone, somewhere, would have applied some of the same principles and mechanisms to affluent individuals and families. You would have been dead wrong. As The Value of Debt describes, a careful examination of the available literature found just one academic Scandinavian study that suggested individuals could benefit from debt the way companies do . . . and that was all.

Naturally, then, this idea raised quite a lot of suspicion and uneasiness in certain circles. “People aren’t companies,” I was told, “and people shouldn’t take the kinds of risks that companies take, like consciously cultivating a strategic debt practice.” It’s true, of course, that people aren’t companies. But like companies, they need money, and like companies, they can benefit from using better debt—what Chapter 3 defines as working debt and, even better, enriching debt—to access and take advantage of their Indebted Strengths. Also, as we consider in Chapter 3, people are living much longer. Like companies that have long-term economic horizons, they need to more effectively plan for increased life spans—including taking advantage of the better debt organically available to them as a result of the success they have already achieved.

Perhaps most important, I wholeheartedly agree that people are not companies. For example, if Walmart goes bankrupt, that impacts about 1 million people. If my wife and I go bankrupt, it impacts five people—the two of us plus our kids. Therefore, one could argue that I could take more risk than Walmart. Perhaps we should have more debt! But that doesn’t seem right to me. Companies are playing a game of probabilities and are in the business of taking risk. People are in the business of surviving first and foremost. For me, nothing is more important than my family. Therefore, in my first book I examine corporate strategies and make them more conservativ...