Baby boomers retiring with debt burdenBy Rosemary McCracken | May 12 2011 03:51PM
Born in an era of prosperity, the baby boomer generation has always gone after what it wanted - whether it's been luxury homes, cars, vacations or launching their own businesses.
They've been big spenders and have been comfortable acquiring debt. And two recent surveys have found that that many Canadian boomers are carrying debt with them into retirement.
A Royal Bank of Canada poll conducted in March by Ipsos Reid found that four out of 10 Canadians over age 50 have retired with some form of debt and 22% entered retirement with a mortgage on their primary residence. And an Investors Group online survey conducted by Harris Decima this spring found that 62% of its respondents planned to carry debt into retirement.
"Many boomers delayed parenthood until later in life and may still be educating children when they are retired," says Lee Anne Davies, RBC's head of retirement strategies in Toronto.
The Investors Group survey also found that the median mortgage balance among retired mortgage-holders is $82,000.
"This came as a surprise to us," says Peter Veselinovich, the company's Winnipeg-based Vice President, banking and mortgage operations. "While an $82,000 mortgage may only mean a monthly mortgage payment of $400 or so and is cheaper than paying rent, is that mortgage just one part of your client's debt?"
Debt is not necessarily bad, Ms. Davies notes. "A home can be an important part of the client's investment portfolio," she says, "especially now when home prices are high."
A mortgage on a residence can also be an effective strategy to manage a client's finances, especially when interest rates are low. "The client may take out a mortgage to leverage his other investments," Mr. Veselinovich says.
But the availability of credit has been a problem for many boomers. They grew up with credit and debit cards - a lot of cards, in some cases. Credit products are convenient, and a necessity for renting vehicles, making online purchases and hotel reservations. Handled correctly, they can be very helpful, says Nick Paratheras, a financial planner with BMO Bank of Montreal in Montreal. "You get a grace period to pay for your purchase and they may allow you to accumulate loyalty points. The trick is to pay off the card every month."
They're also viewed by some as a safety net in case of unforeseen expenses. The RBC survey found that 28% of retirees have acquired more credit products after retirement; 12% have done so to have a safety net in case of unexpected expenses; and another 6% have done so to meet unforeseen expenses.
"Expenses you never counted on can arise," Ms. Davies says. "A roof may need to be repaired or a furnace may need to be replaced. And our poll found that one in five retirees spends more than $1,000 a month on prescription drugs."
The problem is credit and debit cards can lead to impulse spending. Clients who get carried away with credit should restrict themselves to using a certain amount of cash to develop spending discipline, Mr. Paratheras says. "If they take out, say, $1,000 every month for food, gas and entertainment, when that's gone that will be the end of their spending for the month."
And developing spending discipline will definitely be an asset in retirement, Mr. Veselinovich adds, "when many of us will have less disposable income."
Clients approaching retirement need to have a clear understanding of their spending patterns, Ms. Davies says. "Have them add up their living and entertainment expenses, and see what the difference is between these costs and their take-home pay."
She also suggests clients "test drive" their retirement. "If they anticipate they'll be living on less income when they retire, have them try living on a set amount for a month. If they find that's not possible, have them look at making other changes. Maybe they don't need a large home anymore."
And if they're not commuting to work everyday, they may not need a new car every few years, Mr. Veselinovich adds.
It's never too late for clients to get a handle on debt that can erode their retirement funds. Mr. Veselinovich recommends having your clients organize the credit cards they hold from those with the highest interest rates to the lowest, and start paying off and then eliminating the higher-cost ones, such as department store cards.
Mr. Paratheras believes in aggressively paying off a home mortgage with bi-weekly and lump-sum payments.
And obtaining a low-rate line of credit to be used in the case of emergencies will ease the minds of clients who worry about unexpected expenses cropping up.
Ms. Davies notes that retirees worry about the many things they can't control, such as tax hikes, eating into their retirement income. "This is where a financial advisor can help clients with strategies to minimize the client's tax hit, such as not taking too much income in any one year. If income is needed for a renovation or a new vehicle, that should be taken out over two different tax years - in December and January - to avoid getting into a higher tax bracket."
Inflation is another real concern for retirees, Mr. Paratheras says. The boomers' projected longevity not only means more years over which they'll have to stretch their dollars, but it may also mean rising costs in their later years when they may need specialized housing and care. "Right now a seniors' residence in Montreal costs about $4,000 a month," he says. "With greater demand in coming years, what will it cost then?"
He recommends that advisors factor in a 3% jump in inflation every year in projecting client' needs into the future. "And we're looking at lifespans as long as 95 years."
That's why, he says, it's never too late to start reducing expenses, such as the cost of carrying debt. Even small expenses, such as bank fees, add up. He suggests having your client review his bank fees and, instead of running up perhaps $25 a month in a la carte fees, signing for specialized set-fee plans suited to his needs.
"And it's never too late to add to savings," he adds. "If a client has $1,000 of income coming in, I may ask him to live on $800 and put $200 aside."
The compounding effect of savings works to your clients' advantage, Ms. Veselinovich adds, "in the same way that the compounding effect of debt works against them."