Why debt is a prevalent retirement risk

Why debt is a prevalent retirement risk

Why debt is a prevalent retirement risk The dream for everyone is to have no worries or cares when they retire. But the reality is less ideal: healthcare costs, longevity risks, and pension shortfalls are all set to threaten retirees’ quality of life. On top of that, it seems Canadians are leaving behind their jobs without taking care of their debt.

Statistics Canada has reported that 24% of retired people over 55 are still saddled with debt. Meanwhile, a 2017 report by Equifax Canada found that Canadian seniors are taking on debt much more quickly than other age groups, according to a piece in the Waterloo Chronicle.

“That’s a problem for people who can’t keep up with their debt load and are forced to curtail their retirement dreams,” Duane Bentley, Investors Group vice-president of banking and mortgage distribution, told the publication.

One major cause for debt is providing financial support to relatives. Based on a 2015 survey by the Canada Mortgage and Housing Corporation (CMHC), 18% of first-time homebuyers use a financial gift from a relative —usually a parent — to finance their down payment. Young retirees also care for their aging parents, which costs them time as well as money.

Another issue is boomers’ high tolerance to debt, which has been supported by decades of borrowing and an extended period of low interest rates. In an Investors Group survey, 27% of high-net-worth Canadians said they planned to have mortgages while retired — even though 67% of those with mortgages said they could afford to fully settle theirs in cash.

According to Bentley, some people made the choice strategically, using a mortgage to acquire a second property without dipping into their retirement assets. Since withdrawing assets from an RRSP could have tax implications, it could be a good strategy — assuming the passive income from the investments could cover interest as well as other retirement expenses.

One strategy that not enough boomers are considering is debt consolidation. While it won’t reduce the total amount, it can increase the debtor’s chances of getting a more reasonable interest rate. The freed-up cash could then be used to pay down debts more aggressively.

Related stories:
Senior debt a global concern, say experts
Debt-loving Canadians face unprecedented risks: report

More market talk: