Most of the time when we think about preparing for our retirement years we generally think about saving; typically, in our RRSPs, TFSAs and Pension Plans. However, when planning for retirement eliminating your debt is just as important as creating an income stream.
The number of people retiring with debt continues to increase every year. In a new study by StatsCan the debt-to-income ratio for Canadians over 65 has more than doubled from 24% in 1999 to 52% in 2016.
Strong real estate markets have increased the value of consumer’s assets which has empowered them to increase their mortgage debt. More worryingly, the number of seniors with consumer debt (credit card, lines of credit and auto loans) has increased from 4% in 1999 to 14% in 2016.
Debt and savings are two sides of the same coin. If you have debt in retirement, your principal and interest payments will have to come from the same pool of money you are using to fund your retirement income.
What are your choices if you are approaching retirement and still have debt?
Just under half of homeowners (47%) indicated they will continue working until the debt was gone, while 45% said they will retire anyway. Whether you’d choose to continue working or not, incorporating a debt repayment plan as part of your overall financial plan now will increase the likelihood of you becoming debt-free by the time you want to retire.
The good news is you can make a lot of progress in five to ten years, especially with changes to how you structure and manage your debt. And, once you are debt-free, you can focus on the other aspects of your finances to prepare for a comfortable retirement.
What should you do?
If your only debt is your mortgage, accelerating your payments and taking advantage of pre-payment privileges is a great strategy. However, if you are like most people you are probably carrying several debts in addition to your mortgage including credit card and home equity lines of credit. As a society we have too many types of debts, and we tend to transfer debt from one source to another never really paying anything off. In addition, we tend to let the interest rate tail wag the dog; most people don’t realize the amortization on their mortgage is a much bigger expense than the interest rate cost.
If any of this sounds familiar, it is time to implement a Cash Flow Plan (CFP). A CFP will make you feel more in control of your money and help you pay off your debts before you retire. Give me a call if you want to get started.
Have a great weekend,
Tracey
Sources: Manulife Solutions Fall Edition 2013, Stephanie Holmes-Winton, creator of the Money Finder, MT2013. Article by James Langton 03-03-2019 in Investment Executive; Senior Households Face Rising Debt Burdens, StatsCan Reports.
Image courtesy of Sira Anamwong at FreeDigitalPhotos.net