Why More Canadians Are Retiring With Debt and What It Means

As Canadians, we live in a country where certain rights and freedoms are expected, hoped for and, some might say, taken for granted. The freedom to retire early is one many of us begin grappling with as we approach middle age. Ironically, many Canadians won’t be ready to retire until they are significantly older.

The reason? Debt.

Unfortunately, too many retired people – 34% — over 55 years old still carry consumer debt, according to Statistics Canada. In fact, a recent Equifax Canada report found that the debt load of seniors is outpacing that of their younger counterparts.

It’s not as though Canadians have always carried a heavy debt burden. In 2012, 42.5% of people over 65 still had debt, a jump of 55% when compared to seniors in 1999.

A number of economic, social and cultural factors are to blame, say experts. They point to divorce, illness and large mortgages as some of the culprits. Experts also explain that children, grandchildren and other family members may also be at fault, as they often look to their parents and grandparents to lend them hand. In fact, a 2015 survey showed that 18% of first-time home buyers are gifted their down payments thanks to relatives, typically parents.

But, children can’t shoulder all of the blame.

Low interest rates have made debt much more attractive. Further, cottages, pricey vacations, fancy cars and other expensive toys may be out of reach for the average pensioner. Paring down and cutting back in your sixties may not seem fair. After all, you’ve worked decades, aren’t you entitled to a little luxury? Your fixed retirement income simply may not support your lifestyle any more. Perhaps it’s time to downsize and sell your 3,000 square-foot home?

If selling isn’t an option, many house-rich, cash-poor seniors can look to their houses for equity. Often by the time a person retires, he or she has either paid off their mortgage or is only owing a small amount. Because house values have increased in recent years, in some markets quite significantly, tapping into a home’s equity may be something to consider.

Still, as a borrower, you need to be aware of how you are intending to pay back the loan. Is it possible to make monthly payments or would you prefer to have your estate pay off the loan after you die?

No matter how the money is borrowed, the process should be well planned out. Know what you need it for. Have a repayment plan in place. Don’t borrow more than you need – that often leads to trouble.

Dwayne Rettinger

Executive Financial Consultant

Investors Group Financial Services Inc.

Rettinger & Associates Private Wealth Management


This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.

Norma Walton: How Much is Enough?

North American society promotes the concept that having money creates happiness.  Certainly having enough wealth to cover your basic needs is important – a roof above your head, sufficient money for food, a clean supply of water, basic clothing and a healthy environment.  A lack of those essentials will create misery.

money happiness

Once you achieve the above, there is value in considering how much more money you need.  Beyond covering your basic needs, below are some reasonable objectives that you may want to consider when you decide how much money you require:

  1. A reasonable spending plan: Charles Dickens proposed the theory that if your income is $100 per day and you’re spending $99, you will be happy.  If your income is $100 per day and you’re spending $101, you will be miserable.  That is wise advice.  If your expenses exceed your income, you will be constantly scrambling to cover your bills and will head into debt, which is stressful.  Focusing on reducing your expenses or increasing your income so that your income is greater than your expenses is time well spent.
  2. A plan to pay off existing debt: My grandparents’ generation saved their money before they would buy a car.  They saved their money to fund their vacation.  They paid off their mortgage as soon as they reasonably could and would have considered it baffling to refinance to pull out wealth from their house.  Debt often causes stress and tension in your life.  Debt sometimes makes you feel out of control of your financial situation.  Hence a focus on paying off debt will permit you to enjoy your money more as you pay the debt down.

    3d people - human character person carrying word "debt" on his back. Debt concept. 3d render
    3d people – human character person carrying word “debt” on his back. Debt concept. 3d render
  3. An emergency fund or line of credit: If you were to lose your job, do you have enough money to survive until you find a new one?  For some this amount will be one year’s worth of income savings; for others this amount will be a month or two.  It is prudent to have some money available if something happens that impacts your ability to earn an income for a period of time.
  4. A retirement fund: The Canadian banks focus on retirement planning.  They sit down with their customers to discuss how much you would need to save to fund a comfortable retirement.  They create charts and objectives for savings to try to get people thinking about where they want to be when they are ready to retire.  This is a good exercise for most people and helps people set goals for savings and calibrates their financial expectations for when they finish working.
  5. An insurance policy to provide for your dependants: If you were hit by a bus today, who would be in trouble without you around?  Think about the financial needs of your dependants and ensure that you have term life insurance in a sufficient amount to cover those needs.  Once you no longer have dependants who need your income to survive, you can reduce or eliminate that insurance.

piggy bank

Once you turn your mind to how much money is enough for you, you can review the above items and create a plan to ensure you have what you need.

To Be or Not to Be – (or which is better, pay-off the mortgage or buy an RRSP?)

