It used to be that debt and
retirement were considered incompatible. How could anyone enjoy their golden years while being in the red financially? Yet, today, a growing number of Canadians are heading into retirement with significant debt — and that is bad news for many retirees.

Debt can quickly form a chokehold on those living on a fixed income, says Darrell Starrie, president of Strategic Financial Concepts Inc. and director of the private client group for Dundee Securities Corp. in Edmonton. Often, they find themselves rolling debt from one credit card or line of credit to another, letting their debt balloon because they can make only minimal payments, which barely cover the interest charges. So much for those trips to Europe and winters in Florida.

But there are strategies advisors can use to help clients manage debt as they prepare to leave the workforce.

First, a look at the numbers driving the trend. Research suggests the average debt load will increase as the next wave of boomers moves toward retirement. More than one-third of families in which the major income earner is over 65 carried debt in 2005, compared with 27% in 1999, according to the latest figures from Statistics Canada. The median debt (in 2005 dollars) had climbed by 71% for this age group during that period — to $12,800 from $7,500.

It gets worse for the pre-retirement group. Among those aged 55-64, 68% carry debt, with a median value of $40,000. That’s up from 1999, when 61% carried debt with median debt of $23,000.

Why so much debt? There are a number of factors. Whether you blame a consumption-oriented society, a laissez-faire attitude toward debt, low interest rates or a combination of the three, it is a trend that advisors can’t afford to ignore. “It’s a time bomb,” says Starrie, who is also a member of the Retirement Planners Association of Canada.

And it’s a time bomb that’s changing the face of planning for many advisors. Starrie, for instance, has made changes to his practice to accommodate people who carry debt into retirement. “We’ve had to segment our analysis for people in that situation,” he says, “because it’s so common and it changes the whole game.”

Those with debt are often averse to budgeting, and advisors have to address the issue as early on as possible, he says, or risk losing the clients.

It’s not a problem that will go away overnight. But there are many areas in which you can find ways to help clients manage their debt as they approach retirement:



> Good Debt, Bad Debt

Debt servicing is relatively affordable, thanks to low interest rates, and clients should be using every strategy at their disposal to reduce debt, whether they’re near retirement or not, says Patricia Lovett-Reid, senior vice president for TD Waterhouse Canada Inc. in Toronto. Home mortgages are considered “good debt” because they create value down the road; bad debt is high-interest debt, and clients should address that first. They can consolidate and pay off high-interest credit card debt by taking out a home-equity line of credit at a lower rate.

“If you can’t ditch the debt,” Lovett-Reid says, “make it as affordable as possible.”

Some clients can ditch the debt with an accelerated debt-reduction plan. Starrie says mapping out exactly how clients would benefit later by cutting back on excessive spending now is often just the boost clients need to get spending on track. For some of his clients, a two-year belt-tightening budget was enough to get them out of debt. This strategy works best, he says, for those who are “worried sick” about their debt and willing to forgo immediate fun in order to address it.

The problem is often more a matter of acquired spending habits than income, Lovett-Reid says. Many Canadians find themselves quite flush a decade or so before retirement. “The children are through university, their homes are paid off and they become accustomed to a lot more cash flow and a lifestyle that may not be sustainable in retirement,” she says. “You hit retirement, and the decade before has provided an unrealistic expectation of what life should be like.”

Some quick fixes can make a big difference when compounded over a number of years, she says. Everything from cancelling cellphone accounts and magazine subscriptions to cutting down on restaurant outings can significantly reduce some of that bad — what she calls “non-useful” — debt before hitting the critical years.

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>Work Longer

Many Canadians approaching retirement simply plan on working a few extra years to pay off their debt, says Debbie Ammeter, vice president of advanced financial planning at Investors Group Inc. in Winnipeg.

Advisors need to comb through the numbers and demonstrate what an extra year or two of work would provide in terms of debt repayment, Starrie says. This can help clients determine whether deferring retirement is worth it.

Part-time work and contract work may be viable options for bringing in some extra income during the early retirement years. Experienced workers can be difficult for employers to find, Starrie says, and once boomers start jumping ship, employers will be more willing to come up with creative arrangements to keep them in the workforce, either part-time or full-time. For instance, Alberta has launched a recent innovation that allows civil servants to continue working without affecting their current pension by adding new service time to a second pension payment plan.

But plans to work in retirement don’t always pan out.

“What happens if the client can’t work?” Ammeter asks. Advisors should help clients create a Plan B if illness or a disability makes it impossible to work.

And caution those overambitious types who think a new business venture will fund their retirement, Starrie warns. While a business plan may make sense on paper, clients should know that it’s highly unlikely a new business will make money right away and fund a retirement.



> Home Equity

One in five (19%) of those approaching retirement plan to use home equity to generate retirement income, according to an Investors Group poll released late last year. Advisors need to dig deeper to find out exactly what those clients plan to do, says Ammeter. Some of the popular options include selling the home and buying something smaller (54%), taking out a home-equity secured line of credit (22%), taking out a reverse mortgage (15%) and selling the home and renting (7%).

Downsizing as a strategy is often a good place to start the retirement reality check, says Ammeter. Smaller homes or condos that meet standards to which many boomers are accustomed, she says, can often be just as expensive as the homes they plan on selling.

