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Retire Without Debt – So You Can Go-Go With Enough Dough

Retire Without Debt – So You Can Go-Go With Enough Dough

By Anne Arbour

What do you envision when you daydream about your retirement?

Are you lounging on the deck of a cruise ship or are you sinking putts on the golf course? Are you photographing wildlife in the countryside or are you finally taking those singing lessons?

Whatever your dream is, it’s unlikely that it includes being hunched over a pile of bills worrying about how you will pay them.

The reality is, however, that while some of our current living costs, like commuting and dry cleaning, will dip once we finish working, life in retirement isn’t completely free and living on a fixed income isn’t always easy.

New and different expenses will come up, and we need to put ourselves in the best financial situation to make the adjustment from our earning/saving/spending years to our fixed income/spending-our-savings years. Making that transition with debt in our financial lives adds a layer of difficulty many are unprepared to face.

There are different phases of activity and spending in retirement, according to the experts. Jim Yih of Retire Happy refers to them as the Go-Go years, where we are living out all those retirement daydreams.

We are active, travelling, highly engaged and likely spending quite a bit.

Next come the Slow-Go years where we are still engaged, but somewhat less active, staying closer to home and our spending has plateaued.

Then there is the No-Go phase where we are staying put or potentially living in a supported care situation. This is when our spending on health care and/or medical requirements will likely be at its peak.

Carrying debt at any one of these stages can be problematic and can significantly impact our financial security in retirement.

While we may have been able to juggle those credit card payments when we were working, what happens when our income drops even a little bit in retirement and those high interest consumer debts become a proportionately larger part of our budget?

Where does that leave our ability to travel or weather a medical issue? Will we have to dig into savings to make ends meet and if so, what does that mean for how long our savings will now last? Or worse, use credit to supplement our living expenses? Will we run out of money and if so, when? When we are living on a fixed income, what does a rise in a mortgage interest rate do to our monthly cash flow? Does that mean we will need to take on even more consumer debt to manage?

While we can understand on an intellectual level that retiring with debt is not a good idea, it’s happening at an increasing rate.

A recent study by SunLife Financial revealed that 1 in 4 Canadians is entering retirement with debt. That includes mortgage debt (20 per cent of retirees were still making mortgage payments), car loans (26 per cent) and, mostly, credit card debt, with 66 per cent of retirees report unpaid balances.

Numbers in the United States are also worrying.

A study by the Employment Benefit Research Institute reveals that in 2016, some 68% of households headed by someone aged 55 years or older reported carrying debt, versus 63.4% of such households in 2010. For households with heads aged 75 or older, those reporting debt in 2016 were 49.8%, up from 31.2% in 2007.

So how do we attack our debt before retirement so we can achieve those daydreams worry-free?

Assess

It’s critical to face the facts long before retirement, and make a definitive list of what you owe.

That should include a breakdown of each amount due, the applicable interest rate, the related monthly payment, as well as any prepayment options or penalties.

While most consumer debt, like credit cards, can be paid down at any time, certain kinds of loans like mortgages might involve expensive penalties if they are paid out before their actual due dates.

In some cases, however, there are still options available in the form of increased monthly payments or annual lump sum payments that can help you make a significant dent for the debt in the shorter term. As well, while not an option in Canada, some might argue that there could be some tax advantages to carrying a mortgage into retirement in the United States. You should always consult with a qualified tax professional, however, to discuss the pros and cons of this strategy for your particular financial situation. The long term impact on your savings might outweigh any such benefit.

Repay

Now that you have a full picture of what you owe and to whom, it’s time to start a concentrated effort to repay.

What’s the plan of attack? Are you eligible to consolidate a number of different high interest consumer debts into one lower rate debt? If so, be sure to pay more than the minimum, if allowed, to help cut as much time off the term of that loan as possible. Other options include the Debt Avalanche or the Debt Snowball methods. For these approaches, you will be making minimum payments on all debts to keep them current, putting additional resources onto either the highest interest rate loan (Avalanche) or the smallest balances (Snowball) loan each month to reduce it as quickly as possible. When that loan is repaid, all of that payment amount will then be redirected onto the next highest interest rate debt or lowest balance loan, in turn, and so on.

Don’t discount the possibility of downsizing now and using funds from the sale of your home to pay off/down debt.

Balance the budget

Once you’ve got your repayment strategy in place, it is a great time to take a hard look at your overall budget going forward.

Why were those debts accumulated in the first place? Where are the holes in your budget that are causing you to take on debt?

Start by tracking your expenses for two to three months and see what you learn, and devise a plan to start living within your means now, before your income becomes fixed. One of the best strategies around is to practice living on your expected post-retirement income level for a few months. This dress-rehearsal can prove a valuable lesson in identifying where the pain points in your budget will be, giving you an opportunity to address and resolve them well ahead of time.

Prepare

If any of your debt was incurred as a result of an emergency or unforeseen event, then what are you doing to save for future curveballs?

None of us wants to think about experiencing an emergency, medical or otherwise, but of course, as we age, they will likely happen to us or someone we love. Having an emergency fund set up and growing, outside of our retirement savings, will go a long way to helping you weather those storms without depleting retirement funds or turning to debt.

Protect

Simply put, don’t lend money in retirement and don’t agree to co-sign for someone else’s debt.

While it is not technically direct debt in your name, either scenario leaves you and your limited financial resources vulnerable to the action – or inaction – of others. When they don’t pay, you are liable, and your resources are affected.

When all is said and done, debt at any stage of life can be stressful, but in retirement, it can be even more dangerous to your long term financial security.

Time, in this case, is not on our side, and we need to prepare ourselves before our income becomes limited and our opportunities to recover financially are cut off. Eliminating debt and establishing good financial practices before our income becomes limited will go a long way ensuring we can enjoy our plans and, well, go-go with enough dough!

This is the first post in a series of three addressing the issue of retirement and debt. In the next segment, we will discuss strategies for managing if you are still carrying debt into your retirement years. The final installment will cover issues surrounding bankruptcy and retirement.

Read the Second Post: Retiring With Debt – How To Manage

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Anne Arbour is the Credit Counselling Society’s Financial Educator for the Greater Toronto Area. Anne has over 25 years combined experience in facilitation and financial services, including operating her own small business financing company. She holds an MBA and is a Certified Educator In Personal Finance. Anne has served on expert panels for ACTRA and for FuturFund, and has been interviewed by Global News, Today's Parent Magazine, Canadian Money Saver Magazine and The Toronto Sun.