Most Canadians believe they’ll retire and be able to live comfortably thanks to government pensions, company pensions and retirement savings. They believe their homes will be paid for, and they won’t have any debt worries. Unfortunately, many of them are wrong.
Hoyes, Michalos & Associates released our latest Joe Debtor report this May. Every two years we analyze our client data to determine emerging trends in debt and insolvency filings. For the past five years, insolvency filings have been declining in Canada, so we weren’t expecting any revelations in our report. That’s why our discoveries were so disturbing.
People aged 50 and older carried the highest overall debt, and they also had the highest credit card and payday loan debts.
Such folks made up 30% of all insolvency filings during the period under review. This is a marked increase from our 2013 report, when they accounted for 27% of all filings. This percentage has increased with each study since we first analyzed our data almost 10 years ago.
To put the magnitude of the numbers in perspective, debtors 50 and over owed a total unsecured debt of $68,677 each—21% higher than the average insolvent debtor and almost four times the average Canadian consumer debt of $18,207 per adult. And this doesn’t include any mortgages or other secured debt loads.
How did this happen?
For an explanation, we need to look first at pre-retirees and how much debt they’re carrying. In our study, the 60-plus crowd had the highest debt load, followed closely by the 50-59 group, and then the 40-49 year-olds. Across the groups, credit card debt is the biggest driver of debt accumulation.
People aged 50 to 59 made up 19.9% of all insolvencies, while those aged 60 to 69 were responsible for 7.8%, those 70 to 79 made up 2.2% and those 80 and above were responsible for 0.4%.
Historically, people used to become debt-free in their late 40s. They’d paid off their mortgages and started saving for retirement. Now, people are carrying high credit-card and other unsecured debt into their 40s, and so they’re unable to save or to pay off their homes. In fact, it’s now common for 40- and 50-year-olds to refinance their homes to pay down high-interest unsecured debt, only to re-accumulate that debt before they retire. Unfortunately, this is only shifting the credit burden, not eliminating it.
We have all heard of the sandwich generation—the people in their late 40s and 50s who may still be supporting or assisting adult children, as well as beginning to care for their aging parents. This group may also be developing their own health issues, and often they experience an employment interruption (e.g., layoff, downsizing or unexpected relocation). If their finances are already stretched and anything unplanned happens, they have no alternative except to incur more (and more expensive) debt.
While that explains why people aged 50+ are carrying the highest overall debt load, and the highest credit-card debt of all age groups, it doesn’t explain why they’re using payday loans. While only 9% of our clients aged 50+ turned to payday loans compared to 30% of those aged 18-19, this number was still higher than expected. Worse, people aged 50+ who used payday loans owed, on average, $3,693 — the highest among all age groups.
Many debtors will drain their RRSPs and other investment accounts just to keep up with ever-rising minimum payments. Once those funds have run out, they are increasingly turning to payday loans as a stop-gap. Payday loan companies target seniors by advertising that they loan against all forms of pension income, including ODSP, CPP or a company pension.
Help older debtors
These people need to seek professional help, especially before they start selling investments, cashing in RRSPs or refinancing their homes. Some assets, such as RRSPs, may have creditor protection under the law.
A debtor may be counselled to downgrade his lifestyle, restructure his debts, file a consumer proposal or file personal bankruptcy. If he chooses to restructure by filing a consumer proposal, a consumer proposal administrator may be able to reduce his monthly debt payment costs by as much as 75%. The administrator could make an offer to his creditors to settle his debt obligations for a percentage of what he owes. His now much lower consumer proposal payments can be spread over a period of up to five years making it easier for him to balance his finances without turning to more credit and payday loans. Any restructuring plan must take into consideration what assets and investments the debtor owns, which of those assets are protected under bankruptcy law and what his household income and expenses are. By developing a plan first — before he starts selling off investments, cashing in RRSPs or even refinancing his home to continue to meet his minimum debt payments — the debtor may be able to retain thousands of dollars in protected assets and save thousands of dollars in future payments. Every dollar saved may be redirected toward their retirement.
And with a bit of effort, their retirement could still be golden — instead of red.