In my retirement workshops, I always ask my participants to share with me their most pressing questions about retirement. One of the more common questions I get is “Do I need to be debt free in order to retire?”
There was a time when this question did not get asked because it was simply assumed that you had to pay off all your loans before you retired. That’s not the case anymore. A recent survey from RBC finds that:
- 4 in 10 Canadians have retired with some form of debt.
- 1 in 4 have entered retirement still carrying a mortgage on their primary residence
- 17 per cent of retirees had consumer or credit card debt.
- 7 per cent had other kinds or debt or were co-signers on loans
- 5 per cent had mortgages on investment properties or cottages.
Debt has become big business.
Debt has become so normal that it has risen seven times faster than the increase in household incomes. According to a report on the Current State of Canadian Family Finances, the average household has over $80,000 in debt, up 22% since 2000.
There was a time when the financial industry encouraged loan repayment as a financial strategy for retirement planning. Today, the banks are offering lines of credit, credit cards and other loans. Do you think profitability has anything to do with this advice? Which do you think is more important profitability or prudence?
This same survey found that more than one-quarter of retirees have acquired new credit products since they retired. It should not shock you that the head of retirement strategies at RBC says that this is not necessarily a bad thing, “Having access to credit in retirement can be beneficial to managing income and cash flow and provide additional flexibility.” With this kind of perspective, we are likely to see the percentage of people carrying their debt into retirement continue to rise.
Debt reduction needs to be a priority
I remember growing up and my dad saying to me “We can’t buy that because we don’t have the cash.” My have times changed. We no longer need cash to buy anything anymore. Now we buy things as long as we can afford the payments. We’ve exchanged delayed gratification for delayed consequence and the consequence might be delayed retirement.
For many, monthly savings have been replaced by monthly debt payments, which may be the reason savings rates are so low. We’ve now exchanged the pursuit of actual wealth with the pursuit of perceived wealth from overspending.
Loan reduction must be the first priority of a retirement plan. It’s time to get rid of debt. In the financial industry, investing gets all the attention, recognition and hoopla. Hundreds of books and websites purport to have investing figured out and each sells a surefire system from which the investor will reap great financial reward. Does paying off loans seem boring to you in comparison to investing?
Debt repayment is a sure thing. In fact it can be one of the best investments you make. Where else can you find that every dollar “invested” gives you a tax-exempt, guaranteed rate of return equal to the interest rate on the loan? If you have a credit card at 18% with a balance, an extra dollar paid on that card will give you a guaranteed rate of return of 18%. Match that consistently with investments in the market!
According to a study by the Certified General Accountants Association of Canada (CGAAC), four in 10 adult Canadians feel their debt level hurts their ability to weather unexpected circumstances, and 28% of Canadians with debt see this as a significant barrier to realizing their retirement goals. Debt not only affects our sense of financial security today, it also weakens our likelihood of financial readiness for the future. It will pay to tackle debt by whatever means necessary, now.
So let’s get back to the question: “Do I need to be debt free in order to retire?” My standard answer has not changed: Less debt is better than more but the best debt of all is no debt!
What do you think? Should you be debt free before you retire?