How To Resolve Your Debt Before Heading Into Retirement

2014-10-03   minute read


While no one really wants to borrow more than they can afford, life doesn't always go as planned. Things happen in life in which you have no control. To avoid the feeling of being strapped into debt for life as you approach retirement, it is necessary to make sureyou’re debt-free by the time you’re actually ready to retire. This means your mortgage should be paid off, your credit cards should have zero balances and you should own a car that has been paid off. 


Too many Canadian seniors suffer from "financial fragility”. By one estimate, nearly 60% of retired Canadians hold some form of credit card debt and loans. Although the debts of the retired Canadians are not very high compared to those of the working Canadians, they appear relatively high because seniors are also less likely to take steps to accelerate their debt repayment due to reduced income.   

While almost all Canadian retirees are worried about having enough money in retirement, their concerns stem from the following two reasons: the debt itself and a lack of savings. The mortgage most retirees between the ages of 65 and 74 carry aggravates the situation further. On the other hand, the stark reality is that Canadians are living longer and with that longevity, their debts keep mounting. This makes it all the more important to have a good debt repayment strategy in all phases of life, but more acutely when retirement approaches since after retirement, it can be lot harder to pay off outstanding balances.   Further debt carried into retirement can affect your retirement plan and cash flow, as the monthly payments must come from pension earnings or from retirement savings, both of which were intended to serve as retirement income in the first place.

However, whatever the situation, a solution is necessary and the need for financial planning before retirement becomes imperative. An essential step in financial planning is to make sure you have identified your retirement income sources. The question then is what options exist to decrease or eliminate debts at or prior to retirement? On the most basic level, you can either increase your income or decrease expenses in general. Start by preparing a budget to ensure you’re on track to living comfortably while making necessary debt or bill payments. Once you understand your budget, you can begin figuring out ways to work around or within the budget by adding income and by finding places to decrease your expenses.

Remember, the majority of credit card debt is incurred around the holiday season, thus it’s critical to be realistic about your spending habits. Be sure to pay more than the minimum on your credit card bills if you’re hoping to eliminate your debt faster. The smaller the payment, the longer it’s going to take to repay the charges.

It is equally important to try to match up your mortgage payoff date with your retirement date, but may not be necessary given that most mortgages today have very low interest rates. Nevertheless it must be kept in perspective in retirement planning.

Another strategy is to borrow against your life insurance, but only if it has a cash value. While you are borrowing against your own cash and at relatively lower rate, it is not without certain inherent risks associated with depleting cash flow that would put one’s survivors in dire state.

Yet another strategy to consider is to temporarily reduce your retirement contributions, but this is something you should only consider if you have a lot of credit card debt and are not able to get a second job to help eliminate some of your debt. Often termed the ‘debt-blaster’ strategy, this strategy works by paying extra on the debt with the highest interest rate while paying the minimum on everything else.

If all else fails and your situation becomes unmanageable, make sure you take some time to discuss your situation with one of our Licensed Trustees.

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