Retirement in Canada – Majority in Debt
Well, here’s an eye-opening find: the majority of retired Canadians are carrying debt.
Of retirees polled by Harris/Decima for CIBC, 59 per cent had debts. Of those retired with debt, 39 per cent carried balances on their credit cards, 37 per cent had more than one debt payment every month and 30 per cent had outstanding balances on their line of credit.
Another alarming trend is the increase in insolvency and bankruptcy rates amongst Canadian seniors. Today, seniors 65 or older have the highest rate of insolvency in Canada.
Pre-retirement working Canadians aged 50 to 59 are not faring much better – due to their high debt ratio, they are the group most at risk of bankruptcy.
Why the increase in debt in retired and pre-retired Canadians? Low interest rates play a role. Many retirees counting on their investments for income have seen their nest-eggs shrink due to the recession. Current fixed-income rates on products such as GICs, Bonds and High Interest Savings Accounts (HISA) are at all-time lows, making it hard for our money to keep up with inflation.
Easy access to credit is another factor in the current rise of debt levels. With credit cards, lines of credit, mortgages and consumer loans for anything from cars to couches, it’s easy to end up with payment overload. Advertisers know how to lure us with their “only $199 dollars bi-weekly” ads, making us forget about the total cost of our purchases.
But is all debt bad? Surprisingly, I don’t think it is. Carrying some debt, even into retirement, may make financial sense in certain situations. For example, when the market is in a down-turn, retirees may be better off to make car payments at a low-interest or interest-free rate instead of cashing out a large sum from their investments. For those still working, having a small mortgage at today’s low interest rates may make more sense money-wise if it means they can maximise their RRSP contributions. It’s important to calculate the costs both ways, with and without using credit, in order to make the best decision for your situation.
Cash flow is key in retirement. You need to create a positive cash flow that supports your lifestyle. If your income covers all of your needs and payments every month without having to resort to using credit to get by, having some “good debt” may allow you extra flexibility. You can then keep your investments, allowing you to continue to grow your money and improve your retirement income.
The lesson we need to take away from this is that our debt won’t just disappear before we retire. Most Canadians expect to be debt-free in retirement, but the reality is quite different. It’s time to change how we look at debt. Taking a loan or using our credit isn’t just borrowing money from the bank, it’s borrowing money from our future selves. Money we spend now, borrowed or otherwise, is money we won’t have for retirement. It’s important to understand your financial situation – read up on personal finance, build up your retirement savings and meet with a professional to make sure you stay on top of your money.