I’m a firm believer in eliminating debt, and I’m an even stronger believer that if you struggle with debt, you should minimize your available credit as much as possible, if not entirely.
But, if you’ve walked the walk, proven your financial savviness, and are within grasp of achieving FF, then it’s time to take a very different approach to credit. Before you retire.
Well before you give your notice at your everyday job, you should absolutely secure as much credit as your income/assets can support.
The reason for this is simple, once you retire and no longer have secure employment and a regular pay cheque, every bank and most credit card companies out there are going to be a whole lot less willing to lend you money.
It doest even matter how much cash you’ve managed to save and hold in investment assets, the reality is banks like people with jobs, not people with easily liquidated assets that might not be there the day after they extend you the credit.
You may have no intention of ever using the credit, but secure it anyway. If you are retiring young you really have no idea what decades of life might bring your way.
Emergencies that exceed your readily available funds, health concerns, natural disasters, a necessary move etc.
The last thing you want to do in retirement is leave yourself in a position where you are forced to liquidate assets during a market downturn, or with negative tax implications, in order to cover unforseen costs.
If you have credit at your disposal, you can weather just about any storm and look to liquidate assets at a more favorable time.
Or maybe you simply find that down the road you encounter an investment or business opportunity that intrigues you, and you don’t want to disturb your investments in order to make it happen. That available credit may come in very handy, especially since you’ll be an unlikely candidate for approval of a business loan etc.
So what kind of credit should you look to secure?
If you own your own home, your first step is to obtain a Home Equity Line of Credit. Meaning the credit extended will be secured by your home, and registered on title.
Because it’s secured credit, you can obtain a much larger amount. Generally upto a maximum of 80% of the value of your home.
And don’t just take what the bank is willing to offer you site unseen as a market value of your home. Banks will often extend approval on your home based on a lower ratio of comparable known properties in your neighborhood. Instead, have them do an appraisal and look to obtain the top dollar assessment on your homes current market value.
If you own more than one property, secure a HELOC on each one.
After you get your HELOC(s), your next step is to obtain unsecured lines of credit. Because these have no asset to support the credit, these will only be available in much smaller amounts. But still do it. These generally have substantially lower interest rates than your typical credit card.
After that you can start to look at your remaining credit sources such as increasing your current credit card limits or applying for new ones.
Essentially it’s all about creating as much accessible credit as you can, while your demonstrable income is high.
You do not however want to obtain loans for which you are actually extended the funds. Because then you will be paying interest. Borrowing money just to have it available and paying interest on that money is not what you are looking to do.
It also goes without saying, but I’ll say it anyway, this credit should not be used to support lifestyle, consumer or impulse spending, or really anything that you reasonably could have planned for before you retired.
For example, if you really want a vacation home in your retirement, you should not be planning on using your HELOC to fund that purchase.
Make that purchase and finance it (if necessary) via a conventional mortgage BEFORE you no longer have a high annual income to present to your banker.
Again, securing your max credit should only be done just before you actually retire. When the majority of your financial goals have been hit, you are coasting into the end zone, and you’ve consistently demonstrated the self discipline to reduce spending, eliminate debt, and increase savings.
If you’ve done all that, no doubt you will be self disciplined enough to ignored the massive amount of credit that will now be available to you.
Think of it as a major back-up to your existing back-up of emergency cash funds. Just in a much larger amount.
As a caveat, if for some reason you really don’t think you can handle having that much credit available to you and NOT use it, than play it safe and skip this step, otherwise this is a must for all others transitioning to retirement.
While maxing out your available credit may seem counter intuitive as a last step before retirement, it may very well be the last time the banks are throwing offers for credit at you.
So take advantage, and get as much as you can. Your future self will thank you.