Canadians are having a harder time than ever saving for retirement as well as paying down debt. Debt levels are higher than they’ve ever been. For example, 2003 Debt-to-disposable income was 120% versus today at almost 180%. Real estate and consumer goods have jumped significantly in price and it doesn’t appear to be slowing down any time soon. We are often asked, “Is it okay to retire with debt?” There are a few things to consider when we look at this question.
Obviously, the simple answer is “No”. Our sole aim with our clients is to help them achieve their financial goals and have a healthy, prosperous retirement. We factor in debt elimination as well as savings into our clients plan to help reach their goals. Every once in a while we have clients entering retirement while still having debt. The question is, how do you service that debt? The answer is, the same way you would prior to retirement… from cash flow. When talking about retirement and carrying debt the question we need to determine is if your retirement cash flow can sustain the debt payments. This can be determined through investment vehicles such as RRSPs, general savings, or TFSAs. Perhaps you have worked at a position that had a pension or long term incentives attached to it. Typical pensions can cover up to 60% of income over the span of that individual’s career. Pension income is a great source of income as it provides a predictable cash flow in retirement.
There are 2 kinds of debt that we often come across, good debt and bad debt. Good debt can be something that produces cash flow and can be a future income stream in retirement like a rental property for instance. As long as the debt’s cash flow is positive then we view this as a good viable investment. Bad debts are loans such as credit cards / lines of credit / mortgages; this type of debt often carries high interest rates and unforgiving terms. These kinds of debt are something that needs to be addressed immediately as it will hamper your retirement long term.
A recent study showed that Canadians typically retire on 67% of their pre-retirement income. This is a result of lower mortgages (or none at all), kids having grown up and moved out, and fewer expenses in general. Additional things such as no longer funding children’s education, no longer having CPP and EI deductions, and paid off vehicles can allow for this.
So, can you retire with debt? The answer is yes, as long as your investments or pension income can sustain it. We’re happy to help review your unique financial situation and provide valuable insight where we can.