When it comes to opining on seniors carrying debt into retirement, I’ll state upfront my personal bias that anyone with credit-card debt — or even mortgage debt — has no business fantasizing about retirement. To me, it’s simple: if you have debt of any kind, you keep working until it’s all discharged. As I have written elsewhere, I believe the foundation of financial independence is a paid-for home.
That said, I recognize there’s 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’s government-issued Canada Pension Plan, Old Age Security or Guaranteed Income Supplement cheques arrive.
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.)
Senior debtors make up 10 per cent of Hoyes’ 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 — often pension income — by resorting to payday loans.
Payday loans are, in my opinion, almost usury — 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 up to $21 for every $100 borrowed in Ontario, which if paid over a year would be interest of 546 per cent, Hoyes says.
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’re too embarrassed to admit they have few alternative resources.
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.
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.
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.
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 per cent are in debt, including 31 per cent who still have mortgages. In 2013, CIBC found 59 per cent of retirees were in debt.
But this may not be necessarily a bad thing, argues CIBC Wealth tax guru, Jamie Golombek. “There’s no harm in having debt if it’s for an appreciating asset. If you’re in your home for the long term and borrowing at low interest rates, it’s not a big problem. The problem is when you run out of cash flow to service the debt.”
Interest rates are near 60-year lows: posted five-year mortgage rates are under three per cent at most financial institutions (and under four per cent for 10 years). Of course, unless you lock in, there’s no guarantee rates won’t rise to more uncomfortable levels.
In a paper he wrote for CIBC last year (Mortgages or Margaritas), Golombek suggested the zeal to pay down debt could put some people’s retirements at risk. It was written in response to another CIBC poll that found 72 per cent of Canadians prefer debt repayment over saving for retirement. He found that if you can get 6 per cent annual returns in a balanced portfolio of investments, the net benefit was almost double that of paying down debt.
Back in 2012, BMO Financial Group tackled the same issue, noting that rising home prices meant real estate formed a disproportionate amount of couples’ 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.
Still, Hoyes has seen enough senior debt to argue against taking on more. “Low 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’s no money coming in. When your income becomes fixed, your expenses have to become fixed, but it’s hard: you can’t control the price of gas or car insurance.”
Personally, I like to have enough Findependence that you reach what Dahmer terms the “Work optional” stage. It’s about being in control of your days, Hoyes says, “If you have debt when you retire you are not in control of your day.”
And of course, medical expenses can creep up. It’s not as bad here as in the United States, where medical costs can have catastrophic consequences, but “In Canada medical expenses are insidious,” Hoyes says, “It’s a lesser amount, but creeps away and boomers are more likely to get whacked.”
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’s depletion slows dramatically. For couples, if both partners earn that much, the financial picture is rosier still.
This may or may not be “optional” work. BMO found 29 per cent of Canadians expect to delay retirement and work part-time in retirement because of savings shortfalls. For them, BMO says, tapping home equity constitutes “Plan B,” one that 41 per cent of Canadians are considering.
But avoid reverse mortgages, Dahmer counsels. He says it’s more cost efficient to use a secured line of credit against the house. Draw funds only if needed, but set it up while you’re still working and the bank thinks you’re a good credit risk.
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. “You’re far better off paying 2.5 to 3.5 per cent in interest for a few years than forcing yourself from a 33 per cent to 42 per cent marginal tax bracket, not to mention Old Age Security being clawed back.”
The savings can be in the hundreds of thousands: “Retirement is the one time in life that strategic tax planning can make a significant difference. That’s because of the many different places you can source cash flow from, each with its own distinctive tax implications.”