Lee and Daphne are asking this very question – which is better for them? They are aware of the huge interest cost on their mortgage but also would like to be able to retire in their late 50s or early 60s. Can they do both at the same time or must they choose?

Through diligent saving before they purchased their condo, their mortgage is only $150,000. They are able to afford higher-than-normal payments so decided on a 20 year term at a fixed rate of 5.0%. Over 20 years, they will pay about $87,000 in interest, assuming rates don’t change of course. If they decide to make a principal payment of $6,000 on each mortgage anniversary, they would pay it off in 11 years and reduce their interest cost to about $46,000. In theory, they would then begin contributing that same $6,000 to their RRSPs after the mortgage was paid. But is this the best option?

They are both 30 and by waiting until age 41 to start their RRSP contributions, and assuming they are able to obtain a consistent 7.0% rate of return each and every year up to age 60, they would accumulate about $230,000. Really a very modest amount. At current rates that could pay them a lifetime income of about $1,300 per month. Even including OAS and CPP at current maximum rates, and applying the effects of inflation for 30 years up to retirement and beyond, this is not going to be much of a lifestyle.

So let’s examine this more closely. To pay down their mortgage by $6,000 annually, this young couple has to earn just over $9,100 before taxes (BC rates are used for 2013). If they made $9,100 annual deposits to RRSPs after the mortgage is paid, and using the same 7.0% interest assumption, they could have nearly $350,000 at age 60 – which could mean a monthly income of about $2,000, again based on current rates. Better – but not by very much.

So, by doing some reverse math, if the agree to pay off the mortgage in 15 years and starting with $9,100 of pre-tax earnings, they could deposit $6,800 into their RRSPs every year starting now. The estimated tax savings (in BC at 2013 rates) would be about $2,300. This $2,300 is then used as the annual prepayment on their mortgage. The mortgage would then be paid in full after 15 years with interest paid now being about $64,000. By putting $6,800 per year into RRSPs now and increasing it to $9,100 when the mortgage is done, they would accumulate nearly $710,000 at age 60! At current rates, this would provide a lifetime income of nearly $4,100 per month!

To summarise, their choices come down to 3:

a) Eliminate the mortgage in 11 years by making $6,000 annual principal payments then put the $6,000 into RRSPs each year until age 60. This reduces total mortgage interest to $46,000 and has an estimated total RRSP savings of $230,000 and an income of about $1,300 per month at age 60.

b) Pay off the mortgage in 11 years and then start RRSP deposits of $9,100 each year until age 60. The mortgage interest still totals $46,000 but their RRSP totals $350,000 and a potential lifetime income of $2,000 per month. Better than the first choice, but they can still do better.

c) Finally, they could decide to clear the mortgage in 15 years by contributing $6,800 to RRSPs each year and applying the tax savings of $2,300 to the mortgage principal. When the mortgage is gone, they then increase their RRSP deposits to $9,100 per year. Mortgage interest will total about $64,000, but their RRSPs can grow to $710,000 and generate about $4,100 per month.

Time to think things through – Lee and Daphne decided that choice c) gives them the best of both worlds. While option c) does result in higher interest paid on the mortgage and extends the payment period from 11 to 15 years, there is a very significant difference in both their RRSP savings and potential lifetime income. This does require they pay about $18,000 more in interest but their RRSP total more than TRIPLES – increasing by $480,000 and their retirement income goes from $1,300 per month to $4,000 per month.

Doesn’t it make sense to do this same series of calculations on your mortgage? Happy crunching!

2014 Resolutions – is it too early?

2014 Resolutions – is it too early to plan ahead?

Yes, it is only late October. No, no-one likes to make resolutions as most people fear the self-recriminations if they fail. So let’s call them guiding principles for 2014 instead!

1. Avoid credit to the greatest extent possible. Special offers arrive weekly in our mail box – many from institutions with which we already have a business relationship but also some of the “Dear Occupant” variety. And they all sound so tempting. Loans, lines of credit, new credit cards – the choices seem endless – and sooooo easy. For lifestyle items (toys, vacations, etc.), the wanton use of credit can be a death knell for your financial well-being. It is tough realising you are still paying for that vacation 6 months after you return and that 60 inch flat screen is rapidly losing its attraction a year later and the “interest free” purchase is starting to cause cash-flow problems.

2. When you decide you absolutely MUST borrow, shop around and keep your calculator handy. Of course, it is difficult to completely avoid debt. HOWEVER, when you do have to borrow, generally, the lower the interest rate the better it is for you – but beware of the so-called “interest-free” payment plans. NOTHING in life is free – don’t be fooled. The vendor isn’t making that offer without covering all of their costs in some manner. Maybe it is an “arrangement” or “set-up” fee; maybe the actual price is higher than normal. The seller has costs that have to be covered and they aren’t in business to intentionally lose money.

