off debt or invest for retirement

Marcia ThornleySeptember 13, 2006

If you were to inherit $100,000. would you pay off your debts or invest it all towards retirement?

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For me right now in my situation, nowhere near retirement and with a lot of student loan and credit card debt, I'd probably pay off the credit cards and invest the rest. The student loan rate is low, and I could make more off interest than save by paying off that debt. I'm comfortable with the amount I have saved for emergencies, so I wouldn't have to go back into debt to pay for things like large car repairs, new appliances, etc.
I based my answer on how much I have already saved for retirement, how much I have available for emergencies, the interest rates on debts vs investments, how long until retirement (at least 30 years for me), if my home could benefit from investments (new roof, energy-efficient windows, upgrades, etc.) which mine can't, and if I had children to put through school, which thankfully I don't.

    Bookmark   September 13, 2006 at 8:58PM
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Chemocurl zn5b/6a Indiana

Since I have no debts, and am retired already, I'd invest some for additional security, and donate some to a worthy cause.


    Bookmark   September 13, 2006 at 11:47PM
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It would depend on what the debts were.

    Bookmark   September 13, 2006 at 11:56PM
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Place it all on 23 Red....

    Bookmark   September 14, 2006 at 7:30AM
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If you can justify participating in bingos, lotteries, horseracing, etc. as entertainment, maybe you can call it a worthwhile use of money.

By the way - the ratio of payout on the total income is about double in horseracing what it is in lotteries, one-arm bandits, etc., so I've heard.

A creditable investment ...

... it ain't.

If you want to give me a Dollar, I'll give you back about 35 - 40 cents, any day you choose.

ole joyful

P.S. to original poster: as rules re deductibility vary, I can't give worthwhile advice. Interest on mortgage, as on loans for varying other purposes, is deductible in the U.S., not in Can.

If I, a Canadian, borrow to invest, the interest is usually deductible, but not to buy a car (except for business), which means that I prefer to pay cash for a (usually lower-cost) car and borrow, if indicated, for investing.

We have a tax-deferred program in Canada aimed at encouraging people to invest for their retirement, which is heavily promoted by most financial advisors, and I used it during some of my earning years - but am now unhappy to have saved 26% going in ...

... and now paying about 36 - 38% as I redeem the tax-deferred investments.

I can achieve a similar rate of growth without having to deal with all of the rules that go along with using the tax-deferred retirement accounts ... and achieve substantial tax savings as I go along.

I like them apples better.

o j

    Bookmark   September 14, 2006 at 12:44PM
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I guess it all depends on your amount of debt, what you already have invested for retirement and how far away from retirement you are.
My DH will retire within the next year but I still have 10 more years to go. We both have small pensions and have a 401K set aside. If I were to inherit $100,000 I would pay off my charge card debts and put the rest aside in savings/retirement. My home will be paid off at the time of my retirement and i would not pay this off early because it is the main tax deduction that I have (no dependants, etc).

    Bookmark   September 15, 2006 at 10:27AM
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we are facing this with an inherritance of about 185,000. We are in our early 60s, do not own home, live in housing provided by husband's job. Do not have to pay any up keep, utilities. Sounds good? But we will have no home when he retires. We have no savings. Husband has pension. We have debts of about $22,000 which includes car loan. We need all new furniture which I est. at $15-$20,000. Then we can enjoy the rest of our lives in some comfort. I do not have pension but will get social security. I have no life insurance, don't know if it is needed. So, the rest should be invested, but just don't know how that should be. Since we have never had any money we are complete novices at age 60-62. My health isn't top notch and I am pulled with saving all with the probably of needed lots of health care vs enjoying it now while I can. I know it isn't a lot of money but it is a great amount to us. It is scarey that it could slip through our hands if we don't make some quick resonable decisions.

    Bookmark   September 16, 2006 at 4:53AM
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Hi scattered,

Don't chew your fingernails worrying about what to do with it.

Often estates aren't settled as early as one figures.

In any case, were you to receive the money tomorrow, you could put it into a certificate of deposit (short term) or money-market account for a while (probably not a guaranteed certificate, locked in for a definite period).

Give yourself some time to think about it, ask some trusted people who know about how money works, etc.

Some financial advisors have greater training and more experience not only with regard to finances but about life as well, than others. If you plan to use one, choose carefully: it's an important choice.

