Almost one third of all personal insolvencies are now filed by the baby boomer generation. This is a staggering statistic, and shows that not only have many seniors not saved for retirement, but in fact they will be carrying debt into retirement.
While some of your expenses may decrease in retirement (since you are no longer driving to work, or buying work clothes) your basic expenses like rent and food don’t go down. In retirement your income typically drops, so if your income is decreasing and your expenses are staying the same you have a serious cash flow problem. If you have debt payments to make on your reduced income you may be at risk for very serious financial problems.
So how do you know if you are at risk?
Financial pressures come from all sides. While you may expect to be able to repay your debts once you retire, keeping up with bills and other payments can easily become a struggle. Below are some of the factors that can lead to bankruptcy or a proposal for seniors who bring debt into retirement:
- Fixed or reduced income. While 9 in 10 seniors overall say that they are able to keep up with monthly bills and other financial obligations on their adjusted income level, this number drops to 7 in 10 for those with debt. A reduction in income due to retirement, job loss or illness can add pressure to an already stretched budget.
- Grey divorce. Divorced retirees are in fact 1.3 times more likely to carry debt than their married counterparts. Just like with younger couples who separate, the financial cost of legal fees, division of property and conversion to living in two households can add to debt levels and make paying off existing debt more difficult.
- Supporting adult children. With their children unable to find gainful employment, themselves burdened with student loans, many baby boomers continue to help out their adult children financially. Many may have co-signed loans they could ill afford themselves assuming their son or daughter could keep up with the payments.
- Aging parents. Sandwiched between two generations, baby boomers may also find themselves supporting aging parents. This can include paying for medical costs and having to take time off work to help out during an extended illness.
- Extended retirement. The average life expectancy in Canada is 81 years of age. 10 years ago that number was 79 and 20 years ago it was 78. We are living longer and we are more active that we once were in retirement as well. Freedom 55 has set a lot of expectations among baby boomers to live a life of not just retirement, but one filled with high lifestyle expectations regarding travel, entertainment and privileges. Trying to maintain a pre-retirement lifestyle for a longer period of time can come at the cost of additional debt.
- Health and illness. Unsurprisingly dual-income couples tend to have a higher average debt-to-income ratio than single-income couples. This can likely be attributed to the sense of security felt from having two incomes – one for living costs and one for debt repayment. When one individual becomes ill, the burden of debt repayment now falls to just one individual. Combine that with the added cost of medical treatment and you can see why medical issues become a primary cause of insolvency among seniors.
- Tax debts. While their income may be reduced, seniors may find themselves earning income from multiple sources: pension income, RRSP and RIF withdrawals, interest income, and perhaps even part time employment. Used to having their income tax deducted at source, seniors may be surprised at the end of the year with large tax bills accumulating that they cannot pay.
- Death of a spouse. While expecting to live together for many years, perhaps on two retirement incomes, an early and unexpected death of a spouse can cause not only emotional, but financial devastation for the remaining partners. While in general debts do not transfer on death to the surviving spouse, any joint debts will. Living on a single pension income while trying to maintain mortgage or other debt payments can cause financial strain.
Carrying debt into retirement adds a significant risk that you will be unable to meet your debt payments once you retire. Unlike when you were working, there is little opportunity to increase your income or find a better paying job. It is important to plan ahead and ensure that you do not jeopardize your retirement lifestyle.