Approaching Retirement? | By Guest Author: Linda Stern, Licensed Insolvency Trustee
Retirement: Seniors carrying Debt
As a large cohort of baby boomers inch closer to retirement, it is disheartening to read about the debt seniors continue to carry. According to a 2017 Equifax survey, debt among seniors outpaced every other age group. As you plan your retirement, it might be useful to understand what is going on. You will definitely want to do everything possible to avoid falling into the pitfalls of debt as a senior.
Working Part-Time
The pipe dream of travelling the world or spending your free time on the golf course is no longer viable for many retirees. Without doubt, very few of us will see our income remain the same at retirement, when the pay cheques stop.
A fortunate minority will supplement their Canada Pension Plan (CPP) and Old Age Security (OAS) entitlements with income from private pension plans. Others may cash in RRSP’s and private investments. And homeowners may even consider financing through reverse mortgages.
However, for a vast number of retirees, CPP and OAS will be it for income. Even with a modest lifestyle, expenses like groceries, utilities, rent and/or property taxes do not disappear. In fact, they creep up in price each year. Many retirees struggle with living on a fixed income and often cannot make ends meet, even after the CPP and OAS indexed increases. It is no wonder that in 2015, Canada had 1.1 million seniors in the workforce. This is double from a decade ago.
Supplementing your CPP and OAS with income from part-time and part-year work assignments is quickly becoming commonplace for preventing debt problems.
Your Health at Retirement
Physicians recommend a healthy lifestyle for all ages. This includes good dietary habits, a regular fitness routine and a reduction in stress. As we approach retirement, these matters become so much more important. Our bodies will start to show signs of disease and illness as we age. If you must continue to work after retirement out of financial necessity, then it goes without saying that you should attend to your health as a matter of necessity, too. Without good health, you risk not being able to work and in turn, your finances will suffer.
Another issue, not always apparent, is your mental health. A very sad fact of life is that we will attend more funerals of loved ones as we age. Falling into a depression after losing a spouse or a beloved friend will seriously interfere with a work routine. And this too, can directly impact your finances.
However, it is not all bad news on this front. At 65, most medication costs will be covered by the government. And in this matter, Canada’s healthcare system remains a shining star on the globe, no matter the shortcomings. If your employer offers private medical benefits, find out which costs could be eliminated or changed. You might also consider leveraging reduced healthcare benefits as a negotiating point with employers.
Family Obligations
Increasingly, Millennials are graduating with bloated student loans. They are entering the “gig economy”, with part-time and contract work on the rise. All of this has made rents and home ownership, especially in urban centers, unattainable for them.
Inadvertently, their financial burden has crept over to their parents. Whether retired, or close to retirement, many seniors are housing adult children. Through a sense of obligation, many are borrowing against their lines of credit to give the kids a leg up to pay off school loans and finance their first homes.
In this matter, a financial adviser would draw parallels with airline flight safety protocols. Put your own mask on first, before you help others. Increasing your debt load to help your kids, while your own income flatlines, may not be the best decision. In this situation, you must learn to say “No”.
Home Owners
Many home owners entering retirement today enjoy inflated property values and low or no mortgage balances. A HELOC (Home Equity Line of Credit) can be a tempting source for financing the income/expense gap at retirement.
However, HELOC interest rates are subject to increases and we are exiting the era of low rates. When living on a fixed retirement income, such loans are risky. And especially so if the HELOC allowed you to make ends meet, in the first place. When interest rates go up, you may suddenly find yourself with no extra money to pay for emergencies.
A much better strategy may be to sell the property, downsize into a smaller and less expensive home or utilize a reverse mortgage.
Credit Counselling
The slope down the path of indebtedness is extremely slippery. When seniors live beyond their retirement income, invariably the extra expenses are put on credit cards. Gift giving over the holidays and emergency repairs to your home are examples of everyday expenses which can get out of control when you do not pay bills on their due dates.
In extreme situations, some retirees resort to payday loans to fill emergency cash shortfalls. Exorbitant interest rates perpetuate the problem, making such debt loads very difficult to manage.
Mounting credit card and payday loan debt affect your credit scores. And that comes with its own set of problems. All of this can quickly escalate to receiving aggressive collection calls from creditors. If you are having trouble making ends meet during your retirement, you should immediately seek out credit counselling. The worst thing you can do is ignore your debts or suffer in silence because of them. This is nothing to be ashamed of. Mounting debt can be resolved in many ways.
A credit counsellor can review your situation and recommend the best path forward for you.
Bankruptcy after Retirement
If your debt problems are at a point where bankruptcy protection appears to be your only solution, your credit counsellor will refer you to a Licensed Insolvency Trustee (LIT) for further advice. Declaring personal bankruptcy means getting protection from your creditors to prevent them from garnishing your income or seizing your assets.
Every bankruptcy case is unique and your LIT will review your circumstances thoroughly. While the law exempts creditors from garnishing your pension income directly, they can seize funds from your bank account, regardless of whether they came from your pension income or other sources.
Banks can offset funds in your bank account against any overdue debts you owe them. Creditors can apply for a court order to seize them prior to a bankruptcy filing. And if you have already filed for a bankruptcy, then your bank account becomes a seizable asset. Your LIT will advise you of solutions that work best for your specific situation.
Linda Stern, a Licensed Insolvency Trustee, is a guest blogger for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.
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