How are you going to repay all your loans before you retire?

Investopoly

Borrowing to invest (in property or shares) is typically a good wealth accumulation strategy as long as you do it prudently and adopt a proven methodology to select quality investments. If used wisely, debt can be a very effective tool. However, whilst your investment strategy might require you to get into debt, the strategy must also articulate how you will get out of debt (i.e. repay it). This blog sets out some of these strategies. How much debt is safe to take into retirement? You must think about your interest rate sensitivity in retirement. For example, if you have $2 million of borrowings, an interest rate increase of 1% will cost you an extra $20,000 per year. If your only source of income is from investments and super, that increased amount of interest might have a big impact on your cash flow and standard of living. Generally, you want to aim for a debt level that is far less sensitive to changes in interest rates. Worrying about interest rate changes is the last thing you want to do in retirement. One thing I always aim for when developing a strategy is that I definitely do not want any negative gearing in retirement. That is, your investment property portfolio (if you have one) should at least be paying for itself i.e. rental income covers all expenses including loan repayments. It doesn't necessarily have to generate a lot of income (depending on the client's situation of course), but we don't want to be in a position where your property portfolio is sucking out cash flow. Having zero debt might not be an optimal strategy either. A conservative amount of leverage will allow you to build wealth more aggressively, particularly in the first decade of retirement. I would argue however that you want to aim to have more conservative levels of debt when you are retired (compared to when you are working). Debt repayment tactics When formulating a long-term investment strategy for my clients, there are a number of strategies we can employ in the strategy that allows us to reduce debt to an acceptable level prior to retirement. Buy an asset specifically to sell Selling assets to repay debt solves one problem (i.e. reduces debt) but can create another i.e. it might mean that you have insufficient remaining investments to fund your retirement. However, if you formulate a strategy from the beginning that is premised on the idea that you will sell an asset as a debt reduction mechanism, you can proactively plan around this. Firstly, it would be wise to focus on ways to reduce your Capital Gains Tax (CGT) liability such as owning the asset in a family trust, tenants-in-common or in your super fund. Secondly, you can select the most appropriate asset and location that best suits this strategy. For example, if you are planning to sell the asset in 15 years' time then I would consider buying a house that you could add value to (e.g. renovate, sub-divide or develop) - so that you were not totally reliant on the market to generate equity in the property. Owning that house in a super fund would mean that you could avoid CGT altogether if you dispose of the property post retirement (in pension phase). For example, if you purchase a house in a blue-chip suburb in Brisbane for $850,000 and it appreciates in value by 7% p.a., I estimate you will net circa $1.4 million in cash after repaying the loan and all costs if you sell it in 15 years' time. That should be enough to make a significant reduction to your debt. Use surplus cash flow You can direct some or all of your surplus cash flow into offset accounts to notionally reduce your debt. As discussed in my blog last week, good...