3. Pay off debts as quickly as possible. Especially credit card balances! In some cases, they can carry a rate as high as 2.4% per month compounded. That is nearly 33% annually –and yes, it is a usury rate as far as I am concerned – but tell that to our Federal politicians! To put that in real terms, a $1,000 purchase carried on a credit card for a year will actually cost nearly $1,300 in total. For a home mortgage, the shorter the amortisation period, the better off you will be. Go to www.mortgagecalculator.org and play with some numbers yourself – this site also produces some nice graphs for picture-lovers.

4. First, pay YOURSELF, not everyone else. Usually, we have too much month left over after our pay-cheque. If we wait to save money until everything else is paid, there’s never anything left. If we don’t see it, we don’t spend it. Talk to HR (yes, I know they are sometimes interesting people) and arrange to have something deducted from each pay cheque to buy Canada Savings Bonds – this is just one alternative. Some businesses will split your cheque and deposit part into one account and another sum into a different account – perhaps a savings account. Make sure you contribute monthly to your RRSP or TFSA. We make loan payments each month so why not make financial future payments the same way?

5. Plan for your future. If good things are to happen to us, we have to plan – the future will not take care of itself. We have to plan for long term goals such as education, retirement and major purchases. And let’s not forget emergencies such as unemployment, a falling economy, disability or death. We can’t rely on our employer and certainly not any level of Government – which leaves only a Fairy God-Mother. We must take action ourselves.

Talk to a financial advisor about your plans today!

Getting Rid of Debt Faster

Debt unfortunately is a fact of life for a lot of people. Mortgages, lines of credit, student loans, vehicle loans, and credit cards are a part of normal everyday life. The good news is that we can get out of debt and it isn’t as hard as you might think. By making a few minor adjustments in how we pay our debts we can save ourselves time, grief, and a lot of money.

The first step is to lay out all your debt on one simple sheet of paper (or on a spreadsheet if you prefer to use the computer). Who do you owe money to, how much is the total debt, what is your interest rate, what are your minimum payments, and what are you actually paying?

The second step is to order your debts from highest interest rate debt down to lowest interest rate debt. If you have a department store card this is most likely your highest rate debt. For example The Bay and Sears credit cards have 29.9% interest rates, while a lot of your “Don’t Pay a Cent Event” loans can cost you 35% interest.

The third step is to stop using your credit cards and other debt instruments. If you have regular payments coming off your credit cards, move all the payments to one card, preferably one that gives you cash back, AirMiles, reward miles, or some other perks, and make sure you are paying for those payments on top of your minimum balance payment.

The fourth step is to reduce all of your payments on every single debt except the highest interest rate to minimum payment. Take all of your ‘extra’ payments and put them on your highest interest rate debt. Keep all your extra money going onto this debt until it is fully paid off. Then CANCEL in writing (with carbon copies going to both credit bureaus) the card or loan.

The fifth step has you moving all of your now freed up cash to the next highest interest rate debt until it is gone. Then repeat until you are debt free.

If you have access to a line of credit with a better interest rate than your credit cards or other debts you can use that to pay off your more expensive debt and then move all of your payments onto your line of credit.

Becoming debt free is not complicated. By following a simple plan with a bit of discipline you can get free in way less time than you thought possible. And being able to live without the burden of owing money is a wonderful thing.

“Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt.”
Henrik Ibsen

Garage Sales are Your Friend

Spring cleaning time is here and I love it! With even the hint of warmer weather and sunshine I get a major itch to simplify my life and clean my spaces from unwanted clutter. Freeing yourself from the over accumulation of “stuff” in your life serves so many positive purposes.

The first advantage of a good spring clean is you take time to sort through everything. Find what works; what needs fixing; what has been outgrown; what you don’t need, want, use, or have space for anymore; and forgotten, yet still loved items. You can then make a plan to deal with it. Get it fixed. Throw it out. Recycle it. Clean it and put it where you can find it and use it. Put it into your “have a garage sale pile.”

The second advantage is you get the opportunity to better organize your life. Put things in their place. Get rid of the things you’ve been storing for who knows how long or for what reason. How much time do we lose and how much stress do we cause ourselves because we cannot find the thing we want buried amongst all the things you don’t want.

The third advantage is it gives you an opportunity to make some money. Garage sale season is approaching and it is the perfect opportunity to clear your space of your no longer loved items while making some cash. If you don’t think you have enough for your own garage sale, get together with a group of friends that also want to free their lives of a few things. You can then take the money you earn and put it into something you actually want like your vacation fund.

The fourth advantage is getting a good look at all the things you have spent your hard earned money on. Do they bring you joy? Do you use them regularly? Or do they just collect dust, take up space, and add to the debt on your credit card? Facing our consumption head on gives us the opportunity to choose to be more conscious in our lives going forward.

