What do you do when your client enters retirement with a mortgage or other debt? It happens all the time. In fact, the stats show us that 40% of Canadians are retiring with debt and some are even accruing debt in retirement. At this point it’s too late to avoid retiring with debt, so what do you do?
Step 1: Stop making assumptions
Clear away your bias of client life as it relates to debt. Make sure you are not avoiding the questions for your retired or retiring clients and ensure during reviews you are consistently updating all liabilities in your file.
Case in point, I was recently called in by a client to help one of their retired family members. The gentleman, had more than enough between investable assets and pensions to live very comfortably, but racked up nearly $30,000 on an unsecured line of credit with a lender of questionable integrity. They extended this product to him at an interest rate of 29.9% knowing he owned a home outright, had sizable assets and a great pension. He was operating under the false assumption that upon his death this debt would just go away because it was not secured. Wrong.
It was the institution that actually reinforced this client’s misconception. He was of the opinion that he would be failing financially if took on a mortgage again but was okay with the 29.9% interest cost of the unsecured credit line he’d taken out. I actually had to get his advisor in the loop as it turns out he had no idea of the ill-fated choice his client had made. The advisor got onside with the cash-flow plan for the client and adjusted his income so he wasn’t running out of money and turning to less than appropriate products for help. Do you know for sure that none of your clients are in this situation?
Step 2: You cannot change what your clients do not acknowledge
You can’t help clients with debts you don’t know about, so the first thing you need to be asking even retired clients if they have any debt. Then, be quite clear what debt is. I’ve spoken to so many people over the age of 60 who bragged about having no mortgage, only to find out later that they’ve got a secured line of credit on the home, which is essentially a mortgage.
There are those nearing retirement who are proud they don’t have a mortgage to pay off, but they’ve got a big balance on a credit card. Or maybe they don’t have any credit card debt, but only because they pay off their card with their secured line of credit which is housing a healthy and growing balance. This happens all the time. Most people find it much easier to lie by omission but will not tell you an outright lie, so you must ask very more specific and qualifying questions.
- Is your mortgage paid off?
- If not, when is it due to be paid in full?
- Do you have any car loans, or leases?
- Are there loans on anything else you own, like your boat or your cottage?
- What revolving credit accounts do you currently have open? These would be your credit cards, any lines of credit or other accounts which you’ve got credit you can access.
- What are the balances of each of these accounts?
Step 3: Plan away the debt
So, you find retired clients that do indeed have debt, what now? Well, the good news is there is always some form of solution. Here are a few debt retirement strategy ideas to get you thinking.
Capture misdirected cash-flow: There are a few places to find wasted money. You’ll find older clients who carry debt are also more likely to carry creditor life/disability/critical illness insurances with their lender. As they age, the realization that one day they won’t be around to pay that loan back is more intense and they are more easily convinced to just add it on. These products often come with very high monthly (or even imbedded premiums in the case of some car loan products) premiums and many expire before the debt is repaid and often when the client is far younger than they would be when plain old term insurance runs out. You can see how looking at debt with a retired client can have more benefit to it than just helping them pay it down and save interest. If the debt isn’t too big — like a few credit cards with $5,000 balances, or a $15,000 line of credit — you can often trim enough wasted dollars to take care of these debts soon enough.
These clients also have a propensity to carry multiple bank accounts and I’ve seen hundreds a month going out in bank fees. Instead, the client could pare down to one account and pay closer to $15-$20 a month.
These clients are now living on a fixed income, so there is no time like the present to have them get used to controlling their spending. You might also want to recommend they use a limited amount of cash for discretionary spending or that they scale back some of their extras until they get the debt repayment plan complete and then carve out what they really can afford.
Downsizing: Be careful as sometimes downsizing ends up being sideways sizing. The client starts looking for a smaller home that doesn’t always end up meaning a less expensive home. Many a time I’ve seen them start shopping and fall in love with a condo that essentially costs them the same or more as their current home. Help your clients identify if they can downsize in the first place. Downsizing for some retirees means their only options are to live on less, or sell and rent.
My concern with leaving debt in place with no plan in sight during retirement is that the clients themselves are just too exposed. We can’t accurately predict what the interest costs will be going forward or how long they’ll be paying on the debt. You also can’t discount the possibility that the value of their home could fluctuate the wrong way at the wrong time. At least if the client has been paying it down, the effect of that occurrence will be far less extreme. We can’t assume they may not need any equity accrued to pay rent later in life.
In my opinion, the option of letting the insurance pay it out or letting the estate eat the debt, is too much risk for your very much alive client. Banking on death is not, in my mind, financial planning but rather financial finger-crossing.
Is it worth the extra effort? Of course, it is. The more frequency with which you include debt as a part of your process, the less time it will actually take. I can’t stress enough that you need a process and it must include both debt repayment structure and cash-flow control measures. Once you find a process you are comfortable with you will glide through this topic with ease. Those who come to see you will tell many close friends and family about being worked with as a whole financial creature by their advisor.