Friday, June 30th, 2017
Recent research reveals that more seniors are retiring with higher debt levels, and that seniors also represent an increasing number of bankruptcy filings. These developments are placing added stress on older Canadians and making it significantly more expensive for many people to retire.
According to data released by the international consumer credit research company Equifax®, the average increase in debt from Q3 2015 to Q3 2016 was 8.3% for non-mortgage debt among Canadians age 65+. This is significantly higher than average debt increases of 3.6% across the country for all age cohorts 18-65.
Coupled with 2015 data compiled by bankruptcy trustees Hoyes Michalos & Associates Inc. in their Joe Debtor study, which reveals seniors and pre-retirement debtors were the only age group to increase their overall debt load and experience a higher share of all insolvencies, the data shows a significant swing away from the image of the frugal retiree able to get by on a modest income.
Seniors Borrowing More
Globe and Mail personal finance and business columnist Rob Carrick says the trend is not new, but it has growth potential. "People are recognizing that they can borrow in their senior years just as easily as when they are working," Carrick says. "They want to consume more than they can afford based on their income and they are borrowing to do so."
Jonathan Chevreau, CEO of the Financial Independence Hub and co-author of Victory Lap Retirement, says two of the main reasons why seniors are borrowing more than ever is their increasing longevity and additional pressure to help support children and grandchildren longer. There are also more easily available borrowing tools like mortgage (home equity) lines of credit and payday loans. In fact, the Joe Debtor profile of the senior debtor reveals seniors using payday loans have the highest payday loan debt of $3,693 and the highest number of payday loans (3.7). "It's shocking," he says.
Not Saving Enough
In addition, accountant and financial writer David Trahair believes the simple reason why retirees are borrowing more is that they have not saved enough for retirement. "The worst type of debt is consumer debt, like credit cards and payday loans people use to pay for trips and toys they really can't afford," he says.
While traditionally a reasonable mortgage is viewed as "good debt," because it is associated with an asset that is probably appreciating, Trahair still thinks the optimum situation is to retire mortgage free. "Think about how you struggle to pay off your mortgage while you're working," he says. "If you still have that mortgage when you're retired on a lower income, the problem is just going to be compounded." He also notes that a paid up house is an amazing asset retirees can draw on if necessary by selling and downsizing, renting or using it as collateral for a home equity line of credit, to help finance their retirement.
Carrick says the bottom line is that by retiring with debt, people increase the living costs they have to plan for until the debt is paid off. While financial commentators suggest the percentage of pre-retirement income required to retire is about 50%-70%, he notes that these figures are based on the idea that retirees have eliminated a lot of working age expenses including debt. "If you're carrying debt in retirement, you need to save more in order to cover your debt repayments and in addition, it reduces your financial flexibility."
The Stress Effect
Onerous debts can also be emotionally devastating for retirees. The Life Events Inventory ranks getting into debt beyond means of repayment as the fifth most serious life stressor after death of a spouse, a jail sentence, death of an immediate family member and a suicide attempt by an immediate family member.
But Credit Canada Debt Solutions CEO Laurie Campbell told CBC, "It's important to get the message out there that [people in debt late in life] are not alone. They do need to talk to someone whether it is a close friend, a family member or a not-for-profit credit counselling service."
Will Young People be in a Position to Retire Debt-Free Down the Road?
Trahair says that worrying about retirement is pretty low on the list of things to think about.
But Chevreau says young people are going to have the new expanded Canada Pension Plan operating in their favour, particularly if they also delay retirement to age 70. Another advantage millennials have over baby boomers is the availability of TFSAs for most of their career.
"Other than defined benefit pension plans which are now few and far between, the only retirement savings vehicle boomers had before 2009 was the registered retirement savings plan," Chevreau says. "Millennials who have been able to save $5,500/year in tax-free savings accounts since 2009 could have a huge nest egg by the time they are 65 or 70."
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