Review: Top 6 Common Retirement Mistakes

There’s some good advice in this article – with one glaring exception. Most of the article covers some of the common mistakes people make when retiring – things like not getting the most out of Social Security, missing Medicare deadlines, or not knowing what you actually want to do in retirement.

Those are great reminders, but I want to dig into their suggestion about “interest rate arbitrage.” Arbitrage is a fancy word that makes whatever you say sound smarter to a lot of people, so the financial press loves it. And as you can guess, it gets horribly misused.

An arbitrage opportunity is not just somewhere you can make a lot of money. It’s an opportunity where you can make money without any risk. So for example, if I can buy a widget at $10, and then immediately turn around and sell it at $20, that would be an arbitrage opportunity. These are incredibly rare.

The “interest rate arbitrage” that the article is describing is not, in fact, an arbitrage opportunity. The article claims that if your long-term investment returns are greater than the interest rate on a debt, then you shouldn’t pay it off. They say you should capture the difference between your long-term rate of return and what you are paying on your loan.

To be clear, this is completely ridiculous. You may or may not want to pay off your debts as you enter retirement. That’s something that will depend on your exact situation. But simply comparing your investment returns to your debt’s interest rates isn’t even a massive simplification of the analysis. It’s just nonsensical.

The problem is that you are comparing a fixed expense with a volatile asset. You know that you will need to pay off the loan. You do not know what your investment returns will be.

The market is going to do what it’s going to do. Over the long term, it can be an incredibly powerful tool to help you reach your financial goals, but in any given year there’s no way of knowing what will happen.

The market doesn’t owe you a retirement. And it certainly doesn’t owe you any “interest rate arbitrage” on your mortgage.

For more on the things that you should be focusing on as you near retirement, read our ebook I Want to Retire Soon

 

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