Retirement Math: Growing Canadian Debt UnBalancing the Equation
Helping clients create a vision for life in retirement can be tough when 59% of Canadians are retiring in debt. The math just doesn’t add up!
The issue with debt in retirement isn’t just dealing with monthly payments! The fact of the matter is that current monthly payment could very well be giving your clients a false sense of security.
Things such as interest rates and terms and conditions set by lenders affect monthly payments—clients can’t rely on them not to change. Example: Some folks just got a notice from a very popular credit card provider stating they’d be increasing the interest rates by 0.9%. That may not seem like much but if your clients have multiple debts and all of them go up by an interest point plus their mortgage goes up by a few points in the next couple of years, they could suddenly have a very different monthly payment picture.
Also you need to consider how your clients’ debt came to be in the first place. What is it about retiring that will have them spending so much less money to prevent increasing that debt?
The big risk is that many will be forced to drain savings early. Savings like RRSPs will be fully taxable as new income upon withdrawal, causing a three-part problem:
Taking unscheduled or larger withdrawals to pay down debt will cause the asset to run out much faster than anticipated. Funds withdrawn from an RRSP will increase your clients’ total income, possibly increasing their tax rate, meaning they have to take even more to keep the same amount. Withdrawals that increase their income could cause it to rise too high and see them lose precious government benefits such as OAS. They might not be galloping the globe on the modest amount OAS provides, but I’m guessing if they have debt in retirement they don’t want to lose any of it either.
It’s not too late to do something about it. Chances are the structure of your clients’ debt needs to be changed, and that may mean refinancing. However, having a Behavioural Cash Flow Plan™ that allows them to live their life while taking the debt down to a more manageable level is most important should they want any debt changes to work.