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Why Paying Off Debt Too Quickly Can Delay Retirement

By Reese Harper, CFP® , CEO of Dentist Advisors    |   Retirement Plans

Retirement Debt

I grew up on a dirt road. Our small house was in the middle of a huge farm with open skies for miles. Driving into town was a big deal—it took 30 minutes or more to get to the local grocery store. Even years after I had been married, I was still telling my wife out of habit that “I’m going into town.” She’d grin and say, “You live in town Reese.”

I didn’t feel like we were poor, but looking back I can see there was a reason we were regularly eating bowls of rice and nutmeg or boiled wheat for breakfast. Our circumstances improved as my dad worked two jobs and eventually became a successful executive in the potato industry.

One of my strongest memories about money and finance was the debt we carried on our family farm. I remember it being a huge burden over my family’s life. That experience gave me a pretty negative association with debt. As I grew up, it was natural to say that I wanted to avoid debt at all costs. And then I would hear people like Dave Ramsey, say, “Get out of debt,” which reinforced how I felt.

Rethinking Debt

I don’t feel quite the same way about debt now that I’m an adult and entrepreneur. Although I think paying off your debt as soon as possible is a great goal, paying it off too quickly can actually weaken your financial position and constrain your business growth.  

But before I give some opposing views to a debt-first mentality, I’d like to reinforce some common sense guidelines. I do prefer that you always live within your income. I’d rather see someone live lean and mean and pay off all their debt first if the alternative is to increase your living expenses, max out your credit cards, and live outside your means. But as you learn more about how debt works, I’m hoping it may temper your attitude about it. Here are four reasons to reconsider the speed at which you pay off your debt.

Get Used to Tackling It “All”

When it comes to dentists and money, your goals are multi-faceted. You need to do more than just one thing (pay off debt).

I recommend you pay down some debt, but also increase your liquidity to strengthen your balance sheet. Start saving for your kid’s future, invest money back into your practice consistently, and maximize your retirement account contributions so your taxes are reduced. Vacation regularly! It will increase your longevity and appreciation for your career. ALL of these things ALL of the time. Not just one thing at a time.

No Compounding Benefit

When all of your discretionary savings are going towards your loans, you delay the time in which you can start investing. In many cases, fully paying off your loans takes a very long time. Compounding is critical to building wealth. You should start as early as possible building up your investment accounts so they increase in value through the power of compounding.

Reducing debt too quickly shortens the time frame that your money can compound, not to mention the additional tax deductions you’ll miss out on if you don’t make contributions to your retirement plans.

Investing Too Little Too Late in Your Career

If the first time you invest is mid or late career (because you’ve been paying off debt) you probably won’t feel the confidence you would if you started investing earlier in your career. That confidence comes by watching your investments still grow after tough market cycles. Your emotional experience with investing actually takes years to develop. If you start late, and your time frame is shorter, odds are you’ll lack the tenacity to stick with it.

It takes a couple of bear markets to know how investments really work. If you invest early in your career, you’ll learn how to be a patient, disciplined investor with a focus on diversifying your portfolio. This is not intuitive.  

No Liquidity

While an aggressive, debt-reduction plan does save you interest, it’s not liquid—and that can put your financial security at risk. If you have zero liquidity because you paid $250,000 in student loans down to zero over the last few years, you’re actually in a weaker financial position than someone who paid down their student loans to $150,000 but put $100,000 in the bank. Liquidity gives you resources to support your practice, and make the right investments in people, equipment and marketing at the right time. And lenders will also be more likely to loan you money.

Liquid investments are king as you build your practice and as you enter retirement. Liquidity gives you maximum flexibility.

Take a Balanced Approach

The bottom line is applying a balanced approach to debt reduction helps you accelerate the growth of your net worth much faster, protects your practice, helps you learn patience, and gives you more confidence when it comes to financial decisions.


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