Debt and Retirement - How to Handle both when Nearing Retirement
An increasing number of Canadians are facing an uphill battle just trying to save enough and earn enough on their savings to be able to retire on time. Carrying much higher debt burdens than previous generations, many pre-retirees have had to put their savings on the back burner to focus on debt reduction, which, for practical purposes is smart, but it is also the primary reason why some will need to delay retirement or drastically downsize their retirement lifestyle. In retirement, cash is king, and every dollar of debt is a direct drain on your cash flow. But, it’s never too late (nor too early) to take counter measures that will help you get back on track.
Should I try to pay off my mortgage before retirement?
The days of mortgage-burning parties are nearly a thing of the past. As a result of the home refinancing hey-days of the last five to ten years, 67% of homeowners in their 50s and 60s are now carrying mortgage debt well past the age of 70. *
Financial planners are divided on whether it’s a good idea to try to pay down your mortgage as soon as possible. There are those who say that it may be a disadvantage to lose a potential tax deductions. However, most retirees would not qualify for tax deductions, like those associated with a home office, or certain types of mortgage interest tax deductions associated with mortgage refinancing used for the purposes of generating further income.
The answer is, yes, you should try to pay down your mortgage by making extra principal payments when you can. The alternative, which is becoming more of preference for an increasing number of retirees, is to simply downsize and sell your home and apply the equity to a more affordable living space.
Do I save for retirement or pay down credit card debt?
Sadly, this is turning into a classic dilemma faced by a growing number of Canadians. Unquestionably, you should try to pay off all high interest debt before retirement. With most retirement assets earning less than 6% a year, even credit card debt accumulating at 9% will cost you vital cash flow. This is the time to get deadly serious about your credit card debt. Every penny you are paying towards debt needs to go towards your financial security; you can’t begin implementing your debt payoff plan soon enough:
- Get on a budget- get a monthly target for debt payments (and make it a stretch goal) and then budget everything else around that repayment. Eliminate non-essential expenditures. Find ways to stretch your essential expenditures. Downsize your lifestyle. Your goal should be to pay off your debt completely within a year. Most importantly, STOP USING YOUR CREDIT CARD!
- Pay off smaller balances first- it’s easier and more motivating to check off the smaller targets first. It will help you build momentum as you tackle the bigger ones.
- De-clutter- it’s probably the right time to get rid of a lot of ‘stuff’. You can raise more money than you think by getting rid of clothes, appliances, old cell phones, CDs, furniture, and probably half the stuff in your garage by selling it at a yard sale, or online.
- Save any excess cash flow- if you find ways to generate additional income, it should be applied to savings. As soon as you reach your debt pay off goal, apply the budgeted debt payment to savings (not spending) and don’t look back.
Should I just continue working, or should I try to earn an income in retirement?
Recent retirees and Baby Boomer pre-retirees have actually started to forge a new normal for retirement by preparing for a new career well before their retirement date. Some have created a “transitional” relationship with their employer, scaling back hours or changing their status to “consultant.” Such arrangements can sometimes extend the working relationship with an employer. Some are branching out to start a business of their own or monetizing a hobby. Many boomers are already planning their new careers by hitting the books and learning new skills.
The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do. By taking control of their new working life, they are more likely to be able to find an enjoyable balance of work and lifestyle that will sustain them financially, mentally, and psychologically.
*Retirement time bomb: Mortgage debt. Securian research reveals growing burden for boomers and retirees – April 2013
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.