Don't forget when the bank promises that they'll give you back every dollar that they got, remember that, apart from the rent on the money at an agreed rate, they won't give you one dollar more, either.

Of money the value of which each dollar shank every year that they held it (due to inflation).

If you gave them $10,000. on a five-year guaranteed certificate, then renewed it twice, that $10,000. would have bought a nice car 15 years ago - not now.

Perhaps you may want to own your own home in a few years - but maybe not: purchase of a home should be at least a five or ten year term, preferably more, considering the costs and hassle involved with purchase and sale.

Some people buy a condo, some rent a place.

On the other hand, the cost of medical insurance may be a matter of concern, if you don't have coverage from an employer.

Don't ask me for advice on the U.S health system - I know nothing about that.

Good wishes for wise use of the money.

Remember - no one cares as much about your money as you - except for folks that would like to transfer some of it from your pocket into theirs.

ole joyful

    Bookmark   September 16, 2006 at 12:02PM
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When I read the O.P.s question I read it as meaning what would I do in their shoes.
That may say more about my way of thinking than theirs. BTW I havent seen any responses from the O.P. to this thread.

If one could get a better return on oneÂs investments after tax than the interest rate on oneÂs debts, then I would go for the investments.
There are so many considerations that someone inheriting a substantial sum should consider talking to a financial advisor they could trust.

If I personally were to seek the highest return I would pay off my mortgage, take out a new mortgage and then invest the money. The interest on the new mortgage would then be tax deductible. (Both the O.P. and myself live in Canada.)

My personal situation makes a $100,000 windfall look surplus to my needs. My retirement fund is looking comfortable and my only debt is the mortgage on my home. I plan to have that mortgage paid off before I reach 65; I am currently 59. If I were to receive such a sum I would start transferring funds/assets to the next generation.

A number of the posters mentioned paying off credit cards first. It is possible to get good rates on credit cards by having a number of accounts with different companies and transferring the balance for the low introductory rates offered. My daughter did that for a while until the companies involved got wise, gave her a stern talking to and offered her a lower base rate.

O J re the Canadian retirement savings system. Sometimes having oneÂs savings where it is not easy to spend them means that there will be savings at retirement. Also investments outside a RRSP/RRIF get taxed on interest, dividends and capital gains. I wouldnÂt care to do the paperwork on income trusts outside my RRSP. Income trusts have been some of my better investments.
Sometime I would like to see a good study on saving for retirement inside versus outside RRSPs.

I didnÂt think that qdognj was being at all serious about roulette.


    Bookmark   September 17, 2006 at 1:24AM
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yes, the roulette comment was a joke

    Bookmark   September 17, 2006 at 8:15PM
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Hi Ian in the chilly part of BC,

I also figured that qdogNJ was blowing smoke - but it gave me a chance to reiterate one of my favourite rants: against lotteries and other games of chance.

I like your idea of paying off mortgage (as mortgage interest on loan for owner-occupied home isn't deductible in Canada) ... then remortgaging and using the money to invest.

I prefer using stocks, a substantial number of them Canadian, which makes the dividends earned outside of RRSP taxed at a low rate.

If I borrow to invest, using stock already owned as collateral, part of that dividend income plus the income of the stocks purchased with the loan will pay the interest on the loan, and I will be left with minimal net tax liability on that combined income.

Also, I gain from inflation - as the $10,000. that I borrowed 5 years ago (paying interest only on the loan, unless I chose to pay down principal, which I would do when the markets were too high) would be all that I am required to repay of the loan principal, apart fom the interest.

I gain from inflation - the guy who put his/her money into the bank accepting the guarantee that the bank would repay every dollar borrowed saw the value of each of those dollars decrease every year - well, since the 1930s, at least.

Also, when I sell the stocks, or they are deemed to be sold at my death, I must pay tax on only half of the increase in value since I bought them. If they're held outrside of an RRSP.

Actually, I have a better deal than that, for until 1994, all of our capital gain up to $100,000. was tax-free, and I claimed the increased value on some stocks that I still hold, up till that time, that year.

When I hold stocks inside of my RRSP, I lose the benefit available for both the tax credit on annual dividends, plus the capital gain benefit when I sell them.

Plus - I get a substantial portion of the benefit available in an RRSP, if I choose to hold the stock for many years, for I don't have to talk to the Canada Revenue Agency about the increase in value of my holding over the years, until I either sell them, or die.

And I don't figure to do either, this week or next.

