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By Douglas Hoyes
Special to the Financial Independence Hub
While we all strive for a Victory Lap leading to our Findependence, a growing number of Canadians can only dream about getting out of debt.
Every two years my firm, Hoyes, Michalos & Associates Inc., releases our Joe Debtor report, where we profile our clients who have filed a bankruptcy or a consumer proposal. In our report two years ago we reported that seniors are the fastest growing risk group for insolvency, and that’s still the case today.
Almost one in five insolvencies involve pre-retirement debtors in their 50s, and more than one in 10 (12%) involve seniors in their 60s and 70s.
What’s the problem? Shouldn’t older Canadians have a lifetime of savings to rely on as they enter their Victory Lap? Many do. If you had a well-paying stable job that allowed you to save and build assets, have an employer-provided pension, or have been fortunate enough to own a house during the current real estate boom, you are probably in great shape heading into your golden years.
Many over 50s still have dependents
However, not everyone in the over 50 crowd is as fortunate. Twenty-four per cent of pre-retirement debtors still have a dependent (either at home or attending school), and many are also at least partially supporting elderly parents. They are sandwiched between dependents and retirement, and they can’t juggle all of their financial obligations.
It’s even worse if you carry debt into retirement. Your income drops, your medical expenses and other living expenses continue to increase, and you don’t have the income to make your debt payments.
What’s the solution if you have debt, and want to retire?
11% of insolvent seniors have payday loans
First, let’s talk about what not to do: use payday loans. Believe it or not, 11 per cent of seniors owe money on payday loans when they file insolvency. While a payday loan may temporarily solve a cash flow problem today, it creates a bigger cash flow problem tomorrow. This can lead to taking out multiple payday loans to keep afloat. Seniors in our study who turned to payday loans have the highest payday loan debt of any age group at $3,593 owing on more than three payday loans when they declared insolvency.
You might be tempted to cash in your RRSPs to pay down debt or to help make ends meet. The problem is that you are draining your retirement fund and might create a secondary problem: an unpaid tax debt. When RRSP redemptions are combined with pension income your financial institution may not have taken sufficient tax deductions at source to deal with your higher taxable income, and now you’re faced with a big tax liability. Both the 50-to-59 crowd and the 60-and-over group owe, on average, over $12,000 in taxes when they file insolvency.
What to do
So, what do you do? First, make a list of what you owe, and make a financial plan to pay them off before you retire. Start with the highest interest rate debts. This may require selling assets (watching out for tax consequences) and reducing your living expenses to free up cash.
Second, beware of offering significant financial assistance to your adult children. You want to help, but be sure before you do that you are not risking your own future financial security.
Finally, if you have more debt than you can handle, talk to a Licensed Insolvency Trustee about filing a consumer proposal or personal bankruptcy. In most cases, you can keep your RRSP even if you go bankrupt. If you own a home, ask about a consumer proposal as a viable alternative to bankruptcy. Both solutions will allow you to eliminate your debt, and preserve your RRSP.
Douglas Hoyes, BA, CA, CPA, CBV, CIRP is a licensed bankruptcy trustee and the co-founder of Hoyes, Michalos & Associates Inc., one of Canada’s largest independent personal insolvency firms.
