Personal Finance » Debt

The best retirement plan is to be debt free

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For many, monthly savings have been replaced by monthly debt payments, which may be the reason savings rates are so low.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?


  1. Janet Hutchins

    Definitely get rid of debt before reducing income – which is what retiring is usually about.

    • Gary Kwasnecha

      As recent as last nighy, in a clinet interview Male 59, Female younger – we discuused debt reduction as being a priority prior to retirement. The tough decision is taking on more debt to use up some of the unused RRSP as many people do not have tax paid non registered money.
      Keep up the good work Jim.

  2. Craig Ford

    Thanks for the great article. I’ve been following you on MapleMoney. Today my dad emailed me a link to your article and said I should check it out.

    • Jim Yih

      Thanks Craig! You and your dad made my day today! Keep up your great blog!

  3. Derrik Hubbard, CFP


    I totally agree that being debt free in retirement is the way to go!

    Not only do you have interest with debt, but you have to pay it off with after tax dollars, so the actual interest rate is even higher!

    In a recent conversation with someone, they seemed apologetic that they wanted to use their $400,000 to purchase a home debt free instead of investing.

    I told them that no mortgage payment was the same as the after tax return generated on an $800,000 portfolio.

    I think they felt better.

    Debt-free baby!

  4. My Own Advisor

    Nice post Jim. I really want to be home, auto debt free when I retire. I hope to accomplish that at age 50, 13 more years to go….

    I can’t imagine trying to retire with a mortgage.

  5. Edwin @ Cash The Checks

    Having big debts when you’re retired can be awful. Imagine filing for bankruptcy, that’s the worst. To lose everything and then not have a job to recoup your losses.

  6. Bruce

    Have to agree with everyone, get rid of your debt asap and definitely before retiring.

    Hit the big stuff first – high interest credit cards. Then work away at everything that’s not tax deductible.

    When you’re debt free, that retirement plan just seem to grow a whole lot faster.

    Keep up the good work Jim

  7. Steven Hilling

    My wife and I are conciding retirement. We have all our debts paid off. We have $99,000.00 in our savings account plus I draw around $1000.00 a month for my social security. My wife has a retirement plan at her place of business She is a nurse and she has been putting money into her retirement plan since 1969. My question is, By being debt free, would this be a good time to retire?
    Thank you,
    Steve Hilling

    • Denise

      The first question to ask yourself is “Will our income cover our expenses?” In order to answer that question, you should track your regular spending habits for at least 3 months. (I personally track my expenses over the course of a year in order to take into account large occasional expenses such as property taxes, home and vehicle insurance, and vacations. But, for a start 3 months should give you a general idea.) If the answer if yes, then consider if you can still say yes when you take into account the estimated cost of living increase to your expenses and income over time. Your answers should tell you if you are ready to consider retirement. To proceed further, I would talk with a retirement professional who specializes in the de-accumulation of investments. Not necessarily to invest with them but mostly to understand the difference between saving for retirement and saving in retirement. Any money spent on the meeting (education?) will pay itself back both in money and restful nights. Note: I am not a retirement professional but a believer in financial education who retired in 2003.

  8. Charles

    I think that even if you have no work pension I believe that having these things will be important for a retirement plan ..No Debt House/Condo /Car all paid for No Loans Mortgage of any type..Enough Government(Canadian OLD AGE/CPP/GIS) pension to cover all the Basics..Taxes.Food/Hydro Clothing Ins’ Gas .Enough investment to bring in enough interest for the “Extras” Vacation etc…If those “BASICS” are covered .Enjoy the FREEDOM of retirement ..Hey You’ve worked Long Enough In my case I had a biz to sell ..Got enough to survive nowhere near RICH but comfortable enough to kiss the “Rat Race” Adios

  9. jimmy cooper

    I am 59 and my wife is 56. We are wanting to retire in 3 years. No mortgage and Line of credit debt of $40,000 at 4%..Savings are at $450,000. We have a large amount of unused RRSP. Is there such a thing as”good” debt?Such as maxing out our available RRSP?Or just focus on complete debt reduction. Thanks Jim for such a great and important website.

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