When it comes to opining on seniors carrying debt into retirement, I\u2019ll state upfront my personal bias that anyone with credit-card debt \u2014 or even mortgage debt \u2014 has no business fantasizing about retirement. To me, it\u2019s simple: if you have debt of any kind, you keep working until it\u2019s all discharged. As I have written elsewhere, I believe the foundation of financial independence is a paid-for home.<\/p>\n
That said, I recognize there\u2019s a large segment of the population not fortunate enough to have a paid-for home, corporate pensions or financial assets like RRSPs and TFSAs. I personally know seniors who still rent and have no financial safety net. Some may have to resort to payday loans just to get by until the next month\u2019s government-issued Canada Pension Plan, Old Age Security or Guaranteed Income Supplement cheques arrive.<\/p>\n
Doug Hoyes, president of Kitchener-based bankruptcy trustees Hoyes Michalos & Associates Inc., profiles senior debtors every two years in his Joe Debtor study. The data are shocking. He defines seniors as 60 or older, so many are baby boomers either in retirement or on the cusp of it. (The oldest boomers, born in 1946, are now 70, while the youngest boomers, born in 1964, are 52 and presumably still working full-time.)<\/p>\n
Senior debtors make up 10% of Hoyes\u2019 2015 study, up from eight per cent four years ago and owe an average of $69,031 in unsecured debt, higher than any other age group. Nine per cent borrow against their income \u2014 often pension income \u2014 by resorting to payday loans.<\/p>\n
Payday loans are, in my opinion, a form of usury \u2014 defined as debt instruments charging more than 60 per cent in interest a year. However, because the loans are only a few weeks in length (literally, until the next payday), the lenders can charge $20 for every $100 borrowed in Ontario, which if paid over a year would be interest of 546%, Hoyes says.<\/p>\n
Fifty three per cent of these senior debtors live alone and often cite illness or injury as a cause of their financial troubles. Among bankrupt seniors, nine per cent had payday loans. In some cases, their adult children are making financial demands and they\u2019re too embarrassed to admit they have few alternative resources.<\/p>\n
At the other extreme are the fortunate, wealthy boomers with paid-for homes, large defined-benefit pensions and maxed-out registered and even non-registered (taxable) investments. For them, says Emeritus Retirement Solutions president Doug Dahmer, the biggest expense will be tax, something that must be planned for well in advance. In this case, borrowing may turn out to be tax efficient.<\/p>\n
Then there are the rest of us : perhaps with no large company pensions, modest financial assets and a home with only some equity in it, which may be a tempting source of future funds in retirement or semi-retirement.<\/p>\n
This middle group is often torn between paying down the mortgage before retiring, or capitalizing on low interest rates to take a chance on building their financial nest eggs in the stock market.<\/p>\n
Last July a CIBC poll found that, on average, Canadians expect to be debt free by age 56, although some are indebted well into their sixties. Even in the 45-plus cohort, more than 68% are in debt, including 31% who still have mortgages. In 2013, CIBC found 59% of retirees were in debt.<\/p>\n
But this may not be necessarily a bad thing, argues CIBC Wealth tax guru, Jamie Golombek. \u201cThere\u2019s no harm in having debt if it\u2019s for an appreciating asset. If you\u2019re in your home for the long term and borrowing at low interest rates, it\u2019s not a big problem. The problem is when you run out of cash flow to service the debt.\u201d<\/p>\n
Interest rates are near 60-year lows : posted five-year mortgage rates are under 3% at most financial institutions (and under 4% for 10 years). Of course, unless you lock in, there\u2019s no guarantee rates won\u2019t rise to more uncomfortable levels.<\/p>\n
In a paper he wrote for CIBC last year (Mortgages or Margaritas), Golombek suggested the zeal to pay down debt could put some people\u2019s retirements at risk. It was written in response to another CIBC poll that found 72% of Canadians prefer debt repayment over saving for retirement. He found that if you can get 6% annual returns in a balanced portfolio of investments, the net benefit was almost double that of paying down debt.<\/p>\n
Back in 2012, BMO Financial Group tackled the same issue, noting that rising home prices meant real estate formed a disproportionate amount of couples\u2019 net worths. This tempts some to tap into their home equity in retirement in order to overcome their past failure to save. As boomers become net sellers of homes instead of driving up prices, BMO said home prices could fall by one per cent per year. Downsizing, renting or moving to a small town are all ways to access some of the equity in your home.<\/p>\n
Still, Hoyes has seen enough senior debt to argue against taking on more. \u201cLow interest rates are great as long as you can make payments, but what if you lose your job, get sick or divorce? The fact moderate interest rates are only three per cent is irrelevant if there\u2019s no money coming in. When your income becomes fixed, your expenses have to become fixed, but it\u2019s hard: you can\u2019t control the price of gas or car insurance.\u201d<\/p>\n
Personally, I like to have enough Findependence that you reach what Dahmer terms the \u201cWork optional\u201d stage. It\u2019s about being in control of your days, Hoyes says, \u201cIf you have debt when you retire you are not in control of your day.\u201d<\/p>\n
And of course, medical expenses can creep up. It\u2019s not as bad here as in the United States, where medical costs can have catastrophic consequences, but \u201cIn Canada medical expenses are insidious,\u201d Hoyes says, \u201cIt\u2019s a lesser amount, but creeps away and boomers are more likely to get whacked.\u201d<\/p>\n
One option, if available, is to work part-time in retirement. An analysis by Toronto-based ETF Capital Management found that if a retiree earns just $1,000 a month extra in consulting income or a part-time job, a nest egg\u2019s depletion slows dramatically. For couples, if both partners earn that much, the financial picture is rosier still.<\/p>\n
This may or may not be \u201coptional\u201d work. BMO found 29% of Canadians expect to delay retirement and work part-time in retirement because of savings shortfalls. For them, BMO says, tapping home equity constitutes \u201cPlan B,\u201d one that 41% of Canadians are considering.<\/p>\n
But avoid reverse mortgages, Dahmer counsels. He says it\u2019s more cost efficient to use a secured line of credit against the house. Draw funds only if needed, but set it up while you\u2019re still working and the bank thinks you\u2019re a good credit risk.<\/p>\n
Dahmer thinks flexible use of debt through a line of credit is a sound strategy for smoothing spending in peak years, especially if your main income is from registered assets. \u201cYou\u2019re far better off paying 2.5 to 3.5 percent in interest for a few years than forcing yourself from a 33% to 42% marginal tax bracket, not to mention Old Age Security being clawed back.\u201d<\/p>\n
The savings can be in the hundreds of thousands: \u201cRetirement is the one time in life that strategic tax planning can make a significant difference. That\u2019s because of the many different places you can source cash flow from, each with its own distinctive tax implications.\u201d<\/p>\n