Debt and Retirement

A great deal of time is spent considering and planning for income during retirement. However, there are other factors that go into a successful retirement plan. Debt management is one of those factors.

The closer we get to retirement the more effort should be focused on reducing or ideally eliminating debt, especially consumer debt. More and more Canadian seniors are beginning their retirement years still in debt – either mortgage or consumer (credit card, etc.)

According to a 2017 Sun Life Financial survey, one in five retirees are making a mortgage payment, one in four are making a car payment and about two out of three are have unpaid credit cards (consumer debt). While a home is an investment that will likely grow in value, the consumer debt and vehicle payments are for items that depreciate in value and typically have much higher interest rates.

As much as you spend time defining and building a financial savings plan, it is also important to determine a debt payment plan so you can transition into your life after work with only necessary or minimal debt. Afterall, your retirement income plan was likely not designed to support debt.

When we are in the working phase of our life, usually a substantial part of our monthly budget goes to paying off debt – mortgage, car loans, credit cards, lines of credit, etc. Debt is one of those things that is very easy to find ourselves in and can take a long time to get out from under.

In the years leading up to retirement, it is recommended we avoid adding consumer debt whenever possible. Pretty much everything outside your mortgage is considered consumer debt. If you borrowed money to consume a product that isn’t appreciating in value, pay it off as soon as you are able and avoid carrying it into retirement.

Like all financial planning, debt repayment should take all areas of your current financial situation and future goals into account. As mentioned, paying off debt is important but so is saving for retirement and planning your future income.

To build a debt repayment plan, first you need to gather all the information for your current debt. This includes interest rates you are being charged and all current outstanding balances.

There are two methods recommended for paying off consumer debt:

The first one is called the snowball method. This method has you pay the minimum on all but your smallest debt. Add whatever extra money you can afford onto the smallest debt until it is paid off. Then add the amount you were paying on that debt to your next smallest until they are all paid off. As you continue to pay off more and more debt, the amount you are paying off begins to build like a snowball rolling down a hill.

The other method is similar but is based on the size of the interest rate rather than the size of the balance. Once again you pay the minimum on all, except this time you pay more on the one with the highest interest rate. You begin by paying off the debt with the highest interest rate and snowball the payments onto the next highest interest rate until they are all paid off.

This second method makes the most sense mathematically since you are saving more interest payments by doing it this way. However, the psychology at play with seeing results quicker can make the first option better for some. Being able to eliminate your smallest debt quickly allows you to see results early and helps motivate you to continue paying off debt at an accelerated pace.

Either option will get the job done. Choose the right one for you. The one that will help keep you motivated. Most importantly, stop using your credit cards and line of credit if you are not able to pay off balances on a monthly basis. After all, if you find yourself in a hole, the first thing you should do is stop digging. Some debt is better than others. To find out if you have the best debt re-payment and retirement income plan in place, feel free to connect with us.

Will I have enough?

‘Plan for retirement.’ This phrase is something many of us have heard since the time we landed our first full-time job. But even now, as it was back then, it is a pretty vague directive.

When we are younger it translates to putting money away, likely into a registered account. And for anyone under 25 that’s a great first step. Sock away money and let compound interest work for you. Perfect. Done and done.

However, as you get older this approach to retirement planning should evolve and become more formal, with defined goals and a clear plan. A plan that can grow and change as we do, adapting to our lives and goals. This is when the question ‘will I have enough’ begins to become part of the discussion.

If we peel everything away, each of us faces the fear of NOT having enough saved by the time we retire to live out our retirement years in relative financial comfort and provide enough income to meet our lifestyle goals. For some, this fear can stop us from working with an advisor to build a plan. Check out our blog ‘There is No Time Like Now’ to learn more on this topic.

The easiest way to face any fear you have about the retirement nest egg you are building is to learn the facts. Work with a financial advisor to build a retirement plan based on both your current reality and your future goals.

One of the first considerations is the type of retirement you want. Do you hope to travel? Will you move into a different home? Do you or will you have a vacation property? How many vehicles will you have? All choices have an impact on your income needs during retirement.

Any company-based pension plans or savings plans and their income during retirement need to be considered, in addition to RRSPs, non-registered and TFSA savings you are putting aside for retirement. Company-based pension plans are less common today than in the past, but if you have one, the income they will generate during your retirement need to be factored in to your retirement income planning.

In addition, any government income you will be eligible for during your retirement need to be taken into account for retirement income planning. Old Age Security (OAS) and Canadian Pension Plan (CPP) are two common government benefits many of us look forward to receiving. There are some options in terms of when you can begin receiving these benefits. Your specific situation should be reviewed to know what is in your best interest. There are strategies available to ensure you maximize your income options and minimize annual taxes.

For many of us, the concept of retirement planning feels like a distant concern; one that ‘future me’ will be better equipped to deal with. In fact, the earlier you can start, the better. There’s a Chinese proverb that says, “The best time to plant a tree was 20 years ago, the next best time is right now”.

Find a financial advisor you trust and connect with them to help you build your retirement income plan.

A study of Canadians done by the Investment Fund Institute of Canada found households who worked with an advisor had as much as 2.73 times more assets after 15 years compared to identical non-advised households.

You will benefit in many ways from having a financial planner — an expert in your corner keeping your best interests as their priority. They will work with you on a customized plan, help you stay on track and modify as needed. To review your personal financial plan and projection for your retirement income, please feel free to connect with us.