The Value of Debt in Retirement by Thomas J. Anderson

Author:Thomas J. Anderson
Language: eng
Format: epub
ISBN: 9781119020004
Publisher: Wiley
Published: 2012-02-25T00:00:00+00:00

What If You Are Not Optimal Today?

I am against people making sudden and dramatic changes unless the full consequences are very well thought out and understood. I understand that mathematically moving to an optimal ratio can happen at any point in time, but it’s easier psychologically if you move along a glide path—with gradual nudges that improve your overall outcomes rather than drastic changes. For example, if your debt ratio is not optimal I am generally against a cash-out refinance against your house and reinvesting the difference. In many cases this is restricted—or outright prohibited. More important, I worry that people will be tempted to do it at the exact wrong time. People will tend to take on more debt in good times and tend to pay off debt in bad times. It is my general belief that this practice is backwards. People should consider paying down debt when things are looking really good (or reallocating to other assets), and they may want to consider letting their debt ratio drift up a little higher if things are looking pretty bad.

How do you determine when are good and bad times? Unfortunately there is no easy way. It is my experience that if you think the world is falling apart and three random people tell you that “the market” stinks, you may want to consider letting your debt ratio drift higher. If stocks are hitting new highs, or if three random people comment on how excited they are about “the market,” and especially if the media is excited, you may want to consider lowering your debt ratio.

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