When Ottawa-based economics consultant Roger Sauvé set out last year to write the tenth in a series of annual reports on family finances for the Vanier Institute of the Family, he was struck by the growth in financial stress and debt among Canadians over age 55.

Sauvé found that debt loads among people aged 55 to 64 increased by more than 33% between 1999 and 2005. For people over 65 who had debt (about 33.7%), debt loads were up almost 20%, to an average of about $33,396.

This and other research indicates that a growing number of baby boomers are heading into retirement with significant debt loads, while debt among current retirees also is growing. Many experts are concerned that some seniors run the risk of losing control of their debt, having to return to work or leaving no estate.

“For years, people said they were afraid to retire with debt,” says Chris Armstrong, a former TD Bank Financial Group executive who now runs Life’s Next Steps,a Toronto-based retirement counselling service. “But some of the economic strictures are changing. That’s why, for example, you’re starting to see some uptake — although not a lot — with reverse mortgages. But it’s going to increase. There will be an increased trend toward retiring with debt.”

In Armstrong’s view, many retirees have become comfortable with debt. “On the assumption,” he says, “that their real estate will be liquidated to cash them out.”

But for clients who use strategies such as reverse mortgages and equity lines of credit, that home equity will be reduced. It will be further eroded if real estate prices continue to drop. Besides, even if these clients downsize, they will still have to pay for their next home.

House-price deflation may dramatically shift people’s debt/equity ratios, increasing indebtedness among retirees and those preparing to retire, says a 2007 study by the Certified General Accountants Association of Canada.

According to the Organization for Economic Co-operation and Development, Canadian housing prices are currently higher than those in the U.S., compared with long-run averages. Slipping housing prices in many Canadian markets suggest a correction may occur that may dramatically decrease retirees’ ability to avoid accumulating debt.

The fundamental reason for worrying about retiring with debt is that servicing debt, even with the current historically low interest rates, chews up income, says Colleen Mulder-Seward of Michigan-based Retirement Calculator Inc.

Even people who are in moderate debt are taking a gamble; if interest rates go up, even by a couple of points, their monthly payments could become unmanageable.

Applying the rule of thumb that retirees need three-quarters of their working income to live comfortably, says Mulder-Seward, people who retire with debt are likely to need 100% of their working incomes — a requirement that almost certainly means going back to work.

> Good And Bad Debt. To address the question of retiring with debt, clients need to start by making a distinction between “good” and “bad” debt, suggests Warren Mackenzie of Second Opinions Investor Services Inc., an independent, fee-only financial advisory service in Toronto.

“It depends on what kind of debt it is,” says Mackenzie. “Is it a credit card, or is it a tax-deductible loan to buy securities? If the person has a $1-million home free and clear and a loan for securities, it’s not a problem. Same thing if the person has an indexed pension. Under those circumstances, retiring with some debt is not necessarily a bad thing.

“But most people are not in those circumstances,” he adds. “If there are debts, there needs to be a financial plan that shows how the debt is going to be paid off.”

Clients facing retirement with debt should consider the question of borrowing to invest, which is sometimes viewed as a means of forced savings. In Mackenzie’s view, people looking for forced savings vehicles would be wiser to accelerate their mortgage payment schedules or buy a universal whole life policy.

“I would not be encouraging people to borrow to invest,” says Mackenzie. “Most people do not understand the risks involved. Right now is not a time to be leveraged up.”

Research shows that debt among seniors will continue to grow. Credit-counselling services confirm that a growing percentage of people of retirement age are struggling with debt and poverty.

@page_break@“The market basket measure for poverty includes 30% of single people aged 45 to 65,” says Sauvé. “Typically, that’s a group that has done very well in the past.”

> Lack Of Retirement Savings. Public polling on the question of retiring with debt confirms that the problem will increase. According to a December 2005 poll by Ipsos-Reid Corp. , 44% of retired Canadians said they had not planned to pay off their debts before retirement; 48% said they did not view being free of debt as a prerequisite for retirement. These survey results may reflect an overall deterioration in savings among people preparing to retire.

A reduction in the number of people with private pension plans may also be a factor. The CGA Association study noted that the proportion of savers among people aged 45 to 64 decreased by 11% between 1982 and 2001, while the proportion of those 35 to 45 with private pensions decreased to 11.8% in 2001 from 14.4% in 1999.

Overall employer-sponsored pension coverage decreased to 34% in 2006 from 40% in 1976, while RRSPs have not been rising to compensate for the declining coverage of employer-sponsored pension plans, which the CGA Association study said signals “a certain absence of adequate readiness to retirement.”

> Debt Servicing. In 2001, the proportion of tax filers dipping into their RRSPs was twice as high as it was eight years prior, the CGA Association study warned: “Increasing indebtedness may leave Canada’s aging society sandwiched between having already committed yet unearned income to debt servicing and the necessity to accelerate accumulation of pension funds for rapidly approaching retirement.”

The dramatic drop in stock markets this year may exacerbate these trends among people preparing to retire or who are already retired.

Indeed, debt could be contributing to a trend that sees Canadians abandoning dreams of early retirement and returning to work after retirement.

Using data from Statistics Canada, Sauvé found that although people over age 55 hold about 15% of jobs, this group accounted for 55% of all job growth since 2000. In 2007, 32% of people over 55 worked, compared with 24% in 2000.

About 17% of those who retired for the first time subsequently returned to work for pay, Sauvé found, and about half of them said they returned to work for financial considerations.

Although the figures for indebtedness among people over 65 are not terrifying, Sauvé says, they represent a significant trend. “The highest rate of bankruptcy is among people 65 and over,” he notes. “The times are more difficult for people in this age group.” IE