Enticed by historically low interest rates and easy credit, about one-quarter of Canadians over 65 are retiring in debt, while some younger Canadians are caught in debt traps that can be “shocking” in size, a recent Advocis seminar was told.“I don’t think you can walk into a bank without some sort of marketing on credit. It’s become commonplace for people to get lines of credit. It just feels normal,” said Laura Boden CFP, CLU, CHS with Boden & Associates.
Boden said the problem is that some people may start out with a relatively harmless line of credit of say, $20,000-$30,000, but over time that can easily rise to $70,000-$80,000 if they only pay the minimum.
“With interest rates as low as they have been, debt seems irresistible,” said Boden. “All it will take is a one or two percentage point raise in the interest rate for people to really notice a significant change in their cash flow.”
Keith Sjorgen, senior consultant and managing director of consulting at Investor Economics, said about 25% of people over 65 have some kind of debt, with their main challenge being servicing the debt while on a fixed income, especially in times of market shocks.
Statistics Canada said in March that the debt burden among all Canadians reached a new high in the fourth quarter of 2014, with total household credit-market debt to disposable income rising to 163.3%, up from the previous record of 162.7% in the third quarter. This basically means that households owed about $1.63 in consumer credit, mortgage, and non-mortgage loans for every dollar of disposable income. But income growth has failed to keep pace.
A Vanier Institute of the Family study last year indicated that the proportion of surveyed seniors (aged 65 and older) reporting debt almost doubled to 42.5% in 2012 from 27.4% in 1999. The average debt load of seniors in Canada increased to $61,700 in 2012 – a jump of 94% from 1999.
The big culprit
Mortgage debt was a big culprit in the amount owed by Canadian seniors. The percentage of Canadians aged 65 and older with mortgage debt rose to 12.1% in 2012 from 7.7% in 1999, and the average debt amount during this period increased to $125,100, according to the Vanier study. Lines of credit, vehicle debt and credit card or installment loans also grew over the period.
Many people can handle a mortgage because it is usually a set payment every month. But a line of credit or a credit card can be damaging for those who only pay the minimum, said Boden.
Sjorgen said many financial advisors don’t include debt reduction as part of their services, but should put the subject on the same par as seniors’ fear of outliving their money.
Boden agreed debt can have a significant impact on retirees. “It’s important that you encourage your clients to pay off as much debt as they can prior to retirement. Taking on long amortization schedules for mortgages may seem like a good idea at the time, but if they carry that debt into retirement…and if interest rates go up, that will have an impact. With people living longer, adding another 10 years onto that retirement plan with debt is going to be an issue.”
Sjorgen said good financial advice better equips people both pre- and post-retirement. He encouraged advisors to stress to clients that they should not rely solely on their homes as a means of building retirement wealth.
“Housing markets are not as liquid as financial markets. They have to replace that property with another form of housing which may be a much higher cost than they expected. I don’t think it should be the only stop gap measure they should have,” said Sjorgen.
Boden noted that many retirees think they will be able to sell their home more quickly than possible and may not have an adequate understanding of how much a new dwelling will cost.
On the other hand, she said some clients may not want to sell a home that is causing them to go further into debt. “You kind of have to lay it out for them and explain to them what their options are,” she said. Often advisors may have to tell seniors that if they stay in their home they may have to significantly curb their spending.
Other reasons why debt levels are high for seniors include that some retirees are going through a divorce and splitting assets or possibly remortgaging their homes with a new spouse, said Boden.
Children can also be expensive, especially with many younger people having a more difficult time finding full-time employment and extending their stay at their parent’s homes.
Those who have moved out are carrying a large debt load, especially those who live in larger cities where home prices are skyrocketing.
“In some cases I am very surprised at the level of debt that they are really comfortable with. In Toronto, as an example, most of their assets are in their home and you are hoping that nothing goes wrong with the value of houses in the future. But I would say that the debt levels are shocking in a lot of cases,” said Boden.
The Vanier study quoted a Statistics Canada report that suggests the percentage of Canadians under age 35 reporting outstanding debt of any kind actually declined to 78.6% in 2012 from 79.6% in 1999. However, the proportion of those aged 35–44 with debt increased to 84.7% from 80% and a similar increase occurred for those aged 45–54 (to 80.7% from 76.3%).
Boden said some studies have shown that those with higher levels of education and better jobs have the highest level of debt – and feel comfortable carrying it. “Most expect to pay it off and I don’t understand how they are going to do that and save for retirement at the same time.”
She said while many younger people may be more reluctant to put away now for a retirement that is seemingly a long way away, advisors would do well to show them the importance of compound interest and growth if they decide to put off saving for another 10 or 15 years.
Here are a few of Boden’s suggestions that she said will build trust and add value for the long term for clients:
- set a goal for reduction of debt as well as a goal for savings;
- update their plan every year or two and make sure they are on track. Often, if clients feel someone is monitoring their finances and policing their money in some way they make a bigger effort to keep to the goals;
- establish an emergency fund for those unexpected expenses. There is always something that creeps up, whether it’s getting a new roof or a new car.