Q&A: Paying off debt

Question: I am 62 and retiring in October. I have a few GICs maturing in the next few months. I have debt of approximately $18,000. The maturing GICs are worth approximately $20,000. The question is should I cash in the GICs and pay off the debt, or reinvest them for a few more years? My pensions will not be large and my income when I retire will be approximately $1,800 a month. So would it be wise to pay off the debt? Your response would be appreciated. – Diane W., Ontario

Gordon Pape answers: This one is easy. By all means, cash
in the GICs and pay off the debt. You’ll end up well ahead, both before and
after tax.

For starters, the interest rate on your debt is almost certainly higher than
the rate of return on the GICs. So whatever you earn on the investments, you’re
paying out more in interest charges. Second, the interest on the GICs is taxable
so even if you are in the lowest bracket your real after-tax return is less
than the nominal interest rate on the GICs. You get no offsetting tax deduction
for the interest you pay on the debt. So this is really a no-brainer.

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