Debt-free and mortgage-free have a nice ring to them. They’re especially nice to hear during our working years. They resonate even more in retirement.
A good number of Canadians, however, won’t be free of either when the bell sounds to start their retirement. They’ll carry credit card debt, line of credit and loan balances, and mortgages into a time of their life when their money should be working for them.
Consider these statistics1 for retired individuals age 55 and over. Of the 34% that have some kind of debt:
- 20% have a mortgage only
- 57% have only consumer debt
- 23% have both types of debt
Also within that 34%:
- the average debt is $60,150; median debt is $19,000
- 26% have debt between $25,000 and $99,999; 17% have $100,000 or more.
These statistics add to the doubt that weighs heavily on many Canadians: whether their retirement income will be enough to take care of basic living expenses such as food, utilities, housing and insurance premiums:
- 65.5%2 of Canadians ages 57-66 are somewhat or not at all confident about meeting their basic living expenses in retirement.
- 75.8%4 of Canadians ages 57-66 are somewhat or not at all confident they’ll be able to take care of medical expenses in retirement.
With consumer debt or a mortgage part of the basic living expenses mix, there’s added pressure on bridging the gap between these expenses and the income floor – guaranteed lifetime income from government, employer and investment sources – needed to cover the expenses.
So how should someone manage debt in retirement? Should they maintain it and try to manage both their income stream and debt at the same time? Or, is it best to pay it off?
While getting rid of debt would be ideal, each situation would vary depending on someone’s savings, type and amount of debt.
A debt solution
Those of your clients carrying debt into retirement may want to consider a life annuity. It’s one of the income solutions recommended for providing your clients with predictable retirement income – guaranteed for life – to help them cover basic living expenses. Your clients need to service their debt payments no matter what, and a life annuity may be a good partner for servicing a low-interest debt, like a mortgage.
When might life annuity income work best to service debt? It’s probably not a viable solution to pay down consumer debt. For example, the average credit card rate as of February this year was 14.3%4. A life annuity won’t realize a similar return for your client. And it may make sense to take a portion of savings to pay off consumer debt.
On the other hand, with mortgage rates much lower than those for credit cards, a life annuity could be a solution for servicing mortgage debt until it has been paid off in full.
Let’s say your client wants to purchase a life annuity to cover ongoing basic living expenses in retirement. If the client also has an existing mortgage that can’t be paid down immediately due to prepayment penalties or restrictions, including those mortgage payments in those expenses may make sense.
The life annuity can now provide predictable guaranteed income that’s available to finance the mortgage repayment. Once your client’s mortgage is paid, thereby reducing their basic expenses, your client could use the annuity income to cover emerging health expenses or offset the impact of inflation on their basic expenses.
Getting out of debt takes work
While more and more Canadians are aiming to be debt-free – 45%5 say paying down debt is their top financial priority – it comes with a downside: delaying retirement and working longer. And Canadians are doing just that. Twenty-five per cent of Canadians6 who expect to still be working full time at 66 cite the number one reason as to earn enough money to pay basic living expenses.
When you talk to your clients about how debt can affect their retirement, recommend paying down higher-interest debt such as credit card debt as quickly as possible. Remind them that as they look to meet their basic living expenses in retirement, carrying debt and maintaining it can put a burden on meeting those basic expenses, leaving them with less flexibility to put their income toward other retirement needs.
1 Source: Statistics Canada, Canadian Financial Capability Survey data, 2011-04-27.
2 Source: 2013 Sun Life Canadian Unretirement™ Index
3 Source: 2013 Sun Life Canadian Unretirement™ Index
4 Source: Financial Post, March 30, 2013: High credit card rates costing Canadians a fortune
5 Source: 2013 Sun Life Canadian Unretirement™ Index
6 Source: 2013 Sun Life Canadian Unretirement™ Index