Don’t Allow Debt To Derail Your Retirement Plans

Many people approaching retirement may be delaying those plans due to their debt loads.

Boomers are not known for thrifty living. They have earned the title of the “most indebted generation.”

According to a Statistics Canada 2012 Survey of Financial Security, 70% of people aged 55 to 64 are carrying some debt. One-third still have mortgages, 38% are carrying credit card debt and 29% have vehicle loans. The average debt level is $107,900 compared to $60,000 (adjusted) in 1999.

Debt levels for people over 65 has doubled from $31,000 in 1999 to $61,700, with 43% of this age group in debt.

Related: Can this late starter get her retirement back on track?

Credit rating company, Equifax, says seniors, now with reduced incomes, are accumulating more debt to help maintain the lifestyle they enjoyed before retirement. The average debt for consumers over 65 climbed more than any other age group, and people over 60 are the fastest growing age category for bankruptcies.

Don't Let Debt Derail Your Retirement Plans

Why so much debt?

The boomer generation has lived in a culture of spending. They have always had a more casual attitude towards debt than their frugal parents who lived within their means.

“They are used to borrowing money to live well, and now they’re carrying those same habits into retirement, with potentially dangerous consequences.” Gordon Pape

 

“Because people now live longer and healthier lives, Canadians are more optimistic about being able to pay back their debts as they grow older.” Susan Eng, CARP

Another key reason for having more debt is that more are supporting adult children (or grandchildren) for longer. Increasing real estate values have encouraged them to take out bigger second mortgages and lines of credit to help pay for their offspring’s education and down payments on homes.

Many boomers say their retirement strategy is to keep on working as long as necessary to pay their bills, even if that’s not what they prefer. Others will sell off valuables or downsize their homes.

The great asset transfer

Economists are predicting an inter-generational asset transfer of approximately one trillion dollars during the next several years.

Many boomers are depending on the Bank of Mom and Dad to pay off their mortgage and other debts, as well as fund their retirement.

This is a risky plan. Financial planning experts warn that boomers who are counting on a big windfall to fund their golden years may be in for a rude awakening. The inheritance may not be the pot of wealth that they are counting on.

As individual lifespans extend into the 90’s and past the century mark, living expenses continue for longer periods of time. These expenses can be substantial (retirement residence, home care, medications). Payments come from savings, eating up intended inheritances and resulting in a smaller amount being passed on to boomers who themselves may be in their 60’s, 70’s, and even 80’s before amy money arrives. Taxes can take a bigger bite than the beneficiaries expect.

Consider an inheritance a gift, not a guarantee.

Final thoughts

Many people in their 50’s and 60’s have more debt and little in the way of savings. This means they are facing a reduced standard of living and financial stress in their retirement years. Consider the drain on cash flow that will result from making monthly debt payments.

Monthly CPP and OAS cheques will help, but government support combined with meager savings may not be enough to stay ahead of poverty level.

Do you want to be looking for a job years after retirement to pay your bills?

If you are getting ready for retirement you need to seriously address any debt you have and take the necessary steps to pay it off. It’s not going to take care of itself. Plans for eliminating debt should be part of your overall financial strategy.

This is one of the best investments you can make.

How A ‘First 60 Days’ Assessment Saves Us Taxes Year Round

I filed my taxes last week and expect to see a $2,500 refund hit my account some time in the next few days. While normally a big tax refund is cause for celebration, I won’t be treating this one as a windfall. That’s because it turned out my wife owed around the same amount when she filed her taxes. One offsets the other and so our total household taxes owing nets out to zero.

Coincidence? No way! This was all part of a well thought out tax planning strategy designed to minimize taxes and smooth out our monthly income and expenses. Since our tax situation is more complicated than most, a little advanced planning goes a long way. We don’t need any big surprises during tax season.

For some background, I earn regular employment income while my wife stays home full-time and looks after our two kids. Any income earned from freelance work or through the blogs goes into our small business, from which we stream dividends to my wife to the tune of about $3,500 per month.

The small business arrangement allows us to split income and save on taxes. Outside of our corporation, the best tax move we make is contributing to our RRSPs.

How A First 60 Days Assessment Saves Us Taxes Year Round

First 60 Days Assessment

While I do make semi-regular contributions throughout the year, I use the first 60 days of the year to assess our tax situation and identify any opportunities to reduce our taxable income by making additional RRSP contributions.

One quick way to do this is to use an income tax calculator to quickly estimate your tax refund (or taxes owing) by selecting the province in which you reside and then entering your income, taxes paid, plus any RRSP contributions. Toggle this amount until you receive the desired refund. In our case, we want to reduce our taxes owing to zero.

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I’ve done this ‘first 60 days’ assessment for the past several years and managed to reduce our household taxes while also increasing our RRSP portfolio balance to nearly $150,000.

As you know, I’m an early tax filer and so after gathering all of our documents and making an assumption that we’ll owe, I figure out how much of an RRSP contribution is needed to reduce those taxes owing to zero. Then I’ll take out a small top-up loan*, either from a low-interest RRSP loan or by borrowing temporarily from our line of credit. Voila – no more taxes owing!

*A note of caution: A top-up loan only makes sense if you can meet the resulting debt obligations. You must be able to pay back the loan, and on time.

Final thoughts

RRSPs are horribly underutilized as a tax-planning tool. According to a TurboTax national survey, Canadians aren’t taking advantage of tax credits and deductions as much as they should be, with only 31 percent planning on submitting an RRSP contribution slip. That means more than two-thirds of tax-filers will not!

We use the first 60 days of the year to assess our tax situation while there’s still time to do something about it. RRSPs can drastically impact your tax return, but don’t treat RRSP season like a last minute, panic-induced fire drill. Careful planning can save you time and money come tax season.

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