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By Douglas Hoyes
Special to the Financial Independence Hub
It’s a reality that Canadians are increasing their personal debt load.
Whether or not the debt levels they are carrying are cause for concern depends on who you talk to and on what day. On one day you will see a story that debt-to-income ratios, now at 163%, are at record highs and households are standing on the precipice. The next day you will read an article about how interest rates are at an all-time low, making debt affordable.
I can confidently say that my opinion doesn’t change from season to season or year to year. In my opinion, debt does not go well with either retirement or Findependence.
Seniors accounting for more bankruptcies
Granted, I’m an insolvency professional: a bankruptcy trustee who sees people who have accumulated an extreme amount of debt. Every two years at my firm, Hoyes, Michalos & Associates Inc., we review all of our client files to determine who is carrying debt and why. In our Joe Debtor study this year we discovered that seniors represent an ever increasing percentage of total bankruptcy filings. Even worse, they have the highest level of unsecured debt of any age group at the time of filing, with over $69,000 of unsecured debt.
That debt is a serious problem, because if you are retired you will be on a fixed income. If you are still carrying debt, you more than likely won’t have the cash flow to make large debt payments.
From our study, the average senior had a monthly net income of $2,215. If you have a paid for house and car, and reasonable living expenses, you can survive on that income. However, if you have almost $70,000 in debt, not including your mortgage or car loan, you can’t survive.
In our survey, the average senior owed $33,355 on credit cards, $20,096 on personal loans, $12,571 on income taxes, and $3,009 on other debts. If the credit cards carry interest rates of 19.9%, the monthly interest payments on the credit cards alone exceed $550 per month. If the senior is attempting to make minimum payments on all of their debts it’s conceivable that monthly debt servicing costs can easily exceed $2,000 per month.
Having a monthly income of $2,215 and monthly debt servicing costs of $2,000 makes it impossible to have money available for necessities like food and shelter.
Debt in retirement a recipe for disaster
Excessive debt is a problem at any age, but debt in retirement is a recipe for disaster. You can’t simply work more overtime to earn extra money if you are already retired. As a senior you may also have increasing expenses for items such as medical care; it’s that combination of a fixed income and rising expenses that makes seniors the fastest growing group of Canadians that become insolvent.
Debt kills the dream of spending winters in the sunny south and replaces that dream with the reality of moving in with your adult children to make ends meet.
My advice is simple: Take whatever steps are necessary to get out of debt now, no matter how old you are. The sooner you are out of debt, the sooner you can begin saving for retirement.
I would start by considering downsizing your living accommodations. While many may argue that real estate is a great long term investment, it’s important to do the math. If you have equity tied up in your house and you are paying 20% interest on your credit cards, unless you expect your house to increase by 20% a year, cashing in the equity to pay down debt would be an obvious strategy.
Do you need two cars? If not, selling one frees up cash to pay off debt while also reducing your monthly expenses. Have money in a TFSA? Unless it’s earning more than you are paying in interest on your debt, cashing in your TFSA and repaying debt makes sense. You can always replenish your TFSA in the future when you are debt free, from an income not consumed by interest payments.
If you don’t have other assets to liquidate, your best way to get out of debt may be some form of debt relief like a consumer proposal or personal bankruptcy.
Talking to a bankruptcy professional is not what you want to do, however, it may be necessary when eliminating debt becomes your priority. And eliminating debt now is – based on my experience – the only way to have a debt free, stress free retirement.
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.
