We used to pay our debts before we said we would Bye boss. Today, millions of pensioners have liabilities. Is it a good idea?
In 1999, less than 30% of senior households (65 and older) had debt. In 2016, this share rose to 40%, according to 2022 data from the Observatory of Inequalities. According to Equifax, debt among those ages 56 to 65 increased 28.7% between 2016 and 2021. During the same period, it rose by 47.5% among those over 66 years old.
These numbers are frightening, but there is a caveat. Because there is “good debt” and “bad debt”. The first is the mortgage (because it is backed by an asset), the second is consumer debt (cards and lines of credit, personal loans).
According to various studies, “bad” debt is the only source of debt for 57% of retirees. It’s worrying. On the other hand, 20% of retirees have only mortgage debt and 23% have a combination of “good” and “bad” debt.
Context switching
Experts say times have changed: If your mortgage and home costs total don’t make up more than 30% of your retirement income, that’s fine.
Add “bad debt” to this picture and things get even more difficult. Because the more debt you have to repay, the less money you have available for your lifestyle, your projects and your retirement dreams.
Certainly access to property is more difficult than before. But the massive introduction of mortgage credit lines has changed the situation.
According to the Financial Consumer Agency of Canada (FCAC), the number has increased by 40% since 2011. Because of their popularity, loans could be extended for a longer period of time than traditional mortgages.
“Consumers don’t necessarily understand how they work,” says Johanne Le Blanc, budget consultant at Option Consommateurs. They view this type of loan as a way to achieve or maintain a certain level of comfort or lifestyle. »
In addition, certain needs that were once superficial are now essential: internet, television or music streaming, cell phones, annual trip to the south, spa, etc.
In short, people have been dragging on debt throughout their working lives. It is a form of carelessness that they will have to pay dearly for in retirement, because the era of rock-bottom interest rates will not return any time soon.
Some see this painfully: According to the Office of the Superintendent of Bankruptcy, 15% of bankruptcy cases in 2021 involved people age 65 and older (compared to 10% in 2014). However, it is dramatic to go bankrupt at 60 instead of 40: you only have a few years to rebuild your life.
Advice
- Are you 50 or 60 years old? Reduce your unnecessary expenses (leisure, clothing, travel) to pay off your consumer debt as quickly as possible and bring it to zero on the day you retire. Reduce the remaining balance on your mortgage credit line as much as possible: you’ll be spending a fortune on interest every month.
- Ideally, your pre-retirement savings should be 20% of your net annual income. Maximize your contributions to your RRSP account.
- Consider delaying your retirement date to reduce your debt: a year or two makes a big difference!