Americans tightened their belts after the global financial crisis. But Canadians have gone the other way. We've taken on more and more debt, largely encouraged by rock-bottom interest rates. What's especially alarming is the extent to which retired Canadians have participated in the borrowing binge, at a time when they should be free of major financial obligations.
Total consumer debt went up by almost $77 billion, or 6.1% in the second quarter of 2013, compared to a year ago. But the average debt for consumers over age 65 went up by 6.5%, the largest year-over-year increase for all age groups, according to Equifax Canada, a credit-monitoring organization.
That finding is buttressed by a survey released last summer by Canadian Imperial Bank of Commerce (CIBC) that found that 59% of retired Canadians hold some level of debt. Most of that is comprised of credit-card debt, as 39% of seniors surveyed acknowledged they were in this category. The second largest group, at 30%, reported that they owed money on their lines of credit, while another 16% admitted they had mortgage debt. As well, 37% of seniors said they were making more than one debt payment each month.
Perhaps most troubling of all, 19% of retirees said that their debt levels had gone up in the last year, although 36% said their debt levels had remained the same.
There's a number of factors driving this development, says Jamie Golombek, managing director, tax and estate planning at CIBC Private Wealth Management, a unit of CIBC. "Over the last decade or two we have seen a real decline in the number of defined-benefit pension plans," says Golombek. "Some people have had to struggle. That could create a cash-flow crunch and prompt the demand for some credit-card debt to meet spending needs."
Second, seniors who rely on guaranteed investment certificates for income may have a greater need to borrow because returns are extremely low. With GICs earning 1% to 2%, says Golombek, retirees might be forced to take on debt because their savings are not producing enough income.
Third, some retirees may have not recovered after they sold riskier investments in the 2008-2009 bear market. "This could have impacted the amount of cash flow they're receiving, and created a need to dip into debt." In general, however, Golombek believes that many people have not been saving enough and face a cash shortfall when they leave the workforce. "People are not saving as much as they should in their peak earning years."
On top of that, the very low cost of borrowing has prompted many people, including those close to retirement, to buy larger homes and finance renovations. "All these impact on your cash flow and could cause a retiree to be in a higher-debt situation than might otherwise be the case," says Golombek. "Retirement is not a great time to be in debt."
The fact that many seniors are encountering debt issues has prompted a response from the Financial Consumer Agency of Canada, a federal agency that promotes greater understanding of financial products and services and informs consumers about their rights and responsibilities in dealing with financial-services providers.
"Government will work with stakeholders to better understand the unique challenges faced by seniors, and under the leadership of the Financial Literacy Leader, it will implement a financial literacy strategy that specifically responds to seniors' needs," the federal finance department said in the Budget 2013 documents. The process of appointing Canada's first Financial Literacy Leader is well under way, says communications advisor Natasha Nystrom. She added that the National Financial Literacy Strategy will include a seniors' component that is currently in development.
FCAC publishes several free online resources geared to managing debt. Among key points in its budgeting and money management guidelines, known as Beat That Debt, is keeping track of all household spending to see exactly where your money is going every month, in order to create a budget. "Put needs before wants," the guideline exhorts.
Another key step is avoiding "Buy now, pay later" offers which often encumber borrowers with administration fees and high interest rates that accumulate and worsen their indebtedness if they do not pay on time. Importantly, FCAC will release a Financial Goal Calculator this fall which will include a debt-repayment module and help people gain a better picture of their financial readiness for retirement.
CIBC's Golombek also offers a number of ways to reduce, if not eliminate, debt. "A good starting point is to talk to a financial advisor," says Golombek. "That person can help you structure your debt and minimize the amount of interest paid. Consolidate the debt into the lowest-cost vehicle, such as a line of credit, and put yourself on a plan to pay that over one or two years, or whatever timeframe is practical."
Discipline is required, as is a budget. "There are a lot of great budgeting tools available from your financial institution," says Golombek, noting that many banks offer handbooks to develop and maintain a budget. "The tools can help keep you on track, not just with credit-card spending, but budgeting in general. It's important to live within a budget, even in retirement."
This may mean cutting out unnecessary expenses such as frequent restaurant meals and costly vacations. "You may have to do this, until you come up with a plan to bring your debt under control," says Golombek. "You want to tackle that debt within a reasonable period of time, without totally ruining the quality of life in retirement. If you pay down that debt faster, you can have a better retirement going forward because you are not paying that extra interest expense."
However, retirees should put the issue of debt into perspective, and not get too alarmed, argues Ted Rechtshaffen, president of TriDelta Financial Partners Inc., a Toronto-based fee-only planner. "If someone is paying 3% on their debt, that's not a scary, bad thing," says Rechtshaffen. More important, he notes, a lot of older Canadians have "significant" wealth tied up in real estate.
"Suppose you bought a house for $100,000 and it's now worth $900,000. The rest of your liquid assets may not be huge: you have some RRSPs, but not a lot of non-registered money," says Rechtshaffen. "You might say, 'I'm real-estate rich, but cash poor. Now that I'm retired, I have a choice: live a modest lifestyle because my cash flow is significantly lower, or I can say that it's okay to have some debt. I won't live here forever, and can pay off the debt when I sell the house.'"
In his view, debt is palatable provided there is a way to pay it down. "There are people who have the capital to eliminate a debt, although it's not liquid. They get lumped into these discussions about indebted seniors. But I don't think there is anything to worry about," says Rechtshaffen. "A lot of those people [who borrow] are smart."
Still, Rechtshaffen admits it's different for those people whose net worth is low and carry a meaningful amount of debt. "You can't flip a switch and tell the debt to go away. If interest rates should rise, you will be squeezed even more." In short, assets have to be measured against liabilities, and used prudently. "Pay off the highest-interest debt first," he says. "If there are ways to lower your spending, then do it. And if you can, get a part-time job. But it's not a good situation, for sure."
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