Shed those extra pounds of debt for a healthy retirement
Download this issue (PDF, 2 pages, 272.73 KB)
Time for a debt diet?
Shed those extra pounds of debt for a healthy retirement
We’ve heard the warnings from finance officials and economists who urge us to trim back our record levels of indebtedness, due to the uncertain economy and possible rising interest rates. And while paying down debt is common sense advice any time, we now see senior citizens entering retirement with debts that squeeze their lifestyle or force them to return to work. Who knew that our carefree credit habits could haunt us in our golden years?
It gives us one more reason to get serious about minding our debt: if we don’t get our overflowing mortgage and credit card bills under control, we might not achieve the retirement we hope for. It may be time for a ‘debt diet,’ or at least a check-up to ensure we are carefully balancing our borrowing and retirement saving activities.
Debt isn’t all bad, but…
It’s worth mentioning that debt isn’t one of the seven deadly sins. After all, sensible debt decisions make life’s bigger dreams possible, such as homeownership or a new auto. The problem occurs when we take on more debt than we can afford, or we start to use debt to fuel our day-to-day lifestyle.
These habits can cause us to compound a mountain of debt that will hurt us later. In the medium-term, crushing debt levels can cause great hardship, worry or even bankruptcy. And longer-term, debt can impact our retirement. Either we’re so busy paying our debts today that we don’t save for retirement, or, as mentioned above, we begin our retirement with a heap of debt that becomes harder to juggle once we stop working.
Step one: realize you’re not alone
Like any challenge - from losing weight to quitting the credit card habit - it helps to know you’re not alone. In terms of personal debt levels, you’re definitely in good company. That’s why North Americans keep hearing those stern comments from financial experts after years of buying expensive homes and saying ‘yes’ to each credit card offer we receive. In fact, 76 per cent of Canadians carried debt in 2009 and the debt to disposable income ratio reached 147.3 per cent, according to Statistics Canada. Another study found that 44 per cent of retired Canadians are still carrying debt. Clearly, we’ve got some belt-tightening to do.
How’s your debt level?
How do you know if you’ve got a problem? Your gut feeling should be enough of an indicator: if you feel worried about your bills, dread opening your credit card statements or tell yourself that you shouldn’t make that impulse purchase, your little voice is likely right. It’s also a clear sign if you can routinely make only the minimum payments on your bills and see your debt growing.
For further confirmation, check your credit score with one of Canada’s credit rating agencies to see how a lender would judge your financial health (see sidebar for details). Or, calculate your own debt-service ratio. Do this by adding up all of your monthly debt payments, divide that number by your total gross pre-tax monthly household income, and multiply by 100. Many experts state that that number - the portion of your income consumed by debt payments - should not exceed 40 per cent. Many advisors recommend a ratio of 35 per cent or lower.
Take control of your debt
If you realize that your debts need trimming down, here are tips to get started:
- Make a budget & cut back spending: Like so many personal goals, you need discipline. The first step is a household budget to review your monthly expenditures and identify ways to spend less. This will help you reduce your new debt, find the money to pay down your existing debt, and save for other important goals, like an emergency fund or retirement.
- Pay down high-interest debt first: Take a good look at your current debt obligations to see the facts. Focus on paying off those high interest credit card debts first or switch to a lower cost credit card if you must carry a balance. If you have outstanding student loans, commit to pay them off before you take on new financial commitments.
- Consider consolidating debt: If you have multiple high-interest debts, consider consolidating them into one lower-cost loan, like a line of credit. But be careful to focus on paying down the balance, not using this credit to rack up more bills.
- A bigger home may not be better: If you’re currently thinking buying a home, carefully do your own math – in addition to what your lender tells you – to ensure you can afford the payments, now and later, if interest rates went up or you encounter financial uncertainty. Don’t forget all the other home-buying and renovation costs too. In general, experts say your total housing costs should not exceed a third of your household income.
- Pay down your current mortgage faster: With the goal of paying off your mortgage before you reach retirement - or ideally, in your 50s - make smart moves to pay down your home loan. With the help of some household budgeting, you may be able to increase your regular payments or make payments more frequently.
For example, paying bi-weekly vs. monthly saves a lot of interest charges. Choose a shorter amortization period and take advantage of pre-payment privileges that let you make an annual lump sum payment on your mortgage. Apply any salary bonuses or tax refunds to your mortgage and keep your payments the same if interest rates go down. Your banker can help you explore these and other ideas.
- Seek help from a credit counselor: If you feel overwhelmed by debts, it’s a good idea to seek expert advice from a local credit counseling agency, such as the Canadian Association of Credit Counselling Services (www.caccs.ca).
Pay attention to retirement too
While you’re trying to slim down your debts, don’t let it crowd out your retirement savings plans completely. Although there are times where big obligations like a mortgage may dominate our financial priorities, it’s important to keep other goals in mind too. That’s the case for retirement saving, since every little bit you do today will make it much easier to accumulate the nest egg you need for tomorrow.
- Although you may need to spend a period of time focused on reducing your debts, don’t let your retirement plans languish too long. You should try to begin making regular automated contributions to your retirement savings plan as soon as you can afford to do so.
- You may discover that you can pursue multiple goals – like debt payment and retirement saving - at the same time. For example, make your maximum annual RRSP contribution and then apply the tax refund to your mortgage balance. There are many helpful online tools on mysunlife.ca to help make these decisions, such as the ‘Pay off my mortgage or contribute to my RRSP?’ calculator. You may also want to speak with a qualified financial advisor to help sort your priorities and make the best financial choices.
Slim down debt for a fit retirement
Although dieting is never easy, by taking a glance in the mirror at your borrowing habits and your debt load - and pledging to trim a few notches off your ‘borrowing beltline’ - you’ll greatly raise your chances of a fit and enjoyable retirement.
Check your personal credit rating
It’s a good idea to check your credit report, to ensure there are no errors, and to get a snap-shot of your debt profile. You can request a free basic report or pay a fee to see your overall credit score (a scale that runs between 300-900, in which the higher number is better). Visit Equifax at www.equifax.ca or Transunion Canada at www.transunion.ca.
If you have a general question or suggestion about this newsletter, please send an e-mail to email@example.com or write to my money At a Glance Newsletter, Group Retirement Services Marketing, Sun Life Financial, 225 King Street West, Toronto, ON M5V 3C5.
This bulletin has been created exclusively for you. It addresses issues to help you with your financial planning and investments, and cannot be reproduced in whole or in part without the express permission of Sun Life Financial.
Group Retirement Services are provided by Sun Life Assurance Company of Canada,
a member of the Sun Life Financial group of companies.