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Retirement savings

February 12, 2013

Paid in full: How to retire without debt

If you’ve still got debt, maybe you’re not ready to retire. Here’s how to retire debt-free, and stay that way.

The strangest retirement idea I’ve heard recently is that some people believe they’ll still be in debt when they retire.

Retire with debt? That sounds crazy! If you’ve still got debt, my view is you’re not ready to retire.

Planning a debt-free retirement

Two years before retiring, my wife and I spent considerable time making a list of things we wanted to have paid off by the day I retired.

But we thought it was important to go one step further. We wanted to make sure that our stuff was not just paid off, but also not likely to need replacing in our early retirement years. We felt that as a one-income family transitioning into early retirement, we really couldn’t afford big spending surprises just when we were establishing our retirement budgeting routines.

If you’re within five years of retiring, why not make your own list? Here’s ours:

  • House paid off. Ours is a new bungalow we chose to suit our lifestyle at our current life stage. (It’s not the big four-bedroom, two-storey that suited us 15 years ago.) We shouldn’t need expensive repairs for a long time. We’ve budgeted for typical new-house costs: landscaping, paving the driveway, building a deck, fencing and interior decorating.
  • Car paid for. Our car is new enough that it’s not likely to need replacing in the next five years, and we need just one.
  • RRSPs and TFSAs topped up.
  • Credit cards paid off.
  • Dental work up to date and new eyeglasses for us both. It’s important to take advantage of any employee benefits you have while you’re still an employee!
  • Wardrobes up to date and as complete as they can ever be.
  • Electronics reasonably up to date. When I left work, I left behind a nice laptop and a smartphone. To fill the void, my wife bought a small computer that we can take with us when we travel. I also use her old laptop at home and am delaying replacing it so that our two computers won’t both get old and need replacing at the same time. I bought an inexpensive cell phone with a pre-paid plan that doesn’t lock us into an expensive contract. Our TV and digital camera should be fine for years.
  • Money saved for early-retirement indulgences. We had cash saved for our first two trips, including spending money already converted into euros and British pounds.

We’re really pleased with the success so far of this methodical approach to avoiding debt in retirement.

Continued access to credit

This might seem contradictory, but as we approached a debt-free retirement, we also felt it was prudent to have continued access to credit in case of emergency.

Over the years, we’ve proven to ourselves (and to our bank, thank goodness!) that we’re responsible with credit, so we weren’t nervous about the risk of applying for (and later, misusing) a home equity line of credit. And it is a risk: Lenders are pretty picky about granting credit to early retirees with no employment or pension income. And a declined credit application further reduces one’s credit score.

I don’t expect we’ll ever use our line of credit, but if a big-ticket emergency ever arises, we’ll be able to borrow to pay for it. Because I don’t have employment income, the bank set a slightly higher interest rate. But I don’t care, because as long as there’s no balance owing, we’re not paying interest.

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