The fifth advantage is seeing what you need to replace or figure out what you want to get before garage sale season. If your kids need to get new skates or sporting equipment because they have outgrown it you can keep your eyes open to replace it at garage sales. If you are wanting to try out a new sport or replace worn out equipment this is also a great opportunity for you.

The fifth advantage to a good spring clean is how much lighter and more energized you feel after completing it. You know where your stuff is, you’ve dealt with the clutter, and you made some new, and hopefully healthier, decisions.

I challenge you to tackle the closets, drawers, corners, garages, and storage areas in your home. Find your treasures and find future treasures for others. You’ll be glad you did it.

“I had more clothes than I had closets, more cars than garage space, but no money.”
Sammy Davis Jr.

Shopping is NOT a Sport

Everywhere we go the world is set up to part us with our money. It may only be a few dollars, maybe a few more, but it’s okay. You want this gadget, article of clothing, candy, tool, whatever. We put it in our cart, we add it to the till, we pull out our wallet. Next thing we know our bank account is smaller than we were expecting and our wallet is thinner while our credit card statement is thicker.

We have all been bitten by the impulse purchase. All of us. If you think you are immune, let me ask you one question: “If I were to go to your home and open up your closets, your cupboards, go into your garage, your tool shed would I find anything that you spent your hard earned money on that you used once or NEVER?” If you can honestly say no, then my hat is off to you. If you are like the vast majority of people (myself included) you would find an item or two.

So the million dollar question is how do we minimize our useless spending. And yes, I did call it useless spending. The fact is if it really was something we wanted or needed it would have been used more than once or never. The reality of life is that we will have some pointless spending. It isn’t a bad thing as long as we keep it in check, but it is a big problem if it gets out of control.

Conquering the frivolous shopping problem breaks down into a few steps or options. The first step is to stop looking at shopping as a sport. Unfortunately too many people resort to “Retail Therapy” to deal with emotional issues. This works as well as alcohol, drugs, or junk food for a lot of people. It doesn’t fix the problem it makes it worse because the high wears of quickly and now we are out money. If going on a shopping spree is your way if dealing with the stresses of life find another outlet. Preferably a healthy one like exercising, going for a walk with a friend, or meditation just as some examples.

The second step / option is to put yourself on a cash budget and allow yourself some play money. That way you can still enjoy a little frivolous spending without breaking your budget. In fact if you plan for it, it isn’t wasted money, just a part of your overall plan for financial success.

The third, and most important, step is to ask yourself this questions every time before you spend money on anything, “Do I really want this?” By slowing down and asking yourself this very simple, but extremely powerful, question you put into motion your biggest ally, your brain. Most of our spending is unconscious. We are creatures of habit that operate on auto pilot. By taking the moment to ask ourselves this all important question we move from unconscious to conscious. A lot of the time we will look at the item and decide no, this isn’t going to give me what I really want. I’d rather save for my Hawaii vacation, or pay off my credit card faster, or stick with my diet (candy and coffee are regular “wasted” purchases) or whatever may be a bigger want for you. If you can honestly say, “yes, I do want this” then go for it without guilt.

No one is taking away your right to choose how you spend your money. But we all make much better long term and short term decisions when the best part of us is fully engaged in making our decisions. Now go out and wake up when it comes to how you are investing your hard earned dollars and cents.

“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.”
Will Smith

Deja vu – all over again!

Another interesting US Presidential election has come and gone – and there will be lots of comments over the next few days before this blog is posted – but I just wanted to put out a few random thoughts for consideration.

The US legislative branch is fundamentally no different than before this election. The Congress is controlled by farther-right Republicans who will do anything they can to avoid an increase in taxes to retire the national debt and are all about cutting services to reduce the debt. The Senate is still controlled – even more so – by left and moderate-left Democrats who seem to want to both raise taxes on upper-income taxpayers and are willing to reduce some services – by how much is the big issue!

The White House is just the same with President Obama – left-leaning Democrat – but now the popular vote seems to be with him and Senate folks and combined against the Congress. Can they all work together or will there be another stalemate as there has been for much of the past 2-years?

Investors don’t like uncertainty or instability – anywhere. I am not an economist (thankfully) but I think things will be shaky on the markets for certainly the rest of this year and past Inauguration Day in 2013 until people get a handle on how The Executive Branch and Legislative Branches can or will work together. Despite all the talk about being willing to work “across the aisle” – I have my doubts. Which doesn’t bode well for the Excited States as a whole.

I suspect the housing markets are going to be very lacklustre and a great many States are going to be very hard-pressed to come in with balanced budgets – California being a huge question-mark despite Jerry Brown’s tax plan getting voter approval.

My personal belief is that anyone looking for short-term stability in world financial-markets is going to be in for a great deal of disappointment until sometime around the end of 2013 or early 2014 so ensuring a good financial foundation should be a key for everyone!