Enjoy your week.

Have you seen Derek Foster's book, "Stop Working! Here's how *You* Can!". He retired at age 34: I read his story in "Canadian MoneySaver" Magazine.

Available at your library, quite likely ... or visit There's some interesting info on their site, and they'll send a sample copy free. They are totally dedicated to service to their subscribers, as they carry no ads.

There are about 35 - 40 places in Canada where the subscribers get together, usually monthly (though there may well not be one in northern B.C.). There are about 25 of us in London that have been meeting for a number of years.

In recent years several of them have picked a $100,000. paper portfolio at the beginning of the year and a guy on Vanc. Island, I think, reports on their progress occasionally through the year.

Good wishes for wise investing.

ole joyful

    Bookmark   September 18, 2006 at 7:13PM
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Hi OJ,
When you borrow against investments to buy more investments that is leverage. That is great when it works in your favor but not so great when it works against you.

Both my current employer & a previous long-term employer match my RRSP contributions, up to 5% of base salary. Its hard to beat that kind of deal.

Holding stocks long-term outside a RRSP/RRIF means that you have to think twice before selling because of capital gains taxes. In some ways that reduces flexibility.
I suspect that a lot of it comes down to temperament, appetite for risk and discipline.

When I lived in Port Hardy I would read "Canadian MoneySaver" at the library but I cant seem to find it here.

I am not familiar with Derek Foster's book.
If I wished I could retire now, though at a lower standard of living than I care for. When I was off work following surgery a few years back I was going stir crazy. I think that Ill keep working for now, although some weeks retirement looks tempting.

To win those paper portfolio contests means taking risks I personally would not take with my real money.

    Bookmark   September 18, 2006 at 9:59PM
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we are in our mid 40's with, twin 18 year olds.
when they were born we set up college funds for them, as we had the money then. We have a house with 14 years to pay on
and 2 paid off cars (that are ok but need replacing). we have about $85,000 in personal debt.
we are inheriting just about $200,000.
we are paying off all our personal debt. setting up an emergency fund of 12x $1000. CD's (one to mature each month)
repaying $11,000 to an IRA. Then after taxes are done with us, we will either take a nice vacation, invest some money, and/or pay off some of the house.
This will leave us with about $1800 a month in 'disposable income' that we will be able to set aside for retirement.
a monthly house payment of $650. (includes taxes & insurance)and about $60,000 in assorted retirement funds.

If we didn't own a house, i would use an inheritance to pay off debt and make a down payment for a house and then have some fun if any was left over.

bbut definitely set aside a small amount of money to celebrate the life of the person who left it to you in a way that will be memorable to you. My plan is to take a family trip to williamsburg as it was a place my aunt always wanted us to visit. If enough is left over we might also take a trip to Europe as well since she inspired my first trip there as well.


    Bookmark   September 20, 2006 at 2:57PM
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If I carried considerable debt I'd likely use a portion of the windfall to pay it down to a comfortable level and invest the remainder for the future. And I'd focus my attention on eliminating the debt I carried. Being debt-free is carefree living.

I'm all about making my daily/weekly/monthly/yearly expenses EASILY payable. I live "lean", make tough choices every day of my life. Some view my outlook as austere, "tough"... but I lack for nothing and very much like sending my "nickels out to play and having them bring their little friends home".

    Bookmark   September 20, 2006 at 5:25PM
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If I were to inherit $100,000. I'd invest almost all of it - maybe have a little fun with some of it, in a way that would be a good memorial to the one from whom I inherited.

As I have no debt, currently.

I won't go into debt for consumer stuff, daily issues of living: I wait till I can pay cash for stuff that I use up now.

I prefer also to pay cash for a car, and get older cars, usually at $3,000. - 4,000. or less. The last one, costing $2,700., operated for me for over 8 years - cost me substantial amounts for repairs toward the end, more in total than I'd paid to buy it. But I drove it for over 110,000 miles. When I ask an auto salesperson whether s/he can give me 100,000 miles for about $6,000., they just look at me, sniff, and say, "No way!".

Ian in B.C.

Given your offer from your employers, one could scarcely turn it down.

And for folks who have a stay-at-home spouse, and who have a pension plan themselves, a spousal RRSP makes good sense, in order to develop a double income stream after retirement.

I just said that I don't like them for myself.

An RRSP, or a similar type of investment as preparation for retirement, should be in core investments, solid stuff that'll do well over the years, despite some ups and downs along the road.

I have some solid stocks that I bought somewhere around 30 years ago ... with money on which I'd already paid the tax. They've grown well in value, over the long term - and I didn't get all bent out of shape when their value went down by about 20% or so over a short term, for they'd done well before, and I expected them to do well later: usually better than average for a while after there's been a substantial drop.

On such stocks as some of our major banks, pipeline companies, oil and gas and mining shares (the biggie, long-term ones), Geo. Weston, Power Corp. or subsidiaries, e.g. Investors' Group, GreatWest Life, or other major companies, I'm not worried that they may go out of business. Tobacco and booze, if having them doesn't bother you for moral reasons.

I suggest that you check David Stanley's articles in "Canadian MoneySaver" on the Canadian equivalent of picking the "Dogs of the Dow", which he has written about for the past ten years, and back-tested for a number of years before that, usually reporting in the July/August issue what he (supposedly) bought at the end of May, as that was the time at which the TSE 35 was set up, several years ago. Then it was the largest 60 on the TSE, now the largest 40.

He ranks those 40 stocks of the largest Canadian companies in order of the rate of dividend that they pay, from the highest down. Then he picks the 10 that pay the highest rate of dividend and buys an equal dollar amount of each. Despite some loss years, he's made a nice rate of return in about 7 or 8 of those 10 years, usually 10% or more total, comprised of dividends of about 3% and current capital gain ... or better. One year he was up 40%.

There's a sub-set where one buys the 5 paying the highest dividend rate, and another that omits the one paying the highest dividend (as a company possibly in trouble, and possibly about to cut the dividend rate), and takes a double load of the one paying the second highest rate of dividend. In a number of years, this choice has turned out the best performance.

I don't mind borrowing some to invest in such companies: if I use stocks worth $10,000. as collateral, the bank will lend me no more than $5,000. If I borrow the full $5,000. and the value of the collateral drops, say 20%, to $8,000., I get a call from the bank telling me that they want $2,000. more collateral ... or $1,000. cash to reduce the loan amount ... *today* (or at the latest, tomorrow).

When I worked as a financial advisor, I told my clients that I wanted them to be in a position so that they *never* got such a margin call. I don't want any such myself (have never had one - but I've seldom used the borrowing strategy), so I borrow quite a bit less than the full amount that the bank is willing to lend. And I use stock of several companies, so that if one takes a heavy hit, my total isn't reduced too much. If I borrow, say $4,000. and give the stocks that I buy to the bank as additional collateral, they have somewhat less than $14,000. collateral, which means that they're willing to lend up to about $7,000. If the stocks take a hit of 30%, and it's doubtful if those heavy dividend payers would, even if the market as a whole went down 30%, that's a drop so that my total collateral would be under $10,000. But the bank would be willing to lend me something under $5,000. in those circumstances ... and I only owe them $4,000.

You may have heard that the Canadian market has been going down for the last few months?

About 3/4 of the stocks that Stanley picked in May this year are higher now than they were then.

I can give you current particulars if you wish - which you can calculate for yourself if you check July/August 2006 "Canadian MoneySaver" and check current prices. Can give the record over the past 10 years, if you want them.

When I receive dividends on Canadian stocks, I get a tax credit that means that I pay tax of peanuts on them, and use some of the income from the stocks that I own as well as those that I bought with the borrowed money to pay the interest on the loan - which currently, on my fully secured line of credit, would cost me 6%.

If I can borrow at 6% that's fully deductible and buy stocks that earn about 3% now, taxed at a low rate, and use some of the dividends from stocks that I owned previously to pay the interest, I end up with little tax liability.

Also, as the interest payment is deductible, I end up paying almost no income tax on that current income.

Further, I make at least 2% or so annually on inflation (and some of us figure that the actual rate is higher than the 2% or so that the gov't. publicizes). When I pay interest only on the loan as I go along, the $10,000. that I might have borrowed 15 years ago would have bought a nice car - not now. But all that I'm required to pay the bank is the amount that I borrowed - $10,000. But it'll buy a lot less now than it would have, then.

I've had a long-term time horizon, over the years - and continue to do so, even though I'm crowding 80.

Thankful to be in good physical health - don't think that I've taken a pill in 30 years at least. Same for the mental component ... I hope.

Have a great week, what's left of it.

ole joyful

    Bookmark   September 20, 2006 at 7:16PM
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