When it comes to the retirement of the elderly with debt, I will state in advance my personal prejudice that no one with credit card debt, or even mortgage debt, will fantasize about retirement. For me, it's simple: if you have any form of debt, you have to work until the debt is fully paid off. As I have written elsewhere, I believe that financial independence is based on a paid family.
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The governor of the Bank of Canada recently discussed the possibility of negative interest rates, a strange concept that sounds a little antimatter. You may eventually have to pay the bank for the privilege of holding your money instead of charging interest on your bank balance! Bizarro's world is not far away; for example, Switzerland has a negative interest rate on 10-year bonds for most of 2015.
In other words, I realize that a large proportion of people are not lucky enough to pay for family, corporate pensions or financial assets like RRSP and TFSA. The elderly I personally know still rent houses and have no financial safety net. Some may have to resort to payday loans until next month's Canadian pension plan, pension insurance or guaranteed income supplement checks are released by the government.
Doug Hoyes, president of Kitchner's bankruptcy trustee, Hoyes Michalos & Associates Inc., gives a biennial introduction to senior debtors in his Joe Debtor study. The data are shocking. He defines older people as 60 or older, so many are baby boomers, whether retired or at their peak. (The oldest baby boomers were born in 1946 and are now 70 years old, while the youngest baby boomers were born in 1964 and 52 years old, presumably still working full-time.)
Senior debtors accounted for 10% of Hoyes's 2015 study, up from 8% four years ago, with an average unsecured debt of $69031, higher than any other age group. Nine percent borrow from their income through payday loans, usually pension income.
In my opinion, payday loans are almost usurious - defined as debt instruments that charge more than 60% interest each year. However, Hoyers said that because the loan is only a few weeks old (literally until the next payday), lenders can charge up to $21 interest on every $100 borrowed in Ontario, and if paid off within a year, the interest will reach 546%.
53% of these senior debtors live alone and often cite illness or injury as the cause of their financial problems. Of the bankrupt elderly, 9% have payday loans. In some cases, their adult children are demanding finances, and they are embarrassed to admit that they do not have other resources.
The other extreme is the wealthy fortunate generation, who buy houses, have large fixed-benefit pensions, and have maximized registered and even unregistered (taxable) investments. Doug Dummer, president of Retirement Solutions, said the biggest expenditure for them would be tax, which had to be planned in advance. In this case, borrowing may prove tax efficient.
Then there's the rest of us: maybe there's no big company pension, moderate financial assets, and a house with only a portion of the equity, which could be an attractive source of funding for future retirement or semi-retirement.
This intermediary group is often torn apart between repaying mortgages before retirement or taking advantage of low interest rates to build financial nests in the stock market.
In July last year, a CIBC poll found that Canadians on average expected to be able to forgive their debts by the age of 56, although some people were heavily in debt when they were in their 60s. Even among people over 45, more than 68% are still in debt, and 31% of them still have mortgages. In 2013, CIBC found 59% of retirees in debt.
But that's not necessarily a bad thing, says Jamie Gorenbeck, a CIBC wealth tax expert. "If it is an asset for appreciation, liabilities are not bad. If you stay at home for a long time and borrow at low interest rates, it's not a big problem. The problem is when you run out of cash to pay off your debts.
Interest rates are close to their lowest level in 60 years: most financial institutions report five-year mortgage rates of less than 3% (less than 4% in 10 years). Of course, unless you lock in, there is no guarantee that interest rates will not rise to more uncomfortable levels.
In a paper he wrote for CIBC last year (mortgage or Margarita), Gorenbeck suggested that enthusiasm for debt repayment could put some people at risk of retirement. In response to another CIBC survey, the article found that 72% of Canadians preferred debt repayment to retirement savings. He found that if you can get an annual return of 6% in a balanced portfolio, net income is almost twice as much as debt repayment.
As early as 2012, BMO Financial Group (BMO Financial Group) solved the same problem, pointing out that rising house prices meant that real estate formed a disproportionate proportion of couples'net assets. This has attracted some people to take advantage of their home equity when they retire to overcome their past savings failures. As baby boomers become net home sellers rather than pushing up prices, BMO said prices could fall by 1% a year. Downsizing, renting or moving to a small town are all ways to get some equity in your home.
Nevertheless, Hoyers has seen enough priority debt to oppose more debt. "As long as you can pay, low interest rates are good, but if you are unemployed, sick or divorced, the fact that the median interest rate is only 3% has nothing to do with the lack of capital inflows. When your income is fixed, your expenses must be fixed, but it's hard: you can't control the price of gasoline or automobile insurance."
Personally, I like to have enough dependency to get you to what Dammer calls the "job-optional" stage. "It's to control your day," Hoyes said. "If you retire and you're in debt, you can't control your day."
Of course, medical expenses will also increase. The situation here is not as bad as in the United States, where health care costs can have catastrophic consequences, but "in Canada, health care costs are insidious," Hoyes said. "Small amounts, but gradually disappearing, baby boomers are more likely to be hit hard."
One option, if possible, is to work part-time at retirement. An analysis by ETF Capital Management in Toronto found that if retirees earned an additional $1,000 a month in consulting income or part-time work, the consumption of "nest eggs" would slow down significantly. For couples, if both sides can make so much money, the economic situation will still be better.
This may or may not be an "optional" job. BMO found that 29% of Canadians expect to postpone retirement and take part-time jobs when they retire due to insufficient savings. BMO said that for them, the use of net home value constitutes a "Plan B", which 41% of Canadians are considering.
But Dahmer suggests avoiding reverse mortgages. He says it's more cost-effective to mortgage a house with a guaranteed credit line. Only withdraw funds when needed, but set up when you're still working, and the bank thinks you're a good credit risk.
Dahmer argues that flexible use of debt through credit lines is a sound strategy that allows you to spend smoothly at peak times, especially when your main income comes from registered assets. "You pay 2.5% to 3.5% interest in a few years, far more than forcing yourself to pay a marginal tax rate of 33% to 42%. More importantly, the security of the elderly is recovered."
Savings can be hundreds of thousands: "Retirement is the only strategic tax plan in life that can have a significant impact. This is because you can get cash flow from many different places, each with its own unique tax implications."