Lyle Atkins, a fee-only planner with Independent Financial Counsellors Inc. in Winnipeg, insists his clients go through the motions of the strategy they have chosen. If they think they’re going to downsize, he has them shop around for a new home and see exactly how much cash selling the old house will generate. Often, there is no financial upside to downsizing.

But there can be exceptions if the client has a good idea. “You really have to listen to what they are saying,” Atkins says.

For instance, several of Atkins’ clients have opted to sell their main residences and move to their cottages. While that might be a sound strategy for some, it’s not for everyone. Moving to a remote area might not be the best choice for a socially active client or someone with a medical condition that requires regular hospital visits.

While clients are familiar with reverse mortgages, thanks to various advertising campaigns, Jacques Poirier, a retirement planner with Coughlin & Associates Ltd. in Ottawa, maintains there are more economical ways of tapping into a home’s equity. He recommends home-equity lines of credit to his clients who are close to retirement. The debt is only a “paper” gain or loss until the house is actually sold. So, a line of credit with a reasonable interest rate will go a lot further than a more expensive reverse mortgage.

There are other products to serve this group, he adds. Manulife Financial Corp. ’s Manulife One, an all-in-one secured account, is one alternative that several of Poirier’s clients use. The client can place all savings and borrowings into the account at a floating interest rate. By consolidating debt, including their mortgage, with savings accounts and chequing accounts, clients can reduce debt interest and ultimately reduce debt more quickly. National Bank of Canada and several credit unions offer the same type of flexible mortgage account.

“It’s dumb to be in a panic to pay off your house prior to retirement and have no money,” Poirier says, “and then get to retirement and turn around and put a reverse mortgage on it.”

Selling the home and renting — the plan upon which 7% of Canadians plan to rely, according to the Investors Group survey — has its disadvantages. “The biggest problem with that scenario is that you have the money out of your house and now you have to invest it and pay taxes on it,” Poirier says. This strategy can work, but only for astute investors. He sees it working mostly with older retirees.

An alternative housing strategy that Atkins has seen work out well for several of his clients is a program called “life lease housing.” This option, available at residences catering to seniors, basically allows individuals to “buy” their suites and then pay a monthly fee for services. When the resident moves, he or she receives the market value, less an administration fee. Like a home, the life lease is passed along to the resident’s estate upon death. Atkins generally recommends this option over the traditional sell-and-rent strategy because it provides the same investment and tax benefits of home ownership while ensuring a certain quality of lifestyle for older clients interested in being part of a community.



> Depending On The Inheritance

Advisors should find out how realistic a client is about his or her financial future, says Starrie, even if it means touching on delicate subjects.

For instance, a client might be depending on an anticipated inheritance to wipe out his or her debt. But the viability of such a windfall should be examined closely.

“Elderly parents are living longer and not handing over as much money,” Starrie says.

The best strategy is one that treats an inheritance as a bonus, rather than a necessity.



> Tapping Into Savings

Some clients are so overwhelmed with debt that they feel their only way out is by cashing in RRSPs. Most advisors strongly advise against that but, says Starrie, there are times when it might be an option. If worries about debt are too much for the client to bear, it might be a good idea to let him or her tap into retirement savings. But warn the client of the immediate tax consequences and the long-term impact of dipping into reserves.

“Sometimes a partial RRSP withdrawal, combined with part-time work or extending working years,” Starrie says, “may be the right prescription.”



> Understanding Emotions

Money is an emotional issue, and advisors need to be sensitive to each client’s attitude toward debt. Some clients are comfortable with large mortgages and credit card balances. For others, debt can lead to debilitating anxiety and sleepless nights as their dreams of leisurely golden years evaporate.

Credit Canada has noticed a surge in pre-retirement debt in recent years, according to Elena Jara, the credit counselling agency’s education co-ordinator in Toronto. “People are working longer,” she says, “and trying to find some sort of solution to pay back their debts.”

But even the best-laid plans can be led astray by unexpected circumstances, she says. A sudden shift in a person’s situation, such as divorce or illness, can wreak havoc on even the most solid debt-repayment plan.

Demographics are a factor, as well. Because Canadians are having their children later in life, they often have the burden of education costs thrown at them as they’re ready to retire. And many parents want to help their adult children with home down payments. Then there is the trend of adult children moving back in with parents and adding to the household expenses. Sometimes, these unexpected events can trigger financial devastation, and even force retirees to declare bankruptcy.

For the most part, Atkins is unfazed by clients heading into retirement with debt. He’s more worried by clients who spend their top earning years upgrading to bigger homes and then struggling to pay down their sky-high mortgages. In fact, he says, he’d prefer the client who owes a chunk on his or her mortgage — but with savings to show for it — to the one who desperately works to clear debt at the expense of RRSPs and other savings.

Ideally, the right planning means you can do it all. But if a client has reached a point at which doing it all is impossible, it’s time to let them down — and none too gently, Atkins says: “If you can’t get rid of the damn thing, you’re better off with RRSPs or other investments so you have something to live on.”

Atkins has even told clients to take a deep breath and do what they’ve been told all of their working lives to avoid: let debt reduction drop to the bottom of their priority list.

“So, you have debt,” he tells these clients. “Big deal.” IE