“Neither a borrower nor a lender be,” Shakespeare’s Polonius advised his son in Hamlet.
Tom Anderson disagrees.
Anderson, a wealth manager at Morgan Stanley, is the author of The Value of Debt in Retirement (Wiley) and challenges the conventional wisdom that the best retirement plans shed as much debt as possible – of any kind. Instead, he argues that financial advisers need to adopt a more sophisticated view of client debt, taking advantage of low-cost borrowing opportunities to boost liquidity and wealth.
Debate about debt and retirement couldn’t be more timely. The percentage of older households carrying debt has been running higher than historical levels ever since the Great Recession of 2008-2009, driven mainly by higher mortgage debt. For lower-income households, mortgage debt increases foreclosure risk. And for affluent households, some advisers argue that holding and investing in liquid assets rather than paying down debt doesn’t make sense, especially if the investments are in bonds or other interest-bearing vehicles that return less than after-tax loan interest.
Getting rid of debt also has psychological benefits. The Employee Benefit Research Institute’s annual Retirement Confidence Survey has consistently found high correlation of worry about the affordability of retirement with higher debt.
Anderson acknowledges some of those points. But he argues that advisers need to differentiate between different types of debt, and take a more sophisticated view of the overall client balance sheet – paying particular attention to the issue of liquidity. “Just saying that ‘all debt in retirement is bad’ is not thoughtful, and it’s not the way a CFO thinks,” he says.