Dealing with debt in retirement

“In the ideal world, yes, everyone should have zero debt going into retirement,” says Marc Lamontagne, a certified financial planner and partner at Ryan Lamontagne in Ottawa. “But the reality is that people do have debt when they go into retirement. So you’ve got to make sure that they’ve got sufficient retirement income.”

To make sure clients have sufficient income to sustain that debt in retirement, Tracey Greenwood, division director, Investors Group Inc. in Kingston, Ont., says you need to take clients through their “retirement paycheque.”

“It’s really about debt in relation to income,” says Greenwood.

While going through the “paycheque,” Greenwood recommends covering topics such as: what are the client’s sources of income in retirement and where is it coming from? Do they plan to free up home equity at some point?

In addition to the available cash flow, pay attention to the type of debt clients may be bringing with them into retirement. For instance, if clients have substantial amount of costly credit card debt, says Greenwood, then create a plan to help them pay off as much of the debt as possible before retirement.

On the other hand, mortgages are often more manageable in retirement, says Greenwood, because they are held for a short period of time during that life stage. As well, low interest rates make mortgage payments easier.

However, it’s important to test what would happen to a client’s retirement income should interest rates increase.

“[I] show them what the difference will be if those rates do fluctuate quite dramatically,” says Greenwood, “to make sure that they can sustain it.”

Lamontagne adds that if clients can do so, they should use any opportunity they might have to shorten the amortization on their mortgages and pay them off before retirement.

The problem for many retirees is not necessarily carrying debt into retirement, but falling into it after retiring. For example, many people are unprepared for things such as children moving back home or a medical situation, and as a result wind up in debt, says Laurie Campbell, CEO, Credit Canada Debt Solutions in Toronto.

Another possible speed bump for retirement income is unexpectedly low investment returns. When clients are not getting the returns they originally anticipated, says Bev Moir, senior wealth advisor, ScotiaMcLeod Inc. in Toronto, there are several options they can choose from to boost income.

One such option is a reverse mortgage, which lets homeowners borrow against the value of their house, with no loan repayments required for as long as they remain living in the house.

While such products can provide clients with much-needed income, Moir says, the strategy may not work well with their estate plans. The problem is that all the money borrowed against the house must be paid back upon the client’s death, potentially leaving little for their beneficiaries.

Similarly, Moir also cautions against the use of a home equity line of credit in retirement as it could lead to further money problems. “It’s kind of a slippery slope,” she says, “because once somebody starts dipping into that home equity line of credit, it’s hard to step away from it let alone pay it back.”

Lamontagne is not quite so hesitant about clients taking equity out of their homes to fund their retirement plans, such as winters in Florida, provided there is a plan in place to deal with the debt, such as the eventual sale of the house.

In addition to selling their house, Moir suggests clients explore other income-generating options including reducing their investment-related taxes and looking for strategies to avoid a claw back of Old Age Security (OAS).

This is the second article in a three-part series on debt.

Next: Debt considerations for business owners.