6 tips to retire debt-free

Today’s retirees could find themselves facing financial challenges in what used to be the debt-free years of retirement. A new national survey found that many baby boomers are struggling with mortgages and unpaid credit card debt. The Sun Life Financial Barometer by Ipsos reveals that one in four (25%) retirees are living with debt. [tweet this].

The survey results also reinforce the value of seeking sound advice and working with an advisor to help clients reach their goals. You can use your expertise and trusted advice to help retirees, clients approaching retirement, and even millennial clients save and prepare for retirement.

Measuring Canadian retirement debt

One in five (20%) retirees are still making mortgage payments [tweet this]. The financial strain doesn’t stop there. Survey results reveal that retirees still use credit in some of the same ways they did before retirement. Among those who carry debt month to month:

  • 66% have unpaid credit cards,
  • 26% are making car payments,
  • 7% have unpaid health expenses, and
  • 7% owe money on holiday expenses or vacation property.

“It’s striking how many retirees are carrying credit card debt month to month. Given the interest rates involved, it suggests that these folks would benefit from advice on both budgeting and debt management,” says Kevin Press, Assistant Vice-President, Market Insights, Sun Life Financial. “Part of that conversation is an important message about how low interest rates are now, relative to historic norms, and their likelihood to rise in the near future. There’s an opportunity to help retirees make debt management a short-term priority.”

At the same time that retirees face lingering debt, almost one-quarter (24%) of working Canadians are dipping into their retirement savings. 63% of those Canadians pulled out cash because they needed money to pay for health expenses or make payments on debts, for example.

Advising clients about debt and retirement

Press recommends focusing on all debt to help clients understand how different interest rates and loan terms affect what they actually pay for what they buy. “You could describe how, for example, financing a car purchase over seven years is much more expensive than financing it over a shorter period of time or even buying it outright. Or, illustrate what a $1,000 piece of furniture bought with a credit card, and then paid off over a period of six months, actually costs.”

Making the following tips part of your advice can help clients retire without debt and avoid withdrawing money from their retirement savings:

  1. Reduce credit card spending. Suggest clients stop buying things on credit cards. Show the benefits of paying off credit card debt first and how quickly it can add up when they don’t pay it off every month.
  2. Pay the mortgage off faster. Here are three strategies clients can use to avoid taking mortgage debt into retirement:
    1. Pay more than the minimum. Let’s say their mortgage is $1,000 a month, but they can comfortably afford to spend another $200. Doing so will reduce the amount of interest they pay and save years of mortgage payments. With interest rates at low levels today, any increased mortgage payment will have a larger portion of the payment go towards the principal.
    2. Make a lump sum payment every year. This could be their tax refund, their annual bonus or any windfall. Most mortgages provide privileges that allow clients to make additional payments per year, usually between 10% and 25%. Over the long term, these lump-sum payments will reduce their amount of mortgage payments and interest.
    3. Make bi-weekly payments. Divide their monthly mortgage payment in half and make that payment every two weeks. They’re ultimately making 26 half-payments in a year, the equivalent of one full additional monthly payment.
  3. Start now. Encourage clients to begin saving and investing as early as possible to set themselves up for success.
  4. Don’t leave money on the table. If employers of clients offer a pension plan and will match their contributions, suggest they consider contributing the maximum amount possible.
  5. Invest wisely. If clients don’t have access to a defined contribution plan, show them how RRSPs and TFSAs can help them save for retirement.
  6. Have a plan and stick to it. It’s never too late to build a financial strategy that will get clients to where they want to be. Help them set achievable goals, guiding them through each life stage.

Millennials need advice too

If you have millennial clients, help them understand the importance of managing debt and saving wisely for retirement. Press has noticed that “a lot of them are better informed than baby boomers or generation X consumers were at that age.” He’s conducted additional research that points to a tendency among millennials to invest too conservatively, given their longer time horizons. “That’s an important conversation to have with all young Canadians.”

Press notes the other unique thing about many millennials is that the financial crisis had a real impact on their early career. “They’re not as far along as they would have been, in terms of being established in their chosen field and income levels. Add student debt to the mix, and it’s clear this generation needs exactly the kind of support advisors are so good at providing.”

There are helpful tools and resources you can tap into to get clients on the right track to building the income they want and need to retire, including the following [tweet this]:

  • Financial check-up– Assess clients’ current financial health by asking them to answer a few questions about their spending, borrowing, saving and investing habits.
  • Net worth calculator– Understanding the difference between what they own (heir assets) and what they owe (their liabilities) is a great way to help clients plan for the future.
  • Retirement savings calculator– Use this tool with clients to see how much they’ll need to save for retirement. See how making adjustments to their various retirement income sources can help them meet their retirement savings goals.
  • RRSP calculator– Are clients currently contributing enough to their registered retirement savings? What would be the impact of making a withdrawal from their RRSP before they retire? This tool will help clients see how changes to their RRSP contributions can affect their retirement savings.

Contact our Wealth sales support team to learn more about savings, retirement and financial strategies.

About the barometer survey

The Sun Life Financial Barometer is based on findings of an Ipsos poll conducted between October 13 and October 19, 2017. A sample of 2,900 Canadians was drawn from the Ipsos I-Say online panel: 2,900 Canadians from 20 to 80 years of age. The data for Canadians surveyed was weighted to ensure the sample’s regional, age and gender composition reflects that of the actual Canadian population.

The precision of Ipsos online poll is measured using a credibility interval. In this case, the poll is accurate to within +/- 2.1% at 95% confidence level had all Canadian adults been polled. All sample surveys and polls may be subject to other sources of error, including, but not limited to, methodological change, coverage error and measurement error.

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