Recently one of our advisors, Doug Hoyes, was interviewed by newretirement.com about how debt can be a handicap for those approaching retirement.
Roughly two-thirds of Canadians 55 and over carry debt in their pre-retirement years and only half of those will pay off that debt before the5 y retire. So what is the risk with this? Interest rates are, after all, at an all-time low and have remained there for quite some time. Why not postpone debt repayment until later years?
As Doug points out, seniors are one of the most at-risk group of debtors today. Seniors are more likely to experience illness, injury or other health problems and, when combined with a fixed income, this can clearly jeopardize debt repayment. It is because of this risk that debt repayment prior to retirement is the safest approach.
Doug recommended 5 simple steps to retiring debt-free:
- Create a budget that recognizes that your income level will be reduced. While your expenses may also decline it is important to match your new income with your future cash needs.
- Manage your retirement lifestyle to suit your new fixed income. It is critical to understand that your income will drop during retirement and that you prepare early to cut back on expenses so you are living within your ‘new’ means.
- Pay off all consumer credit that you can before retirement. This is particularly true of high cost credit card debt. If you are living on credit now, you will not be able to sustain these habits after retirement.
- Once your credit card and other revolving credit is paid off, move on to car loans and your mortgage. You should be building wealth, not debt, into retirement so it is important to reduce mortgage debt during your income earning years.
- Once you retire, do not use credit to fund living expenses. Doug explains that this is one of the highest risk factors in terms of seniors declaring bankruptcy.
The biggest advantage of retiring debt-free is flexibility. If you owe a significant amount of credit card or other consumer debts, you are at risk. If you or your spouse become ill, your income may drop and your expenses will certainly rise. These added costs can become unmanageable if much of your income is already being used to service debt. On the other hand, if you are debt-free you can set your own priorities. Now you may be able to choose to take that vacation or perhaps help your children. On that note however, Doug recommends that you carefully consider the long term implications before helping your children financially. Many senior debtors find themselves in financial difficulty because they co-signed a loan for a family member who was unable to meet their own obligations.
The key is to approach retirement as debt-free as possible. If you are so deep in debt today that this looks like an impossibility, talk to a debt expert about your options. Don’t wait until retirement to deal with your debt. It’s easier to deal with now.