Most people know that they should be debt free by the time they hit retirement, but many still carry large mortgages, lines of credit and other kinds of leverage. According to Statistics Canada, 34 per cent of retired people over 55 are still carrying debt*, and a 2017 Equifax Canada report found seniors are increasing their debt loads at a much faster pace than other Canadians.
“That’s a problem for people who can’t keep up with their debt load and are forced to curtail their retirement dreams,” says Duane Bentley, Investors Group Vice-President of Banking and Mortgage Distribution.
There are several reasons why seniors are in debt – here are a few, along with strategies for dealing with them.
Many baby boomers are still paying for their children, especially when it comes to housing. According to a 2015 survey**, 18 per cent of first time homebuyers have their down payment paid through a gift from a relative — usually a parent.
Many young retirees are also caring for aging parents and that comes with both a financial cost and a time commitment.
Less aversion to debt
According to an Investors Group survey, 27 per cent of high net worth Canadians plan to have mortgages while retired — and 67 per cent who have mortgages say they have the cash to pay them off in full***.
Part of the reason for this is that many boomers are used to debt – they’ve been borrowing money for decades – and with low interest rates, they don’t’ see the need to pay off their house before they retire.
In some cases, they’re being strategic, says Bentley. They may use a mortgage to acquire a second property without drawing down on their retirement savings. That can be good strategy because withdrawing other assets, such as money from an RRSP, would trigger tax implications.
But it’s a risky one. If you’re making less money in retirement, you could have trouble paying your debts back, especially as interest rates rise.
Pay attention to leverage
Boomers need to manage their financial situation carefully as debt problems could force you to sell your home or compromise other plans.
One way to alleviate some of the debt burden is to consolidate your leverage. It won’t reduce your overall debt, but you’ll likely achieve a more attractive interest rate and free up more monthly cash flow. The money you save in interest can be used to more aggressively pay down your debts.
There are other strategies for reining in your debt and a good place to start is by reaching out to your professional advisor for a full debt assessment. Your professional advisor is also the ‘go-to’ source for a borrowing strategy that makes sense for your financial situation and life stage.
**2017 Mortgage Consumer Survey by the Canada Mortgage and Housing Corporation: cmhc.ca/surveys
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.