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The Value of Debt in Retirement: Why Everything You Have Been Told Is Wrong



The Value of Debt in Retirement: Why Everything You Have Been Told Is Wrong

Thomas J. Anderson

ISBN: 978-1-119-01998-5 March 2015 336 Pages


Increase the odds you won't run out of money in retirementusing 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.

Foreword xv

Acknowledgments xvii

Introduction xxi

Part I: Basic Ideas and Core Concepts

Chapter 1: A Better Path 3

A Successful but Controversial Debut 4

The Fifth Indebted Strength 7

Who Can Benefit from This Book? Not Only Millionaires! (But They Can, Too) 9

Everyday Example #1: Immediately Better Credit Card Debt 11

Getting beyond the ABLF and Focusing on Retirement 12

Notes 14

Chapter 2: Debt in Retirement: Conventional Wisdom, Right and Wrong 17

What Some Popular Retirement Books Get Right—and Wrong—about Debt 18

The “Good versus Bad” Debt Camp 19

Bach Where We Started: The Irresolutely “Against Debt” Camp 20

The (Very Small) “Sometimes It’s Okay to Have Debt” Camp 21

Everyday Example #2: A Bridge Loan over Troubled Quarters 22

Notes 24

Chapter 3: Why and Whether to Adopt a Holistic Debt]Inclusive Approach in Retirement 27

A First Look at the Three Main Types of Debt: Oppressive, Working, and Enriching 28

Seven Rules for Being a Better Debtor 30

In the Company of Longer Life Spans 31

Winging Your Way to a Successful Retirement: The “Whole Chicken” Approach 33

Everyday Example #3: A Holistic Business Recipe for Success 35

Notes 37

Part II: The Power of Debt in Reducing Taxes, Increasing Return, and Reducing Risk

Chapter 4: Returning to the Return You Need 43

Cash Flow and Incoming Money: The Ultimate Key to Resource Management 45

You Have to Get Your Numbers Right! 46

Regardless of Your Net Worth, Distributions Are Rarely Constant over Time in Retirement 49

How Much Can You Safely Take Out? 52

How You May Be Able to Increase Your Rate of Return 54

How Is This Possible? A Big]Picture Overview 56

Risks and Problems 57

Everyday Example #4: Retiring the “Loan” Survivor 58

Notes 60

Chapter 5: The Power of Debt Meets Our Ridiculous Tax Code: $5.5 Million Net Worth, $240,000

Income, and $4,000 in Taxes! 61

Some Brief Preliminaries: Income versus Incoming Money 63

The Websters: A Tale That Taxes the Imagination 64

Your De Facto Tax Advisor 76

An Inconvenient Truth 77

How to Pay Almost No Taxes in Retirement: A Few More Examples 78

Everyday Example #5: “Auto” You Not Be Sure You Are Getting the Best Loan? 81

Notes 84

Chapter 6: Risk Matters More Than Return 87

Why Your Personal Risk Tolerance May Not Matter 88

A Simple Understanding of Risk 91

An Overview: “What Time Is It?” 95

A Detailed Understanding: “How the Watch Works” 97

Proof That Debt Can Reduce Your Risk in Retirement 105

Everyday Example #6: A Lot to Think About? Not Really 107

Notes 109

Part III: How to Get There: A Glide Path

Chapter 7: The World Is Full of Risk—Especially Now 113

Not Your Usual Serious Caution 114

Learning from What Companies Do—Value Liquidity! 114

What about Interest Rate Risk? Fixed versus Floating Rate Debt 117

Investment Risks: It Isn’t the Debt That Matters, It Is the Quality of Your Investment Decisions! 119

Asset Allocation and Investment Considerations 119

A Six]Step Approach to Diversified Investing in Retirement 120

Lessons from Math and History Suggest Caution 121

Be Careful What You Watch! 124

My Opinions on Asset Allocation 126

Notes 130

Chapter 8: The Sooner the Better: Moving from Oppressive to Working to Enriching Debt 133

Understanding the Implications of These Ideas for Your Life Plans 138

Getting a Handle on Whether You Should Adopt a Strategic Debt Approach 138

The Need]Want]Have Matrix 139

Watch Those Ratios! A First Glide Path into Retirement 144

What If You Are Not Optimal Today? 147

Dying with Debt? 147

Final Mortgage Considerations 148

Notes 150

Chapter 9: Conclusion: Lots of Tricks and Tools 151

A Checklist Review 153

Bringing It All Together: A Strategic Debt Strategy in Action 156

A Last Word: The Value of Debt in Retirement 159

Notes 160

Part IV: Guides

Guide 1: Leaving a Legacy 163

General Giving Philosophy 164

The Benefi ts of Giving While You’re Working 167

Giving to Create Income 168

Notes 172

Guide 2: Managing the ROI of Retirement 175

Retirement “ROI”: Resources, Outer Pragmatics, and Inner Dynamics 176

Retirement Is Coming: A Holistic Roadmap of the Territory before You Retire 176

Meta]Management against a Background of Accelerating Change 177

Staying Eff ective and Informed over Time 180

Resource Management for the Long Haul 181

Partial Retirement/Partial Income 182

You Can Test]Run Retirement 183

Real Estate, Small Business Ventures, and Personal Guarantees 184

Medicare 185

Long]Term Care Insurance 185

Thoughts on Life Insurance 187

Reverse Mortgages 187

How You Should (or Should Not) Factor in Inheritance 188

Outer Pragmatics: Real World Concerns, Issues, and Details 189

Legal Planning 191

Medical Planning 192

Residency Planning 192

Life Planning 193

Inner Dynamics: Meaning, Purpose, and Pleasure in Retirement 194

Sharpening the Saw 196

Particular Considerations on Retirement and ROI for the LGBT Community 197

Notes 201

Guide 3: How to Help Your Family and Buy the Stuff You Want and Need: A Reference Guide 203

Act Like a Company/Think Like a CFO 203

Principles When Financing the Purchase of a Desired Item 204

Managing Credit Card Debt 208

Helping Your Kids with Their Credit Card Debt 208

Helping Your Parents 208

Buying a Luxury Car 209

Buying a Boat/Airplane/Art/Antiques/Jewelry, Paying for a Dream Vacation, Financing a Hobby (Horseback Riding, Car Racing) 210

Paying for Fractional Ownership (Home/Plane/Boat) 211

Helping Out Our Kids and Student Loans 212

Homes: Downsizing/Moving/Building 212

Purchasing a Second Home: Pluses and Minuses 213

Rent versus Buy a Second Home 217

One Hundred Percent Financing: The No]Down]Payment Real Estate Purchase Option 219

Notes 221

Part V: Appendices

Appendix A: About the Companion Website 225

Appendix B: Details for Chapter 4 227

Understanding the Ideas of Chapter 4, with Charts and Tables 227

Notes 234

Appendix C: Chapter 5 Detail 235

Understanding RMDs 235

The Liger at Work Again 237

Understanding Cost Basis and a Step]Up in Basis 244

Notes 246

Appendix D: Details for Chapter 6—A Study of Withdrawal Rates in Retirement 249

Background: How the 4 Percent Rule Came to Life 250

Trinity Study Results 251

Trinity Study: Unfortunate Timing 258

Notes 260

Appendix E: A More Detailed Discussion on Risk, Return, and Correlation 263

Notes 266

Appendix F: More Detail on ABLF, Risk Details, and Official Statement of Disclosure and Understanding 267

More Detail on ABLF 267

Statement of Disclosure and Understanding 268

With Respect to ABLFs 270

Additional Important Notes 272

Notes 275

Glossary 277

Bibliography 283

About the Author 287

Index 289