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Joe Anderson, CFP\xae and Alan Clopine, CPA interview Tom Anderson, author of The Value of Debt in Retirement, to discuss why debt isn't always a bad thing in retirement. The Value of Debt placed #2 on Forbes List of Personal Finance Books Financial Experts Say Will Change Your Life.\xa0Plus, Joe and Al answer more email questions on-air. Original publish date January 21, 2017 (hour 2). Note that content may be outdated as rules and regulations have changed.

0:58 \u201cWe\u2019re answering email questions as well, and this is fitting for our next segment.\u201d

1:03 \u201cI have a large 401(k) plus a pension. I want to retire before the end of 2017. I will be 62 years old in September. Would it be wise to pay off my car loan so I don't have any debt when I retire? Should I withdraw from my 401(k) to do this?\u201d

2:56 \u201cMaybe this will work for you\u2026I would look at my income over the next eight, nine months and try to budget extra payments so that by the tenth month I can have it all paid off with my salary.\u201d

3:35 \u201cA lot of people go into retirement thinking they have to have their mortgage paid off; that\u2019s not necessarily true.\u201d

6:28 Start of Interview with Tom Anderson

Joe (7:11) \u201cTom, let\u2019s talk first of all about the title [of your book], \u2018The Value of Debt in Retirement\u2019 \u2013 when you think of most financial pundits, that\u2019s the opposite take of what you might hear when you approach retirement.\u201d

Tom (7:27) \u201cThat\u2019s the general plan, is people are saying they need to rush in and get rid of all their debt before they retire \u2013 so we went with a more controversial title\u2026we tried to put the math around it and explore that topic.\u201d

Joe (7:57) \u201cMost individuals, as they approach retirement, don\u2019t necessarily take a look at both sides of the balance sheet. They might focus on the debt side a little too much where they pay extra on their mortgage payments and they have very little liquid capital to provide any type of retirement income, and they might think that will be a safer route approaching retirement where in actuality that might be the opposite thing they should be doing.\u201d

Tom (8:25) \u201cThat\u2019s exactly right\u2026what happens is a lot of people find that they don\u2019t have enough retirement savings\u2026while many people feel they\u2019ve under-saved for retirement, what they\u2019re doing is they\u2019re rushing in to pay off their debt, and they\u2019re finding that they don\u2019t have the liquidity or flexibility or the resources to put them on track for retirement.\u201d

9:03 \u201cYour listeners have to know that I don\u2019t think all debt is good.\u201d

Joe (9:37) \u201cRight, it\u2019s figuring out what is good debt and what is bad debt. I think people just lump debt into one category and say \u2018no, it\u2019s all bad \u2013 I want to be debt-free\u2019 and then all of a sudden when they get into retirement they may have a paid off house but they have very little liquid assets and don\u2019t have the retirement income they need long-term.\u201d

Tom (10:09) \u201cI would love for everybody to be able to pay off their house, but what happens is when you\u2019re getting close to retirement, until you have enough money to pay off all of your house, I suggest why pay off any of it, because it\u2019s a one-way liquidity trap.\u201d

10:34 \u201cWhat readers need to be thinking about is how to protect the liquidity and flexibility and make sure there are enough resources; [consider] working with an advisor\u2026\u201d

Joe (10:55) \u201cWhat are the right types of debt?\u201d

Tom (10:58) \u201cAny debt that has a rate of return or a cost of it less than what you think you\u2019re going to earn long-term in your portfolio\u2026\u201d

Joe (11:47) \u201cAre there certain ratios that you take a look at?\u201d

Tom (12:00) \u201cWhen you retire, you basically have a pod of money that you\u2019re trying to create an income stream from in retirement\u2026there\u2019s no clear math-compelling case that debt will add value. If you need to have between a 4% or 6% distribution rate \u2013 let\u2019s say I have $1 million and I want to spend $50,000 a year, then I show that a 30% debt to asset ratio actually can add value. Those people have to take risk either through investing in risky assets or debt\u2026some debt, the right kinds of debt, the right way, can actually reduce that risk.\u201d

13:40 \u201cIt is a mathematical fact that debt can increase the rate of return in your portfolio. It is a mathematical fact that debt can reduce taxes; it is a mathematical fact that counterintuitively debt can reduce risk\u2026it is a fact that this is not a guaranteed path and that you\u2019re basically choosing between two different risks.\u201d

18:36 End of Interview with Tom Anderson

19:34 \u201cIt\u2019s not the end of the world to have a mortgage these days, particularly because interest rates are low, and this is what we call good debt because your home should continue to appreciate.\u201d

24:54 \u201cWhich retirement account should we set up for our children? \xa0We would like to set-up accounts for our three kids, who are young adults. We are not sure if it is smart to make them wait until they are 59 1/2 years old. Would you recommend we set up a Roth\xa0IRA or a low cost index fund?\u201d

26:45 \u201cWith a Roth contribution, the kids can always pull the money out \u2013 I would have them put it in a Roth IRA.\u201d