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Borrowing to Invest Before Retirement
As financial plans go, borrowing to invest is a venture that requires perspective and significant amounts of time and this may mean that it is not the wisest course of action for someone about to retire. While good retirement-plan/financial-advisor'>financial planners recommend a three to five year process of analysis and planning leading up to the actual date of retirement, even the five year period cannot yield enough return to outweigh the obvious risks of going into debt to yield income.
Let’s take a quick look at how borrowing to invest might be achieved. The funds may be gained through an asset such as a home. This would be for an equity loan, and current interest rates stand at roughly six to eight percent. This means that the borrower, who may have to come up with a down payment on the loan, will probably have a five to six percent interest payment on the total amount due to the bank each month. This means that any investment is going to have to sustain approximately double that amount for the life of the loan in order to be worth the risk.
This translates to a ten to fifteen percent return from anywhere between five and fifteen years. Additionally, the point of taking such a risk means that the payoff is going to have to be significant if it will be worth the effort. This also means a larger initial investment, or a risk of capital. While this may be perfectly acceptable to someone in their 20s or 30s with ample time to make up for any mistakes in judgment or any flaws in their plans, anyone about to enter into retirement is probably not going to be receptive to such obvious risks.
Most financial experts suggest that leveraging, which is what this scenario is aiming to do, should be done only if the regular cash flow supports the payments. This too may be a perfectly acceptable scenario to a younger individual who is exploring their options for enhancing their portfolio or for fattening their retirement accounts, but most people are not structuring their retirement streams of income to leverage investments. Instead they have carefully planned their strategies to meet the needs of the lifestyle they desire once they cease working on the traditional nine to five basis. Before borrowing to invest when close to retirement an individual should sit down with a Certified Financial Planner to ensure that such a move won’t disrupt or destroy their financial strategy for a comfortable retirement.